When sourcing in China, importers often ignore that some tools are at their disposal for reducing their risks. The key lies in transferring the responsibility onto the exporter.

There are mostly three types of risks regarding the behavior of exporters:

• Some Chinese suppliers are guilty of wishful misconduct such as scams, for example to get a buyer’s deposit or hide the identity of the manufacturer. These situations are listed in How to tell if a Factory is Cheating you, on the Quality Wars blog.
• Another type of fraud is “quality fade”, as described as “the deliberate and secret habit of widening profit margins through a reduction in the quality of materials” by Paul Midler.
• To complicate matters, the poor organization of most Chinese manufacturers also leads to “an inadvertent slide in various aspects of the manufacturing process, such as standards, production equipment, testing procedures and instruments”, as described by David Dayton in Managing China product quality: Preventing ‘quality fade’.

These three cases can cause an importer to lose a lot of money and/or put unsafe products on his market. Who is to blame? At the risk of shocking some readers, I think the buying company bears the entire responsibility… unless it takes specific steps.

Importers should use the tools at their disposal to keep responsibility on the supplier’s side

Buyers have tools and they should use them: background/credit checks, letters of credit, contracts, factory audits, product inspections, visits during production, lab tests… Each one adds to a project’s costs, but reduces risks. Serious importers know that the risks are too high if at least two or three of these tools are not used.

To me, it is like going sailing at sea. If you don’t check the weather forecast in advance, and you don’t bring with you the basic safety items such as life jackets, whose responsibility is it if a disaster strikes? Would you say that the weather is at fault? Same thing when it comes to guard oneself against exporters’ behavior.

Forget all about business ethics – responsibility does not mean guilt

In principle, a supplier that intentionally commits a fraud is guilty, and the buyer who didn’t catch it is a victim. Who can argue with that?

However, in China people don’t exactly think this way. They work in a low-trust environment. Many local vendors try to cut corners all the time, and manufacturers are quite savvy at bargaining prices and then checking what they receive. They expect their partners to behave unethically, so why don’t these foreign buyers also expect it from exporters?

I don’t think I am exaggerating. For example, the principle of presumption of innocence is not applied in China’s courts, at least not like in most developed countries. Similarly, the Chinese government expects most companies to “cook their books”, so they collect tax on turnover–not only on profit. Chinese factories would get cheated all the time if they trusted their suppliers.

(One might point out that, on the contrary, Chinese manufacturers tend to trust their suppliers too much, because constant verification is considered embarrassing–it might cause loss of face to the company whose products get controlled. It is true, but only when the two parties are considered old friends. It seems they either “don’t trust and do verify” or “do trust and don’t verify”. No middle ground here!)

Different cultures expect different things, and this is the root of the misunderstanding. Western importers expect Chinese suppliers to ship safe and commercially acceptable products, because that’s what they are expected to deliver to their own customers. Many Chinese suppliers follow the same logic, but in reverse: it is not their responsibilty.

Doing “unethical” things is fine in China–more specifically, it is fine until one gets caught. The Chinese have no religion telling them what is good and what is bad. Decades of communism and the current materialistic behavior also play a role.

I discussed these issues with Chinese friends, who naturally think “if a buyer doesn’t control the goods before shipment, whatever happens after that is his problem”. The supplier does not bear any responsibility, in the sense asking him to re-produce for free is not realistic.

And it is not restricted to local manufacturers and exporters. A friend of mine purchased an expensive bag in a famous department store, only to find that the color faded on her clothes. She tried to get a refund, but it was impossible.

How to keep responsibility on the supplier’s side

I am not trying to find excuses for dishonest Chinese exporters. And I am not suggesting that all Chinese companies are lying and cheating, either. I suggest that buyers should take the lead and keep responsibility on the supplier’s side.

I mean that many small-and-medium-size importers take unnecessary risks, and they transfer these risks to consumers. Unsafe products are regularly recalled in the US and in Europe. But these recalls are only the tip of the iceberg. Many more dangerous goods probably end up in stores, until accidents are reported.

How to avoid these risks? As noted above, some tools are available. They can be used appropriately… Or not. For example, testing will not be reliable if the supplier sends samples of his choice to the lab or his choice. A product inspection will not be reliable if the importer relies on a trading company’s inspectors. But these tools can be used in an effective manner, and they can place responsibility on the shoulders of the suppliers.

Let’s focus on two of these tools that are often ignored by SMEs buying in China:

How product inspections help reduce risks:

Why pay a supplier and let him ship the goods without getting any information? Even if the supplier is honest, the factory might have made mistakes that will give the importer a lot of headaches on delivery. Sending the products back is not an option, and having them replaced takes a lot of money and time.

Apart from checking the quantity and quality of the goods, inspectors can pick production samples and send them to a laboratory to can ensure they are safe. It is estimated that about 80% of shipments out of China are not checked professionally. When it comes to small buyers, this proportion is more likely 90%. Why not spend $250-300 and sleep better at night?

If defective goods are found before shipment, the whole responsibility is on the supplier’s shoulders. If he does not find a solution, he might face an order cancellation.

How contracts define the exporter’s legal responsibility:

A specialized lawyer can draft a contract in Chinese that can be enforced in local courts. A buyer can use it to get compensation for unacceptable quality. But also to prevent a manufacturer from subcontracting, from keeping the buyer’s molds, or from making counterfeit products.

Good OEM contracts are missing in most transactions, and I never saw a small buyer taking the time to get one. Getting a good draft is expensive. But how much does it cost per shipment, if the only things that change are the supplier name, the shipment date, and the product specifications?

Contracts, like QC inspections, have a strong dissuasive effect on the supplier (risk reduction), AND help the importer if something goes wrong (transfer of responsibility).

To sum up, every importer should find a solution adapted to his needs. A few examples:

• Factory audit + letter of credit + final random inspection
• Lab tests on materials + in-process inspection + final random inspection
• Credit check + OEM contract + final random inspection

Related posts:

Who is responsible for China quality problems?

Chinese vs. Western business: different ethical standards?

The importer’s dilemma: legal risks or higher costs?