Prices have surged due to factors like the rapid price increases for raw materials and freight costs have skyrocketed to historical highs, coupled with adverse exchange rates due to a strengthening renminbi (“RMB”).
Whilst these factors are largely outside the control of SMEs, there are some useful things businesses should consider to smooth trading with China:
1. Manage FX risk
Always ask for prices in suppliers’ local currency – renminbi.
Suppliers normally set their export prices considering US dollar/renminbi exchange rate movements. Given the market volatility, businesses should expect Chinese sellers to add some buffer into their foreign currency pricing to protect against small fluctuations.
If there is a large adverse move in the exchange rates, then suppliers are likely to increase their prices so buyers will share the FX loss. By asking to be invoiced in renminbi, buyers ensure stable prices that will not be impacted by currency fluctuations.
2. Always negotiate prices
Bargaining might not be very common in Australia, but in China it is a widespread practice. Suppliers expect prices to be negotiated so buyers don’t need to be shy about it and failing to do so could, in essence, be causing unnecessary losses if you are paying over the odds.
Some negotiation tools that you can leverage are the expectations of establishing a long-term relationship, increasing order volumes over time or offering to help with other client referrals. These tactics create a win-win virtuous circle for buyers and sellers, and so can help drive initial prices down.
3. Communicate like a local
WeChat is the most common communication tool in China and it is also a popular means of doing business. As such, it is important that businesses are able to use WeChat to ensure smooth communications with suppliers, building up strong relationships. In addition, it is likely to significantly speed up response times: suppliers might take longer to reply over an email, but most of the time they will reply promptly on WeChat even if it’s non-working hours or weekends.
4. Develop personal ties beyond business
The Chinese way of doing business is that business partners are often deemed as friends with a greater mixing of personal and work relations. For example, it is common for Chinese businesses to host you in their office with a team ceremony, while business deals are often discussed over a restaurant table. Addressing your suppliers as friends and going the extra mile where you might not normally in Western business culture will bolster your business relationships and lubricate further negotiations. This could range from sending them regards for the Chinese New Year, inviting them to visit your country and be their hosts, etc.
5. Understand local market practice
The language barrier as well as Chinese market and cultural differences is a significant hurdle for Australian business to overcome when trading, which sometimes can make conversations more difficult.
As such, it is important for businesses to get some Chinese-specific resources and support to understand the supplier side better and to facilitate the negotiations. There are a range of different options that businesses can investigate depending on the size and resources available.
Most commonly this can range from using a local purchasing agent in China to centralise communications with suppliers, all the way to setting up your own China office with local staff or employing Mandarin-speaking staff in your country to help manage the suppliers.
China can be often perceived as an opaque market, with a lot of particularities that define the way to do business. However, as China’s economy grows, we are also seeing how it is trying to increase its international relevance and open up to the rest of the world.
Some trends worth looking at are the increasing digitalisation in China and its impact, e-commerce has experienced an exponential growth, initially focused on B2C but more and more it is also evolving to the B2B side. In addition, the introduction of the digital yuan that was launched in trial mode last August, will also change the ways international trade is settled and it is expected that it can be eventually used in the cross-border trade between China and the world.
Rick Roache, managing director Australia, Ebury