Tips and tricks when cutting costs in China

Dr. Kuang-Hua Lin

When seeking to save costs, German companies often overlook certain tricks. And yet there are a number of effective ways to enhance efficiency and cut costs, irrespective of industry, that have proven their worth in practice.

Chinese competitors are getting better and better. And as production costs steadily rise, so German companies in China are slowly but surely facing cost pressures. In sectors such as purchasing, especially, as well as in logistics and HR, companies can make significant savings.

Optimization according to the 80:20 rule is not enough

Purchasing should always be the first area to be periodically reviewed – at least once a year. This is where the greatest savings potential is to be found because, as a rule, Chinese employees – whether purchasers or general managers – maintain very strong relationships with their suppliers.

From experience, it can be said that most companies have already “optimized” purchasing according to the 80:20 rule – this means that employees have already made considerable efforts to find alternative offers for larger purchasing items in order to negotiate and push down purchase prices. However, this rule does not work as well in China, as Chinese employees are already very familiar with the methods used by German companies and are therefore able to exploit their weaknesses. For instance, they may obtain pre‑arranged quotes from many alternative suppliers in such a way that their prices are always higher than those of a preferred supplier. In this case, therefore, the standard safeguard of obtaining at least three quotes and comparing prices misses the mark completely. In a similar vein, it is also not unusual for a major supplier to distribute its entire volume of stock to several dummy companies, so that it is not identified as a major supplier by potential customers. German companies would therefore be well advised to check all purchasing items and submit them to internal rules of procurement. In most companies in China, there is a procurement rule that states that purchases must be strictly controlled above a certain amount (e.g. RMB 10,000). In order to circumvent these checks, Chinese employees may buy more often and in smaller quantities to avoid going over this limit: so, instead of buying 10 computers at the same time and negotiating a good price, each device is bought individually – and at a higher price.

A case in point is the example of an office-supplies retailer who was able to sell all of his products at a significantly higher price than usual: he went as far as setting up three dummy companies in order to split his total turnover, so that a German managing director would not notice that he was a major supplier to the company. The prices for his products were never checked because purchases were fragmented into small quantities and the purchase amounts were extremely small.

Large savings potential in logistics

While prices for raw materials and supplier parts are subject to strict checks and controls, most German companies in China rarely review their logistics and transport costs. However, what they may not be aware of is the custom whereby freight forwarders pay Chinese employees kickback fees of RMB 500 to RMB 1,000 per container in order to obtain lucrative orders.

Corruption is often the reason why it is so difficult in China to change suppliers, even when it comes to freight forwarders and logistics service providers – who, in principle, always offer the same kind of services and can theoretically be changed at any time. In practice, though, the employees responsible almost always vehemently oppose changing service providers. Similar situations also exist in sectors such as IT, accounting and other business services. It is therefore important for every German company in China to conduct regular overviews of all service providers and their prices and annual turnovers.

Central travel reservations reduce costs

All major travel booking platforms in China offer kickback payments if a hotel is intentionally booked at a more expensive rate: in the event of a booking, users receive a certain amount back from the travel platform as a disbursement. Therefore, many employees tend to deliberately book hotel rooms at higher rates. Similarly, flights in China can be obtained with significant discounts if they are booked early: one week ahead, you can often save 50% on airfares, and frequently up to 80% for booking two weeks in advance. However, kickbacks also exist when booking flights, which is why many employees going on business trips rightly say that, as a rule, appointments in China can only be confirmed one to three days in advance. However, even one day before travelling, it is generally possible to save 20% on airfares – and even three hours before a flight, a 10% reduction is often still possible.

The best way to make savings is to make central travel reservations – that is, in general, where one employee makes all bookings for all employees travelling, in order to find the best deals. Employees who often have to go on business trips typically have neither the time nor the patience to look for the best options; however, if employees ever have to make last-minute reservations, they should adhere to specific rules and reimburse any kickback payments made by the travel agency to the company.

Check expense reports correctly

Most companies and accountants only check expense reports from employees to ensure that company names and tax numbers are correctly indicated on the official invoices (fapiao). This leaves a wide margin for fraud – e.g. where employees on business trips allow restaurant and hotel bills not related to their business activities to be paid by the company.

A wide-ranging review is only possible if employees must specify in their expense reports the exact dates of their stay, in which location, at which company, and with which business partners. Expense receipts must then be submitted chronologically so that the accountants can check if all expense receipts were in fact issued in the stated locations at the stated times. As in Germany, employees have to specify exactly with whom they have had a meal for each restaurant bill.

Review the need for expatriates on site

Although most Germans are reluctant to hear it, there is very often hardly any need for expensive German employees to be deployed to China – except for a few key positions such as production managers, quality-control managers, and specialists. In general, all commercial positions can be exercised better by Chinese employees.

For instance, many German companies assume that one needs a German managing director or chief financial officer in China in order to control the Chinese organization. However, a majority of German employees are unable to read entire documents such as contracts and receipts in Chinese. These German executives therefore have to place their trust in a Chinese employee to read and translate the documents for him. The question here is why the Chinese employee was not directly entrusted with the task in the first place, if he or she is trusted without reserve in this way.

Increase productivity intelligently

It has meanwhile become very difficult and expensive to dismiss employees since, customarily, the statutory severance payment corresponds to a monthly salary per year of employment. If German companies wish to dismiss employees, they should absolutely seek professional assistance, in order to avoid making costly mistakes when issuing notices of termination and dealing with all the associated formalities.

One broadly applicable principle is to adapt remuneration from time rates to piece rates so that employees are motivated to work more quickly and more efficiently. To achieve this, a system must be developed that yields higher wages for productive employees, which must then be negotiated with employees individually. Only then can a piece-rate system be successfully introduced.

Taking into account all the possibilities mentioned above, together with company-specific measures, a cost reduction of around 10% – and in some cases even as much as 20% – could feasibly be achieved. During the implementation process, communication with the employees concerned is important, so that they understand that, in the long run, they will benefit from these changes. Once these employees are on board, the practical implementation of such measures will then become substantially easier.

Published in:

Asia Bridge, 12:2017/01:2018

Original title: “Tipps und Tricks beim Kostensparen”

Image source: @ Andrey Popov –

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