What Does This Mean To Your Business?
The news is everywhere: materials costs are increasing in China; there’s a labor shortage in the cities in southeast and wages are trending upward; and the US government is pressuring the Chinese to revalue their yuan (RMB). Is it time to bail on China and partner with suppliers in a new low cost country?
We don’t think so… It used to be commonplace to realize a ‘China Discount’ of 65% – 80% without substantial negotiation – those days are gone (for now). Now we routinely see the discount rate on consumer and industrial products somewhere between 35% and 50%. Certainly not as substantial a savings as in years past, but nothing to sneeze at. Savings of approximately 40% generally aren’t conceded by existing suppliers.
But how can you maximize your company’s cost savings in this environment?
There are five sure tactics that produce results in China:
- Focus on products that have high labor content value. Products whose selling price is dominated by raw material costs (corrugated stock, sheet metal, bulk wire, chemical feedstock, etc.) aren’t likely to cost lees in China than they do at home. The costs to install and operate automated production lines are fairly even around the globe. instead, focus your procurement efforts on value added products that require multiple steps to manufacture and package. For example, printed knocked down corrugated packaging, formed sheet metal enclosures, cable harnesses and power distribution bus bars and polymerized plastics.
- Get terms. Many legacy trading relationships came with credit terms that favored the vendor abroad. Your vendor may have required cash-in-advance, 30% down and net upon shipment or payment my letter of credit (LOC). It’s time to push back. Customers with long term trading relationships should ask for a minimum on net 30 day terms. Remember that net 30 is still the equivalent of prepayment when you factor in ocean shipping times.
- Deal directly with your vendors. We’re constantly surprised at the number of North American companies that place their orders through agents, brokers and trading companies. These intermediaries don’t often add tangible value and can mark-up your cost by 15% to 50%. Many buyers don’t even know that the company that’s selling them the goods isn’t the manufacturer. This isn’t sensible in tough times. Do your homework and find out exactly what’s contained (or hidden) in the commercial chain. An easy way to start is to call the factory and ask to speak to your contact. If s/he’s not there, it’s a red flag.
- Negotiate the price in RMB. The Chinese yuan (alternately known as the CNY and Renminbi, or RMB) is till funny money outside of China. Most Chinese vendors don’t have the necessary licenses and permits to trade in US dollars and local banks here at home can’t make payment in yuan. Small and mid size North American companies now have access to foreign exchange banks (more on this in next month’s newsletter) and can arrange for direct payments in RMB. You can also find effective currency hedging tools for smaller companies. Paying your vendor in yuan takes currency variation out his court and makes you a more attractive customer.
- Know your vendor! Beyond the common sense benefits of establishing control over import compliance and control issues, if you don’t really know your vendor, there’s little chance that you’ll avoid that price increase letter. If you’ve never met your supplier in person, if you’ve never even spoken to him of her (a consequence of online manufacturers’ portals and the proliferation of intermediaries listed above) it’s time to change that. Pick up the phone, visit, make a plan to reach out and establish a direct relationship.
Try these reliable tactics to stabilize your pricing and make the most of the ‘China Price.’
Vendor Profile: FutureStar Arts & Crafts Co., Ltd.
FutureStar produces a wide range of costume accessories, promotional items and toys for the apparel, costume and gift industries. They are based in Yiwu in eastern China and take customer service seriously. FutureStar has a comprehensive new product design group and low sample charges. They also have reasonable minimums and take pride in manufacturing products that are compliant with US product safety standards. Please see: http://www.party-china.com/en/main.asp
Jack Daniels is the president of Buyers Bridge Corporation. He can be reached at 617-401-7373 or jdaniels@buyers-bridge.com
