The Collapse of GBP – Why You Need to Negotiate With Your China Supplier

For businesses buying from China and who find themselves fighting for profit margins due to the collapse of the GBP and it's exchange rate with the US$, there are a number of options open to you, which include the following:

1. Continue with the status quo and see your profits eroded due to increased costs.

2. Increase your customer price and hope your competitors do the same.

3. Stop buying goods until the GBP strengthens.

4. Look elsewhere for similar goods.

5. Buy US$ in advance to mitigate against currency fluctuations during your order process.

6. Request to pay in RMB for your orders, this may be acceptable to some China suppliers, but will not fully protect you as the GBP will fluctuate in all currencies.

7. Negotiate with your current China supplier.

1. Continue with the status quo and see your profits eroded due to increased costs.

This is not a sustainable option, especially with increased utility costs. If you cannot maintain a profit margin to allow you to cover your expenses and survive, it's only a question of time before you hit cashflow problems.

2. Increase your customer price and hope your competitors do the same.

This is probably the simplest route to maintain your profit margins, however you're relying on your competitors to do the same. If they are cheaper than you, you may lose sales to your competition.

3. Stop buying goods until the GBP strengthens.

Any business needs new stock and there's a limited time you can put off buying more stock. Also, if the GBP plunges even further against the US$, then you'll be paying even more if you delay ordering.

4. Look elsewhere for similar goods.

This is a tough one, and may be doable for some product categories. This will take time to develop and may need to start the process of building relationships with new suppliers. It's also important to note that a factory anywhere in the world, relies on a supply chain for components, most of which will be traded in US$ and many coming from China.

5. Buy US$ in advance to mitigate against currency fluctuations during your order process.

This has it's risks. Firstly when booking US$, you will need to pay for them at that time, so there's an investment for you to make. Secondly, when you book the US$ rate, there is no way of knowing whether the rate will be higher or lower at time of payment to your supplier. This method is a good option if you want to ensure the price when you book, is the price you'll pay. This can help with quotations to your customers.

6. Request to pay in RMB for your orders.

This option may be acceptable to some China suppliers, but will not fully protect you as the GBP will fluctuate in all currencies.?

7. Negotiate with your current China supplier.

This is a realistic option for a number of reasons:

a. China factories need to produce to stay solvent.

b. Your supplier does not want to lose a valued customer.

c. China suppliers are fully aware of the hardship of the shipping costs during the past 2 years.

The strength of the US$ against the RMB means your supplier is getting more money for their order when you pay in US$, which is at it's strongest point against the RMB for 2 years.

This is your reasoning to negotiate with them now!

In order to understand the logic to this reasoning, it's important to understand how a China factory calculates their prices, which is generally based on the RMB rate with the US$ at the time the Pro forma is issued, or based on your historic price quotation with that supplier.

On some Pro forma invoices or quotations, you'll see, usually at the bottom of the page, the currency exchange reference 1 US$ = RMB 6.52. This effectively gives the supplier, the legal option to charge extra if the USD/RMB rate falls below 6.52. This may not happen, as during the timeline of processing an order (say 30 - 60 days), the likelihood of a major fluctuation is unlikely. Factories in China will normally 'build in' a safety margin on their side of a 2% fluctuation rate change, so if the US$ weakens by up to 2%, they will still have the profit margin required.

However, if the US$ strengthens against the RMB, then they make more profit. This is your reason and opportunity to re-negotiate your price.

It's important to understand that all the China supplier/factory costs are all paid in RMB. There are very few components (albeit there are some) that need to be paid in currencies other than RMB.

The following is an example of currency fluctuation over the past year between RMB & US$:

1 year ago (26 October 2021): 1 US$ = 6.46RMB

Todays rate (at time of writing - 26 October 2022): 1 US$ = 7.28RMB

That's a 11.93% difference!

When negotiating based on currency fluctuations, it's important to note that your supplier may have their own arguments to refuse your negotiations, namely the following:

1. They do not adjust the prices if the US$ strengthens, so cannot accept your proposals.?

2. They pay for components in US$, so they have suffered too with the fluctuation.

3. it's not company policy to change prices, after they've been agreed.

Knowing China suppliers and how thier 'mind works', they will use any trick in the book to rebut your proposals. Understanding that they want to keep you as a customer, as well as knowing they have made more profit than anticipated on the order, any decent supplier will interact and negotiate with you, perhaps meeting you somewhere in the middle, or better.

So, how good are your negotiating skills?

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