From time to time, a reader who has received unacceptable products asks me how they can force a Chinese supplier to refund an order.
My response is usually “forget it, and do things right on your next order (make sure you read about best practices)”.
There are four very important things to keep in mind when you buy from Asian developing countries:
1. Pre-production samples are not indicative of average quality
Your supplier might show you nice samples, and pretend that they come from a past production of that factory. Do not think that’s what you will receive.
Even if that’s true, who knows if they were the nicest pieces out of a batch that counted 90% defectives? Don’t forget, most assembly & finishing operations are done by hand in low-labor-cost countries.
2. After you have paid, you have no more leverage with your supplier
What will a supplier tell you if you complain about their product quality/performance, after the order was shipped and paid in full? They will probably promise to give you a discount on your next orders. But do you really want to give them more orders?
If you want to avoid bad surprises, you should check product quality (and probably also the production status) in the factory, before shipment.
The details depend on your mode of payment:
- If you pay by bank wire, make sure you confirm quality before you transfer the remainder.
- If you pay by letter of credit, don’t forget to include a third-party inspection company’s certificate in the list of required documents.
3. It is pointless to start thinking about litigation/arbitration after production
Did you know that a purchase order is not a contract? Actually, it will often protect the seller in a court of law, not the buyer.
Did you know that countries such as China do not apply judgements from American courts? If you need to take legal action against a company that owns assets only in China, you’d better have a contract that is enforceable in that country (and that was properly chopped by that company).
If you need a contract, go and see a specialized lawyer and ask for an enforceable OEM agreement. Before you wire your deposit/open your letter of credit, not after.
4. Qualifying a supplier is necessary, and so is monitoring production
Yesterday, an Australian importer told me she had received unsellable products, and she has not checked quality before shipment “because it was a Gold Supplier”.
As I wrote before, suppliers pay to get a “gold” status on Alibaba, and it means nothing for the importer. The sad truth is that nobody certifies the past performance history of a supplier in China or Vietnam or India. It is entirely up to each buyer to pay for his due diligence… or to take huge risks.
The solution is simple, but it takes the importer money and/or time:
- Asking for customer references, paying for background checks, and auditing factories is the solution for qualifying a supplier.
- Being present in the factory or sending third-party inspectors is the solution for monitoring production.
Does it make sense?
Another good post Renaud. “Forget it and do the right things on the next order”…it was blunt, direct, but exactly correct. The things buyers do, they would never do with a supplier in their home country (assume, leave it up to them, complacent), but for some reason, when it comes to dealing with a “developing” nation, they seem to get cloudy-headed…I think it’s all that “cost savings”… It’s called “developing nation” for a reason. If they always produced correct and careful, it wouldn’t be low-cost.
Jacob,
I think there are 2 types of buyers who fall into this trap:
–Those who are used to buying from domestic manufacturers or wholesalers, and who think they can just send bad products back to the factory.
–Those who have no real business experience, and who think “they are the manufacturer, so they know the production side better than me… I should focus on sales & marketing”.
Hi Renaud,
While your statement “forget it, and do things right on your next order (make sure you read about best practices)” is certainly applicable in MOST of the cases. I would not be so quick to brush aside the opportunity to seek compensation from the supplier.
Essential Check List
If the buyer has the following items in place, even a foreign buyer will have a decent chance of negotiating a resolution that is acceptable:
1. a signed / chopped contract that clearly defines what is the acceptable level of quality
2. a clear paper trailing showing proof of payment
3. the seller named on the contract matches the receiver of the payments. (With so many trading companies out there it is a common mistake to have a contract with a supplier but pay a trading company!)
4. your supplier has physical and financial assets (small “one-man-bands” disappear as soon as they feel a lawsuit is on the way)
5. the jurisdiction on the contract matches the location of the supplier’s assets at a city, province or country level.
It is always nice to have future orders you can leverage as well.
Preparing for Battle
The first step is to define the damage and put a value on the costs to repair or replace.
Second step is to negotiate with your supplier.
If negotiations fail, consider getting an English Speaking Chinese lawyer to write a demand letter.
KEY POINT: Unlike most nations, in China you can sue for lost revenue. Since the price you sell to your buyers is certainly much higher than the price you pay to your suppliers, your demand letter can “swing big” and put the fear of God into a supplier!
If the demand letter doesn’t work you can bring in 3rd party mediators or go right to court.
“SP Shenzhen” is a team of US and Chinese mediators who work in conjunction with the (not- for-profit) China Sourcing Information Center who have done a good job for me in the cases when I couldn’t solve the problem on my own. (Renaud, if I haven’t yet introduced you to Jamon and Matt at SP, I will do so when you get back to Shenzhen from France.)
I have been involved directly or indirectly with 8 court cases during my 12 years in China. In all 8, the foreign party was victorious, BUT in all cases the buyer had the 5 critical items mentioned above in place.
Speaking of courts, in my limited experience dealing with the Chinese courts during the past few years, I have actually been pleasantly surprised. Here is a highlight from a blog post I wrote on the experience.
“Litigation in China”
A supplier was holding some funds that belong to me and diplomacy had failed, so my assistant and I got up early and made it to the court to be the first in line to submit our notarized documents and present our papers to the clerk in order to book a date for the hearing. The clerk went over our papers and everything was in order, except a very technical suggestion in their SOP that we needed a formal letter from my company’s board of directors stating that I have the right to represent the company in submitting the paperwork. That request was quite silly because I am the sole owner of the company and carried the company chop and passport and even business license stating I was sole owner with me that day. But a government officer has a lot of room to interpret the rules as they see fit. So we explained the situation. Plus it helped that I went in person as having a westerner kow-tow to the clerk to ask to speak to her supervisor to explain our case actually worked, and after a bit of a wait we got an audience with one of the judges that very afternoon. We once again explained the situation and politely mentioned how the costs of lawyer fees, court fees and notarization, combined with my time away from the office, travel back from out of town to come to court and so on… are significant when you consider the whole case is for less than 20K USD. Believe it or not, the judge was receptive and wanted to help. But he couldn’t easily overturn his subordinate’s stance that we should submit more documents as that would cause his subordinate to lose face. But he did want to help, so he actually picked up the phone and called the defendant in our case to explain that he was “sitting here with the foreign boss, who is very serious about this case and after reviewing the case, if he was the judge, he would probably rule in his favor,” so the defendant would be better off paying the amount now rather than risking a loss and even larger payment once court cases and perhaps damages were applied.”
The situation made me really pause to reflect on how much China has changed over my 10 years living here. Even as recent as a few years ago: 1. the courts would certainly not go out of their way to help a foreign entity 2. The clerk would no way allow her superior to be bothered. But today was remarkable, the system was working fairly and both the clerk and even the judge went way out of their way to help. Wow, China court system is more effective than my experiences in the USA.
Wishing you and your readers successful China Sourcing!
Best Regards,
Mike Bellamy
Mike,
Thanks, this seems like an excellent checklist. Thanks for sharing.
I absolutely agree that a proper contract can help. However, 0% of the people who wonder “What to do after receiving bad quality products from China?” have a proper contract. If they had one, they would contact their lawyer as soon as they receive a defective shipment.
And yes, I’d love to meet with the SP Shenzhen people!
As I am a experienced footwear QC,I want to share you some thing about qulity control.For every order,you must arrange a staff or a third party QC to the factory to make sure every item with good quality.This may add some cost,but compared with recieve bad goods,the cost worth its value.
Create a complete quality procedure for all of your orders,it really works.
Reduce the risk for receiving bad quality shipment, prevent suppliers’ cheating.
It’s a better way to set up an office in China, or hire some formal staff to follow up the orders and control the quality.
Saving a lot of trouble and time when you just need to pay not so much money comparing the loss if you receiving the bad shipment.
Quentin,
You are right, it helps to monitor that quality standards are respected. You can have your own staff (legally hired, as you mention) or work with service providers.
Wow, you are so informative and real. I am about to go into production in the next week or 2 overseas for the first time. I feel like I trust my factory over there but am very scared that my goods will not come out like the samples they sent me. I hear horror stories about this all the time. I am planning on traveling to China right when production finishes to accept or reject goods before shipment. So that if things look bad, at least I’ll only have lost a portion of my investment…but. If I accept and then later find out my spot checkings were not representative of the whole order…man, I’m screwed.
Cassey,
If you check the production carefully, you should be fine (98% probability).
Just make sure you arrive at the right time… The factory WILL be late (65% probability), sometimes by 3 or 4 weeks, and sometimes without telling you about it.
I now have had a few shipments of samples and stock from china, all I can say is that I have checked the credibility of these companies, some have been around for many years, the samples were very good but the main orders were very bad, surely there must be a better way, if these companies are sending great samples then they must be accountable for sending stock that is nothing like the samples,
They can create good samples to reel you in so they surely know what they are doing and how to scam us when they send products that are bad quality,
Why should the purchaser be the loser for doing the right thing,
Why should the purchaser be conned for doing the right thing,
Why can’t someone really make one of these big companies pay, really pay,and maybe this conning will stop!
Sorry for my ramblings but I have worked very hard all my life, always trying to do the right thing, trying to get somewhere and here they are these so called business people in china fooling most of us. THIS IS WRONG!
Angelo,
That’s why I am writing all the advice on this website… To help importers avoid bad experiences.