By Steven Chow

Price negotiation is one of the most tricky parts in international sourcing. But meanwhile it isn’t that difficult if you do enough homework, research and follow some basic principles.

Some misconceptions:
I have visited China, people seem to bargain for everything, oftentimes we can cut down the price from 100RMB/pc to 10RMB/pc, so it is really hard to figure out where the bottom price is.

Clarification:
Sellers in low-end markets and stores do quote ridiculously high prices, waiting for buyers to cut it down dramatically, especially in retailing. But  in international trade practise, the prices are quoted very reasonably as the price in the market is relatively transparent, so you shouldn’t expect to cut the price down dramatically, like from 100RMB to 10RMB.

What factors affect product price in China?

1. Raw material and energy price.
The raw materials price like rubber, plastics and steel changed dramatically during the past few years. Before the financial crisis, the raw material price increased several times and then it dropped dramatically when the recession came. The material price fundamentally affects the cost of products. Some seasoned buyers will research the raw material market price in China to roughly figure out the cost of products.
Comment: When I worked for an export company selling UL Christmas light to the U.S, a senior buyer from a U.S company left a very deep impression. He asked us about our raw material price every time we were negotiating the price, surprisingly, he could roughly estimated how the price change of raw material affected the finished products. So the buyer will need to learn two things, first what the cost of products consists of (labour, energy, raw material, overhead etc.), secondly, how price changes of each part affects the overall price.

2. Tax rebate rate
The Chinese government gives export company tax rebate to encourage exportation. After China joined the WTO, the Chinese government tried to lower the tax rebate rate. But since last year, especially after the start of global recession, the Chinese government began to raise the tax rebate rate to control the panic in export and manufacture industries. According to a notice released by the Ministry of Finance and the State Administration of Taxation, China would raise export rebates on 3,802 tax items from April 1, including textiles, light industrial goods, electronic information, iron and steel, non-ferrous metals and petrochemicals. The tax rebate rate for CRT mode televisions will increase to 17 percent; textiles exporters will get an increase in their rebate to 16 percent; the tax rebate rate for some light industrial goods such as metal furniture will be raised to 13 percent. For inquiry of tax rebate rate for specific product, please visit China Customs.
Comment: It is a good excuse to ask for a price cut if you know that your supplier gets a 17% tax rebate rate instead of 10%.

3. Labour price
Labour price has risen very fast in these past years, the salary of skilled workers in South China has increased 100% in the past 5 years. But interestingly, the labour price in North China or inner land of China is almost half the salary level in South China. That factor can be considered during negotiation.

4. Operation overhead
The factory needs to rent land, hire management personnel, pay benefit packages to the staff, those factors also affect the price.

5. Currency appreciation
The Chinese Yuan has been appreciating from 8.28:1 USD to 6.80: 1 USD within a matter of one year, the appreciation will definitely go on. But for some short period of time, the Chinese Yuan might drop against USD and other major currency as the Chinese government seems to be interested in using currency as economic weapon..
Comment: It will be useful to know that the Chinese Yuan has dropped last week while the Chinese supplier is trying to increase price with the reason of appreciation of the Chinese Yuan.

Price Negotiation Tactics

1. Perform a research on alibaba.com or globalsources.com to figure out the market price of the product.
2. Perform a research of tax rebate rate, raw material price, currency exchange rate before you start to negotiate price.
3. Please remember that, unlike the price negotiation in some low-end retailing markets and stores, export companies in China normally quote a reasonable price and price is relatively transparent. You can’t expect to cut the price down by something like 50% or more.
4. Be sincere and be polite. Don’t say something like “You must cut the price down to xxx dollars before next Wednesday or you won’t get my business”, reason with the supplier with the factors affecting prices(abovementioned) politely, don’t threat or showdown to the suppliers. Practically, inquiries from some specific countries (I won’t single them out) in Asia are often neglected by many suppliers because we think they are very rude.
5. Suppliers like to deal with established importers, not newcomers who are just testing the waters. Established importers mean stable and big quantity purchasing. Suppliers respect seasoned buyers, sometimes they bully newbie’s.
6. If you are buying large quantity, you can ask for a bulk discount.
7. If you are buying small quantity, you can say it is a trial order.

Steven Chow, China Inspection Service

This is the third part of “China Sourcing Ultimate Guide”. Here you can find Part 1 and Part 2.