If a cost is too good to be true, then it probably is not true.

If you approach a new vendor with a project and they give you a cost that seems too good to be true don’t expect you have found your partner in China for life. It is SOP among China vendors to give customers a low cost in order to get their orders. After the first order the cost will go up, sometimes dramatically, much to the customer’s chagrin. Why do vendors do this when they are aware that they may lose their customer ( and please note they are aware of this because I have asked them) ? The reason is that meeting a customer’s cost expectations is perhaps the only way the vendor will get the order. For the first order the vendor may just break even which is fine with them. They will not have lost any money and will have kept the factory busy. Their hope is that after the first order their customers will be so pleased with the quality or delivery that they will accept a price increase and place a second order. But for the overseas company that is sourcing in China and is basing its business going forward on the same low prices they received on the first order, a sudden cost increase can bring their business to a screeching halt. I have seen this happen many times and I would estimate that 30% of my clients come to me for this reason.

So what can you do about this if you are a small business sourcing in China? The answer is nothing. All you can do is be aware that this happens and to make allowance in your retail margins for an anticipated price increase from your first order to your second order. NEVER assume that your second FOB price is going to be as low as the first. If you don’t think this way you may very well find yourself in a situation where you have promised your customers that you will hold your prices only to find that your vendor in China has doubled the prices they are charging to you. You then have a choice to pass on the price increase to your customers, and risk losing them, or having to quickly begin a search for a new vendor which will severely curtail your ability to deliver product to your customer. Another thing you should do is to always have at least one back up vendor so in the event your current vendor suddenly gives you an unworkable cost increase you have someone else to go to.

In short you should think of doing business in China like coaching a football team. When you can anticipate the other team’s plays and draw up your own plays accordingly you will have a better chance of winning.

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