Questions & Answers Section Given in HKICPA Seminar on 23 Jun 2012

Question 2:
When you talk about suppliers engaging in automation, productivity improvement and the like. We work with the suppliers to help them undertake these improvement initiatives, but you can't fool the suppliers. The end result is that suppliers will ask for a price increase. We're talking about 8% to 10% price increase. Every supplier asked for price increase. Everyone in China asked for the price increase. You know the minimum wage is going up labor costs, materials costs going up, what do you do?

Agreed, but it depends on the industry or sector which you are competing in. For example, in the mobile phone industry. You have buyers and customers with large bargaining power coming the other way with 5% cost down every quarter and so there is this clash of powers or pressures between the large customers and the suppliers which are feeling these increased labor and raw material costs. So what these large customers or buyers will do is seek evidence to justify why the supplier is asking for. I'd large a price increase or I reduce the crease, that the customer is asking for. They want evidence to show the customer that the supplier is faced these increased natural costs. They want evidence that to show the customer that the supplier is undertaking investment in R&D in order to improve their technological capability in the long term.

So in the lower technology intensive components such as inductors and resistance and other types of passive components. I thought that such suppliers would be under a lot of pressure from these large buyers such as smart phone manufacturers. But there was this one supplier that had the strategy and vision that they make the best inductors in the world and they were prepared to loose contracts to their competitors whenever this 5% cost down request came from the major assembler in China.

Therefore, I think there are two types of suppliers, there are those suppliers that fight back directly against these requests will cost down. The suppliers have invested in their research and development and productivity improvements. They have a brand name and a clear strategic vision about being a leader in a product that they make in the industry sector that they are in. So I think that these supplies are justified in fighting back against cost down requests from major customers.

But then you have other suppliers are trying to fight back against cost down requests without investing in research and development or productivity improvements. And I do think these suppliers are justified. So was the buyer you have two separate out the first type of supplier from the second type of supplier. One way of separating out these types of suppliers and finding out which type a supplier is?