There are frequent misunderstandings between importers and their Chinese suppliers, and they could be avoided if the purchaser placed himself in his supplier’s shoes from time to time.

Andrew Hupert came up with an excellent reminded in American Negotiating Culture – Through the Eyes of the Chinese Counterparty. He describes the American style, but most of his points are also valid, to some extent, for Europeans and Australians.

Here are a few differences that are often shocking to Chinese negotiators:

Americans believe that negotiations end. To Chinese, the negotiation is part-and-parcel of the business relationship. As long as the counterparties are still engaged in business, the negotiation is supposed to continue. What’s the point of taking the time to build a connection if you aren’t going to grow the relationship through continuous give and take?

Americans want to decide everything in advance and put procedures ahead of human decisions. Chinese (and most other Asian) negotiators understand that conflict and differences of opinion are inevitable, and their business agreements usually assume that the leaders or concerned parties from each side will work things out informally. American contracts, with their penalty clauses and rigid requirements, are not only insulting and arbitrary, but seem designed to undermine any kind of positive relationship.

Have you ever wondered why some Chinese suppliers keep increasing prices for what seems like irrelevant excuses? It looks dishonest to you, but in their eyes it was to be expected.

That’s why I always advise purchasers to come to China regularly and hold face-to-face meetings with all their key suppliers at least every six months. Informal discussions go a long way, and they are only possible after you have build a human relationship.

Americans love deadlines, timetables and schedules, even when there is no business rationale for them. They can be arbitrary and illogical.

Yes, insisting on signing on a shipment date will make your supplier uncomfortable. BUT, if they are used to dealing with export customers, they should be the ones who adapt to you rather than the opposite!

Most disturbing of all, American negotiators are adversarial and rude. We insist on running everything and taking control of situations that we don’t understand.

This is a big one. You should always be reasonably friendly. Screaming on a supplier is like giving him the finger, and it means he will HATE you forever.

Anybody has other examples of cultural disconnects?

Yesterday I had a good discussion with Bergson Wang, who has worked in the CSR (corporate social responsibility) departments of Adidas and Puma.

There is one thing both of us believe: using audits does not work if the goal is to improve working conditions.

The system is broken

Systematic audits is the solution chosen by the vast majority of brands that follow a social compliance policy. However, this system is not effective, for two reasons.

First, the information contained in the audit reports is wrong.

If I take a wild guess, here is my estimate:

• 30% of the time, auditors get bribed and ignore some “inconvenient” evidence.
• 50% of the time, auditors don’t look deep enough, or the problems are very well hidden — remember, CSR audits deal with people and papers; employees can be instructed to lie and records can be fake.
• 20% of the time (and I am probably optimistic), the manufacturer deserves to pass (with or without corrective actions to implement).

And why can’t most manufacturers respect the “compliance” criteria? Because their customers are constantly pushing for lower costs!

I pointed to a study of the perverse effects of social audits in a previous article.

Second, big companies are happy with the audit system.

They appoint a third party that conducts the audits. The suppliers pay for the audits. In some cases, the auditing company has to give a part of the fees back to the buying company, as part of the deal.

If the buyer has its own audit team, they still charge their suppliers for audits. It quickly become a profit center!

So it costs them nothing. And it gives them the information they need for their annual report: “90% of the subcontractors we use are 70% compliant or above, and these numbers are better than last year”.

What big importers would do, if they cared

What do manufacturers need? Guidance and gentle pressure to improve, coming from their biggest customers.

And it is starting to happen. Tchibo, a huge German coffee chain that also sells clothing, household items, and electrical appliances (purchased from about 1,000 suppliers in Asia), is leading the way.

Their new program was initiated with about 100 key suppliers in China and other Asian countries. It is entirely voluntary. Suppliers that accept to give it a shot are not audited for 2 years.

Manufacturers get advice from consultants, who come to the factory every 3 months (at the buyer’s cost). These consultants facilitate communication between the management and the staff of the factory.

If the factory owner takes this initiative seriously, it is believed that ultimately he will save money:

• No more audits to pay for this customer
• Better staff retention at CNY, a more experienced workforce, better morale and engagement, better quality, better efficiency…

You can read more about this program here.

Many importers are frustrated and exasperated by the behavior of some Chinese suppliers, who are “playing games”.

Paul Midler’s book (Poorly Made In China) does a fantastic job at dissecting the tactics of a few Chinese suppliers. Actually, he originally wanted to call his book “The China Game”…

Unfortunately, Chinese exporters are experienced players. They are quite good at extracting dollars from their customers. And they are on their own turf.

So, what can foreign buyers do to avoid pitfalls? I can see a few solutions:

Changing the rules

If you keep losing at a game, maybe you should change the rules. There are two ways to do this:

• With a legally enforceable OEM agreement that binds your supplier
• With a letter of credit (no upfront deposit, easy to cancel)

Changing the players

I have seen many importers working for too long with a poorly-performing supplier. Once a factory screws up on an order, the relationship seldom gets better with time!!

So a solution is to switch to another supplier. I know, it is not easy and sometimes it is not realistic. But you should try to keep your options as open as possible.

Also, don’t hesitate to “punish” a regular supplier by suspending orders for one season. If you announce it and you do as promised, they will be more careful in the future.

Changing the way you play

Some buyers place orders without clear specifications, don’t pay enough attention during the sample approval process, and then push the manufacturer to ship “as soon as possible”.

This is a recipe for disaster. Be more organized, don’t ask for favors from your supplier, and you’ll be in a much better position.

Learning all the tricks

I have worked closely with an importer who, after 15 years of hands-on experience in China, was savvier than his counterparts. He was excellent at slashing prices, was setting tough terms, and was paying everything through letters of credit.

The problem with that strategy is that few suppliers in his industry accept to work with him, and he has gotten a bad reputation. Not something I advise!

Changing the playing ground

If you keep losing money on your China orders, why don’t you try to buy the goods once they are in your country, in stock?

For certain kinds of products (with low customization), this is usually possible. There are always new intermediaries ready to take this risk… New players in the sourcing game!

A few readers have asked me whether it is normal to pay for pre-production samples when they buy from a Chinese factory. So I thought I should cover this topic.

Short answer:

Basically there are no rules. It is all left to negotiation between buyer and seller. If are not a small buyer, you can probably negotiate for receiving pre-production samples for free, on the supplier’s account.

Longer answer:

Importers often ask for many samples:

• The development samples, until the “golden” (perfect) sample is approved and used as a standard. For garments it often means tens of pieces until the look but also the fitting of every size is approved.
• The pre-collection (“salesmen samples”), which is used to pre-sell the goods. I have seen buyers requesting 50 salesmen samples for each new style!
• The shipment samples, which are supposed to come from bulk production, and are used by buyers to evaluate the average quality. Needless to say, manufacturers don’t pick these samples randomly, and often prepare them in a separate room.

So, should it be free to make all these samples?

And should it be free to receive them by express courier?

For big buyers, the response is yes. They would not start a business relationship with a supplier who is not even willing to make the investment of sampling.

For smaller buyers, this is a different story. There is simply no standard . Samples are often sold at their FOB price, or double their FOB price (which seems fair to me, since they are made in smaller quantities and are still below cost).

The most important, I think, is to negotiate to have follow-up samples for free when the previous samples were rejected due to a lack of respect of the buyer’s specs/drawings. If you forget this term, you are in for angry discussions.

Why is it difficult to negotiate for free samples? The challenge for suppliers is to distinguish between time wasters (who keep asking for many samples but never place orders) and real buyers.

Before you blame Chinese greediness, you should understand that tens of people (if the supplier has some visibility on the internet) contact them every day asking for samples. And maybe 1% of these people has the potential to give significant, profitable, and recurring orders. The vast majority are hunting for free goodies or are operating a small shop (and haven’t understood that China isn’t for them yet).

If you are in the “serious buyer” category, this is something you should sell to your suppliers. If you can’t convince them, it is your turn not to be greedy. Pay for samples the first time, negotiate to pay nothing the following time, and let the volumes you buy speak for themselves…

A few years ago, China decided to be the biggest producer of photovoltaic cells and panels. They gave out billions of RMB in loans to local manufacturers (located mostly in Jiangsu and Zhejiang provinces, close to Shanghai).

What happened? As usual in China, excessive competition and oversupply. My Friend Gaetan from Eyo Green helps foreign buyers of solar panels, and he tells me prices keep going down. In what other Chinese industry do you see prices (in USD) going down over a 6-months or a 1-year period??

Manufacturers are forced to sell at a price that does not cover the amortization of their initial investments (in buildings and machines). It means they are in the red, and they might be incapable of paying the loans back.

It seems like the Chinese authorities decided to reduce competition, and to allow prices to go up again… By wiping out small suppliers. They make it look like they are setting a new quality standard, but a collateral effect is the death of the little guys (like so often in China).

Below is a more in-depth look at this new standard and its impact on the industry.

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PV panel industry may consolidate due to new quality standard

By: James Jakoplic

About two-thirds of China’s 400 small and midsize solar panel exporters could close down if and when the government introduces a nationwide quality standard, according to Shen Fuxin, secretary-general of Zhejiang’s Solar Energy Industry Association.

The standard, now being prepared by the General Administration of Quality Supervision, Inspection and Quarantine, is expected to cover all companies and all types of PV panels made in China. It is likely to be rolled out in 2012.

Although no specifics are available, analysts agree that a large number of SMEs will not be able to pass given the substandard quality of their products and their limited investments in R&D and production.

With the new regulation, the government hopes to improve the quality of solar panel exports. Since most suppliers target overseas markets, the government has so far lacked motivation to set up a national standard. Products bound for the USA or EU must be compliant with UL (Underwriters Laboratories Inc.) or RoHs (Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment).

The new regulation is also seen as an attempt by the authorities to organize the industry, which saw a growth spurt in 2009 and 2010. At that time, roughly 200 manufactures jumped into the line as a result of stimulus measures by the China government and higher EU demand. Most of these makers are in Zhejiang province, the country’s second largest production base for solar panels.

After a consolidation, according to Meng Xiangan, vice chairman of the China Renewable Energy Society, only about 15 large suppliers with core technology and vertically integrated production processes will remain.

Currently, only a handful of the more than 400 PV panel suppliers in China are big companies. The top names include Suntech in Wuxi, Jiangsu province, Yingli Solar in Baoding, Hebei province, Trina Solar in Changzhou, Jiangsu province, and LDK in Jiangxi province.

The big players are welcoming the new regulation for a number of reasons, including the fact that price competition will be less intense if many SMEs exit the line.

Currently, the average price for PV panels is between US$1.40/W and US$1.50/W, while upscale products may go to US$1.60/W. Some small companies, however, quote as little as US$1.20, which makes it difficult for companies offering high quality products to justify their higher prices.

In addition, larger companies will have access to talented personnel that become available if smaller suppliers close down. Also, some SMEs may merge or cooperate with their large counterparts, which could strengthen the latter’s business.

More challenges for SMEs

SMEs are facing a number of other difficulties as well. Demand from the EU, the top export market, has been shrinking since early 2011. In May, Italy slashed subsidies for PV panels by 18% to 20%. Similarly, Spain, Germany and France have already or are planning to cut their subsidies.

SMEs are the companies most affected by these changes. Exports of midsize company Zhejiang Aurora PV Solar Co. Ltd, for example, have dropped 50% year-on-year.

Competition from overseas producers is also adding to the pressure, as more nations are encouraging local R&D and production of PV panels.

Quality problems

Most SMEs focus on assembling PV glass and cells. Instead of thin-film panels, they mainly turn out crystalline silicon modules (including polycrystalline and monocrystalline PV panels) for both household and commercial appliances.

Typically, production processes are done manually at smaller factories. Many of these makers also have inadequate QC processes and few testing machines.

Products from such suppliers often suffer from uneven performance and low power output. The first problem results from low-quality components and fittings. The second issue is the result by inferior cells. For example, an 185W polycrystalline panel may in fact only work on 180W or less.

Although most companies offer a 25-year warranty, problems like these usually do not surface until after six to eight years of use.

James Jakoplic is a writer for Global Sources, a leading business-to-business media company and facilitator of trade with China. They have experience in all industries, from Electronics to Garments & Textiles.

If you are planning to attend a fair in a few days/weeks, you should read this article: What to ask for at a tradeshow (and afterwards too).

David Dayton came up with a great list of questions that importers can ask the exhibitors they meet on sourcing fairs:

Where is the facility and can you go to visit (this week while you’re in the country)?

Will the person that you’re speaking with at the show be in the factory when you go to visit (so you don’t have to repeat everything you’ve gone through today)?

Do they have business documents that they’ll let you see?

Will they let you talk with engineers and other managers?

Will they allow 3PQ [third-party QC firms]?

Can they give you referrals?

Will they sign (and keep) NDA’s and other agreements?

Can you meet and even QC sub-suppliers?

Do they have the correct export documentation?

Have they exported to your country/region on the world before?

How much of their production do they outsource?

How do they deal with non-conforming product?

I would only add “are they familiar with your country’s safety standards?” and “does your company belong to a mainland Chinese person?”. This list is really good.

He also came up with a list of questions that will allow you to evaluate whether exhibitors are a good fit for your needs:

What is there average order qtty? Is your order similar?

What is their average order time? Is your lead time sufficient?

Have they done similar projects (similar levels of customization, similar components)?

Can you communicate with them effectively and do you feel comfortable working with them?

I couldn’t agree more… Maybe you can also ask about the seasonality of their business, about what distinguishes them from their competition (generally nothing), and whether some top managers speak English.

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Related reading:

Should you tell China suppliers about your target price?

Top 10 mistakes committed by importers

I was invited to participate to two conferences in Hong Kong in October.

First, I will be on a panel during the China Sourcing Fairs (Organized by Global Sources, and to be held in Asiaworld Expo — next to HK airport.)

The topic will be “top 10 China sourcing mistakes”. It will be held three times (once for each session) on 14 Oct. at 3:30pm, on 21 Oct. at 1pm, and on 29 Oct. at 1pm.

The other participants to this panel will be Kevyn Kennedy from CBI Consulting, Thaddaeus Mueller from Fiducia Management Consultants, and Mike Bellamy from PassageMaker and CSIC.

The second one is Asian Sourcing Event. This networking event will be held at the Grand Hyatt Hotel on 19 Oct. 2011. It is located in Wan Chai (in downtown Hong Kong, close to the Convention & Exhibition Centre). It will be convenient for importers coming to walk the trade shows in this area.

There will be two speakers, and we’ll each have 30 min:

• Fundamental principles of sourcing in China: Common pitfalls and best practices with Mike Bellamy (from the CSIC).
• Quality control tips, tools and templates for audits and inspections with Renaud Anjoran (that’s me!).

Promotion code: if you enter “qualityinspection” when you sign up, you’ll get a $50 discount.

I hope to see a few regular readers there!

When I read articles from American newspapers, it seems like the USA buy most of China’s exports. Wrong!

European countries purchase about as much from China as the US, and then there is the rest of the world–this last category is the one that receives most of China’s exports. And its share is growing!

Mike Bellamy explains this trend in Chinese Exporters and New Markets:

In the past 15 years, if there was a China sourcing play to be made by fortune 500 companies, the move was done long ago. All of the big American companies and most of the medium sized companies have found their suppliers in China and have settled into a stable relationship. But the big and medium sized companies in developing countries — in places like Latin America and former Soviet states — are just now getting around to jumping on the China sourcing bandwagon.

Well, not only are these countries late to the outsourcing game, but their economies are often growing much faster. I heard many stories about Russians or Brazilians who are eager to spend their cash. Their QA processes are typically very light, by the way, and they often get burned. It is part of the learning process, I guess…

Ten years ago, if you showed me a pie chart of [Hong Kong trade show] attendees, I bet 70% of the buyers were from Developed Western Nations (N. America, Europe, Aus/NZ). These days I bring Spanish and Russian speaking co-workers with me to handle the growing number of buyers from those areas of the world. I bet the number of attendees from Developed Western Nations is under 40%. That doesn’t mean orders are slowing down for the sellers, it just means the factories are adapting to the new buyers.

Very true! And these newcomers are the ones who sustain China’s continued growth in exports.

Manufacturers like to diversify their portfolio of customers, especially since the brutal recession that hit North America two years ago. So they welcome this new source of business.

The takeaway for importers? Chinese suppliers often have to turn some customers down. They have the choice of whom to serve. Make sure you are seen as a good customer.