Much has been written on how to approach contract negotiations. But things are different when manufacturing in China. Many of the books and articles written serve more to perpetuate conventional wisdom than to offer a useful “how to” guide on the subject. So before I get into the dos and don’ts of Chinese contract negotiations for electronics outsourcing, let me debunk some myths about contract negotiations in China.
Myth: If you concentrate on mastering traditional Chinese etiquette, you stand a good chance of succeeding.
Reality: Yes, your counterparty will be appreciative that you took the time and effort to mimic a polite Chinese person, but unless you’re really good at it, they will find it more amusing than impressive. Anyway, it won’t move your efforts forward, so don’t worry too much about how to hand over the business card (two hands, bottom edge facing away from you), who makes the first toast at the banquet (your host), to bow or not to bow (they’re not Japanese—just a little, at first meeting can be nice but not required)
Myth: Forget about laying out a compelling value proposition—if you can out drink your counterparty you win!
Reality: There are plenty of westerners boasting about winning extremely favorable concessions out of Chinese counterparties by simply drinking the boss under the table. I don’t buy it. Yes, out drinking your counterparty will impress the Chinese side, but impressing them will not get your contract signed on your terms. The scorched-liver strategy may have worked years ago when dealing with government entities, but not in today’s EMS industry. (OEM Exclusive: Request list of EMS/ODM providers anywhere in China or the greater Asia region)
Myth: Most importantly is to develop a “special relationship” (guanxi) with ranking government or party officials is a sure path to success.
Reality: Actually, the most important thing is to layout a compelling value proposition for your provider, one that clearly and significantly improves their bottom line in some way. Normally, developing official guanxi will not help when negotiate a contract with an EMS provider– it’s simply not relevant.
Dos and don’ts
Do spend the up-front effort required to choose a motivated provider. In China the most important step in successful contract negotiations is choosing a provider incented to close the deal, as much as possible, on your terms.
But just because someone in the provider’s organization (e.g., sales manager) indicates an interest it doesn’t mean the decision-makers upstairs will get onboard. Here are some things to consider:
Capacity: If your program’s volume requirements are low, say a few thousand small SMT boards per month, a provider running 20 high-speed lines may not be that interested in negotiating with you, even if the unit prices are relatively high. On the other hand, a provider with three machines might roll out the red carpet.
Product mix / end market: If your provider concentrates on high-volume consumer electronics products like tablets or phones, and your program requires specialized, low-volume / high-mix components such as power boards for hi-tech medical equipment, you will find negotiations an uphill battle.
Technology: If you find the provider’s value-proposition centers on assembly technology your program doesn’t require, you may find management is not motivated to negotiate with you.
SEE ALSO
Checklist for evaluating contract electronics providers
Evaluating contract electronics original design manufacturers (ODM)
9 Steps to help OEMs improve provider contract negotiations
Search listings of electronics outsourcing providers
Do ensure access to a decision-maker
Some EMS providers will assign an overseas manager to deal with you. While these individuals may be knowledgeable, some rise to their level by virtue of their English ability or, if female, their looks. Regardless, you’ll still need a real decision-maker sitting across the table at some point.
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