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 several times.
In this article I am going to focus on cases where the supplier increases the price of an order he already accepted — a very upsetting situation for the buyer.
1. 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 won’t 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 pretty 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;
- We have to pay a new/higher tax;
- Someone in our company quoted too low for this order and we are going to lose money;
- The import/export agent just told us he would charge more for your order because XYZ”.
I can see a new excuse coming up soon, from those factories that are polluting: “we have to pay for carbon quotas”. (Pilot programs were just launched in several Chinese cities, and a list of 634 polluting companies were given targets and allowances last month). Get prepared!
2. Why they raise prices
As I wrote above, many times the reason invoked 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 spend 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. More often than not, 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.
3. How buyers can avoid this situation
If you really don’t want to suffer a price increase for a current order, I see five solutions:
- A letter of credit. Since no deposit was wired, you are not “hooked’ and your option to cancel the order remains credible.
- Other sources that can supply products very fast (for example, a domestic manufacturer). It means you can cancel the order and avoid being short of stock.
- Stock in your warehouse: same reasoning as above.
- Working with a trading 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’s a good source of leverage if you crossed all the T’s and dotted all the I’s with a good lawyer.
If this problem happened to you and you didn’t 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.
4. A word of caution
Should buyers really 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 actually dangerous.
As Dan Harris wrote a few months back:
Your Chinese manufacturer will either go back to you and ask to be able to raise its prices in light of 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?
That’s a real danger, I think. Do you agree?
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