Having triumphed 1-0 in the previous meeting between the two sides in December, the side formerly known as Heart produced a surprisingly lacklustre performance in what is normally a keenly contested battle for local bragging rights.
Goals from Besart Berisha in the first half and Kosta Barbarouses and Fahid Ben Khalfallah after the break sealed City's fate, with their Dutch coach acknowledging his side were well below par.
"How do you say, we were not at the races," he said.
"The performance wasn't what we wanted. We didn't turn up in the way that we wanted. We gave away cheap goals as well. If you give away goals like that it's hard to win a game. They were very cheap. I think in general you can say that was the story of the game. We were flat. In our pressing we were not aggressive enough."
"It was an evening we have to learn from. We have to bounce back, stay positive."
Iain Ramsay was the scapegoat for City's slow start at Etihad Stadium, Van 't Schip replacing him with fellow forward David Williams after just 30 minutes.
"(We were) coming from behind and at that moment we could already see we were not pressing well," he said.
"Iain had a few touches that were not helping him. Knowing that Willo came in last week and did well, we decided to try that earlier to try and change the game at an early stage."
City were without holding midfielder Erik Paartalu due to a calf issue, meaning Singapore interntional Safuwan Baharudin was called upon to make his A-League debut in the cauldron of a Melbourne derby.
"This morning Erik Paartalu had a test and he didn't pass his test," Van 't Schip said.
"We put Safuwan there (holding midfield), he plays in that position where he came from. We knew he could do that. He's a player whose character is fit for that position, but that's also a bit of a risk. Sometimes it works out ... this clearly didn't. I'm not blaming him at all, but we were maybe a bit disjointed."