Raising Your Supplier's Prices in China: Not the Answer You're Looking For

So much to chew on lately in the blogosphere and media regarding China's quality, prices, liability, etc.  There is a lot of noise out there regarding "who" is to blame and "why".

Paul Midler, of TheChinaGame blog, recently wrote a post entitled The New Bugaboo: Low Prices. Midler presents some good counter-arguments to those out there that claim US businesses' chase for low prices is the true culprit in these quality fiascos. Midler's general points are:

A) US companies cannot fully control their suppliers.  Chinese suppliers, just like any person, are in control of their own actions and decisions.  Consider the analogy he uses:

Consider yourself in this situation: You ask someone to run to the store to buy you a candy bar, and you give him more cash than necessary. Keep the change, you tell him. The guy gets to the store and decides to shoplift the candy bar instead of paying for it. Are you responsible for this person’s unethical actions?

B) Putting the blame on the abstract cause of "price pressures" to excuse Chinese suppliers' failure to live up to certain standards in environment, labor, and quality criteria simply passes the buck in terms of responsibility.

C) Simply paying the suppliers more money to solve these problems is a ridiculous notion.  If actually implemented, many Chinese suppliers would be laughing all the way to the bank with no intention of actually improving conditions to the level that we'd like.  Unless we were of course to pay more next year, right?  Paul offers another good analogy:

First, if you give more money to a supplier who has behaved unethically, isn’t that sending him the wrong message? What would these people say about a CFO caught embezzling corporate funds? “Well, he must have taken the money because he needed it. Let’s give the guy a raise and see if the problem clears up on its own.”

I agree with Mr. Midler.  Price is the reason companies approach low-cost countries, like China, with manufacturing in the first place.  It isn't the Sichuan hotpot dinner (although I do find myself wandering out to restaurants specifically for this reason).  Simply paying more for a given product will probably do nothing to fix the issue.  Consider this little anecdote I wrote a while ago about surgeons masks being offered at a factory I toured in Shenzhen.  U.S. companies wanted surgeons masks available to factory workers.  The factory begrudgingly purchased them.  Half the workers didn't want to wear them. 

In another case, an associate of mine with a U.S. automotive tool sourcing company a few years back, got burned when he offered laptop computers to some employees.  Being new to China and a bit naive, he thought he would give laptop computers to three employees in their newly formed Changzhou office.  Supposedly, the workers would be delighted and their productivity would improve.  The employees were gone, laptops in tow, in a matter of a few weeks. 

These are only two, small anecdotes.  But they demonstrate a point. It goes far beyond simply offering a piece of equipment, clothing, or raising the price.

Comments

[Kathleen Fasanella]

My co-blogger is in Hong Kong this week (and blogging about it if you're interested). She calls me every morning with a dump. Yesterday she said something very interesting with respect to quality and sourcing. She was talking to a vendor about the price of making a handbag based on a sample shown. He gave her a very good price but she didn't like the zipper and wanted to know if he could substitute a YKK zipper for a higher price. His reaction was nearly "no" and tried to talk her out of it. He said ykk was too expensive for "her market" (the US), that none of the US companies are willing to pay for that. He said that the good stuff they make all goes to western europe but none of the US companies will pay for it.

[Audall]

Kathleen,
Interesting comment and experience. It's a little different from the situation of simply paying a supplier more for the same product--and assuming the quality will improve. Hopefully your co-blogger knows "her market" better than this supplier in HK, and will know whether US companies will in fact feel the YKK zipper is too expensive or not. It's hard to judge whether the guy in HK is basing his assessment on a wide breadth of experience with many US companies, or derived his conclusion from one or two experiences. Whichever is the case, if YKK zippers are a requirement for the product, than I would either push the supplier to source and include the zippers regardless of what he thinks or move on to a new supplier. There could be any number of reasons he doesn't want to get involved with YKK zippers--beyond his market assessment.

On another note, it's tough to conclude whether US companies and consumers are more interested in quantity and low prices than quality. I recently heard a very experienced supply chain consultant who has worked with companies in both the US and Europe remark about differences in the European and US environments. For instance, European stores tend to have far less on the shelves, and items are replenished less frequently. In many stores--it's ok to have blank shelf space and European consumers tend to care more about a product's uniqueness and quality. In contrast, US store shelves are always stacked sky high with product and as soon as shelf stock gets low, it is replenished quickly. This is based on the assumption that Americans like to see quantity and abundance--and feel they are buying a commodity that many others like.

It's difficult to generalize from observations like these--but it's worth thinking and talking about.