Pricing, Negotiation, Contracts | Vetting Chinese Suppliers (Part 10)

In This Episode...

You've tuned into part 10 of our mini-series guiding you through effective vetting of Chinese suppliers that will help you to find the best possible manufacturer for your products (listen back to the entire mini-series on vetting Chinese suppliers here 👍).

If you've been following this mini-series, you will already have learnt about due diligence, factory audits and visits, exploring testing facilities, and much more when it comes to vetting suppliers. But if you're at the point where you are ready to start asking for quotations, there is still quite a lot to be learnt about the potential suppliers on your shortlist and that's what Adrian and Sofeast's CEO, Renaud, get into in this episode.

Show Notes

00:00 - Introduction and why getting quotations is a helpful part of the vetting process.

02:39 - When is the right time to start discussing pricing with a potential supplier and what can we learn from their prices? There's a difference between off-the-shelf products and more unique products that you're developing new for the market. For the latter, protecting your IP is important so that your product's unique features remain confidential.

05:41 - When to discuss pricing if you have confidential IP to keep secure. The risk of IP leakage (see additional resources below) here is a real threat. A useful strategy is to only release IP to properly vetted suppliers and hold off on speaking about pricing until this has been done (this means going through the whole vetting process outlined in this mini-series before sharing product details and requesting pricing).

You may also choose to omit the unique IP from your designs submitted for a quotation at an early stage in order to get pricing back which will be roughly equivalent to the true cost a supplier can provide when they see your complete product design - this helps you gauge market rate and get an idea of which suppliers are suitable on cost.

10:47 - What you should also discuss with a potential supplier when you're in a position to request pricing. Getting pricing means sharing technical information, but you should also be asking about business terms such as payment terms, incoterm, how shipping is handled, packaging, if the supplier stores your products in the warehouse and then ships them to different countries in batches, etc.

11:32 - How working with the wrong manufacturer on prototyping is a recipe for disaster. Worst case scenario for the maker of a new product is that by working with the wrong Chinese supplier on developing your product and creating its prototypes, you're effectively training them to become your competitor with your own product idea. This shows why vetting suppliers to select the 'right option' is so important.

13:47 - A summary of steps you can take to protect IP. Narrow down the right profile of manufacturer for your needs. Screen out poor candidates. For complex products and large orders, performing advanced due diligence is a must. For simpler products where changing supplier is easier and protecting IP may be less of an issue, some screening is still required. After this, have your one or two shortlisted suppliers sign an NNN agreement and make it very clear what is confidential and understand who works on it and is a party to this IP. Assure they don't share confidential IP with sub-suppliers unless they also sign the NNN agreement. Look out for telltale signs of suppliers who don't take IP security seriously, such as staff members sending important business emails from personal accounts!

18:06 - What can we learn to show us that a supplier is capable? How well does the supplier understand your requirements before quoting? Do they ask questions to get the right information that helps them provide a very accurate quotation and not surprise you with additional extras later on? You also need to make sure you give the supplier the right information to help them, though. So paying attention to what the quotation is based on (such as your quality standard, your intended warranty, etc) is a key indicator of whether the supplier truly 'gets' what you require.

25:03 - Mistakes buyers make when requesting quotations from Chinese suppliers. Negotiating a low price at an early stage before the supplier has all of the information they need may seem like you're locking a good deal, but if the supplier hasn't sourced components and don't know how long production will take, for example, price rises later are almost inevitable and will cause you a lot of trouble.

26:26 - Why doing product design and prototyping outside of China/Vietnam etc is a good way to protect IP and streamline the vetting process. Instead of vetting a supplier, then going through the product development and pre-production stages with them, you can do that abroad while you vet them and go to them with very specific designs and prototypes to get accurate quotations and start work quickly. This also means that the Chinese supplier wasn't involved with the design and there's less chance of IP leakage. This would typically be the model when using a contract manufacturer and such preparation helps show you as a serious and credible customer.

30:35 - Are the extra costs for developing products and prototyping abroad worth it? This depends on the expected volume and how much capital can be spent at this early stage. If you don't do this, working with a Chinese OEM could work, but assuring you own the IP is going to be a key concern before doing so, otherwise, you can go into partnership with them if sharing ownership of IP is acceptable and you're unsure if you can get investment elsewhere.

33:42 - How buyers need to be very clear when communicating requirements in order to help suppliers give them a solid quotation. Chinese suppliers may not be very organized, so you need to be sure to help them to help you by being very organized yourself - not sending them full information, or sending it piecemeal will definitely slow things down and cause misunderstandings.

34:50 - Closing tips for buyers who are new to manufacturing in China in order to have more success when negotiating price with suppliers, etc. Don't be tempted to try to drive down the price to the extreme, even if it makes you feel like you're a top negotiator (this will no doubt increase later or result in very poor quality).

Extra information you may find helpful

• We discussed manufacturing contracts as a source of protection and clarity for your supplier to understand your expectations in this episode of the podcast. 
• You should read this China Law Blog post about IP leakage which casts more light on the dangers of providing too much IP information to too many potential suppliers.
• Renaud suggested either working with a contract manufacturer or an OEM, depending on your requirements. We discuss the types of suppliers and their pros and cons here. 
• If you're interested in taking care of product development and prototyping before finding a manufacturer, this list of prototyping companies in China could be useful.

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