Scared The Factory Off With a Contract? Chinese Supplier Negotiations Saga Continues

Well, we are approaching mid December and seems the factory – gave up on us? This week’s show we have the majority of the founders of our Amazon FBA business on to discuss the latest upset in the China sourcing saga. Maybe we are a smaller buyer, maybe we are a troublesome buyer? Or maybe the contract coming into play saved us a big headache down the road. It comes down to us sending them a contract with terms and punishments if they are late delivering and them coming back saying this order won’t be ready until after Chinese New year! That is in over 2 months from now – and the holiday would end in March, shipping to USA would be around a month – meaning April?

Yes, sounds fishy. In today’s show we have Lorenzo our partner on the ground in Hangzhou, China with Roland our COO and project manager and then a quick appearance at the end with Cadrian our CMO co-founder as we discuss the latest in this saga.

Are we really going back to the drawing board in the sourcing struggles? Listen in and learn the thought process.

Want the template of the contract we used? get your copy of the factory contract that scared them away here (not sure if that is a good or bad thing, I’ll let you decide!) what do you think of the contract?

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Note from the factory

===
Dear Lorenzo,

We double checked your contract, and notice:

General Terms :
1. Time of shipment: If the agreed upon order date is not received at 义乌市北苑街道厚富小区13
栋1单元201 within 30 days after signing this agreement due to delays by Supplier for non-Force
Majeure, a 1% deduction of the total order from the balance due, will be made for every day the
production is late as well as any other lost due to tardy delivery. Buyer will deduct the penalty from
the balance of the final invoice.

Sorry we cannot accept this item. We never do this 1% per day item before, the most was 2% for after 2 weeks and 5% for after 3 weeks.

Also this order schedule has been delayed long enough, in time of the busy season now. The factory will start holiday before the end of January, PO has already arranged fully, new orders almost can not be delivered before CNY.

Well then – as this show goes online Lorenzo will be back in Zhejiang province meeting our backup factories. I don’t want to blame the factory, I can see how we should have had this contract presented earlier – but at the same time – they said 25 days, sometimes, and other times 30 days – so in my honest opinion when they saw us coming to them with a contract with penalties for being late I think that made them realize we aren’t playing around.

I really have to say, it is also a benefit that I have a Chinese company – my company is a Shenzhen based WFOE and we used that in the contract. By being a Chinese company to another Chinese company, it is more enforceable and they cannot skip out of the terms in the agreement as easily.

But at its core, having a solid contract in place with your factory is the best way to take all the emails and wechat history (and we had a ton!) and making it “real” and official. You can’t go to a court in China with a Wechat history log and expect something to be enforced.

So check out my template contract here and let me know what you think – cheers.

Button isn’t working for you? Ya, popups are sometimes blocked, try our Free Business Templates Center instead.

Great feedback from a reader, putting his valuable email here

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Welcome to the Global from Asia Ecommerce Gladiator Series where you can follow along the progress of setting up a Cross Border Ecommerce business from start to finish. Hear insights of real product research, Amazon FBA, China manufacturing, branding, marketing, and all the blood, sweat, and tears of building a global business from Asia. Now let’s tune in.

Mike: E-commerce Gladiator Episode number 20. And another run in on the sourcing side. It keeps reminding why I’m not a fan of factory sourcing. But I think we scare our factory away. It seems maybe the contracts, or some kind of we had different style negotiating Roland and Lorenzo, were both talking to the factory pretty regularly. This week pushing ‘coz we’ve been trying to push this through. I think it’s been changing pretty often. So we brought in some almost all the partners on this week’s show. I know a lot of you guys have been telling me. It’s hard to keep track of which partner, who this people are, we have me plus 3 today. I’m just gonna recap Lorenzo. So Lorenzo’s newer founder on the team. He is on the ground in Hangzhou and Yiwu, China going back and forth, hustling for us every Friday or so. He’s able to get down to the factories and see people face to face. He’s also more of our how do I say, soft skills kind of guy. He’s real working and investing in relationships and keeping everybody happy, I’d say. Now we have Roland, and Roland is in Hungary, Europe. And he is also do a lot of sourcing in this work and he’s really great on project management and pushing the project forward and he has been a little bit more different negotiation style with the factory, kind of pushing through while Lorenzo’s trying to keep everybody happy. It’s been interesting to see the communication a lot this week and then he’s on this week’s show. And then we also had Cadrian Chan he has been helping a lot. He’s got Chinese skills, so he’s helping with Chinese contract a bit. He’s also been giving us a feedback on negotiating with Chinese. Even for him it’s been challenging. So 4 of us, chit chat a little bit about this factory seeming to almost turning away our business. I won’t go into too much. But we talked about this contract, we say it’s really valuable. So I took as much as sensitive information as I could out and it’s audible word document. You can download it off from our website www.globalfromasia.com/ecommerce020 for episode 20 of Ecommerce Gladiator Series. You can find it there and get your copy to use for your business. It seems like when this came up people change their tone a lot so let’s tune in to the discussion.

Mike: Episode 20. believe of the Gladiator Series. Roland you were at Matchmaking Event with Europe, Asia, or China, and you call yourself a gladiator, I’d like that.

Roland: Yeah, I had the opportunity to go to China and the Central European countries. Had the government meeting summit. That’s where I met the President of Hungary and the President of China, Mr. Lee Keqiang. I had the opportunity to take a snapchat and just have a couple of word. It wasn’t official so it’s not like I was the invitee of them or anything. I just had the opportunity to stream by.

Lorenzo: Nice.

Mike: Awesome. So, we’re gladiators again. Today’s session is gonna be interesting one I think for listeners. Still on the supplier issues. So Lorenzo you could.

Roland: I’m happy to start let’s just, we have to face that gladiator lose sometimes. But they get up and keep on fighting and that’s how they improve. So basically, what we’ve been doing is we’ve been fighting and fighting with the factory and all suppliers. Internally and externally. But this is what makes us stronger and basically we’ve been trying to do a lot deeper if it says contact the purchase order and the attachments that maybe for the sale contract so factories know everything what they would have to do. I believe one of the best value that we’re gonna be delivering in today’s podcast is what to have before you go to a factory. So our audience don’t have to go through we just have been through, right.

Mike: Yeah.

Lorenzo: Right, yes.

Roland: So basically what I would recommend for everyone to have just let’s start straight into it and definitely is to have the sales contract where you’re stating your payment terms. Preferably have some payment terms that is well good for you. We have a 30/70%. So basically what it means is that 30% paid before the mass production starts and once we the mass production ready and the order is delivered to our quality check partner Insight Quality then they release it that’s where we are going to pay the rest of the amount which is 70%. Now, another term that necessary to be on is lead time. Because factories, we gonna tally a lead time what to expect, but i feel like that this lead time is not something carved in stone and just for reference. We put the lead time on contact which is 30 days from our factory and what they said today is the beginning of December and they said that it might not be ready for Chinese New Year which is 72 days. We’re at the point that we don’t understand why they’re giving us a lead time of 30 days when they say it might not be done for Chinese New Year which is 72 days. And then we’re also adding a point to our contract which is being late and the arbitration is that how we call it, right? And they said that 1% after the 1% deduction from the entire amount. Day after day they’re being late. Straight up they’re starting to defend themselves by saying “Oh we usually don’t do this, we usually do 2% per week or 3% per month” I don’t even know what they said but some ridiculous. They pretty much telling that’s “Look, even if it’s not ready I’m not gonna take responsibility for it.” which is crazy and also another point in the contract is what you want obviously, the quantity some description and the total amount include all the setup and this all NRE cost which is like the NRC cost which is not recurring cost one time fees for packaging, one time fee for the setup, one time fee for tooling at your setup. And make sure to create a document supporting this that you’re listing and detailing what you want on the product to be done for the manufacturing pretty much. And once we sent our contract, well Mike and Lorenzo, if you guys wanna give your opinion on what you think of, once we sent the contract, they got back with defending themselves that why the lead time is not good. And why the arbitration is not correct. What’s your opinion on that?

Mike: Yeah, Lorenzo, what do you think?

Lorenzo: I think it’s a very bad sign from them and I was hoping that things would go well with them because I’ve been spending about a month and a half going there at least once or twice a week for the past month and a half. So trying to build good relationship with them and I thought I had it then. I mean, not the last time, the time before that, we have agreed on all terms, on packaging and all that. And that’s when the red flags start to show up. The last time I was there, I thought I will just go there, just to sign the contract and being out in 2 hours. And we’ve been spending, we’ve wasted whole day because the owner of the company started like “Oh no” especially regarding with the terms and the quality and the pricing for the packaging and he said “Oh no, that’s not included” and I’ll say wait a minute we have agreed that we will have before that. The packaging, the basic standard packaging would be included for free. But I ask for higher quality which is 5 cent extra. So if something is free, if you have 5 cents that’s gonna be only 5 cent cost and the guy was keep on saying, “No, that’s not we’re doing and that’s not what we have agreed on”. And I was really frustrated. But somehow, someway we found a solution for that so I said maybe we just have a one time misunderstanding. And then again, we’re trying to talk with them and each time they would something else and at the end it was very frustrating for us, very frustrating and long story short I mean we just disappoint, we can be patient but there’s a point our patience has no limit. And once you go beyond that line, I don’t believe it’s gonna be fit to continue with them and at this time I think we are reaching at that point with them. Well you can use that as a learning experienced to what you expect, it’s a game that we have to learn how to play them. The factories are gonna play those type of games trying to, you think you have found an agreement on terms, quality, quantity, and pricing and then the next time you go there they will say that’s not what we have agreed on. And you try to change things and that’s part of the game from what I understand here in China especially when it comes to dealing with the suppliers and dealing with manufacturers. So we have to learn from it ‘coz it’s been enviable lesson for us. And it’s good that we found out about those now on the beginnings especially for a small order like, imagine what if this would happen if we’re just about to place 2,000 or 5,000 unit order. That would have been tragic, almost. So now we will learn about that, will still gonna leave them an open window and say we can come back and we can change those, I mean the terms they send us out today, they’ll gonna give us like only 2% for like what, what was it like, 2 weeks late, that’s completely unacceptable. As Roland said, basically it means, if they late for any reason they’re not gonna be accountable for that, that’s not how it works. We’re not gonna accept that. We cannot accept that. So we’re still gonna try to give them a chance to come up with a more acceptable fair and reasonable terms if not I’ll just start contacting 2 other suppliers. I’m gonna meet them on Friday and we’ll gonna take it from there to top our lost. Very frustrating for all of us, causing frustration for us internally and externally with them. But we got to keep strong, be unified, united, and just move forward make the decision together, collective decision and just move on. We have other options, not the only options in town, that’s the bottom line.

Mike: Yeah, so basically, I think it broke down about Wednesday that’s what we record, today we’re recording this and it got a little heated. For me I’m trying to stay, I’ve been seeing us, we’re also learning as a team, I think the factories are also feeling like it’s a small order for them. They wanted a thousand pieces and we bargained to 500. So I feel that I didn’t like, they don’t like that either. ‘Coz that’s what they’ve been talking about now, Lorenzo right.

Roland: This also can be way of negotiating on their side because they want sales, they want money at the end of the day. And since they’re making us pay for the one time setup fee, it doesn’t cost them extra, they’re not making a favor, they’re making money. All companies are making this moves before and negotiating and it’s a matter of us accepting them or not. I understand that it would be a lot better for them to get a 10,000 piece order. But since we don’t know them, they can easily say that, we can say that okay 500 pieces samples order so make it. And they cannot decline that. So the outlining that in the communication is just not fair in my opinion. I mean outlining is okay, but taking advantage on this and trying to play this cat and mouse game with us is not cool, in my opinion. Referring back to some issues, probably as we learning the, I believe we had some internal communication issues as well. We don’t know who has been talking what, and they are improving on this day after day as well. To make sure that we all know what point and what page we are on. For example, I made some aggressive moves on the company I mean by negotiation. Meanwhile I was in structure that the exact sale message was communicated to them that I thought was. So regarding this, this is an internal case we have to develop but I believe that we are making moves, I just messaged our QC guy Eno, who asked for our company email address. I gave him and they are also creating a WeChat group for quality guy so everyone knows what’s happening because he have some updates on sourcing and quality. So it doesn’t have to go through Lorenzo everytime, which wouldn’t be a problem but we all have lives and we all do something. And since you are different timezone, we cannot always answer or to questions. So it’s better to see the entire flow of communication. At least will happen ‘when you skip something it’s fine. But as long as you are able to check it and search for it, I think transparency is very important.

Mike: Yup. So we’ve been catching up Lorenzo I think maybe, he’s been fit on how it works. So we’re trying to use a shared Gmail box for the sourcing Cadrian and Lorenzo. I mean Cadrian and Roland have been using it and now Lorenzo is also gonna be happen there. We’re trying to make WeChat groups so we’ve been discussing how to communicate with the factory between WeChat and Email and what to put in email, what to put in WeChat. Of course like, they’re sometimes, I think maybe also talking in a group environment might be different to the factory. And I know Lorenzo’s a very good negotiator or likes to talk. You’ve been working very hard to build relationships, It’s been like a month. You’ve been talking to this factory. So I think even also trying to keep relationship going.

Lorenzo: I believe we’re here in the long term business and I believe that the foundation that established as solid and trust, respect and all that. Of course with the Chinese that takes longer and that’s what I’ve been trying to build with us for the past month and a half. It’s not easy.

Roland: It’s funny because, there are also several strategies in communication to factories and we are, even the companies had different strategies and different views on how to do this. Lorenzo is especially good on the relationship and make sure that emotionally, feeling both us is happy and satisfied. On the other hand, I am more like the straight to the point and the execution guy that doesn’t really care about it the factories, if feels good or bad about it as long as they deliver and they tell us the info. And these are also stuff that are figuring out internally. I believe in the beginning it’s better to get straight to the point and once you’re satisfied then see at least one mass order. We can get that to building a relationship. The other way around if you fall in love then it’s gonna be a harder for everyone else to break this fight, if you know what I mean. So if you guys close to them and they don’t deliver at the end of the day you’re still making business. And you still have to caught or make a deal.

Mike: I think also they didn’t.

Lorenzo: Talk about falling in love with them, it’s just a matter of doing things in the factual way. Because maybe think work differently say with the Westerners do not apply for the Chinese. You have to understand that the Chinese mindset, the Chinese mentality. Here, things are lot different then. I know even from me it’s been quite a challenge with them like I’m sitting with them and basically telling me complete opposite of what we agreed on last thing with smile on their face. You have to have the self control of, buddha control, trust me on that. And that’s the skill that you must, you must learn and cultivate here otherwise it’s not gonna work. Chinese are different. As I keep on saying they are different species, they come from different planet from a different, operational, you know.

Mike: I think also what happened is we send this contract, was it the first time they saw it?

Lorenzo: No.

Roland: I believe so, yes.

Mike: I think it’s the first time they saw and this is what we’re trying to put this charge for being late because they were never given an exact date they said 25 days or 30 days. So when we put in this terms that if you’re late, we’re gonna deduct it from the order and I think maybe show them that maybe we’re not playing around anymore or this is gonna be some, we gonna sign this. It’s not just gonna, ‘coz the reason we want to rush like last week to send the money because what happens is we get tired. I think in negotiations Chinese can be pretty patient and worry you down, which is my experienced. We want to take action and we’re getting really excited to make this business happen and make this work go through. So then she’s just saying “oh send the money and we’ll get started” and then once you send the money, it’s hard to walk away for 30% deposit. So, I think now we’re more serious, I think they have gut feeling “Oh this is more trouble”. And then, but they also started to tell us a priority. I think the other reason might be slow is worst, they’re not prioritizing our order, because we’re smaller on run so I think that might be another issue.

Lorenzo: Especially we are approaching the business at the season time of the year, that’s probably also the problem.

MIke: Yeah. So they’re saying Chinese New Year. But that’s crazy that’s like 2 months away.

Lorenzo: I know, I know.

Roland: I checked it on Google because it knows everything, it’s 72 days away. And even if we’re calculating with 8 weeks of weekends, that’s like 16 days, we’re still left 50 plus days. So, this is liability and reliability.

Mike: So this is like, I don’t know about you guys but I can tell if it’s, I guess it’s too reasons they’re saying this. One is we put in the contract about times and late fees. So, they didn’t expect that and now they’re telling us the real dates. So, that we can update the contract. Or 2 they’re just kind of fed up with us and they’re just trying to hope that we just don’t do business with them. ‘Coz I mean who do want to do business waiting 2 months, 3 months. I mean that was 3 months away.

Lorenzo: I think this is the way that the Chinese we have politely telling you to go take a hike, in my opinion. That’s what they’re trying to say.

Cadrian: Hi guys. This is Cadrian. I’m also outside and I just manage to find another place. I was listening in earlier actually and I think the issue about them is about setting expectations. I think in the beginning maybe we’re not too clear about the, like we didn’t have the contract or we didn’t have a requirement. So, I think for factories that works like vendors, ‘coz I used to work in software industry. I worked with a lot of vendors and everytime we have to set the right expectations from the beginning. So we have like, for software we have the IT requirement, we laid out all the features, etcetera. So I think it’s the same kind of, it’s a different industry but it’s the same when you negotiate with people is important is that the right expectations from the beginning. And then I think what happened is we kind of did it later and we send the contract earlier this week and then they feel like “oh, this is like a bit different from what they expected”. They kind of, I think gave that some ridiculous terms of kind of implied or maybe they’re trying to bluff us on the terms.

Mike: I think basically, they thought that they could get away with just the purchase order and the payment and then maybe change the delivery date and keep delaying us later.

Roland: It happened to me before when I made the mistake of, I’m thankful for you Mike for insisting on sending the contract because once I private labeled the product before and basically I didn’t send them a contact and it was delayed by 4 months, instead of like 3 weeks. It was an entire hustle and struggle through that.

Lorenzo: What was the reason?

Roland: The reason was that I would get late answers. I would get them to say that oh sorry this and that happened. And now another order came in and they’re capacity is like full, slow down, blah blah. Whatever, they would come up with anything. I have nothing in my hand to squeeze their balls pretty much.

Lorenzo: Was that your first order with them?

Roland: Yes and the last one, too.

Lorenzo: Any red flags prior to sending them the money.

Roland: Once, I sent the money it started. So obviously, they were doing all this sweet talk and then everything. So, basically I believed that there is a partially, this is what happening right now that the sweet talk is being done until they received the money. And then they are not really providing or not as strict on providing as they were talking about it before. Event hough if you do the relationship getting in the beginning. You’re still just a money walking around Lorenzo in their office.

Lorenzo: Now it makes sense Roland. Now I understand where are you coming from in terms of being more direct. And I understand.

Roland: And if you’re aggressive, a little bit more then, they might be a bit more scared about you. And then they might you give you a better respect, I guess. Because if they say you’re sweet and can play around with you.

Lorenzo: No, I’m not being sweet with them, I’m just being polite, tactful but in a firm way.

Roland: Yeah, I get it. That’s why I said in the beginning that there are different strategies and one convert with one company and the other one convert with another company, you really have to see who we are and who they are.

Lorenzo: No, seriously. Now I understand where are you coming from. Because I wasn’t sure what was the reason behind this. But now it makes sense. I get you.

Mike: Okay, so. Let’s get going into, I think we kind of caught up the listeners with what’s happening or happened. Seems like Lorenzo on the show goes live Friday of the same day we go live at the show, you’ll be at the factories again. Are you still gonna meet this one. I know you’re talking others, to other back ups.

Lorenzo: No, I’m gonna go back to the first 2 suppliers that we have met back about early mid-October. I already arranged appointment with the first one. It was pretty big and fancy trading company. And then also the second one which is more like a workshop/factory and still awaiting advise from them. But that’s my plan to go there on Friday. Also, I probably gonna arrange a visit to a factory of the electric stove on Friday, time permitting. I got their sample today and it’s decent quality. And I’d like to go and see that in person and inquire about that to see what’s their available and any opportunity for us to work with them.

Mike: Great, alright guys. So let’s stay positive. I think it’s also we’re just learning. I’m also learning how to work well together.

Roland: Basically all the of us are getting the sneak peak or internal discussions and how we communicating internally. It’s just a great way for them to be able to do the same.

Cadrian: Looking on the bright side. We’ve already learned our lesson and this time when Lorenzo is contacting another supplier, we’re already in the beginning, we send out the product. So I think, we’re just kind of, don’t be discouraged and look at the bright side.

Lorenzo: Exactly. We’re gonna be fully equipped with all the everything in our hand right now in terms of this. This is what we want, can you do it, yes? Perfect. If no, thank you very much, let’s move on to the next one. And no time wasted.

Mike: Yup, the main point is we’re staying positive or continuing and we’re learning and improving. Thanks guys.

Roland: Thank you very much guys and have a good one and subscribe, listen, and keep on going.

Lorenzo: And make sure you support us, once the product is live, please purchase and leave positive reviews. I’m joking.

Roland: Alright, see you guys, have a good one.

Mike: I mean, that’s what it takes to be a team. We have a lot of different types of personalities and background and skills and negotiation tactics and I think Cadrian is right. I think we should have had this contact up front earlier and the specification is more clear at the beginning. Maybe one we show them more organized and they can’t push us around. Who knows, if we just paid that 3% without a formal contract. We might be waiting like Roland did for 4 months. And they are already saying Chinese New Year which is not until February. It will be right after that. Which means March shipping to America April. Can you believe that? My birthday and also Cross Border Summit. We got our first order and live in Amazon. It’s taking a lot longer than I thought but we are doing it directly at the factory. I think a lot of times I talked about dropshipping and wholesaling in the US with our shows in the past, talking about that. As much faster way, this is obviously private label. It’s not just you can see, not just throwing your logo on something. But we could just throw a logo but we’re making some nice packaging. We’re making 3 or 4 different modifications to the product. To improve on the feedback we’ve seen. So it’s not just some off to shelve product. So, it’s not as unique as a kickstarter project. It is got someone in style and we want to make sure we do this right. So we will keep you guys posted as promised. It’s been hard sometimes to share some of this stuff. But you can also get that template for the contract that I’ve used for free on site. I hope I don’t upset the team but it’s something that I used many years ago, my previous sourcing and there’s no sensitive information. I have to removed all of that. So you can download that at www.globalfromasia.com/ecommerce020. I hope you enjoy and sharing is caring. So it’s almost gonna be 2018, can you believe that. We have some announcements and email newsletter as well. It’s just something that might you guys don’t even know, we have email newsletter. Just some updates and I’m gonna make an announcements to email only. So if you’re interested to hear some announcements for the New Year, we have some new things going on. You can subscribe by downloading our contract. Alright everybody, have a great day and stay positive. I’m pretty, I’m so amazed at our team stay positive through this, ups and downs. I think that’s the truth about e-commerce and entrepreneurship is the roller coaster ride there’s great days and there’s bad days. So once you get it right, you hear people say, how to become a millionaire. I think it’s just this getting through this tough times like these. So thanks everybody, have a great day. Bye bye.

Global from Asia Ecommerce Gladiator Series where you can follow along the progress of setting up a Cross Border Ecommerce business from start to finish. Hear insights of real product research, Amazon FBA, China manufacturing, branding, marketing, and all the blood, sweat, and tears of building a global business from Asia.