Smart Sourcing in China

In the past decades, ‘Made in China’ products are becoming a commonly accepted and preferred choice of purchase. Nowadays, China sourcing—meaning to purchase materials or products from China for production needs and sales on the domestic or global market—is an almost unavoidable trend in all different kinds of industries and business sectors. Smart and effective sourcing in China could generate the opportunity for direct cost savings,which becomes visible in a bottom line improvement for Western companies who follow this sourcing strategy. It is important to be well aware of this trend. In business reality, the truly amazing fact is not necessarily how big China has become, but how little it is understood.

-Wujiaochang Shopping Mall, Shanghai (Copyright: Wang Shu)

Every year, tens of thousands of new businesses start purchasing directly in China. Signi cant numbers of big-scale international companies incorporate a ‘low cost country (China) sourcing percentage’ in the set of key performance indicators. However, many of them have an initial bad experience. The key to successful China sourcing is not a black-and- white list of rules or set of tools; it is primarily an adaptation of mental models.

Textbooks can elaborate on Chinese culture: how to bow; how to pass on business cards;how to dress for negotiations; and how to choose expensive gifts for building up relationships with Chinese counterparts. A super cial understanding and obedience of the etiquette might bring a certain amount of return. However, without understanding business behaviour resulting from the essence of Chinese culture and values, a business relationship could easily burst. Delay in delivery or misinterpretation in communication could have a negative impact on securing supply and jeopardise the Western company’s performance.

-The Bund in Shanghai(Copyright: Wang Shu)

Smart sourcing in China requires a basic understanding of representative business behaviour in China. Therefore, the general principles of doing business with China are also applicable for Western companies’ sourcing activities and for their dealings with Chinese suppliers in China. Meanwhile, there are also some practical and operational concerns in choosing the right Chinese supplier. Finding a suitable Chinese supplier is an art more than a science.

Most Western business people may encounter the following business behaviour traits in their Chinese counterparts at the other end of the negotiating table:

- Personal Connections
Personal connections in China have a different meaning compared to ‘networking’ in the Western world. Western business relies heavily on the internet, information and systems. The Chinese focus more on friends, relatives, partners and so-called “social capital”.

Personal connections are also determined by creating win-win mechanisms in business. Chinese mentality is as such that the ‘bene t’ created is not necessarily immediately exchanged. Western negotiators normally have a list of negotiation factors in hand and expect that when taking a step back, the Chinese counterpart should also take a step back at the same place for exchange. However, the return could actually come at a later phase if the Western negotiators allow more time for further discussion and keep encouraging their Chinese counterparts by emphasising the different bene ts through cooperation.

A long-term win-win mechanism is the lasting cornerstone for personal connections.

- The Intermediary
A capable Chinese intermediary who has good personal connections with the Chinese business partner is essential in the trust-winning process and business success. Chinese businessmen normally would not directly express their opinion; instead, they would change subject or remain silent, or give subtle hints, such as “seems not bad”, “seems fairly all right”, or “let us study it”. Only Chinese embodying Chinese values could interpret this mood, tone, facial and body language. Normally, the intermediary determines the process of the business in question. It is rather the intermediary instead of the negotiators, who rst raises the business issues that need to be discussed. The intermediary rather than the interpreter of the language is actually the interpreter of culture, bridging the differences between the parties involved.

- Social Status
Social status plays a very important role in Chinese business culture.
Prior to negotiations, the rank and position of the Chinese counterpart needs to be investigated with equivalent personnel sent to the negotiations. A Chinese manager would have negative feelings, even ones of shame, while seating with a relatively young and lower ranking sales representative on the other end of the negotiating table. Thus, the sincerity of the Western company can be questioned in the rst instance.

- Interpersonal Harmony
Chinese value the importance of interpersonal harmony between business partners. Trust and harmony are more important than
any contract on a sheet of paper. For the Chinese, the lack of building suf cient interpersonal harmony and directly moving to the ‘subject matter’ in business is irrational and churlish. While necessary, interpersonal harmony could facilitate business development and solve con icts with regard to contractual issues for the long-term bene t of both parties involved.

- Time is the best negotiation tool
Time is the best negotiation tool, especially for commercial negotiations. Chinese negotiators are more concerned about methods than
results, more about process than targets. The best compromise can only be obtained through routine haggling. This process cannot be shortened. Threatening does not work effectively against Chinese on business. At the same time, Westerners often feel threatened by two-handed preparation from the Chinese counterpart. This means that Chinese often indicate that they also talk to your competitor in parallel, especially when you disclose that you are under time pressure. It is just a part of the haggling culture in business.

-Communication University of China subway station, Beijing (Copyright: Xu Shun)

- Holistic Thinking
While negotiating with Chinese, preparations need to be made to discuss all of the issues simultaneously, and sometimes, even repetitively. The Chinese tend to ‘forget’ the pre-de ned discussion sequence in the perception of Western negotiators. Nothing is solved until everythingis solved. This holistic way of thinking is a challenge to the Western way of thinking, which is more focused on sequences and individuals. Signals for good progress can be, for example, when more senior managers become involved in the discussion; when questions start focusing on the more concrete issues; when involvement of the intermediary is being asked; or when more meetings are required.

- Endurance and Relentlessness
The endurance and relentlessness in Chinese culture can also be re ected in business negotiations. Exerting tremendous effort in the preparation stage of the negotiations, the Chinese expect an even longer time for the haggling process. A Western negotiator who shows a similar level of endurance and relentlessness may gain the respect of the Chinese partner. Some useful tactics can be, for example, asking the same question on different occasions to nd out the weakness in the opponent’s argument, or bringing research results into the discussion and carefully presenting the competitor’s situation to the Chinese opponent.

Being patient plays a key role in building a long-term business relationship with the Chinese partner. It is hard for Chinese to make immediate compromises due to the collective decision-making process and the social
status background. Chinese are good at using procrastination as convincing tactics.

On top of business behaviour in the negotiation phase, Western companies should also focus on the challenges in the operational phase.

Finding a suitable Chinese supplier is an art more than a science

A number of considerations should guide the search for a suitable Chinese supplier:

- Signicance
If your orders take up only one percent of the factory’s capacity, you will normally be the last priority. You will suffer delays as soon as another customer pushes for a quicker delivery. Therefore, knowing your relative signicance is one of the key research points at the initial phase. Continuous monitoring on changes in signi cance is a must.

- Internal competencies
Professional Western companies usually have standard audit checklists. However, in order to get a better understanding of the internal competencies of the Chinese supplier, reliance should not just be placed on the checklist; instead, more concrete questions need to be raised and decisions made on whether there is a need to outsource a certain competence, for example, checking 100% of the products in a third party warehouse before packing.

- Seasonality
Production patterns at the Chinese supplier should be investigated and the ordering pattern at the Western buyer side should be adapted accordingly, if possible. Some Chinese suppliers run their production only at limited occasions during the year. Time pressure leads to poor quality and frequent delays.

- Intellectual Property (IP) risks
Large manufacturers tend to be better at protecting their client’s IP. However, they might already be present on your market.Trust and interpersonal harmony are essential on tackling IP-related issues. For Western companies on the Chinese market, enhancing overall competitiveness is very necessary. Although facing the challenge on IP, competitive advantage comes from deeper understanding of the market and risk mitigation, not risk escape.

- Thorough understanding of the business strategy of your Chinese supplier
Third party auditors generally do not have in-depth experience in the production of your product. They would not necessarily be aware if the machinery is adapted to your production; if the operators are precise enough for your quality expectations; or if your standard is different from that of the factory’s current customers. In order to gain a complete insight into your Chinese supplier’s business operation, purchasing personnel and supplier quality assurance or technical personnel are recommended to join the supplier audit.

- Nature of the Chinese supplier
Finding a suitable Chinese supplier also involves some questions about the nature of the supplier company. There are plenty of trading companies dealing with similar products from different manufacturers. The Western buyer could bene t from price competitiveness through direct contact with the Chinese manufacturer. However, does this manufacturer possess export rights? What suits your company’s goal the best? Different companies may have different preferences because of their own past experiences.

The potential of China sourcing for optimised cost structure remains huge. The economic bene t through cost optimisation and business globalization is in nite. Though there are quite some challenges on understanding the Chinese suppliers bearing a different cultural background, smart sourcing in China is often a rewarding experience as long as Western buyers overcome obstacles and adapt to the rules of the game. Both the Western buyer and the Chinese supplier could learn from each other’s business practices and different ways of thinking, leading to mutually desired outcomes. With a well-selected Chinese supplier and a steadily formed business relation, the Western buyer could obtain a stronger competitive advantage along the value chain as well as an easier entry on to the global market. The efforts required for smart sourcing in the Chinese market should not be regarded as light- hearted; thorough preparation, exibility and especially adaptation of mental models are really needed. Moreover, it is vital to possess an open-minded attitude towards understanding what makes the Chinese different, learning their culture and corresponding business behaviour. Aim high and adapt quickly!