How Knowledge of Your Suppliers’ Challenges can help Your Negotiation Strategy in China
In April 2015, I had the chance to supervise interviews of over 1000 suppliers attending the Global Sources electronics and household goods trade shows in Hong Kong. The Questions focused on what is your number one challenge and how are you responding to it. We all have ideas of the supplier challenges in China, whether it be costs, labor turnover, materials costs, uncertainty about government regulation, the need for skills to support homegrown innovation, etc. However, what we want to understand is how suppliers are responding to various challenges and what are the factors that make suppliers respond to the same challenge differently.
Understanding the supplier’s challenges can help you improve your negotiation outcome as you bring to the table suggestions that can improve the supplier’s operations, marketing and innovation strategy.
In the first graph, we see that competition (25%) and cost control (21%) are the two biggest challenges faced by suppliers. But since these challenges could be driven in part by the industry they are in we chose to separate these challenge and response questions into the three main industry sectors represented – Electronic products (60%), Houseware and home furnishing (29%) and Fashion and Home Products (11%). We consider each of these industry groups in turn.
Supplier Challenges – What is Your Number 1 Challenge?
Number one Challenge Faced by Suppliers
April 2015, 607 Chinese suppliers were interviewed at two Electronics exhibitions in Hong Kong. 399 of them were interviewed at the Hong Kong Global Sourcing-Electronics Exhibition, and 208 of them are interviewed at Hong Kong Electronics Fair (Spring Edition). The top 3 challenges for Chinese suppliers are Competition, Cost Control and Technology Innovation.
Supplier Challenges – What is Your Number 1 Challenge?
Responses by Chinese Suppliers
In response to competition (170 suppliers, 28%), improving quality (24 suppliers), R&D (17), changing the product design (24) and differentiation (17) were the main responses. In response to cost control (95 suppliers, 16%), using scale economies to reduce costs (12 suppliers) and improving production efficiency (6) were the main responses. In response to technology innovation (44 suppliers, 7%), R&D (9 suppliers) and talent recruitment (6) were the main responses.
Challenges faced by different groups of suppliers
I next divided the suppliers according to the location of the main customer (domestic versus international), size and type of product. Across all groups on these three dimensions, market competition, and cost control were the first and second challenges faced by the suppliers. However, differences existed with respect to a) the third most commonly cited challenge to suppliers, and, b) how the suppliers responded to the top three ranking challenges.
First, the main challenges faced by suppliers with international customers was with the 3rd largest response – technology innovation (7%) for suppliers with main overseas customers, and market development (12%) for suppliers with domestic customers as their main customer base.
Second, comparing on size, smaller suppliers had a lower price and profit (8%) as the 3rd largest challenge (after competition and cost control) while larger suppliers had technology innovation (7%) as their third largest challenge.
Responses to the challenges. Additional information is provided on the specific responses to each for the challenges by the groups of suppliers divided into the three categories were given – customer location, supplier size, and product type.
Third, comparing on product type, I compared the differences between smartphone and tablet suppliers and other suppliers and found that lower price and profit (12%) was the third largest challenge facing the former group. Interestingly technology innovation (8%) was the third largest challenge facing the other supplier group. The smartphone and tablet market is very competitive at the price end as well as the component cost end. A major cost is the touch panel screen and CPU which generally suppliers by more powerful suppliers who can demand increases in the price of their components.
Key Takeaway on Supplier Challenges in China
Chinese Suppliers are facing many challenges beyond rising costs alone. The results of the survey give some insight as to how suppliers are responding to these challenges. The more successful suppliers will respond in ways that are sustainable through investments in research and development, training and seeking out new markets. Generally, the results indicate that suppliers with international exposure have a greater awareness of the need to innovate, which could be in part due to the need to respond to various customer dictates as an EOM supplier or distributor feedback as a brand name supplier. Suppliers with a domestic focus as challenged by the need to develop their market. Smaller suppliers are facing more pressure from their customers to provide a lower price which larger suppliers are more likely to have the capability to focus on longer-term challenges such as technology innovation.
When you enter into negotiations next, think of your supplier first by asking questions about their key challenge/s, let the dialogue focus on the supplier and use it to seek out ways that you can help the supplier beyond just giving the supplier your next order.
Read more about supplier challenges in the Chinese fashion industry in this article.