With the recent onslaught of tariffs, our international manufacturing lawyers are increasingly drafting manufacturing contracts for Asian countries beyond China. In the last few weeks alone, we’ve drafted manufacturing contracts for Vietnam, Malaysia, Indonesia, Taiwan, and India. We also have seen a noticeable uptick in our Mexico contracts as well.
One of the issues our manufacturing lawyers perpetually face is pricing. How much will the factory charge to make widgets and, more importantly, how much will it charge for the widgets a month and a year from now. And what about currency flucuations?
Many of our clients (especially those recently stung by trade tariffs) are seeking to lock in pricing. If you are maybe going to buy 1000 widgets at $34 from time to time with no minimum requirements, no legitimate factory anywhere will lock in its prices for any extended period, if at all. They have no incentive to take a risk for an occasional buyer. But if you contractually commit to buy five million such widgets, the factory will be a lot more willing to give you a price lock.
The same holds true for currency risks — which really just translates to price in the end. If you are an occasional buyer of 1000 widgets, you likely will not find a factory that will commit to selling you its widgets for $34 for the next five years, no matter how much the Dong/Rupee/Ringgit/Bhat/Rupiah/Riel/Peso/RMB changes against the Dollar or Euro. If you are buying five million widgets, sharing in currency risks could be doable.
Yet many foreign companies believe it possible to get a price lock when it isn’t. Even worse, many foreign companies believe they have a price lock when they don’t. Most factories are well-versed in how to convince their buyers that there is a price lock when there isn’t. These factories lure buyers with a fake price lock and then when that price lock really matters, they easily and legally back out.
Factories dupe product buyers on price locks by refusing to accept a purchase they are under no obligation to accept. The below email from one of my firm’s lawyers regarding negotiations with a Vietnam factory illustrates this sort of legerdemain:
The discussion on price adjustment is meaningless. If the Vietnamese factory is not required to accept all purchase orders with the locked price, it can change its price simply by refusing to accept your Purchase Order (PO). It is standard practice in Vietnam (and pretty much everywhere else) for the factory to agree to a low price and in return get certain minimum order commitments from you the foreign buyer. Then when the factory’s costs rise (or less common, its currency rises), the factory will refuse to accept your purchase orders until you agree to pay a higher price. A price lock is meaningful only if the factory is required to accept your purchase orders with the locked price. In this case, your factory has rejected that approach, which means you will not have any price protection. Your factory understands this and this is why it revised the contract as it did.
You must decide whether you want to move forward with this factory without price protection or see if you can get price protection elsewhere. You might want to see whether you agreeing to commit to buying more from this factory will get you a real price lock or not.
What are you doing about product price locks?
