Spoke with a U.S. manufacturer the other day regarding the Manufacturing Agreement my law firm’s international manufacturing lawyers are drafting for them. This company has been manufacturing in Asia and in Mexico for more than a decade and their COO quickly let me know that one of the things that drives him nuts is how his Chinese manufacturers “change prices” on him, no matter what the contract says. He then asked if our Manufacturing Agreement could stop that. My response was “probably not” and then I explained to him why stopping it might not be such a good thing anyway.
“Take your widgets,” I said (actually I mentioned his actual product, but you know what I mean). “Stainless steel is a big part of that. If we put in your contract that your widgets have to remain at X price for three years, we may be asking for trouble. What happens if the price of steel doubles during that time,” I asked. “I’ll tell you what will happen,” I said. “Your Chinese manufacturer will either go back to you and ask to raise its prices in light of its greatly increased costs for stainless steel or it will secretly start replacing some of the stainless steel in your widget. Which would you prefer?”
His response was pretty much as follows:
I get it. You are right and I know that because that is exactly what keeps happening to me. The manufacturers start changing their products for me and always for the worse. Sometimes they do come back to me and ask for a price increase and then we negotiate one.
We talked a bit more and he agreed that the manufacturers that came back to ask for price increases were overall much better manufacturers than those that secretly changed the product and that he was no longer doing business with any of those.
I then told him that the best way to handle pricing in his situation is usually by setting a price for maybe a year, but be ready to be flexible even on that. I then noted that many factories do not hedge their material goods pricing and that for right now at least, adjusting prices, no matter what a contract says is still pretty common.
I then asked him whether his company does anything to hedge against exchange rate risk and he said no and I connected him to a bank to see whether that might be a way it could reduce its product price fluctuation risks.
Nobody ever said having your products made overseas would be easy.
What do you think?