HOW AND WHY CHINESE SUPPLIERS RAISE PRICES OF AN ORDER ALREADY ACCEPTED?

If you have done regular business with Chinese suppliers, you have certainly noticed how eager they are to push prices up. And you probably felt like you got cheated sometimes.

In this article, I am going to focus on cases where the supplier increases the price of an order they already accepted — a very upsetting situation for the buyer.

How they raise prices

·         I think it works out this way most of the time:

·         The boss looks at the prices negotiated for current productions.

·         He says to the salesperson “we will not make money on this order. We need to increase the price.”

·         It is always better to invoke an external fact, upon which their company has — supposedly — no control. So, the boss chooses an excuse of this type.

·         In the email from the salesperson to the customer, it often sounds unconvincing.

·         The customer generally cannot check the reality behind the excuse, and it ends up as a “you will do as I say or the order needs to be cancelled” contest.

·         I heard many types of excuses over the years. Here are a few:

·         The main material used for production got more expensive since we worked on the quotation (but no, we cannot give you a breakdown of our costs);

·         The VAT rebate we get from the government was reduced;

·         Someone in our company quoted too low for this order and we are going to lose money.

Why they raise prices

·         As I wrote above, many times the reason involved is a joke. And, to be sure, the supplier never comes back to the buyer with a price decrease when components get cheaper. It only goes one way — up!

·         It means there is a lot of insincerity, and importers feel that. BUT there are reasons why prices often need to be raised:

·         Chinese manufacturers often run on very slim margins. If you leave little profit to the supplier, you know the temptation to bump the price up is very high (especially after you have spent lots of time developing a new product, and after you have pre-sold the shipment to your customers).

·         They have a poor quotation process, and make mistakes regularly. When it comes time to buy the components and the accessories, these mistakes appear clearly.

·         Price competition is brutal. Often, those suppliers that sell at a low price and then ask for a raise after the deposit was wired are those that get more customers and grow up. Others notice it and emulate that bad behavior. I am not trying to excuse them, but it is a fact.

How buyers can avoid this situation

·         If you do not want to suffer a price increase for a current order, I see a few solutions:

·         Working with a sourcing company that will absorb the price increase and will not dare to renegotiate the price they gave you. I know several importers who work with faithful intermediaries to avoid managing all the little problems and tricks from manufacturers.

·         Getting a lawyer to write a contract (preferably in Chinese) that can be enforced in China. That is a good source of leverage if you crossed all the T’s and dotted all the I’s with a good lawyer.

·         Finding a backup supplier, so you will have alternate options when the original supplier raises price to you.

·         If this problem happened to you and you did not take any of the above-mentioned measures, the best is to gather some information first. You can pretend that you need to inspect the components before taking a decision. If you see that they have already received some components that will be hard to use for another customer of theirs, you are in a stronger negotiating position.

·         If you want to mitigate price increases in the mid-to-long term, though, the best is to cultivate a few backup factories that will put pricing pressure on your main suppliers.

A word of caution

·         Should buyers try to contain price increases?

·         I would avoid dealing with these issues in a “this is what you signed and there is no way you can change these terms” fashion. Refusing a price increase is dangerous.

·         Your Chinese manufacturer will either go back to you and ask to be able to raise its prices considering its greatly increased costs for Stainless Steel, or it will secretly start replacing some of the stainless steel in your widget. Which would you prefer?

QUALITY CONTROL FOR IMPORTING FROM CHINA

When your business entails importing products from China, it’s vital to incorporate a quality control process at the factory you work with. Even the best managed factory might not always produce a perfect batch, so a robust quality control plan should be used to ensure your specifications and quality expectations are met within every order.

WHAT IS QUALITY CONTROL?

Quality control can focus on both product specifications and manufacturing process specifications for any type of goods and is especially important for importing from China. The goal is to identify any problems, defects, and non-conformities in the product that doesn’t follow required specifications from the buyer, or from general international standards. When caught early enough, these issues can easily be solved to fix the initial batch and avoid any future problems.

CHALLENGES FOR IMPORTING FROM CHINA

Import business owners face several specific challenges that can affect their return on investment as well as the delivery of goods. The first major issue to be aware of is that importers typically need to purchase goods in advance. Since payment is generally released to the manufacturer prior to the goods being shipped out, you run the risk of receiving low quality goods with few (and costly) options for sending them back or reworking the goods locally. Whether the factory’s mistakes are deliberate or not, the bottom line is that they impact your business. The expense for shipping and customs duties would be enormous, not to mention the amount of time it would take to send back products and receive a new batch. Since many smaller businesses don’t understand the intricacies of China’s legal system, it’s very unlikely a lawsuit would have any success. So, in this situation, the importer would take a financial loss if the goods’ quality was not at an acceptable level because there’s little to no recourse for the factory even if they don’t fix the problem. Even if the business decided to sell the product anyway, their brand image could be substantially damaged if customers viewed them as lower quality.

Quality control not only ensures the quality of the product, it can also monitor their timely delivery. Without a quality control plan in place, production schedules can fall behind and you might miss your sale season, resulting in low product turnover.

WHO PERFORMS QUALITY CONTROL IN CHINA?

There are a few different options for quality control when importing from China. The first is the supplier’s in-house review of the manufacturing process. However, it’s obvious that solely relying on the manufacturer presents a conflict of interest. At the end of the day, they are likely to be more concerned with their own financial interests than the quality of your products. To get a better idea of how the supplier operates, consider performing a factory audit prior to the confirmation of your order. This will give you a clear idea of exactly how they control the quality within the factory. You might also check the factory’s licenses and certifications, along with their production capacity, human resources policies, and more.

Another way to perform quality control is through your trading or sourcing partner in China. You could consider requesting that they add a product inspection to their other duties; however, this also carries a high conflict of interest. Intermediates negotiating with suppliers need to keep good business relationships with them, sometimes it is difficult for them to provide a neutral opinion.

You could also decide to have your own quality team. This strategy requires intensive training on your products, plus local human resources management. Travel time and costs could quickly add up if your suppliers are located throughout the country. There are additional risks as well. Because quality teams have a limited number of human resources, the same quality inspector will regularly be in charge of verifying goods at the same suppliers’ site. There is a high chance that QC and suppliers develop a friendship that will end up with risk of corruption or at the very least influence his point of view on the goods’ quality.

As an alternative, there is a wide range of reputable third party inspection companies who advocate on your behalf in China. The company’s sole purpose is to protect you and your financial interests by verifying the goods based on your requirements. They have a neutral relationship with the supplier or trader; in fact, their business relationship is on one side only: the importer. They can provide several QCs to visit a unique supplier to keep the opinion the most neutral. They are able to provide services all over China. Plus, many importers are surprised at how affordable professional third party inspections are, especially compared to the potential for loss if a low-quality shipment makes it to your door.

WHAT DOES QUALITY CONTROL INCLUDE?

When you work with a third-party inspection company, the process is very detailed and specific to your products. You develop a detailed inspection protocol based on a checklist and your own product specifications and quality requirements. The inspection protocol sets up all the different verifications the QC may have to perform while controlling the goods on-site: it includes cosmetic verification, functional verifications as well as verifications to your requirements. It’s best to be as specific as possible to ensure every detail is controlled and evaluated as you want it. Provide clear details, otherwise the inspector and the manufacturer will use their common sense which may be different from yours. Also realize that your checklists should be constantly evolving as your own specifications change. You can even provide a reference sample to be used in conjunction with the specification sheet to get the best results.

sure to rely to the right quality control experts when performing product inspections. Having a third-party inspector is probably the most flexible and reliable option for small and medium companies, as they guarantee product expertise while sitting on your side to defend your interests. Not only that, they can quickly operate all over China, with a third-party inspection company, you keep control on your goods quality and benefit from their expertise regardless of location.