Purchasing & Negotiating
Purchasing
Purchasing in China with CHINA SOURCES
Whether you have contacted factories in China yourself or we have sourced products for you in house, the purchasing process of goods from Chinese factories is all handled by the CHINA SOURCES office.
Before we make payments to factories we first need to verify their credentials. Once we have established this and signed all relevant contracts with the factory here’s what happens:
The usual terms are to make a 30% deposit to the factory/factories for the goods. The balance is then paid once goods have passed our quality control checks and delivered to our warehouse ready for export. Upon receipt of the goods we will pay the remaining 70%. Smart importers structure payments to factories contingent on certain goals being met.
Your supplier will pay more attention to your wishes if he has spent 70% of his sale price to buy raw materials and components and has only received a 30% deposit from you. This offers you leverage in any future negotiations. You never pay the remainder until the quality is confirmed by your own independent inspectors.
As we are able to pay for goods in Chinese Yuan we can in some cases obtain a better purchasing price.
Before we make payments to factories we first need to verify their credentials. Once we have established this and signed all relevant contracts with the factory here’s what happens:
The usual terms are to make a 30% deposit to the factory/factories for the goods. The balance is then paid once goods have passed our quality control checks and delivered to our warehouse ready for export. Upon receipt of the goods we will pay the remaining 70%. Smart importers structure payments to factories contingent on certain goals being met.
Your supplier will pay more attention to your wishes if he has spent 70% of his sale price to buy raw materials and components and has only received a 30% deposit from you. This offers you leverage in any future negotiations. You never pay the remainder until the quality is confirmed by your own independent inspectors.
As we are able to pay for goods in Chinese Yuan we can in some cases obtain a better purchasing price.
Why A Sales Contract Is Essential
Sales contracts with your supplier are very important.
You must write detailed product specifications into your contract with the factory. This means working closely with your account manager and being very specific in your product specifications – prior to placing your order.
Chinese suppliers have been known to put European plugs on Australian electrical goods! Or make blue bags with green straps (instead of blue). If you didn’t specify this in the contract, the Chinese factory will think they’ve done nothing wrong and see this as being your mistake.
Having all your specifications prior to making your order eliminates these problems.
You must write detailed product specifications into your contract with the factory. This means working closely with your account manager and being very specific in your product specifications – prior to placing your order.
Chinese suppliers have been known to put European plugs on Australian electrical goods! Or make blue bags with green straps (instead of blue). If you didn’t specify this in the contract, the Chinese factory will think they’ve done nothing wrong and see this as being your mistake.
Having all your specifications prior to making your order eliminates these problems.
What Else Do I Need To Do Before Placing My Final Order?
Before you’ve confirmed and placed your order with us, you must make sure any specific product requirements i.e. colour, packaging, technical details are given to us at this point.
Once you’ve given the final specifications we’ll go and do all the hard work so you can get on with running your business!
Once you’ve given the final specifications we’ll go and do all the hard work so you can get on with running your business!
Negotiating
How to Successfully Negotiate In China
When dealing with China you’ll quickly learn negotiations are an ongoing process – not a one-time event.
The First Rule of Negotiating
The first rule of negotiating in China is this. Only negotiate with people who have the authority to make decisions.
China is extremely hierarchical. Generally there are only a few people within the factory with the power to make important decisions. And usually they won’t speak any English at all.
So just because you’re talking to the best English speaking person in the factory – doesn’t mean they have any power to fix problems. English speaking sales staff are often used as a shield to deflect blame and stifle your attempts to figure out the real story behind an issue.
As in all places the higher up the food chain you go, the better. The factory owner or lead engineer is usually best. CHINA SOURCES has the most success when dealing with factories repeatedly and we get to know the factory owners and lead engineers very well.
When Problems arise, there’s a real story and a cover story
Most Westerners take too many things at face value in China. When problems arise be aware that there is a real story and a cover story.
Say you’ve visited a factory, inspected its facilities, you’ve performed on site quality control. It all looks great. Yet problems are occurring with a particular part of your product.
The real story might be that the factory has outsourced some component to another less capable supplier. Even though they deny it!
The factory will never tell you the real reason for the problems. Excuses will be made. You’ll scratch your head wondering, why can’t the factory do this? Even though you’ve inspected their facilities on site and they should be able to.
Price Negotiation Tips
Generally there are two strategies to ensure you’re getting the best available price.
The first is when importing smaller quantities of goods. The second is when purchasing large quantities. They require different strategies.
If importing small quantities you have limited bargaining power. However you still want to ensure you’re getting the best value for money.
This means shopping around and getting several quotes. You will end up with a mixture: really low prices, really high prices and something in between.
Here’s where you need to be really careful...
You might have 3 quotes (it wouldn’t unusual if three quotes, from three different factories have the same picture!)
How do you know which supplier has the best mix of price/quality/reliability? You need to ensure you’re comparing apples with apples.
Ask as many questions as you can to the factory:
A price that may seem really cheap could, in reality, be expensive rubbish. Make sure the price you’re getting is right. And ensure the quality of what you’re buying is suitable. If the price seems incredibly low, beware! If it’s too good to be true – it usually is.
Importing Larger Quantities
If importing substantial quantities of goods you’ll need to have an estimate of the production costs of the factory properly negotiate the price. To do this, you need to have an understanding of:
Secondly, you need to understand what the labour costs are wherever the factory is, and also, how many units that factory is capable of producing per day, week, or month.
Finally, when a factory in China exports goods they can claim tax back. This varies for different products – know what it is for yours!
Once you have a good handle on these costs, you can then work out the true cost to manufacture the product.
Obviously the factory needs to make a margin, but once you know the real costs, only then can you negotiate the best possible price!
Typical Negotiation Example
Say you’ve recently agreed to a deal with a factory. Prices, timelines, contracts etc have been signed and agreed to. Or so you think!
A few weeks into the production the factory comes to you and says "the price of the moulds is going up 100% because our costs increased".
What do you do then?
Sometimes the request for money may be legitimate. You’ll need judgement to know whether it’s likely to be true – or not.
The vast majority of the time this is simply a request for more money. Perhaps the factory thought it would be cheaper and easier than it was?
If you say yes, the factory will continue trying to extract more and more money!
Here’s how we’d handle it. We’d politely tell the factory that we have a contract that they agreed to, however, if they can’t do this that’s fine. We’ll have our product made somewhere else.
Essentially we call their bluff and walk away.
In the vast majority if cases the factory will come back in a few days having magically "fixed most of the problem" and try to extract a smaller price increase.
Obviously this is a simplified example, but such negotiations are common. This is why it pays to understand "how the game is played".
When dealing with China you’ll quickly learn negotiations are an ongoing process – not a one-time event.
The First Rule of Negotiating
The first rule of negotiating in China is this. Only negotiate with people who have the authority to make decisions.
China is extremely hierarchical. Generally there are only a few people within the factory with the power to make important decisions. And usually they won’t speak any English at all.
So just because you’re talking to the best English speaking person in the factory – doesn’t mean they have any power to fix problems. English speaking sales staff are often used as a shield to deflect blame and stifle your attempts to figure out the real story behind an issue.
As in all places the higher up the food chain you go, the better. The factory owner or lead engineer is usually best. CHINA SOURCES has the most success when dealing with factories repeatedly and we get to know the factory owners and lead engineers very well.
When Problems arise, there’s a real story and a cover story
Most Westerners take too many things at face value in China. When problems arise be aware that there is a real story and a cover story.
Say you’ve visited a factory, inspected its facilities, you’ve performed on site quality control. It all looks great. Yet problems are occurring with a particular part of your product.
The real story might be that the factory has outsourced some component to another less capable supplier. Even though they deny it!
The factory will never tell you the real reason for the problems. Excuses will be made. You’ll scratch your head wondering, why can’t the factory do this? Even though you’ve inspected their facilities on site and they should be able to.
Price Negotiation Tips
Generally there are two strategies to ensure you’re getting the best available price.
The first is when importing smaller quantities of goods. The second is when purchasing large quantities. They require different strategies.
If importing small quantities you have limited bargaining power. However you still want to ensure you’re getting the best value for money.
This means shopping around and getting several quotes. You will end up with a mixture: really low prices, really high prices and something in between.
Here’s where you need to be really careful...
You might have 3 quotes (it wouldn’t unusual if three quotes, from three different factories have the same picture!)
How do you know which supplier has the best mix of price/quality/reliability? You need to ensure you’re comparing apples with apples.
Ask as many questions as you can to the factory:
- What’s the thickness of the material?
- What’s the grade of steel?
- How many layers of paint etc?
A price that may seem really cheap could, in reality, be expensive rubbish. Make sure the price you’re getting is right. And ensure the quality of what you’re buying is suitable. If the price seems incredibly low, beware! If it’s too good to be true – it usually is.
Importing Larger Quantities
If importing substantial quantities of goods you’ll need to have an estimate of the production costs of the factory properly negotiate the price. To do this, you need to have an understanding of:
- Material costs
- Labours costs and production capacities
- And, the tax back system in China.
Secondly, you need to understand what the labour costs are wherever the factory is, and also, how many units that factory is capable of producing per day, week, or month.
Finally, when a factory in China exports goods they can claim tax back. This varies for different products – know what it is for yours!
Once you have a good handle on these costs, you can then work out the true cost to manufacture the product.
Obviously the factory needs to make a margin, but once you know the real costs, only then can you negotiate the best possible price!
Typical Negotiation Example
Say you’ve recently agreed to a deal with a factory. Prices, timelines, contracts etc have been signed and agreed to. Or so you think!
A few weeks into the production the factory comes to you and says "the price of the moulds is going up 100% because our costs increased".
What do you do then?
Sometimes the request for money may be legitimate. You’ll need judgement to know whether it’s likely to be true – or not.
The vast majority of the time this is simply a request for more money. Perhaps the factory thought it would be cheaper and easier than it was?
If you say yes, the factory will continue trying to extract more and more money!
Here’s how we’d handle it. We’d politely tell the factory that we have a contract that they agreed to, however, if they can’t do this that’s fine. We’ll have our product made somewhere else.
Essentially we call their bluff and walk away.
In the vast majority if cases the factory will come back in a few days having magically "fixed most of the problem" and try to extract a smaller price increase.
Obviously this is a simplified example, but such negotiations are common. This is why it pays to understand "how the game is played".
Sales Contracts
Why You MUST Have a Sales Contract & How to Ensures It’s Done Properly
When you place an order with a factory you simply must have a contract. If there’s a problem with your order, getting the factory to take responsibility is impossible without a contract. While contracts are rarely the FINAL word in China, they offer you an important bargaining positioning to reference again and again.
Here are five important considerations:
Do I really need a Contract?
Many think “the legal system is still quite under developed in China, what’s the point in making a contract? If someone defaults for any reason, would you really take them to court?”
The answer is yes you would. China’s legal system does give you some rights. And while you would take them to court if you had to – importantly – the act of having a proper contract makes this event extremely unlikely.
A contract offers you a strong bargaining position should something go wrong.
If problems occur and you need to visit the factory and apply pressure, you can reference your contract, giving them no way to deflect blame.
Four Sales Contract Specifics – Never Forget to Include These
When making a contract with a Chinese factory, there are specific points to remember:
Why CHINA SOURCES ?
CHINA SOURCES creates all the sales contracts on your behalf – ensuring those with real authority are signing off on them.
As a Chinese registered business, Chinese manufactures tend to abide to our contracts more than they would if it were with an overseas company, as our contracts are valid under Chinese law.
If a factory knows you have zero presence in China, you’ll be ignored should something go wrong.
Being on the ground in China – Chinese factories treat CHINA SOURCES differently from the beginning. Why? Because they know we will turn up to the factory in person and apply pressure. We will reference the contract, giving them no way to deflect blame. They know we will hold them accountable. Something many importers fail to do.
A well written contract is an absolute necessity. It offers you strong bargaining position, and holds the factory accountable to the standards you have set. If you do not have a solid contract and problems occur – you can guarantee the factory are going to deflect blame.
When you place an order with a factory you simply must have a contract. If there’s a problem with your order, getting the factory to take responsibility is impossible without a contract. While contracts are rarely the FINAL word in China, they offer you an important bargaining positioning to reference again and again.
Here are five important considerations:
- Phone calls and verbal commitments from your factory rep are absolutely NOT enough. You need to get a written, stamped document from a factory manager/owner that says exactly what you both agree to.
- Getting a sales person to sign off on a contract is NOT ENOUGH. You need to get this contract stamped by someone in an authority position – an owner or manager. Not the English speaking sales staff. It’s very common for Chinese factories to use the excuse “that sales person left the company, so your contract is invalid”.
- All payments to the factory must be tied into passing the quality control (QC) standards you have set. These QC standards must be detailed in the contract and have been signed, stamped and agreed upon by a decision maker. It doesn’t count, unless the right person signs off on the contract.
- Never change your contract once it has been made. This says to the supplier – I’m willing to accept lower quality. It’s a slippery slope to follow.
- A well written contract is an absolute necessity. It offers you a strong bargaining position and holds the factory accountable to the standards you have set.
Do I really need a Contract?
Many think “the legal system is still quite under developed in China, what’s the point in making a contract? If someone defaults for any reason, would you really take them to court?”
The answer is yes you would. China’s legal system does give you some rights. And while you would take them to court if you had to – importantly – the act of having a proper contract makes this event extremely unlikely.
A contract offers you a strong bargaining position should something go wrong.
If problems occur and you need to visit the factory and apply pressure, you can reference your contract, giving them no way to deflect blame.
Four Sales Contract Specifics – Never Forget to Include These
When making a contract with a Chinese factory, there are specific points to remember:
- You should make sure that all your specification and details are clearly laid out in the contact. However, bear in mind you need to keep the contract as short as possible. Don’t write long winded paragraphs. Use bullet points and keep it simple. Importantly, don’t forget to put everything in - no matter how obvious.
- You’ll want to establish the factories policy on replacement of defective merchandise. You’ll want to write how the supplier will replace any defective items, indicating that they will be responsible for replacing the product, but also arranging for the collection and return shipment as well.
- In China, people do not use letter headed paper. They don’t recognise this. Instead, each company in China has a stamp. If the factory hasn’t put their stamp to the contract, even if it has been signed, it makes the contract worthless.
- Include the address where your goods will be produced. It’s not uncommon for suppliers to show you one set of production facilities while outsourcing production to a smaller factory nearby. A less reliable factory with lower standards, lower quality and using cheaper materials. If your quality control/factory audit uncovers such games, you need to ensure you have the production address in your contract.
Why CHINA SOURCES ?
CHINA SOURCES creates all the sales contracts on your behalf – ensuring those with real authority are signing off on them.
As a Chinese registered business, Chinese manufactures tend to abide to our contracts more than they would if it were with an overseas company, as our contracts are valid under Chinese law.
If a factory knows you have zero presence in China, you’ll be ignored should something go wrong.
Being on the ground in China – Chinese factories treat CHINA SOURCES differently from the beginning. Why? Because they know we will turn up to the factory in person and apply pressure. We will reference the contract, giving them no way to deflect blame. They know we will hold them accountable. Something many importers fail to do.
A well written contract is an absolute necessity. It offers you strong bargaining position, and holds the factory accountable to the standards you have set. If you do not have a solid contract and problems occur – you can guarantee the factory are going to deflect blame.