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天马行空的Jussi

关注亚太地区的社会与经济发展及EPC行业动态。

 
 
 

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Q&A when conducting business with Chinese vendors  

2008-03-20 13:32:11|  分类: 行业新闻 |  标签: |举报 |字号 订阅

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 Q1: When performing purchase order, some Chinese vendors ask for extra payment on ground of material cost escalation. If not consent, a smooth execution of the contract might be endangered. What can we do to avoid such kind of situation?

 

A 1: In light of my experience, such kind of phenomenon may happen when the raw material market experiences big swings and fluctuations, which is especially a case with long lead equipment since year 2006. Most of Chinese engineering companies, starting from proposal stage, tend to sign a mutual agreement serving as a protection umbrella, where it is stipulated that after both parties enter into the contract, the finalized price shall remain unchanged till a successful completion of delivery has taken place, and if a top-up order later turns out necessary, it shall be entitled to be calculated and complemented according to the same unit price. Under no circumstance shall the final price be changed unless the following conditions emerge:

 

  • When being confirmed a least 5% of cost escalation occurs in the market and it’s believed to bring about impact to the final price agreed in the PO, upon receiving vendor’s application for payment hike, the buyer will request vendor to produce an open book cost(OBC) plus service charge with certain percentage, normally below 10% of the total cost adder. Prior to consenting to the hike, a raw material market status survey shall be conducted by buyer against the OBC containing detailed and itemized cost adder information such as B/M and sub-vendors etc.
  • A C/O may happen, giving rise from buyer’s request for changes, such as designing parameters, scope of services and the like…

 

Q 2: Some Chinese vendors refuse to release shipment of material or equipment after acceptance test before receiving full payment, which is not in line with the PO agreed, what to do?

A 2: It’s very rare to see this happening, since  in recent years more and more Chinese vendors are  open to buyers outside China and progressively becoming accustomed to international business practice, in the case of being  the first time for a Chinese vendor to set up business relationship with Samsung Engineering, I suggest that we generate a PO under the name of Samsung Shanghai IPO, thus to alleviate their fear for dishonor problem on ground of any “fabricated” excuses, which is their biggest worry and misunderstanding toward us. Furthermore, we should try to earn more trust and understanding from them by conducting more continuous communication.

 

Q 3:  While most of Chinese vendors can offer equipment with very competitive price, we might confront hidden quality problem when cooperating with them, it seems to be a big trade-off, how can we benefit from dealing with them to the maximum value at no cost of quality?

A 3: This is no longer new, I suggest we copy experience from such companies, as Bechtel, AMEC, Flowserve and JGC etc… When awarding P.O. to Chinese vendors, these engineering giants will categorize the equipment into 3-4 classes according to their criticality. For instance, class 1 is regarded as the top critical equipment with long lead supply period, normally critical path method for the fabrication process will be designed accordingly and buyer will dispatch Certified Mechanical Engineer as a resident inspector during some hold point stage, the frequency of shop inspection visit depends on equipment criticality class. Such kind of Inspection Institutions are very popular in China nowadays, say, DNV, SGS, Moody, Maison and other well known firms who are capable of executing the examination in full conformity with buyer’s technical requirement, since most of them have been developing the localization strategy, the man hour cost for such services, as far as I know, is much lower than their foreign counterparts.  One more suggestion from me is for the long run or long term, Samsung Engineering should consider hiring some experienced Chinese mechanical engineers, so they can do some conversion engineering work like Chinese engineering companies that may have established relationships with local vendors. By doing so, some hidden technical problem can be prevented or ruled out during the inquiry stage.

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