The news is everywhere: materials costs are increasing in China; there's a labor shortage in the cities in the 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 percent to 80 percent without substantial negotiation; those days are gone (for now). Now we routinely see the discount rate on consumer and industrial products somewhere between 35 percent and 50 percent. Certainly not as substantial a savings as in years past, but nothing to sneeze at. Savings of approximately 40 percent 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:
1. 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 less 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.
2. Get terms. Many legacy trading relationships came with credit terms that favored the vendor abroad. Your vendor may have required cash-in-advance, 30 percent down and net upon shipment or payment by letter of credit. 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.
3. 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 percent to 50 percent. 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.
4. Negotiate the price in RMB. The Chinese yuan (alternately known as the CNY and Renminbi, or RMB) is still funny money outside of China. Most Chinese vendors don't have the necessary licenses and permits to trade in U.S. dollars, and local banks here at home can't make payment in yuan. Small and mid-sized North American companies now have access to foreign exchange banks 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 of his court and makes you a more attractive customer.
5. 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 or 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."
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