Repost | Consequences of winning bids at low prices: starving competitors, exhausting oneself, and ruining the client’s interests

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This post was last edited by q2774594 on 2016-8-23 at 08:10. In recent years, news of companies in various industries “going bankrupt”, “shutting down”, “defaulting on wages”, “experiencing declining performance”, and “incurring losses” has been unsettling people’s minds. Due to severe overcapacity in the domestic market, many companies either have no business to do or rely on low profits to survive. In addition to the external environment, fierce internal competition is also undermining the favorable conditions for the manufacturing industry. To retain customers and ensure a steady stream of business, some companies resort to selling at a “break-even” price, thereby increasing the risk of more small and medium-sized factories going out of business. Using engineering projects as examples, this article explains how winning bids at low prices leads to the downfall of competitors, exhaustion of oneself, and harm to the client! But is this the same in other industries, especially the certification industry? It’s worth considering. “There’s always someone willing to take on a business no matter how low the price is! ” It now seems that worse than the wave of business closures is price competition. 1 In this issue’s update, we’ll explain how winning bids at low prices in construction projects can drive competitors to bankruptcy, exhaust the contractors themselves, and harm the clients! The broader context is the poor economic conditions recently, which has led to a severe shortage of decent projects available on the market. The company received a bidding invitation from a client at a time of intense tension before the war. It’s like a grassland covered in heavy snow; only a few herbivores show up there. The wolves’ eyes turned green when they saw it. 2 Competitor Company A began to use relationship-building tactics to figure out the preferences of the project owners’ senior management to a large extent. Competitor Company B made a firm statement: no matter how low the owner tries to drive down the price, they will still take on the project. We have worked on three or four projects with this client; one of those projects has just started, so it’s still early on, and there’s a high chance of informal conversations and laughter. Since there are still projects in operation for the time being, the quotes are prepared following standard procedures; a small amount has been added for meal expenses in areas where the working conditions are more challenging. The prices quoted thus appear completely normal compared to usual levels. 3 Results: In the first round of price comparison, Company B’s price was 70% of ours. The colleagues were a bit surprised; Company B’s usual prices are on par with ours, and sometimes even slightly higher. I asked B’s friends, and it turned out that many people at B are OVER HEAD (which means they have no projects to work on). If there are no more projects, layoffs will be necessary, so B decided to go all in and take the risk. During the second round of negotiations, our company reduced the price all the way to the level before B. Because the management said that old customers cannot be lost. I just heard that Company B won the bid in the end. Reliable information from the client side indicates that Company B’s final bid price has dropped to around 50% of our initial quote. What’s the concept here? 4. The electrical engineering design industry is essentially a service industry. For example, if this contract is carried out properly so that the system can be launched without major problems, the cost will be around 10 million (for simplicity’s sake, let’s consider only the design aspect of the contract). The costs here (in man-hours) include engineers’ salaries, management costs, administrative costs, confidentiality costs, IT costs, and so on. A normal engineering company would only dare to ask for 12 million, as the profits are transparent; if they ask for more, the client will throw them out. For long-term partners with a good relationship, an appropriate discount will be given. In other words, if you initially set the price at 12 million, applying a 10% discount brings it down to 10.8 million. Typically, design contracts account for no more than 10% of the total project cost. For simplicity’s sake, let’s assume that the total cost of this project is 100 million. This means that even after a whole team works hard, busting their backs and putting in a lot of effort to complete a project, the company manages to earn less than 1 million, which is less than 1% of the total contract value. 5 For a contract of one year’s duration, around 20-30 people are required. The company takes away the majority of the profits as cash flow, so what everyone gets as an end-of-year bonus is probably just a few thousand dollars at most. With these prices these days, a few thousand in first-tier cities will only allow you to buy a few big baozi to try. Well, this is still a smooth situation. The current situation is that this contract was taken on at a cost of around 6 million. What kind of concept is this? To carry out this project, the company must cover the daily costs while also subsidizing the project itself. Many design firms and engineering companies calculate their output based on revenue generated. These poor engineers, after completing a project, find that their revenue is negative, meaning they have to pay money back to the company. A company certainly wouldn’t do such a foolish thing as giving you money only to take it back from you later; it will simply take what is due once it gives it to you. As a result, the engineers found that various benefits were getting worse, with some even being eliminated. There’s no reduction in the workload for the project, and in the later stages, to cut costs, the company will gradually withdraw its staff. This means that for more dominant majors, the later stages become extremely exhausting. Those homeowners who initially thought they had gotten a great deal found themselves trapped in a situation from which they could not escape. At the end of the project, I calculated that I actually didn’t save any money at all. Xiao Ming in Project 6 has just been promoted to engineer; he is around 30 years old, likes to wear white shirts, and always smiles politely when meeting people. Xiaoming has a decent salary, but at the same time he has to pay off mortgage and car loans, and his chubby son needs to attend a better-quality kindergarten. When Xiao Ming first joined the project, he was told that there would be a monthly project subsidy of 2,000 yuan. However, after he started working on it, the subsidy was canceled because the project wasn’t generating any profits. Gradually, the benefits in other areas also became thinner and thinner; the company’s resources grew more scarce. After eating a meal that barely sufficed to sustain life, one still had to smile and take on even more burdens. There is more than one Xiao Ming like this. He is with each of us; most of the time he remains silent and works hard. You can’t see the burden on his shoulders. Li Lei, the project manager at the engineering company, began to suffer from insomnia on the day he was assigned to the project. After working on this year-long project, I’ve got several hundred more gray hairs, and I smoke a pack of cigarettes a day. Originally, I had a very good relationship with the owner, JIM; but after finishing the work, we basically stopped talking. The manager sends an email every month questioning his progress. At the weekly project meetings, engineers from various disciplines grumbled that they couldn’t finish their work. I had planned to go on a month-long vacation to Singapore, Malaysia, and Thailand this year, but there were serious problems with the technical drawings on site, so I had to rush over to resolve them. The return flight tickets have expired. His wife, Han Meimei, refused to speak to him for a week. JIM, the project manager from the owner’s company, felt increasingly desperate as the project progressed. At first, I thought I had gotten a great deal – being able to get the project at such a low price, and on top of that, the person handling it was my good friend Li Lei. Things took a bad turn as soon as the project started. The people shown in the project architecture diagram seem numerous, but they are actually all placeholders. It seems there are 40 people on the project, but 25 of them are working on other projects at the same time. The patient JIM endured it. A month later, his good friend Li Lei got angry at him for the first time. Since a reasonable suggestion did not require any changes in man-hours, JIM held back. 7 Three months later, Li Lei came to JIM with the first change order, requesting an additional 500,000 in the contract amount. At the time of signing the contract, there were ongoing disagreements between the two parties regarding the scope of work. However, the sales representative from Li Lei’s company laid a hidden trap, and the native English speaker JIM failed to see through this trick; now he has no choice but to accept it. Six months later, the additional contract value reached 2 million. In the seventh month, JIM’s boss talked to him on the phone for an hour and, for the first time, expressed doubts about JIM’s work ability. By the tenth month, the additional cost adjustments had exceeded 4 million. JIM smiled bitterly and said to another engineering company, \"If I had known this would happen, I would have chosen you from the start.\" In the eleventh month, during on-site construction, it was discovered that a certain piece of equipment could not be lifted. After breaking off one of the secondary beams and moving the equipment into its proper position, foreign engineers conducting checks on the structural loads found serious weaknesses in terms of strength… After the project was completed, JIM fell seriously ill. 8 I firmly believe in one thing: whatever others endure today, I will surely endure it someday. When the nest is destroyed, how can any eggs remain intact? This is a tragedy for the entire industry; no individual, whether it’s Xiao Ming, Li Lei, or JIM, can escape it. To resist such tragedies, it must begin with the awakening of each of us. This is an iron window; many people are asleep, while a few awake individuals begin to scream. At first, the shouting woke everyone from their sweet dreams, and many people began to beat those who were shouting. As they were fighting, everyone realized that there was a gas leak in the stuffy room, so they worked together to break the windows. I don’t know from which day it started, but the industry has entered a vicious competition driven by low bid prices. Doing projects has turned into something like selling cabbages – if you offer 15 cents, I’m willing to offer 12 cents. So what was the result? “Stealing others’ orders blocks one’s own path! ”Companies that take on orders at low prices focus only on short-term gains, and these seemingly forced individual choices are harming the overall healthy development of the industry. Such a business model cannot last long, and as the industry undergoes transformation and upgrading, companies lose their ability to improve in areas such as product development and process innovation. Their path of development becomes increasingly narrow, eventually leading to a dead end. In fact, in the competition of price wars, companies can definitely rely on leveraging their own strengths to gain more benefits. ——Let the products speak—this beats a price war hands down!