Payment terms in outsourcing contracts are a primary issue to be negotiated and they reflect on the trust levels between the business parties. The terms consist of these parts: when and under what conditions payments are made, and what percentage of the total payment is to be made.
According to the eight cases summarised in Table 7.4, all eight companies interviewed use T/T transfers for payments, indicating that this is a popular method of payment in international trade. Only four companies (50%) pay deposits when
signing outsourcing contracts. Three companies use letters of credit (L/C). Their suppliers ask for L/C when dealing with large contracts and with new or imperfect business relationships. Some companies use L/C or telegraphic transfer (T/T) for different contracts. For existing business relationships and small contracts, T/T terms are widely used. Among the four companies paying deposits, Companies Three and Seven pay 30%, Company Five pays 50% and Company Four pays 100%. Paying 30% is a common practice for most industry trade contracts. Paying one hundred per cent when signing contracts reflects the highest level of trust.
With regard to the time at which full payments are made, Company Seven pays in full prior to shipment. Companies One and Five pay in full against shipments. Companies Three and Eight pay in full after receipt of goods (or in 60–90 day terms). In the event of dissatisfaction with the product quality received, some purchasers return the products for remake (for example, Company Four), and some deduct a percentage of payments (for example, Companies Two and Six).
Of the four companies which pay no deposit when signing contracts, Companies Two and Six withhold payment until receipt of satisfactory quality products; Company Two plans to not pay in full until receiving payment from its customers; and Company Eight accepts only a signed bank draft and short payment terms for export contracts. These conditions of payment terms represent low levels of trust. The later the payments are made, the lower the level of the trust as purchasers do not want to take the risk of not receiving products and of defective quality products.
The next section provides the verification and conclusions that are drawn and verified based on the analysis results presented in Tables 7.1–7.16 above.
7.8 Summary
This chapter has investigated eight cases of how the companies conduct manufacturing restructuring from their own production to outsourcing to China, and the import/export of merchandise. The problems that companies experience in practice are described, and the strategies that companies devise to deal with the
problems are discussed. The companies’ strategies for success and planning for outsourcing to China are reviewed as business success factors. All steps provide evidence to answer the research questions. The content also provides evidence to support the thesis arguments and test the propositions.
The eight study samples are Australian companies which conduct manufacturing outsourcing and importing from China. All are located in major industrial areas in Australia. Their primary motivation for outsourcing is to take advantage of lower labour and other production costs in a developing country in order to increase their capability to compete in Australian and overseas markets. The six manufacturing samples show that outsourcing has resulted in some level of production cost savings, and that outsourcing generates some kinds of inter-firm business problems. Even though the companies recognise these problems, all of them want to continue the outsourcing business and find ways to solve the problems.
The study samples represent different business backgrounds. Company histories range up to 70 years (as of 2010). Company sizes range from ten to 3000 employees. Three companies have established their offices in China. Six companies are manufacturers, the other one is an import company, and the last one does both import and export. Company One produces mostly labour intensive, low technology electrical household goods. The other five manufacturing companies produce middle-to-high technology goods. Company Two has a joint venture factory in China producing whole seats for vehicles to sell to Australian and Chinese markets. Other than Company Two, the other seven companies outsource mostly non-core, low technology and labour intensive components and products, or only import and export products. Company Seven sells their products only in Australia; Companies One, Two and Four sell to both Australia and New Zealand. Companies One, Three and Five have markets in Europe and the USA.
For the inter-firm outsourcing problems, combining the two groups of findings from the questionnaires and from the interviews, it is found that the similarities are:
• product quality, technological level and quality standards are not high enough in China
• high transaction costs, and overload of management work in setting up and managing production.
These three are the most common and important outsourcing problems supported by the evidence from both survey questionnaires and interviews.
For solutions to the problems, the similarities of findings from both questionnaires and interviews are:
• hiring of bilingual staff and translating product specifications into Chinese • increasing communication levels, visiting, meeting and training
• strong controls including visiting, face-to-face-talks, quality inspections and audits.
For business success factors, the similarities of findings from both survey questionnaires and interviews are:
• specifying quality and service standards in contracts and good management of the handover process,
• increasing levels of trust, sharing data, high levels of transparency of operations and policies.
Different payment terms are used by the eight interviewed companies. Four companies (50%) pay deposits when signing outsourcing contracts. Three companies use both L/C and telegraphic transfer (T/T) for different suppliers and contracts. All eight companies use T/T transfer for payments.
Only Company Two has a joint venture in China. Three companies have their offices and hire staff in China. The other companies only contract manufacturing or purchasing with companies in China. All the sampled companies outsource only non-core technologies to their suppliers in China, but keep the crucial technologies in-house in order to protect their intellectual property. Some outsource high technologies to European and American companies because Chinese companies
cannot produce the same quality products. Some outsource to many suppliers and conduct final assembly on their own in order to avoid duplicating products.
The next chapter discusses the research results, evaluating the components of the conceptual framework, verifying the propositions, answering the research questions, and supporting the thesis arguments.