Don’t put all your eggs in one Chinese basket

It is never wise to put all your eggs in one basket and especially when you are doing business in China. The other day I had a conversation with the CEO of a small American company that makes kitchen apparel in Guangdong Province. Their products have been well received by US customers but the rise in cotton prices in China (between 30-40% over the last year) has really cut into their margins forcing them to raise prices and lose sales. The company has only one supplier of print fabric now and their option is just one: wait it out and hope the price of cotton drops (which it will do. The question is when ). From the tone of his voice I could tell the owner of the company is losing some major sleep over the direction of his business because of cotton prices. I also suspect that the Chinese supplier knows that the US company has no other options so it does not have to make concessions on its prices. In its cost negotiations with the US company it just has to point to the worldwide spike in cotton prices and the US company can do nothing.

Of course, cotton is expensive everywhere in China but that is not to say that a vendor with a favorable cost cannot be found. In my experience negotiating with suppliers I have found that some suppliers – depending on their size, their location and their current volume of business – can be drastically cheaper than a another supplier of the same product. When I worked in the furniture business I would routinely ask several vendors to cost and sample identical product and what I often received back was costing that differed greatly from one vendor to another, as much as 30 % in some cases. Of course one does not always go with the vendor who has the cheapest price. Sometimes the quality problems you are forced to address by going with the cheapest vendor offsets any savings on first cost. Still it is possible to find the vendor who has low first costs and who will cooperate with you about managing quality.

In fact, one of the worst things you can do in China when you are trying to grow a small business in the US is to rely on just one supplier. What you risk is bringing your business to a standstill in the event of a natural disaster or crisis like we are seeing now with cotton prices in China. The key is to have several vendors who are strategically located. This will not only help you get better first costs but you will find also that different vendors have a different range of product and this means you can offer more to your customer.

http://www.theeastasiaco.com

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