If you negotiate too hard, you risk cut corners and poor quality. If you don’t negotiate hard enough, you risk handing the factory your profits.
Everyone has his or her own negotiation style and there’s no single way to get the best deal, but here are some lessons I’ve learned that can enhance anyone’s bargaining skills in China without undermining quality and relationship down the road.
Start as early as possible. Try to get a non-binding estimate at the outset to make sure you’re in the ballpark. You don’t want to spend weeks or months discussing a design just to find out that prices are 10 times those in your break-even model.
Understand the factory’s costs. If the factory can provide you with a rough breakdown of materials, parts and labor (usually referred to as a “BOM” or “Bill of Materials”) you can independently verify those costs to estimate how much labor, overhead and profit the factory is including in their prices. If a factory’s prices are more than double the cost of goods, something isn’t adding up.
Understand the factory’s incentives. Even more important than the above, if you can figure out what kind of customer or project the factory is looking for, you’re on your way to a bargain. Keep in mind the factory may be looking for more than just a source of big orders. Access to new markets, using a new type of technology or a genuine interest in your product can motivate just as much as projected profits in some situations. Try to find out what drives decision-making and investments at the factory and frame your project to fit to get the best deal.
Sell yourself. Some people balk at this (“Why should I have to bend over backwards? It’s my money. The customer is king, right?”). However, remember that in most cases the factory is both larger, more leveraged and more experienced than you are. A better way of thinking about selling yourself is showing the factory how well your goals align with theirs, i.e. when you win big, the factory will as well. If the factory believes in your vision and sees a valuable role in it, you’re bound to get better terms.
Always have a competing quote. Finally and by far most important is to always have at least two quotes. Even if it is just an anecdotal second opinion from a friend, reference or Alibaba.com, it’s impossible to negotiate in a vacuum. The Chinese also use the expression, “Don’t put all your eggs in one basket.” Competition is an indispensable tool for negotiation in any setting. China is no different.
All five of these tips are best followed when you have a personal relationship with your factory. Please contact me at firstname.lastname@example.org if you know anyone who could use a hand with their Chinese manufacturing.