I was asked a question today. It involves something I had written in Feb. You can read the initial post here.
First I want to say, no, I wasn’t the one this actually happened to. It was from a blog that I read called Silk Road International. Silk Road International (SRI) is a U.S.-owned and managed international procurement agency based in China. They basically help people who want to make things in China. They find them the right factories, make sure everything goes well, yada, yada.
The question that was asked by one of my thousands of faithful readers was this:
I read on your blog where you helped a factory manufacture a hat or something in a new manner, which was different than the way they normally do things.
It sounded like you had ‘shown them the light’ and everything had worked out, I am assuming.BUT in my experience, if you ask a Chinese factory to make something differently than how they normally would, while they MAY be able to do it, they then say that it will cost more, or that it will produce more defects which lead them to say they need to raise the price of the item…blah blah…. and some other BS.
So I was wondering if you encounter this quite often, like every chance they get, they will try to raise the price.
Its just quote frustrating to me, and I need to learn how to negotiate better with them. Any insight?
To answer this, first, I wasn’t the one who manufactured the hat. No worries because I can still answer this a couple of different way.
Insight. Yes. The first lesson you learn is this:
The white man lesson. Which boils down to a few things. One: The white guy has the money. Two: From an Asian’s perspective It’s ok to swindle that money out of said white man. Three: Business.
Ok before I get bombarded with emails about this let me explain.
One: China has only been really involved with the global economy for the last 30 yrs. Shenzhen this year is celebrating their 30th anniversary. Shenzhen is massive, I mean massive. So many factories, apartments, etc. Just thirty years ago there was nothing. I mean nothing but mostly farms. So the Chinese didn’t really have money till now. So the white man, westerners that came to China for the cheap labor and places to manufacture had money. Hell even a teacher here that teaches English make more than 6 times the minimum wage. So the white man (foreigner has money).
Two: It’s ok to take that money. Let me explain this the best I can with what I understand. No I am not an East Asian Culture Major nor have I spent thirty years here, but I’ve read a good amount on China and this topic. I understand it as this. And it also comes from “The Art of War” by Sun Tzu. You can read about it here. If you are a dumb person, I can then take your money by what means I can. In the Western world I may be called a cheater but in Asia I would be a smart businessmen. So, for the dumb foreigner that rolls in to try to make money and China then gets shafted, well, you’ve been Shanghai’d son. I’ve read stories about people coming to invest in a business, actually see an office, people working, etc, and then leave, send a bunch of money and bam, not hear anything back. Because it was all a scam. All actors hired to work for a day in an office space. Pays to be smart I guess.
Three: Good business. The yuan is rising, labor is rising, everything is rising. The factories have money now. They can afford to hold out for a better price. They have more power then ever.
So how does all this relate to the question. Well, since most likely the person asking the question is a white guy, you have money, control the money or something like that. A factory is going to try to squeeze as much as they can out of you with whatever tactic they can. You change a process or the way they do something. It may or may not actually matter but, it give the factory a reason to ask for more money. You can A: stand your ground and tell them that you still have a specific NG amount and it’s not your problem if they do it a different way. B: You an give and give them more money. C: You can meet them half way. Give them face by giving a little. They want power and money, you want good products. Raise the NG rate. If there is a no good rate of say 2-3%, then maybe raise it a bit to allot for the change in processes. It would depend of what you can deal with. But giving them more money. I don’t see how that would help or compensate for the new process. But raising the NG rate would probably soften the factories fear about you rejecting a bunch of products because they just started a new way of doing something. I would for sure QC in the beginning of the production cycle to see what the NG rate is. Just to get an overall picture. If you need to make a million things and out of 10,000 there are 100 bad ones, your looking at a estimated NG rate of 1%. That’s not bad. Well, really it depends on the industry and what not. If the change in process gets you a rate of 2%, but saves you time and money to offset burning twice as much bad product, then hey, that’s awesome. Just have to ease the factories fears. They don’t want to lose money by you rejecting product. You don’t want to pay them more money up front. Raise the NG rate to something realistic, come to an agreement and then QC. Or something like that.
The second part of the question or implied part. Factories are having to raise costs. Labor is going up, materials are going up, the yuan is raising. Foxconn is going to almost double the wage it pays. That’s going to have to for sure come from somewhere. Mainly the clients. Apple, Sony, etc. There are a million reasons that a factory would want to raise it’s prices. Millions. Hell, it got hotter, I have to use ac, how to I find money to run it, well, the next customer get a bump in price of 3 cents to offset my air usage. You think that’s funny. Ha, I hear stories like that. No one here, NO one here wants to pay for anything. At all. Period. They will use any method to get their money back. For example. Factory A gets some material in, accept it and then find out that it had some slight defects. They cannot return it back to the vendor, they have accepted it. So what do they do, well, Factory B need some material. They sell it to factory b and package it really good. Factory B looks at it, good stuff. They accept it but didn’t notice that the material has a slight defect. However they have accepted it. They cannot return it to factory a. They got shafted and or cheated depending on your perspective. Or, factory a was daft, skillful and clever with their tactic. Yes this is a true story. So Factory b has to pawn it off again, or eat the cost. But they won’t eat the cost. The customers at the factory will get a slightly damaged product or a price increase. One way or another factory b will make they money back to offset the cost of that bad material, believe me.
There is no real way to combat this but to know your industry inside and out. Know all the prices for everything. Say you are making a snowboard binding. You have to know the material costs, plastic, eva, mold costs, hardware costs, everything. Know everything. Then when you get a price increase that’s not reasonable. Price increases are going to happen, it’s just a matter of controlling them. You can cite facts that the materials haven’t gone up, etc. You don’t want to embarrass you Chinese counterpart. Hell, maybe they just want to show power over you and raise the cost to see what you will do. Give them some face, some power, but only with what’s acceptable to you bottom line.
I was just thinking about this also. They may give you a higher price because they haven’t worked with you before. They are taking a risk taking you in. You could be over demanding, etc, etc. They want to make sure they you mean business, and so on. Maybe counter this be giving then more money, but wirte the contract so that it’s rear end loaded. They want an extra 5,000, fine, but they get that 5,000 after the products ship. They get the money, and you get peace of mind that they just don’t want an extra 5,000 of easy money out of you. If it’s in the rear end they have to actually produce to get it.
I’m no export in this. I just call it like I see and read it. You have to do your research, know you industry, and negotiate the best you can. Hell, you may even save them money by making the product line move faster. Will they tell you that, no. Just be smart. Read all that you can.
Some good blogs that are most defianently better they this one are:
http://www.allroadsleadtochina.com/
Do you homework, due diligence, etc. Don’t be dumb. I know that’s easy to say but be ready to walk away, don’t put all your manufacturing in one place, have back up plans, and don’t be naive. Someone before you was, and they probably think you are too.
Hope that answers your question. I’m not an expert. I don’t pretend to be. I just like to make things, design, write, photograph, and eat Oreo cookies when I can.
Peace.