by David Dayton in 'Silk Road International'
A couple months ago I ran across a very interesting piece about working with suppliers. The story was that suppliers are no longer willing to work with buyers that are “difficult.” Typically the “we don’t make much profit” line is part of the give and take of the pre-order negotiations. But this time, when the buyer pushed back the sales rep imediately got “very angry” said they should trust them and then ended with “we don’t want to work with you anymore.”
What’s odd is that I bet that we’ve had a similar situation happen to us 5-10 times in the last 6 months. It’s odd because it’s completely new; we’re still shocked each time it happens. Like the buyer in the story, we push factories for better quality or lower prices (or even just to meet contracted standards) and they instantly give up and offer our mold fees or deposit money back. Yes, offer to give us our money back, just like that. We’re not putting inordinate amounts of pressure on them, like in the buyer’s case, we’re just following the typical pre-order dance routine.
Before we get into what I think is happening, I will admit that margins are small now–this is true. And they are smaller than before so there really is less room to negotiate. But there have been tight margins in many industries for a while and no one went to Def Con 4 that quickly. It’s more than economics for both sides.
I think that I’ve been here long enough now to see that China has changed in more ways than just the infrastructure. The Olympics, the Sichuan earthquake, the Western economic meltdown vis a vie China’s continued growth, increasing inflation (and the accompanying dissatisfaction), the college graduation of the first wave of “little emperors,” millions of new cars, millions of under or un employed college grads and many other social other events have changed the dynamics of the Chinese psyche.
Entry-level employees (newly minted college grads) who typically have the English skills that put them into factory sales offices are not the 30 and 40 somethings that grew up in hard times of the 70’s and 80’s. These two generations look at foreign customers completely differently. Foreigners aren’t only “normal” for the younger kids (who probably had foreign teachers in high school and college), they are probably a pain in the ass—stricter standards, more demanding, and all in ESL—much more difficult to work with then domestic clients. Order frequency and qtty’s from foreign buyers are all less then they were three years ago too. And as “everyone on both sides of the [pacific]” knows, this is the Chinese century, so foreigners should take their attitude down a notch or two, right? (Don’t let this, or this or this ruin you red-tinted dream.)
I completely 100% agree that you’ve got to let your supplier make some money. In fact I’ll go so far to say that if you as a buyer are getting exactly what you want for your expected target price you shouldn’t even care how much your supplier is making, even if it’s 1000%!
But, I don’t agree with the article’s conclusion. The author said that Chinese suppliers really are not “asking for much” and so foreign buyers shouldn’t worry about paying “a little extra.”
To me, “a little extra” is Pandora’s box—you open the door a little and you’ll never get it shut again. Especially when the person getting the money is the one making the decision about what both disclosure and the amount of “a little extra” are.
And I don’t think that it’s true either, that suppliers aren’t asking for too much. In my experience in China, suppliers ARE asking for too much. And often after contracts have been signed. Anything over contracted prices is too much in my book. And suppliers are typically asking foreigners (as opposed to other Chinese buyers) for more of the “too much” as well. In my opinion, anyone that tells you that Chinese and foreigners get the same price are either a large MNC (volume/leverage) or they don’t speak Chinese and so don’t really know all that’s going on.
This conclusion is dangerously close to the xenophobic argument of “foreigners are rich, so of course they should pay a little more.” (Or conversely, “Chinese are poor and have been oppressed by the West for 100 years so we and you both deserve this.”)
I’ve been here in China since the days of two official prices at hotels, airports, train stations, supermarkets, etc. And, while working for a Chinese company (e.g. getting paid Chinese wages) back then and paying Chinese taxes now, I’m of the same opinion: Why should it matter to the price where I’m from or what I look like? It shouldn’t! Just because I’m getting the quality I want does NOT mean that I should be willing to pay more for it than what we’ve contracted for or higher than market price.
This argument is based in the fallacy that “it’s fair” for those with relatively more to be (secretly forced to) pay more for the same things that others are getting for less simply because they look or sound different. But you can’t even read that sentence without realizing that it’s certainly not fair, not to mention that the standards are so subjective that it could never be “fairly” implemented. Especially when the other party involved in the agreement is the one determining “fair.” It’s all about one party’s justifying getting a bit more than they agreed to.
The other end of this is that right now most foreign buyers are working in a depressed economy where every “little bit” is more than they may be able to honestly handle. Many Chinese suppliers don’t realize that while there may indeed be a 100% mark up from COG to wholesale prices, R&D, design, higher costs for labor, professional services, warehouse space, transportation and other things eat that margin up much quicker in the West than in China—which means that a supplier’s clients maybe working on equally thin margins. I personally know of many companies that are doing the exact same things that Chinese suppliers are doing, namely working on little to no margin to keep the company going and the brand alive in the recession in hopes that it will be profitable a couple of years from now. (No, I’m not claiming that westerners are poor. I’m saying that recently the margins on both sides are very low to non-existent.)
The common response by Chinese (and other SEA people I’ve talked with about this) is three fold. 1. Yea, but I don’t do it like that. 2. It doesn’t happen as much as you think, you’re exaggerating. 3. You’re just bashing the Chinese. You’re lying to make China look bad.
First, “Yea, but I don’t do it like that” is usually followed by some convoluted version of “yes, but they still get what they want, I just get a little bit more than we agreed.” I’ve never been clear how these two positions (“they get what they want” and “it’s different than we agreed”) co-exist. You either follow the agreement or you don’t. The typical problem is when the supplier can save money and then doesn’t feel that there is any reason to pass those savings along (or even share that there were savings in the first place).
I would agree with the supplier (like I said before) if the contract was for a fixed price/fixed costs/fixed quality and all those could be met without additional issues or even additional disclosure. But, so often the costs savings come at a price—lower quality—and the question of disclosure if left up to the one benefiting from not disclosing (if the client says “I want to share the savings” the sales guy gets less). Oftentimes the dip in quality isn’t noticeable (but it certainly would be found in testing—if you’re not testing, it’s you, the buyer’s, fault).
The real issue here is the standard “If no one knows, then why is it wrong?” Just because this is common, and many say, “It’s just the way it’s done here,” this isn’t “Chinese culture.” I don’t care how many people are willing to claim that it is. It’s wrong and illegal here and in the US and just about everywhere else too.
Suppliers at some point have to be responsible for what they sign up for: contracts with specific standards for quality, prices, everything. So where is that point? When is the “difference” too big and the “little extra” money that could be made irrelevant? Obviously, there isn’t a acceptable sliding scale for quality/prices—and it’s never acceptable to the buyer if the supplier is the one make the decision independently.
Second, “It’s really not like that, you’re exaggerating.” Just like I can’t speak for what it must be like to be a Chinese or an ABC or a woman or any number of things, Chinese people can’t tell me what it’s like to be a foreigner (or a foreign buyer, for that matter) in China better than my own personal experiences over the last 12 years can. So from my experience let me say this: I KNOW that this happens almost daily and I’m sure that there are other times when I don’t catch it as well. I do not think that I can underestimate the degree to which is CONSCIOUSLY happens—and that’s just based on the events that I’ve been able to confirm!
I have had multiple Chinese (and Thai) friends go shopping with me and after a while get embarrassed at how many times it happens and they have to keep sticking up for me. I can’t count the number of times in the last 16 years I’ve had shop or factory owners/workers tell the Thai/Chinese friend next to me that they’ll just charge a bit more since I’m a foreigner. And when I bust them, since I speak the languages, there is always a laugh (cover up for a loss of face) and the honest retort—“You know, that’s how we do it. You’re a rich foreigner, just a little bit more won’t hurt you.”
Again, anyone that tells you this doesn’t happen either is naive or ignorant. And when it becomes personal to those that are naive, all of a sudden they see it more often than they did before.
I’ve had Chinese family members and employees almost get into fights with people over this issue. It’s uncomfortable the first couple of times, but when they’ve see it for the umpteenth time they get frustrated with it too. When you’re buying food on the street it’s obnoxious, but when you’re ordering tens of thousands of dollars worth of product from a factory it’s neither ammusing nor acceptable. My wife has had to stop taking clients and family visitors shopping because she was continually getting in fights with shop owners because it was happening every single time they went out—you take a couple foreigners out shopping and the price goes up. Automatically.
But it happens other places too—not just shops and factories. I’ve had people tell me different prices than what is listed on menus, on fare charts or what’s written on signs or not give me a sale price that’s advertised. When I was making Chinese wages, it would make me angry, but there was nothing I could do (other than beg, which worked sometimes) as this was the legal standard for hotels, buses, trains and airplanes in China. But now it’s technically illegal. But changing the law is easier than changing traditions. Hell, Chinese charge other non-local Chinese higher prices based on their different accents too.
The only place I’ve found that it never happens is in the supermarkets.
Third, “Liar liar pants on fire.” A number of times people have basically gone ballistic on me. A number of people that comment on this blog, people that overhear foreigners complaining in a pub or people with just a little to much patriotism to let foreigners share real experiences have tried to either shut me up or argue that I was lying about China for some other personal/hegemonic agenda. Sorry. No agenda in talking with friends in a pub and no agenda in asking factories to be honest (other than getting my contractual prices and standards).
Admittedly, mine is one of many versions of the reality of doing business here. There are certainly other opinions. But to claim that mine is somehow less valid because it’s “foreign” is exactly why there is a problem—bad habbits will continue until they are confronted and discussed and replaced.