This is the 10th part in our China supplier vetting series. We’ll cover requests for quotations, negotiations, and contracts.
By now we covered pretty much all sorts of due diligence a paranoid importer might go through! And yet it’s not over. While I am no expert in this stage of the buying process, there are a few important considerations that I want to address.
Organized RFQ (Request For Quotation)
One thing you want to check is whether the supplier you end up working with is over-charging you, and by how much.
That’s why most importers compare the pricing of several potential suppliers. If more than 5 suppliers give you a quotation, you start to have an idea of the average market price. If you get 20 quotations that were prepared seriously, you have a pretty good idea.
The problem with that “get many quotations” approach is, the best potential suppliers might not respond to you. They are busy and, unless you spend time communicating with them, you are not sending the right signals. They simply don’t have sufficient time to answer all enquiries. (Obviously this is different if you are Apple or General Electric).
What can you learn about a potential supplier here?
If you are starting to develop a complex new product with a Chinese company and they already try to rip you off on the first order, imagine what they will do once you depend on them 100% for that production!
They will know you have no backup supplier. They will guess that getting another manufacturer up to speed will take at least 4 months and will be painful for you. Do you want to rely on greedy and short-term-focused business people you have virtually no control over?
You also want to make sure their quotations include sufficient detail. For example, for a plastic injection molded product, do they specify what steel is used in the mold, what the hardness is, and how many shots it will survive? Do they write the weight and material of the molded parts, and the number of cavities?
If they are unspecific, you need to know whether it is due to a lack of time, a lack of involvement/motivation, or if they want to avoid committing to a clear standard. Again, if they are planning to gouge you, they will tend to remain very evasive and unspecific. See if you can pin them down. If you can’t, you might want to walk away.
(In case you feel confident in your sales numbers, you can work with a lawyer to negotiate an OEM agreement that spells our order quantities and, in exchange, request the price to follow a predictable formula.)
How do they respond to pressure on price?
If you mention your target price is 20% lower than their quotation, do they plead for an effort on your side and then accept a lower price? It might indicate that they are solely focused on getting your business, and they will find ways to ‘cheapen’ your product later. That’s what you really want to avoid!
Or do they suggest to change a material, or skip a process? This is a much better sign. They understand their cost structure (which is not always the case in China) and they are relatively open.
I could go on and list other behavior-related risks. We compiled a good list here before.
When to ask for precise quotations?
It depends on several factors. Here are a few examples.
- If it’s off-the-shelf Christmas balls, ask for pricing right away. There is no downside to it, and I guess pricing is the most important consideration!
- If it’s a product design you have taken 15 months to perfect, you need to qualify the supplier first in order to avoid sending your blueprints to too many potential competitors.
- If you work in a highly regulated industry (say, medical devices), you need to first qualify the factory because it makes no sense to waste time communicating with potential suppliers that claim to be compliant AND to have a high quality standard… In 95% of cases they are over-extending their capabilities.
- If you know you will be “married” to a factory for years but the product to make is not highly confidential, you can start by asking for quotations based on a similar product (that uses the same materials and processes, generally speaking). As you screen most suppliers out, you can disclose more details and get finer quotations. Watch out for unreasonable increases in the price!
As this last example suggests, asking for revised quotations in several rounds is a good opportunity to spot unscrupulous suppliers. This will happen naturally as you add details to your enquiry — for example a nice packaging.
Requesting the supplier to sign enforceable contracts
How do they react when you ask them to sign a contract that is enforceable in China and might come back to bite them? Do they read it carefully and ask intelligent questions? Do they sign it and send it back right away (presumably without reading it)? Do they keep it aside and wait until you are engaged too deep in the relationship?
(Don’t work with your usual commercial lawyer. This is something that requires a lawyer specializing in China business law. Otherwise, the contract may be poorly written and may end up not being enforceable.)
Similarly, how do they react when you announce that you will have them audited, and then their production will be inspected before every shipment? Do they disappear? Do they push back (and why)?
Overall, all these business-related contact points will teach you a lot about a potential supplier. There is one caveat, though. On your side, do what you can to look like a serious and experienced buyer. If they detect that you are very green, or that your business is relatively small, they will give much less time to your enquiry and that might look like an intent to bamboozle you.