What is Guanxi And How to Build Long-Term Relationship With Suppliers?
January 11th, 2021
Do you want to learn about Guanxi? the art of building long term relationships with Chinese suppliers?
Do you wish to get better prices, better service, and priority in production for your products by the Chinese suppliers?
This article talks about how you can build Guanxi (Relationships) with Chinese suppliers and what are the different strategies and what are the benefits if you have established Guanxi with the suppliers.
Many times, when working with a Chinese supplier you may have experienced that there is always something lying under the surface of all of the emails, conversations, and WeChat message exchanges.
Sometimes what matters most are those things that are not said. So the art of interpreting these unsaid things is very important for you to master so that when you are dealing with the Chinese suppliers, you will be on a stronger side of negotiating the deals.
This results in getting competitive prices and also building long term relationships with the suppliers.
1) Guanxi definition
Guanxi can literally be translated as relationships or connections. In China, more values are given to relationships than a contract. This is part of the culture.
Let’s say you have a supplier who signed a contract with you with all the terms and conditions. But when you got the order, you got some quality issues. Now you do not have good relationships with this supplier.
So you will have to put a lot of effort to work out the solution for this issue and in any case, if the supplier does not help you, you are left with the choice to go to court.
But this is not a long term solution because then you will have to find a new supplier and that will not provide growth to your business if you replace the supplier, you have to start from the beginning, like making supplier research again, ensuring that the supplier understands all your requirements as well.
2) 4 Key factors of guanxi
Guanxi revolves around 4 key factors namely, Trust, Respect, Time, and Face. The concept of “face” is also very important in China.
Let us see what does face means. It refers to someone’s respect, honor, and social standing.
Your actions and words which may be seemed as disrespectful may cause somebody to “lose face”. Simply, we can say that it is like disrespecting someone especially in front of others. This is taken very seriously as a huge disrespect and doing so with your suppliers may also mean the end of the relationship.
On the other hand, building “face” is also a process where one can give gifts and honest praises to suppliers on their good work which helps to create a long term relationship with them and create mutual trust.
This concept of face is a very difficult one, it has a lot of deeper meaning as well and one needs to really go deeper to understand its true meaning which only comes by spending time and experience within China, dealing with the suppliers.
Here is an explanation by Yvonne Chang of the University of Texas:
“Deeply rooted in the Chinese concept of the face are conceptualizations of a competent person in Chinese society: one who defines and puts self in relation to others and who cultivates morality so that his or her conduct will not lose others’ This contract with the American cultural definition of a person who is expected to be independent, self-reliant, and successful.
The end result is that a Chinese person is expected to be relationally or communally conscious whereas an American person is expected to be self-conscious” Strategies for Building a Good Relationship With Chinese Suppliers Win-Win Collaboration.
3) Guanxi strategies to build good relations with suppliers.
Chinese always take time to develop trust. It will not happen in one day. You need to care for your supplier and his business and not just your own.
Do not try to squeeze their profits because they also need to run a factory. If you just focus on bringing the price down and get a cheaper and cheaper price.
Suppliers will not respect you because they will think of you as someone who just cares for himself and want to make more and more profit.
a) Giving gifts
Giving gifts is considered a very important ritual in China. This increases the level of trust with your suppliers and is very essential to build a long-term business. However, do ensure what you are giving as a gift. Some items for example a clock or a watch is not considered a good gift at all.
It is considered very bad as it depicts that time to your death is coming sooner and sooner. Similarly, some colors are not considered as good luck. Red is by far the most popular color in China. So when you decide to give any gift.
b) Treating to an expensive meal or banquet
Have occasional dinners with your Suppliers. Get to meet their families. This shows a huge amount of mutual trust if you get to meet their families, visit their houses, and hang outside in a KTV or a posh restaurant.
c) Wishing on Important Days
Wish them on Chinese spring’s festivals, national holidays, mid-autumn festivals, and other such occasions. They will cherish this moment that you remember it.
d) Building a personalized relationship
China is not an individualized society rather but a collaborative society. That is why personal relationships are of great importance. Building a personal relationship with the Chinese party on a day-to-day basis is crucial. Constant contact will help you in fostering this relationship.
e) Public praise
Praising someone publicly is a great way to help them boost their morale and face especially by the elders or boss.
4) Benefits of building guanxi with your Chinese suppliers.
a) Competitive prices.
Once you have to build trust and good relations with the supplier, you are more likely to get better prices. Continuation of a good relationship is very important in the Chinese culture, that is the reason that supplier will go to further extend to ensure that you get a good price which will help you to grow your business. That is the goal of this relationship that both need to win.
Sometimes the supplier even may provide you with an exclusive price, such a price that he is not offering to anyone else in your market. This too is the result that he has a personal relationship with you and wants to make your business successful as well. Having an exclusive price for you as the buyer ensures that you will get an edge over your competitors in your market.
One may think that if I order huge quantities with the supplier, he may be able to get exclusive prices. But this is not likely to happen often because if another buyer also orders the same quantity he may get the same price too. However, exclusivity is possible only with trust.
b) Flexible payment terms & credit facility
Normally in Chinese business practice, when you place an order, some factories will ask for a deposit of 30% minimum and the remaining 70% as balance. It is also possible that some factories will ask for 50% and some even for 100% if they have to produce an order with your logo because if for any reason you do not take that shipment and do not make the balance payment, it is not possible for that factory to sell them because the product has your logo.
However, when you have a good relationship with the supplier, and by good we mean when he trusts you as his good partner, he sees you as a crucial part of the business and knows that you will be his long-term customer.
Then he may go even to such an extent that he may not require you to pay any deposit upfront deposit and start production without the deposit. You may pay a full payment once the goods are ready.
The supplier may also ask for a very low amount of deposit, maybe a 5% or 10% deposit. This can be a huge advantage for you since you will be able to have more cash reserves in your hand to utilize for something else.
Sometimes, a credit facility can save your business. It becomes essential sometimes to get some inventory from the supplier but you do not any cash on hand at that time. However, you do have a huge amount of demand from your customers and if you are not able to fulfill it, there is a chance of losing the customers, and it a huge risk for you.
c) Priority production
There are times when the supplier has received back to backorders and the factory is very busy. Let’s say before the spring festival (New Year festival) in China, all the factories will close, therefore they are in a rush to finish the orders and there is a lot of backlog of the orders as well.
Now, you have placed your order but the supplier tells you that it will take a month to be produced, unlike the normal 5 days of production time.
For you as the importer, this can make a huge impact on your business because it may mean that once the supplier has finished the product, there is no time to ship the goods because the Chinese holidays have started.
This is a huge problem because if the goods but not reach you on time, you will have no inventory and will lose potential customers, so in such a situation, the best solution is your relationship with the supplier.
If you have a good relationship with the supplier, it may be easy for you to get your orders in the production line a priority basis, because the supplier will value his relationship with you in such a critical situation and will not want to harm your business growth.
Therefore, you will get priority production and shipment from the supplier which can provide a huge advantage to your business.
d) Higher quality checks
Quality control is the key to make sure that your goods are manufactured at the right standard that you needed. Sometimes the suppliers are in the rush to produce more orders; therefore they do not pay a lot of attention when inspecting the goods properly.
For example, if before they were inspecting 10 samples of our every 100 units, now they may reduce it to 2 to 3 pieces per 100 units to increase the production time.
e) Low MOQ accepted
When you buy and customize products from China, one thing that all the factories want is large orders. They tend to give more attention to those customers who order tens of thousands of units compared to those who order a few hundreds.
However, let’s say you want to buy a new product and want to test the market. This means that you cannot order a huge amount of units right away. You want to get a lower MOQ.
So if you want to buy from China just 100 units, a lot of suppliers will not agree to this since their MOQ maybe is around 500 to 1000 units. Now if you have a good relationship with this supplier, it is much easier to persuade him to produce 100 units for you.
f) Increased protection to your IP
Many buyers will develop a new product that will be produced by a Chinese supplier. As a buyer, you may also patent your inventor, own the mold in the factory as well but there can be a chance that the supplier starts selling the same product to others.
This happens when the supplier can see that the product is being sold very well and have good profit margins. Greed will motivate him to start selling it yourself and you may end up seeing those products into your competitors’ hands, selling sometimes even at a lower price than you.
It may also be possible that the supplier himself is selling that product on online platforms for example AliExpress or Amazon etc.
There is a legal way to solve this for sure, but that will take a lot of your time and money. Sometimes it costs so much that you will not be able to afford the legal way. That is why when you build a strong relationship with your supplier based on trust and mutual understanding then it is unlikely that the supplier will do any fraud with you.
By looking at the benefits and strategies, you can see that why Guanxi is so important and how much positive impact it can have on your business if you understand the concept and know how to practice it well. This is by far the most important and crucial concept in order to have long term relationships and fruitful business in China.