As I've mentioned a number of times, the key to price negotiation in China, and probably in any negotiation is knowledge.
If you know what the price "should" be, you are already half way there.
One warning: Chinese factories and retailers in general often use what Westerners describe as "tricks" to fool us into buying. This is part of the Chinese negotiation style and can catch the unaware.
For example, in a retail situation, many visitors to China will be offered a very inflated price, which they successfully negotiate down - e.g. a leather bag from 3000RMB down to 1000RMB, they think they have got a bargain where in actuality the retailers cost was perhaps 50RMB and they could have sold it for 150RMB!
A more relevant example is where Chinese will negotiate down to a very low price or perhaps even offer an extremely low price to begin with - this usually means they will substitute components or materials with low quality or recycled material.
This is very common, and you will receive "low-ball" offers from factories to catch your attention only to find out later you end up paying much more to achieve the quality you require.
When I first began sourcing products I found I picked up a habit of calculating the price of any new China product I came across.
A router for my computer, a promotional mp3 player, a new window, bike etc. I found I could quite accurately estimate the cost of any item - often at the behest of friends and family whose item I was examining.
Now, I can almost automatically estimate the cost of any item and you can too by following the simple formula:
Production Cost = raw material + energy + labour + overheads & tax rebate
1. Raw Material and Energy
The price for raw materials such as rubber, plastics and steel fluctuate - sometimes greatly.
You can quite easily track the price of relevant commodities by going to one of the trade portals. The material price makes up a significant portion of the cost calculation.
2. Factory Labour Costs
China labour costs are one of the reasons China is the "Factory of the World". With low labour costs China is able to undercut most of the world by having lower production costs.
Knowing the labour resources required and their wage costs will enable you to calculate the production costs.
For example, will your product require high skilled workers?
Recently China has seen an explosion within the supply industry particularly in Southern China. Despite this, wages in central and northern China have remained the same and are often 50% below levels in Southern China.
This should be a factor in your manufacturer search but can also come up in negotiation - if a factory in northern China is quoting the same price as a factory in Shenzhen, you are correct to ask "why"?
3. Factory Overheads
Factories need to be built or rented, they need to be on land that has been purchased or rented, they need lights on they need to pay management and so on. Just as in any business, factories in China have overheads to pay.
Knowing these costs and being able to estimate how they will be spread over total production will enable you to accurately calculate costs.
For example think about the comparison between a factory that makes 1000 cars a year and a factory that makes 50 million USB memory sticks a year.
4. Tax rebate rate
This is a good way to indentify someone new or an â€˜old handâ€™ in China.
Companies in China get a tax rebate from the Government when they export.
This is an incentive by the Chinese Government to export. After joining the WTO the Government was pressured into reducing rebate levels however during the financial crisis the levels were raised again in order to stabilise an industry the Chinese economy is reliant on.
Tax rebates are generally somewhere from 10 to 17 percent which the factory will receive once the goods have left China.
5. Exchange Rate
Fail to take exchange rates into account and you could be in big trouble.
Example: I know of a case where a construction supply company were importing huge quantities of items for use in large projects in Australia. In a period of a few months the Australian dollar dropped from $1 to 6RMB to $1 to 4RMB.
Unfortunately for them, their contracts were already signed and they had to supply at prices which for them were now 1.5 times higher!
Also, exchange rates can affect material or component prices. Factories may import components from outside of China so if the exchange rate changes it could impact the production cost in this way.
Probably the most obvious factor is your order quantity. The larger the quantity the lower the cost per unit of overheads and therefore the lower the price. In larger production runs factories can also achieve greater efficiency.
Price Negotiation in China
1. During your manufacturer search you will have asked for quotations from a range of factories.
Now you can compare prices to create a starting price.
2. Know your raw material prices, labour factors and tax rebates.
3. Know your product. Will the factory need to produce a mould or do they have existing stock.
This kind of knowledge of your products production process will not only allow you to conduct a negotiation effectively but will demonstrate to the manufacturer that you are a serious buyer.
4. Meet your Chinese manufacturer and establish a relationship.
In the West we can sit down and start business immediately. In China this would be considered rude. Begin by exchanging business cards and get into small talk such as getting to know them, children, are they married.
Chinese love a good (appropriate!) joke so use a bit of humour to set a warm tone for the rest of the negotiation.
When you begin your negotiation, use real reasons for a price reduction from your knowledge of tax rebates etc learned during research.
Don't just demand a price reduction or you won't give them your business - unless you are Wal-Mart they will think you are rude and won't take you seriously.
5. Chinese manufacturers like to deal with seasoned buyers, they don't like to deal with (or waste time on) new buyers.
Early on, I often found my Chinese colleagues could always reach the desired price faster than I could, if I could at all, why? Because the staff in the factory understood that a Chinese buyer representing a foreign client was much more likely to buy than a foreigner contacting them from overseas or from within China.
With everything you do from the way you conduct yourself to the way you present your company and the knowledge you demonstrate in negotiation you need to reassure them you are a serious buyer that will follow through with an actual order.
Conversely if you don't demonstrate you know what you are doing, manufacturers will automatically take advantage of you and even use bully tactics against inexperienced negotiators.
6. You should negotiate a price relevant to your order size.
The larger the order the lower the price. Many will argue you should lie about this but it really comes down to your skill as a negotiator.
While some will negotiate a price for a large quantity then drop the quantity at the last minute and claim it is a trial order, unless you can manage this effectively you will most likely end up with problems.
I recommend being honest and getting a fair price rather than using tricks to achieve a low price, as most likely that will be returned in kind by the factory with tricks of their own such as delayed orders, low quantity, "lost" items and so on.
Negotiation is important and you must be in China if you want to take negotiation seriously.
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