How to deal with price increases from your Chinese suppliers
Brexit and the coronavirus pandemic have had dramatic effects on the price of shipping. If your business uses suppliers based in other countries, you’ve no doubt felt that impact on your profits. Add to that the continued strengthening of the Chinese yuan against the US dollar, and that spells price hikes.
We caught up with our partner Ebury, a fellow fintech that helps SMEs navigate trading abroad. We chatted about what businesses importing from China can do to protect their balance sheets when prices rise. Just because your supplier has quoted an increase, doesn’t mean you can’t negotiate. The key is knowing how to handle it.
Ebury is the world’s largest fintech global transaction platform, and we’re thrilled to be working with them. From dealing with foreign exchange rates to facilitating international payments, they solve financial problems for SMEs.
The Ebury team speak to their customers around the world regularly and hear the same issues cropping up again and again. Right now one of the biggest challenges facing small businesses is price increases from their suppliers in China. We spoke to them about what SMEs can do to negotiate these rises.
The most common reasons suppliers give for price rises are increases in material costs and changing foreign exchange rates. Labour costs can also have an impact, and sometimes it’s necessary for a factory to start charging more if they’re investing in new equipment.
It goes without saying that supply chains have been hit hard by lockdowns and trade restrictions during the pandemic. Some commodity prices have jumped up as a result, meaning it’s genuinely more expensive for suppliers to produce goods. It follows that factories have put their own prices up.
But it’s not just British businesses that are feeling the pinch from their suppliers. Ebury has offices in 16 countries and it’s a common theme everywhere right now. Interestingly, they noticed a lot more customers coming to them about supplier prices around Chinese New Year. This is generally a common time to see price adjustments, so plan ahead in your forecasts.
1. Understand your supply chain
There are a few things businesses can think about when negotiating with suppliers. Firstly, always be aware of your supply chain. You can do basic checks on the prices of specific materials in different countries. Although you tend to have to pay for the most accurate information, there are websites that list this information for free.
To look at commodity prices, head to IndexMundi. If your products are made from steel then MEPS is a steel-specific site you can check out. And if you want to look at a variety of indicators, from import and export costs to production, then have a look on Trading Economics. Compare your supplier’s prices over the past year with how material costs have fluctuated. If things don’t add up, use that information in your negotiations.
2. Have a backup supplier
Bringing some competition into the mix often helps when getting prices down. Do some research to find alternative suppliers and ask for quotes. If you get offered better prices, let your original supplier know and see if they’ll offer you a counter.
If your supplier says they’re putting up their prices because of labour costs, then look into competitors that make more use of machinery. This is cheaper for factories in the long run, so it’s likely their prices will be lower. Take time to consider if the cost benefit outweighs making a switch to a more automated process.
Changing suppliers last minute is a risky strategy. Make sure you’ve got all your designs and specification sheets ready when you hand over the job. If you find a better price, be ready to move quickly if you want to use it as an ultimatum. It’ll make onboarding a backup factory much faster and smoother.
3. Show them you’re good business
Sometimes the maths simply doesn’t add up for a supplier to continue selling you goods at their original price. In these cases, try negotiating based on your next order. You could start by asking if they’ll stick to the old price one last time. Make sure you assure them that you'll be ordering again soon at the new price. This tends to work best with suppliers you’ve worked with for a while, or when you place higher value orders.
Alternatively you can try to negotiate a discount on your next order based on the amount you’re ordering now. Accepting a new unit price doesn’t mean you can’t rewrite other terms. There might be flexibility on an economy of scale discount, or one based on how well the items they supply you sell. If you come to any agreement then it’s important to make sure you and your supplier sign a written contract.
4. Ask how it might benefit you
When a supplier is increasing prices because they’re investing in new machinery, it may benefit you in the long run. Labour costs are likely to go down over time if a process is more efficiently automated.
Talk to your supplier about why they’re making these improvements and find out what kind of benefits you can expect. Try discussing more favourable terms in the future when the investment is paid off.
5. Be prepared for quality to suffer
Sometimes a price increase really is unavoidable for a supplier. If you do convince them to stick to their original price, they may need to make cuts elsewhere. The quality of your goods might go down as they try to protect their margins.
Before you start negotiating, make sure you’ve done enough research into why they’ve increased prices. If you don’t think there’s a real reason for the rise then open up discussions. But if it seems like a genuine reflection on the market, it might be better to accept.
Ebury has a team of Mandarin speakers in the UK as well as a Hong Kong office and have plenty of experience when it comes to price adjustments. They've helped numerous businesses safeguard their positions and prevent future price changes.
The team can open the door to conversations and find out the real reason behind the rise. They can then offer you advice or alternative solutions, usually based on currency rates. And their experience gets results. Unless you already have a close relationship with your supplier it can be very difficult to negotiate these things on your own. With Ebury’s help, your chances of success go from about 25% to over 80%.
If you’d like to talk to Ebury about your relationships with Chinese suppliers, get in touch now. You can arrange a call here.