A few days ago, I was invited to speak in a seminar organized by the European Union Chamber of Commerce in China. The topic was “How to collect payments from Chinese suppliers”.
The first speaker was Javier Hernandez, a lawyer based in Beijing. From his presentation, I realized the main source risk factor is the fact that many Chinese suppliers don’t follow what is considered normal business practice in the West.
Here are three examples that are very, very common. Surprisingly, most purchasers “go with the flow” and assume it is normal business practice in China.
1. Invoices in the name of another company
Have you already seen one company name on marketing materials (trade show booths, name cards, email signatures…) and another one on invoices / bank accounts?
Why would they collect payments through another company?
Maybe it is a sister company that has a better ability to export products, collect VAT rebates, and change foreign currencies.
Maybe it is the Hong Kong branch/holding of the Chinese manufacturer.
Maybe it is the manufacturer’s company, while all negotiations were conducted by the agent (who has an agreement to get X% from the manufacturer). Maybe it is the reverse.
Or maybe it is a totally unethical and illegal arrangement whereby certain orders are diverted to another company by unscrupulous employees!
For example, I know of a trading company that was set up (in the names of family members) by a manager working for a large state-owned enterprise. That SOE had a nice booth on the Canton Fair, and got thousands of customer inquiries every year. Some orders were issued in the name of that trading company.
After a few years, the manager and her closest subordinates left the SOE and joined the trading company full time. I know one of their regular customers, who was told that story but still doesn’t care: “that’s the way things get done here”. It IS common, but do you want to do business with this kind of organization?
Why is it risky?
Imagine your orders were made in a nice factory, and suddenly they get made somewhere else (in a cheap workshop, under the supervision of a rogue salesperson). Scary.
What should you do to avoid it?
Ask for an explanation when you see different company names, and then check if what you are told is true. An excellent tool is glo–bis. It is amazing what one can learn about any Chinese company, for less than 300 USD…
2. The salesperson uses a personal email address
It seems to be the case for about half the Chinese suppliers. Their representative use addresses such as xxx@163.com, yyy@yahoo.com.cn…
Why? Out of convenience. Free email accounts are easy to set up. And the factory boss often doesn’t use emails himself.
Why is it risky?
Let’s say you don’t receive products from a supplier, even though you have wired money to them.
You go and meet with their owner, who says he never heard about your order. You show the email where his salesperson sent you a pro forma invoice. The owner replies “this person has left our company last year”.
Naturally, the salesperson was using a personal email address — the same she had been using for years to communicate with you. And the invoice was in another company’s name.
The owner’s excuse might be right or wrong. But it is a good excuse, and you have likely lost your money.
What should you do to avoid it?
First, be careful what company you pay — see point 1.
Second, research the company’s phone number on the supplier’s website. They will often show a number (and maybe even a general email address) to reach the export sales department. Use it from time to time.
3. Failure to confirm a contract in a legally binding manner
Let’s say a manager signs your contract. It is not enough for two reasons:
- That manager might not be the legal representative of the company it represents.
- A signature is not always enough. It is important to require a chop (stamp).
Why is it risky?
It reduces your chances in case the relationship deteriorates and you try to sue them in China (remember, suing outside China is nearly always useless) to collect money.
What should you do?
Work with a lawyer specializing in China business, to draft your contract template and to clarify what you should look out for. Signing a contract without checking the Chinese version’s meaning is another common trick to avoid (read this recent article on the China Law Blog).
(To be fair, many purchasers also lack professionalism. See list of top 10 mistakes for illustrations.)
Anybody has other examples of supplier behavior that puts buyers at big risk?
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some fty are small enterprise, they are not familar with OR don’t know how to set up a e-mail system, so salesperson are all use personal e-mail A/C such as 163.com to communicate with client, I think foreign buyer should choose a ”big enterprise (fty)” that at least have company e-mail system in the beginning, may be their quote will be little bit higher than small fty , but it can lower buyer’s risk. In fact, doing business with china fty are so risky, so sometimes I think **Success** is base on **Lucky index**, if you meet a good fty , you don’t need to worry too much ; otherwise it is too hard to keep the business.
Right. Paying a bit more to reduce risks is often a good calculation.
Unfortunately, big manufacturers don’t care about small orders, so the tradeoff is not that simple.
Big qty + lower price + lower quality => made in northern china
Small qty + higher price + higher quality => made in southern china
Trade off is not that simple —> totally agree. Too much business relationship between all parties, buyer, fty, supplier….so sometimes, don’t ask , just believe.
Right… But when it gets really complex it’s good to take it step by step and not to extend trust too fast.
i hav had experience ( 4 yrs ago), where boss said chop was not put by him, actually they wanted to increase price, so he said staff put the stamp without his confirmation
Yes, this kind of behavior happens frequenty.
“Sloppy” appearance, lack of detail and just a general messy atmosphere about how they operate -that’s how many in the West view how the Chinese vendors operate. I still view it that way and I’ve dealt with them for 10+ years.
It scares the buyer off. They may think, “if the supplier cannot properly format an invoice, how can they handle my production?”
You’ve done a good job above showing how these “unimportant details” can actually spill in to the order, thus affecting if the buyer is cheated or not. (if a buyer is careful on details, the Chinese vendor many times think the buyer is being “picky”.)
A good balance is those buyers who can accurately determine if it’s a professional company and able to handle their orders, in spite of some of the obvious lack of administration detail and professionalism. In my line of work, the vendors that are more polished in detail and appearance are usually more expensive.
You make two good points. If you want a low price, (1) you don’t necessarily be seen as a picky customer, and (2) you will have to live with the mess…