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Five tips for negotiating contracts in China

By David Levy (Guangdong, China)

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.

If you’re dealing with large Chinese providers like Foxconn, Inventec Appliances or Compal Electronics, a higher-level decision-maker may only be available at the start of the negotiations. Make sure you have access to this person from time-to-time during negotiations so you can overcome obstacles encountered at lower levels. Make sure you can call this person if you need to, even if you need a translator to assist.

Don’t take yes for an answer
Sometimes you will find a “yes” given during negotiations becomes a “maybe” or even a “no” later on. This type of behavior is sometimes taken as evidence Chinese are dishonest negotiators, but I disagree.

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Even if the person across the table has decision-making power, he or she still may be only one component of a larger and more complex decision-making apparatus, including stakeholders from engineering, logistics, finance, and quality functions.

So if he or she is uncertain, it’s easier to default to agreement as a way of putting a placeholder at an issue that needs more offline, internal discussion. It’s not “yes” until it’s been codified in your service level agreement.

Do develop a personal relationship with the guys across the table
This is a type of guanxi that’s always useful, and is usually pleasant. Even if language and culture puts a distance between you and the Chinese party, there are ways to come together that don’t involve talking business (or politics).

Some suggestions for building a closer relationship with Chinese business people:

  • Ask them to help you choose a Chinese name. For some reason, Chinese people like to help westerners pick Chinese names, and a group of Chinese can argue happily about the best characters to choose.
  • Ask them about their hometown customs and food. Even among Chinese people from different places, discussions about regional differences are often welcomed.
  • When in China, let them take you to dinner. Be sure and try everything on the table, asking about the cuisine. Chinese people generally love food and like to discuss it. For many, Chinese food is a source of Chinese pride, and sharing it is important.

 

Do consider these 5 tips when draftng your contract
When outsourcing OEM programs to EMS providers, most OEMs know what to included in various contract service level agreements when it comes to product quality and delivery, consigned inventory, approved vendors… But for contracts with Chinese EMS providers, I suggest these five tips:

  1. Insert a non-subcontracting clause. Your contract needs to specify the EMS services will be performed only at the provider’s location, the one you approved in advance. If the provider wants to add a new location, for whatever reason, this requires prior approval, by you, in writing.
  2. Make sure the contract is signed and chopped (stamped). Your provider should have a “contract chop” (round with a large star in the center) as well as a “company chop” (oval). These chops are only in Chinese — English chops have zero legal validity.
  3. The Chinese name on the chops need to match the Chinese name as written on both the contract and the company license (a copy of which you should get from your provider). The company address written on your contract agreement should match the address on the business license. Signatures can be used along with chops, but not instead of chops.
  4. Choose a legal forum where the provider has assets a court could seize if needed, rather than one you would feel most comfortable litigating in. If the assets are only in China the contract is best actionable in Chinese courts. A foreign court judgment holds little weight in Chinese courts who are unlikely to enforce a foreign judgment against a Chinese citizen or company in China. (Arbitration is a different story.)
  5. If the contract is actionable in Chinese courts, it needs to be written in Chinese, and written by a Chinese lawyer. The good news is that in China, this service is much cheaper than in the USA or Europe.

Don’t be in a hurry
For Chinese negotiators, the process is important, and the process takes time. Chinese negotiations simply will not be rushed. Chinese often like to chew over even the smallest issue from all possible angles, sometimes allowing many inputs from members of a group (mainly to diffuse risk). Consensus is important, and consensus takes time.




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