The Chinese Manufacturing Times Are a Changin’
For companies buying products from China, doing business used to be straightforward – you placed an order, they shipped the goods. Those days are gone.
Chinese manufacturers are struggling, and buyers who understand the new landscape can negotiate deals that were unimaginable just a few years ago. Play your cards right to get better products, lower prices, and exclusivity. This article will explain the changes happening in China and how you can use them to your advantage.
Based on our work this year and ongoing client inquiries, we have observed that companies outside China are in the middle of a fundamental restructuring of relationships with their Chinese suppliers. Many Chinese manufacturers face an existential crisis as their business model unravels. Their decades-old business model of producing cheap products for sale abroad is under stress for a variety of reasons, both internal and external. This stress has manifested itself in a variety of ways in the relationships Chinese manufacturers have with their non-Chinese product buyers.
Savvy buyers can use this opportunity to get higher quality products at lower prices while strengthening supplier relationships.. It is a buyer’s market for those who are ready to seize the opportunity. But it helps to really understand the current market terms for these relationships and what currently motivates your Chinese supplier.
How Chinese Companies View Product Sales
Chinese companies do not do business the same way you do. They primarily see the US and other foreign markets through the lens of wholesaling as many products as possible, period. They are accustomed to just producing and selling products. They do not see the advantage of helping to establish deep sales channels and partners outside of China.
They want zero responsibility post-manufacturing. This is especially apparent when you raise the issue of a product warranty. They want nothing more than to sell ex-works (EXW) to you and for your future orders to be at ever-increasing order volumes, with zero warranty inquiries.
Getting Exclusivity for Your Preferred Sales Territory
When you try discussing the concept of exclusivity with Chinese manufacturers, they typically will try to deflect in favor of a broad but somewhat hierarchical approach. As used in this post, “exclusivity” refers to an arrangement in which a distributor is given the sole rights to sell or distribute a product within a specified territory or to a specified group of customers.
First earn their trust. At the outset of your relationship, they have no way to know whether you are a great partner for them. It doesn’t matter how much of a big deal you are back home. It doesn’t matter how big of an advance deposit you put down with them. The only thing that matters to them is actual product sales for which your company is the buyer.
Even if you can convince your Chinese manufacturer that you should be their preferred overseas selling partner, they will not refer to you as their dealer. But they may refer to you and their various other selling partners as their “general agents,” with their most favored agents having “priority” (优先) agency rights. They may also refer to you as their “core distributor” (核心经销商). These vague terms offer no real exclusivity. Don’t expect true exclusivity until you’ve been through a full year of sales.
The manufacturer will either ask you for or provide you with sales targets for each month. They will want the certainty of your forecast, but you should negotiate for a cumulative total goal rather than a rigid month-to-month volume requirement. Until you reach the annual purchase goal, the manufacturer will not seriously consider you to be an exclusive sales agent in your desired territory.
What Else Should You Expect in Your Distribution or Sales Agreement?
Nonrefundable Security Deposit
Even after you achieve your sales goals, you may have to pay for exclusivity in perpetuity with an evergreen nonrefundable security deposit. Your Chinese manufacturer will likely require several hundred thousand dollars up to a million dollars from you.
The contract term will initially be year-to-year, even if you express a strong desire to have your relationship continue for many years. Hit your sales goals and try negotiating a lower deposit or eliminating it entirely. No guarantees.
Extremely Limited Warranty
Even if your Chinese manufacturer agrees to provide you with a warranty, they may not be willing to extend that warranty to your customers. That may mean that you will need to deal with all customer warranty claims, especially if the manufacturer has no presence in your home country. This means that you get the burden of being a dealer without all of the benefits.
In a worse scenario, the Chinese manufacturer’s offered warranty may be so short that the product will not have arrived at your warehouse before it has already expired. This scenario necessitates a thorough pre-shipment product inspection process, which is not feasible for every industry or for every company.
Short and Unhelpful Contracts
If the manufacturer provides you with their preferred contract, it will be short and not particularly helpful to either of you. It will most likely look like a glorified but inadequate purchase order form. If it is at all long, it is probably something that your Chinese manufacturer was given once from an overseas purchaser, with everything your manufacturer didn’t like removed, with nothing put in its place.
You and your lawyers will need to slowly start introducing key concepts you need included in your contract to protect you and provide clarity to both sides.
Suggestions for Negotiation Points
If your Chinese manufacturer pushes to have you pay 100% of the purchase price upfront, you should push back for 50/50 or 30/70. 30% down and 70% upon delivery was standard pre-Covid, but with so many Chinese manufacturers now struggling, it is getting harder to get good payment terms. In some instances, Chinese manufacturers are hinting that without a higher down payment, they will not have enough to buy what they need to make your product. This is obviously a red flag, but if nobody will give you better terms and nobody seems any more financially viable, you may have no choice. Ideally, pay no more than 50% upfront and push for late delivery fees, such as 1% per day up to a 30% max discount.
The manufacturer may want to continue selling directly to consumers or wholesalers in your market, even though they agree to give you priority status. If this is going to be the case, you should get credit for those sales against your monthly or annual sales requirement. Even better, you should try to get a reasonable sales commission for those sales, especially if you will be dealing with any warranty claims for those sales.
The Start of a New Relationship Focus
From my work this year, it’s clear we’re entering a new era with Chinese manufacturers. We are seeing the greatest success in situations where the Chinese manufacturers have unique products but have struggled to sell their products in the US or the EU markets and now recognize that they know they need a good sales partner in the US or the EU to market and sell their products.
Educate manufacturers on succeeding in your markets and why they need you for the long-term and convince them you’re their pathway to success. And then you need to memorialize everything in a long-lasting contract that gives your company rights that no other companies have.
The playing field for buyers and Chinese suppliers has fundamentally shifted. By understanding these changes and negotiating wisely, foreign companies can secure supplier relationships that benefit their business for years to come. Find trustworthy partners, reduce risks, and align incentives through exclusivity. The era of cheap, mass production is ending. Strategic Chinese partnerships are just getting started.