So, your Chinese manufacturers ask for price increases in the 10-20% range. Are you unsure of what to answer?
Here are few tips.
First, tell them you don’t understand
You might have a few arguments in your favor:
- Maybe your volumes have increased. Shouldn’t you be entitled to lower prices?
- Maybe you have been a regular customer and orders have been pretty smooth. Shouldn’t they take this into account and give you favorable pricing?
- Maybe you can get other suppliers to quote lower prices for similar volumes. Shouldn’t they look at the market price at adjust their offer?
The strategy here is to refer to general business principles (without closing the door for a price change), and see what the factory responds. After all, it is up to them to give a detailed justification.
Second, center discussion around hard data
You will need to evaluate their cost breakdown (very roughly). For example:
- Labor might represent 20% of their total cost
- The main material might represent 50% of their total cost
(The rest of the costs lie in equipment, energy, logistics, sales & marketing, etc. but you probably don’t need to mention those.)
If the factory wrote “salaries went up 20%” (which is possible), the total cost is only up by 4% based on the above estimate (20% x 1.2 = 24%).
I am taking this example because Chinese manufacturers often use the rise in wages to justify price hikes. But you need to be prepared to fight three other excuses.
1. If the supplier says the cost of the main material has gone up
You should search the trend on the international market.
For example, for aluminum, you will find that the price has been going down steadily (click on the image to enlarge):
In this case, you can probably suggest that your supplier finds a better source rather than passing his inefficiencies on to you. If they respond that their price has increased, you can suggest to involve a sourcing agent to double-check on this.
Note that the international price is not the price manufacturers pay within China, but the trend should be similar… And you are providing data, so it is up to your supplier to do the same.
2. If the supplier says the USD/RMB rate has gone down
Once again, you should look up what the trend looks like.
Over the past 3 months, actually, the RMB has lost some of its value in front of the dollar:
Is the long-term trend clear? No. But now is definitely not the right time for them to invoke the exchange rate as an excuse for higher prices!
3. If the supplier says your quality standard is too high
Ask them how it impacts costs.
If it slows production down, ask why they quoted too low last time, and why they waited for you to send a re-order before they told you about it.
If there is a high scrap rate, ask them how high it is for your production, and how high it is on average. To test if they are serious, ask if they are ready to pay consultants to come and fix this problem. (You can say that you are willing to pay for the consultants’ fees).
A note of caution
In any case, don’t push back in too firm a manner. Keep in mind that your manufacturers have a very primitive accounting system, and they don’t really know what drives their costs.
If they feel that your orders are not profitable, they will find a way to cheapen your product. And it will probably cause quality problems. This is not what you want!
If you feel they are gauging you, though, you can mention that you will start looking for another supplier for orders to be in production next year. You can use fear of losing your business to your advantage, and keep price increases moderate.
What do you think? Any other tips?