China Factory Prices are Falling: How to Get Yours
The Plight of Chinese Factories
In China’s tumbling prices push some exporters to the brink, Reuters News wrote about something the international manufacturing lawyers at my law firm have been seeing for quite some time now. Desperate Chinese factories are lowering their prices, and most Chinese factories are desperate right now. My firm’s international manufacturing lawyers have observed a trend consistent with these findings: a significant number of Chinese factories are reducing their prices in a bid to remain competitive. This phenomenon is not isolated but reflects a broader state of urgency within China’s manufacturing sector and, indeed, in China’s economy at large. See e.g., Chinese prices deflate amid wider pressures on the economy and China to export deflation to the world as economy stumbles, from The Hill and the Financial Times today.
Navigating China Product Price Negotiations
Is the situation dire for every Chinese factory? Not all. But a substantial number of Chinese factories find themselves compelled to negotiate lower prices, and many of our clients that get their products from Chinese factories have negotiated meaningful reductions in product costs. This success rate underscores a widespread willingness among Chinese manufacturers to adjust prices, reflecting the pressures of their increasingly tough economic environment and their own desperation.
China Product Prices Have Been Falling for 15 Straight Months
As the Reuters article notes: China “producer prices have been falling for 15 straight months, crushing profit margins to the point where industrial output and jobs are now at risk and compounding China’s economic woes, which include a property crisis and a debt crunch. There is no disputing that China’s economy is in deep trouble and its unemployment rate is high and still rising. And in the face of this, the CCP has done what it has always done whenever its economy is weakening: it increases subsidies to Chinese manufacturers to allow them to stay in business and avoid terminating their employees.
But with it becoming increasingly easy for foreign product buyers to move their product buying outside China, and with Chinese factories increasingly moving their production outside China as well, the Chinese government subsidies and the price drops those subsidies allow are larger than they have ever been.
We have clients that have successfully negotiated discounts of 25% or more with their Chinese suppliers, often by proposing increased purchase volumes or by extending contract terms. We also have clients who have secured substantial price reductions unconditionally, with Chinese manufacturers quickly agreeing to price cuts of 10% to 20% without requiring additional commitments.
The Risks in Negotiating Product Prices with Chinese Factories
The Reuters article leads with the story of a Chinese manufacturer that cut prices to the point where it would lose money on every sale but did so to avoid having to immediately shut down the company and terminate all its employees. This Chinese manufacturer likely chose to sell at a loss because it believes the CCP will keep increasing subsidies to the point that it can again be profitable.
Per Reuters, and per exactly what our China manufacturing lawyers have been seeing in China:
“Companies cut product prices, then staff salaries. Then consumers won’t buy – this could be a vicious cycle,” he said. Profits at China’s industrial firms fell 2.3% last year, adding to the 4% drop in COVID-hit 2022. An official survey showed manufacturing activity contracting for a fourth straight month in January, while export orders shrank for a 10th month.
The China Desperation Price
Now is The Time to Lower Your China Product Costs
But Negotiating Lower Prices from Chinese Factories is Risky
How to Safely Negotiate Lower Prices from Your China Factory
When discussing pricing with your Chinese factory, you need to plan strategically, communicate diplomatically, and prepare for any potential financial or other claims that may arise because of what your Chinese factory might assume to be the end of its business relationship with your company.
At least ten percent of the time when one of our clients goes to its China supplier to negotiate a lower price, the China supplier says something like “we are done manufacturing for you. We don’t need you anymore. We are selling our own products [which are actually YOUR products] direct now.”