China Law Blog

Paul Midler's always excellent China Games blog just did an interesting post, entitled, "Survey: Testing Affects Price," on the correlation between price and quality in China. The post is on how prices quoted for Williams Loft, a distributor of mattress products, rose after Williams Loft made clear it would be verifying quality:

The company [Williams Loft] sent out requests for quotation (RFQ) to twelve suppliers in China. Each was given the exact same set of specifications. The company did nothing with the quotes, but went back to the same factories six weeks later. On the follow-up, they mentioned in passing that they would be verifying quality through a testing agency. Guess what the impact was of mentioning a third-party tester: Ten out of twelve factories immediately moved to raise prices by an average of 20%. Why would a factory raise its prices after learning that customer would be checking quality?

The answer to Paul's question is that, at least to a certain extent, the initial quotes were based on a different product. The initial quotes were probably issued based on a belief that Williams Loft was not terribly serious about quality; the second sets of quotes were based on the assumption that Williams Loft meant what it said. Now I know this sounds funny, but this sort of thing runs rampant in certain industries. For example, in the fish business, many companies order ten kilogram boxes of fish, but with a wink and a nod, the Chinese supplier provides nine kilogram boxes. I have a client who, unwilling to go along with this artifice, makes very clear to its Chinese suppliers that it truly wants ten kilograms of fish in its ten kilogram boxes. Not surprisingly, the price is about 10% higher.

The lesson to be learned here is that if you are serious about quality, you must tell your Chinese supplier of this again and again. One of the things we always advise our clients is to be sure to put all quality specifications in writing, in excruciating detail. Assume nothing and reveal and be clear of everything.

UPDATE: China Economics Blog just did a post on this that teases out a bit more from the survey and postulates the following three reasons why the Chinese suppliers increased their prices when told there would be quality testing:

The question is why?

Clearly, it costs more to produce higher quality but given the request was for identical products, quality should have been equal and hence price should not change.

Possible answers include:

1. These companies usually cut corners allowing them to undercut rivals - an example of quality fade. Because the buyer is signalling its serious attitude to quality the firm provides the "real price" for a given level of quality.

2. The firm, by signalling its intention to employ independent inspectors, that it can afford to pay more and thus the price is hiked up on them.

3. The sellers increase their quotes as they see the buyer as "trouble" that will induce additional internal costs of monitoring and the potential for damage to its reputation from any returns or failed inspections. Thus the price rises to compensate for the extra hassle.