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SCRC Article Library: Identifying and Negotiating with Chinese Suppliers (SOURCE) - China Series Part 3

Identifying and Negotiating with Chinese Suppliers (SOURCE) - China Series Part 3

Published on: Jun, 23, 2005

by: Rob Handfield

SCRC

An interview with a US expert who worked closely with Chinese business people for many years reveals the unexpected difficulties that may exist when attempting to negotiate and establish a contract with a Chinese global supplier. This is surely not representative of every situation, but illustrates the potential pitfalls that may arise if one is not careful.

This executives noted that “In my experience, Chinese business people will always want to negotiate, even after a contract is signed. It would be foolish to think that many Chinese do not understand English – even if a translator is present. The translator will be used, but they understand every word. They may even look through your private papers while you are out of the room – and claim it is “intelligence.” A lot of business is also done under the table in the form of payoffs. Even though I was not involved in payoffs and favors – I knew my Asian contact was doing it. We made him sign that he should not be doing these kinds of things, bearing in mind that the Foreign Corrupt Practices Act comes into play if you are working with a US corporation. You could be liable.

This is a big problem when dealing with government officials at all levels who will drag their feet a lot without an incentive. You will often hear “what is in it for me, before I do anything for you?” They will work with an agent and whisper in their ear that they want a cut under the table, or require that their son be hired as an employee. Everyone wants a favor. At a deep level, the communists envy the US, and they procrastinate a lot. The older they are, the tougher it is!

One of the most useful tools I used in China was a Glossary of Business Contracts, which contained Chinese words with English translation. I used this to go through every single one of the terms – and quickly realized that I needed to use very specific words: Warranty, guarantee and terms of payment all mean very different things. Even though there are laws to protect intellectual property – you need to have a very good American lawyer, and they are very expensive. The root cause of this practice is that people in China were “burned” by German and Russian companies earlier in the century. These companies built plants and equipment, and then squeezed their Chinese buyers through contracts that they couldn’t get out of. As such, Chinese business people have become very careful.

Logistics and timeliness is another concern. Scheduling a shipment or business process to move product from point A to point B is a real ordeal. Simply finding and hiring a logistics carrier can take 3 or 4 or 5 days – and people are not in a hurry. If you wish to have a product manufactured you need to ensure that it is commercialized. Even if you have the drawings, you may require government permissions. If it is pharmaceutical you must connect with the commercial medicine industry. In steel, the contact is the Ministry of Metallurgy.

Finding a supplier in China is not easy. The best approach is to always get a reference. If you know of anyone who has done work in China, contact them and identify two or three potential suppliers to interview. References are critical. One of the biggest problems in sourcing from China is quality. Many manufacturers assume that they can do things their way, and not necessarily follow the drawing or specification. To ensure quality, be prepared to hire someone to oversee the design and manufacture of the product at all times so drawings are interpreted correctly. In negotiations, the manufacturers will always say “no problem” if you express concerns. Do not assume that this is the case: what matters the most is that they understand 100% what you are after.

A lot of US companies have agents in that part of the world. They may have an agent and an office – a phone call and a cup of coffee with someone there can help you to get a reference. Before you meet, contact the agent and have them establish a set of appointments with suitable supplier candidates. It could take you a lot of time to find people on the Internet or in the phone book. During the interviews, take your time, and spend at least half a day meeting with each supplier. Ask for multiple references – who have you done work for, what are their names and numbers? Then be sure to follow up with each reference (especially the ones in the US). Don’t expect them to be perfect – if 90% of what they tell you is true, that’s a good sign. Remember that the agent has ties with the manufacturers you are interviewing that are very tight. He is not going to upset these people for you.

It is always worthwhile to visit the facilities. The large Chinese factories will impress you, as they are absolutely incredible in size and scope. However, the smaller sized facilities may have problems. In some factories, it was obvious that they knew what they were doing but the working conditions were terrible. I was afraid to use the restrooms!

Don’t pay a supplier just because they shipped the material. If you have an agreement that states “payment upon shipment,” it is worthwhile to spend some time trying to negotiate terms for payment upon receipt, inspection and approval of the product in the US. You absolutely need to be tough on this. Otherwise, they have your money, and you have a product that doesn’t work. People assume everything is okay, and it’s not. In a worst-case situation, your US customer receives the product and discovers a defect. For example, I bought a desk heater, and then received an email from the company that they had found a default switch that could cause a fire – and had to do a product recall. In China this would not be viewed as a major problem.

In situations when a problem arises, have the agent explain the legal issues in detail. Ask about similar cases when there was a problem. The manufacturer can generally get out of these issues in a court of law. That is why it is very risky to write your own contract, which may not be recognized in a Chinese court of law. For that reason, you may choose to include an arbitration clause that specifies arbitration in a particular state – New York. Of course, the manufacturer will argue that it should take place in China. Stay firm on this point: “Do you want the business or not?”

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