For many distributors, the “micro OEM” craze going on now has been a modern day gold rush. And in our current economy pennies can mean the difference between living to fight another day and having the company that you have spent your blood sweat and tears building from the ground up sink, or at best sold to the highest bidder (Just ask any of the distributors going out of business or cashing out this year. I won’t name names). These tips are for businesses who are just starting to make the move to buying direct from the Chinese manufacturer. China is a different universe and many are dumbfounded when I explain that many manufactures are making around 30 points NET on their overseas orders. Chinese manufacturing is a bloodsport and the reality is you can never know the bottom price for what your buying, but you can take these steps to get as close to it as possible…
#1 Are you dealing with them in English? Rookie mistake #1
This targets you as someone new to the game and a rube ripe for the picking. Spend 50 bucks and get a translator to talk FOR you. These factories pay a premium for bilingual sales staff and, believe me, they pass that premium off to you and then some. The prevailing opinion of many Mainland Chinese businesses is “Foreigners don’t know how much it should really cost, so charge them what you think they will pay.” and to their credit they are sometimes right, though far less so now than in the good ol’ days of pre-2008. By working through a native speaker, businesses will be less inclined try for the big margins.
PRO TIP: Many trade shows will have these kinds of people lurking about. Alternatively, you can find these kinds of people on wholesale forum boards like HKTDC and Global Sources, under “Sourcing Agents”. Avoid “Sourcing Companies”, as these can carry their own margins, often costing you more than contacting them directly.
#2 Do they know you? Ouch, big mistake #2
When I have advised companies looking to go into mainland China, in most cases I suggest they take it a step farther than just a translator. If you are in Mainland China for the long haul, for 500 bucks a month you can buy eyes on the ground to represent your company, semi-anonymously. Working through an intermediary that gets paid directly out of your pocket can cut the opening price significantly and shows that you are a real player. This person can also appraise the size and conditions of the factory, the competency of it’s management as well as offer insights into the situation that would be otherwise lost in cultural and lingual translation. After the groundwork has been laid and some rough price-points established, you can make formal introductions and build the groundwork for a more personal long term relationship.
PRO TIP: Whenever possible get someone who has an eye for quality. Getting someone with high quality standards and an eye for detail allows them to double as the vanguard of your quality control and saves valuable time. There is no sense in haggling out the best price with someone who can’t consistently measure up to your standards.
#3 Relying on their quality control? That’s mistake #3
So when you have finally whittled down the price to somewhere close to bottom, the factory your dealing with is going to do everything in its power to keep those pennies. The first way they are going to do this is by letting QC slide. If a batch of 5000 pieces comes back with a small defect, believe me they are going to do whatever they can to cover that up and stick you with a truckload of defective product to protect their bottom line. For around 1500 bucks a month you can get your own foreign QC team to make sure that your getting exactly what you ordered, the way you ordered it. In fact, with the increase of trade between Brazil and Mainland China, there is a whole industry of Brazilian staffed QC teams that specialize in doing just this. If you’re planning on doing long term, big volume deals, having your own eyes in the factory is a necessity.
PRO TIP: If a QC company of full time staff are too steep for the volume you are doing, you can usually get away with getting your sourcing agent or an independent 3rd party to take detailed pictures and video, as well some some basic stress testing on site. However, whenever able, use professionals. Caveat emptor!
Now that we have covered the most common mistakes, let’s take it up a level and talk how to REALLY get the best bang for your buck.
#4 Understand what the factory is actually doing and pay accordingly.
It’s vital when dealing with factories that you understand exactly what they are actually manufacturing. It is surprising to a lot of people that many factories are advertising whole products that they themselves don’t even make. Their part in the manufacturing process is merely a point of contact for those less in the know to buy from. Do your due diligence and make sure that if you are buying a pre-made product OEM. Check that they have the correct patents in both engineering and design. If they lack those patents, chances are they are getting that product from someone else, or worse, stealing the design from the actual patent holder which could get you into a heap of trouble.
PRO TIP: When you are sent promotional pictures of a product you want to pick up, throw the image into a reverse image search like Tineye. This will not only show you if other “manufacturers” are selling this product, it will give you a good idea of the current global saturation of the product. Your “brand new” patented Super-Power 5000 might already be sold by hundreds or thousands of other distributors. Either way, knowing this is another bullet in your gun come negotiation time!
#5 NEVER get the manufacturer to arrange shipping
Even if you manufacturer is not marking up the shipping costs, manufacturers have literally no reason to get you the best price on shipping. Typically they will ship TNT or DHL air the day after the products are ready. Now the day after that could be 20% cheaper, however this isn’t going to factor into their thinking. Product out is money in the bank. Wash, rinse, repeat. I find arranging shipping independently translates into 20-30% savings on average and, in the current sink or swim market, those pennies count.
PRO TIP: Instead of going direct with a shipping company, hire a Mainland China forwarding company. They collect orders from multiple sources and arrange them together, buying bulk space on the plane. Provided you can correspond in Mandarin and you can be a little flexible with the landing time, a forwarding company can shave an additional 20-30% above and beyond direct shipping’s best rate.
#6 Whenever possible, pretend to be from Mainland Chinese company
This is an uncomfortable truth. I have tested this time and time again at trade shows, in wholesale negotiations, at virtually every level. I have my sourcing agent contact the seller (even though I speak Mandarin) to enquire about pricing. Then I contact them independently. In most cases the initial price they quote me is 50-150% higher than the initial price my agent was quoted. Now after negotiation I can usually bring this down to the same final price, but there are enough times where the seller would outright refuse to even give me the same price they quoted my sourcing agent. The uncomfortable truth is there are in many cases two, or even more, price lists; one for domestic and one or more for international. This applies to supply, production, even shipping to the exact same location through the exact same forwarder. With larger or newer manufacturers this is less of a problem, but it never hurts to be prepared and make doubly sure you are getting the real price.
PRO TIP: I know many companies that set up a small office or even a mailbox just to have a Mainland China address. In this way they maintain the image of being a domestic business. I’ve employed import/export companies to act on my behalf in the past and had shipments sent to their warehouses then forwarded to Canada or the US. It sounds like a lot of rigmarole but depending on who you are dealing with, the savings can be shocking.
China has always been, and quite possible will be for the foreseeable future, a double-edged sword. It’s really up to each business to weigh the pros and cons before making the leap across the pond. With crashing MOQs and rock bottom pricing, even the smallest business can afford to do it. Just make sure the dullest side of the sword is facing you.