Spoke with a US manufacturer the other day regarding the OEM Agreement we are working on for him.  This manufacturer has been manufacturing in China for about a decade and he quickly let me know that one of the things that drives him nuts is how his Chinese manufacturers “change prices” on him, no matter what the contract says.  My response was to say, “I know.”  He then asked if we could stop that with our OEM Agreement.  My response was “probably not” and then I explained to him why stopping it might not be such a good thing anyway.

“Take your widgets,” I said (actually I mentioned his actual product, but you know what I mean).  “Stainless Steel is a big part of that.  If we put in your contract that your widgets have to remain at X price for three years, we may be asking for trouble.  What happens if the price of steel doubles during that time,” I asked. “I’ll tell you what will happen,” I said.  “Your Chinese manufacturer will either go back to you and ask to be able to raise its prices in light of its greatly increased costs for Stainless Steel or it will secretly start replacing some of the stainless steel in your widget. Which would you prefer?”

His response was pretty much as follows:

I get it.  You are absolutely right.  I know that because that is exactly what keeps happening to me.  The manufacturers start changing their products for me and always for the worse. Sometimes they do come back to me and ask for a price increase and then we negotiate one.

We talked a bit more and he agreed that the ones that came back to ask for a price increase were overall much better manufacturers than the ones that secretly changed the product on him and that he was no longer doing business with any of those.

I then told him that the generally best way to handle pricing in his situation is to set a price for maybe a year but be ready to be flexible on it.  I then noted that very few Chinese factories hedge their material goods pricing and that for right now at least, adjusting prices, no matter what a contract says is still pretty common in China, probably more so than just about anywhere else.  I then told him of how Chinese companies drive our commodities clients crazy.  One client in the paper business says that when the price of paper plunges, the way non-Chinese companies typically handle that is to pay the higher price to which they previously agreed or to come clean and say that they cannot afford to pay that price and then negotiate a lower price, with the expectation that they will be indebted to the paper seller for the foreseeable future. But Chinese companies, I am told, simply reject the paper, claiming it is bad and thereby avoid having to pay the higher price.  In other words, Chinese companies out of all companies seem to be the least willing to recognize that a price is a price.

Just one more thing you need to account for in doing business with China.

What do you think?