Common Challenges of China Sourcing – Part Two

In my last blog, Common Challenges of China Sourcing – Part One, I shared my thoughts and suggestions on the basic challenges importers face when managing their China sourcing programs. This blog goes a step further by covering the more complicated issues they face financially and legally.

Chinese Law and Regulations – From laws to protect intellectual property to laws forbidding “corrupt payments,” navigating China sourcing’s Commercial law is a maze. On top of that, Chinese commercial laws are evolving rapidly and what was true yesterday may not be true today, so it pays to be aware. For more information on this topic, you can view an interesting Top Ten Legal Considerations for Doing Business in China here.

Contracts – You found a supplier and came to an agreement. A common mistake is to place an order without a contract. You may be told there is no need, we know each other, trust is what matters, etc.  All this is important in China sourcing but remember that a contract is just a document to prevent misunderstanding, and the more the supplier resists signing one, the more you want one.  Such a contract does not have to be complicated, but it must include the essentials such as: prevailing law, parties involved, payment terms, logistics, definition of the product and quality standards, etc. When in doubt, consult a professional who specializes in US and China law.

Funny Payments – If you are a manufacturer, meaning if you own part or all of a factory in China, you may be asked to send money or something valuable to Chinese officials for gaining or keeping business.  That is a big no-no. Chinese regulations take a dim view of this and will pounce on you since you are foreign, not to mention that the US Foreign Corrupt Practices Act prohibits American companies from engaging in such activities.  Importers are shielded from this, but you should limit your involvement to pure China sourcing and avoid any entanglement with the supplier’s issues with permits etc.  Tread carefully, and when in doubt, seek legal counsel.

Recourse – Say you placed the order, you did everything right and the goods still came into your warehouse in un-sellable condition.  Will the supplier pay you back?  This is a big concern with importers involved in China sourcing.  And the short answer is: “No”.  Most suppliers will run for the hills when this kind of thing happens. And there is not much you can do to recoup your losses. Keep in mind that when merchandise is bad, costs escalate.  Besides the costs of the goods, you have to deal with freight charges, third party inspections, and often customer penalties – these costs could easily triple the cost of goods.  Unless you have a good contract, the factory will claim they did everything right and, basically, it is your fault.  Even if the supplier acts in good faith, the maximum they usually will offer is credit on future orders, not the full costs of the losses, the penalties, etc.  So what to do?  One solution is to avoid paying until you have had a chance to examine the goods in your warehouse, this is a good solution, but you pay a price for that too.  The best of all solutions?  Make sure it does not happen.  Take steps to anticipate problems and prevent them.  Prevention is better than cure when it comes to China sourcing.

Have you confronted any of these China sourcing challenges? How did you overcome your obstacles? Share your experience with us in the comments below!

 

By Jocelyn Trigueros