Stiffed By Your China Manufacturer? It’s Probably Your Own Fault.

In the last five years, the China lawyers at my firm have been contacted literally hundreds of times by foreign companies (mostly American, Canadian, British, German and Australian) that have received bad product or no product from their suppliers in China. And no exaggeration, I cannot remember a single time where the foreign company did not bear at least some responsibility for its own problems.

What are these foreign companies doing wrong, and so often?  Two things.

First, buying product from companies that they do not really know, or at least do not know well. We have written so often on what it takes to conduct due diligence on Chinese companies that instead of rehashing all that again here, I will simply refer you to the following posts:

• Basic China Due Diligence. Is This Chinese Company Legitimate?
• China Business Due Diligence
• How To Conduct China Due Diligence. Just Ask.
• Doing Business In China Safely. The Due Diligence Basics.
• China Due Diligence. Cause It Really Really Really Matters.
• China Due Diligence. Not Optional.
• Seven Rules of China Due Diligence
• China Due Diligence. It Is Different.
• Let Me Tell You About China Due Diligence
• How To Really Really Investigate A Chinese Company
• Giving China Due Diligence Its Due
• Giving China Due Diligence Its Due, Part II. Don’t Be A Sucker.

The second thing that consistently gets foreign companies in trouble with their Chinese manufacturers is failing to have a written contract that actually makes sense for China. I have recently gotten into email discussions with a few companies that I have for years been telling need a contract with their Chinese manufacturers. These company (years after we last communicated) recently wrote me after having lost six figure amounts due to having received bad quality product from their Chinese manufacturers. Each of them asked if my law firm would consider suing their Chinese manufacturers on a contingency fee basis and I responded by saying that we would not take their cases on even a 100% contingency (i.e. my law firm getting every penny of whatever we collected on their behalf) because the lack of a good contract made these cases not worth our time.

The US companies then usually complain by email how difficult it now is for small businesses buying product from China — the below is a composite of some of these emails:

Those of us who are small business people and who are almost forced to deal with Chinese manufacturers because of price have been forgotten about as we have many problems that the Chinese manufacturers take advantage of and we do not have the funds to solve those problems.

My industry is _____ and the Chinese in this industry pretty well know that a North American company has little chance of winning legally in China, and just as little a chance of collecting when we win a suit in North America.  These suits are very costly and most of us bow out and take our loss and lose customers. Chinese companies won’t even sign the agreements we give to them.

Most under 35 Chinese business people are only concerned with themselves and are not interested in building a business relationship that lasts.  As long as they get their money they do not care who gets burned as they usually have many customers and orders to replace the ones they lose.

I hope one day these business people will understand how important quality and on time delivery means to our industry but I personally do not think it will ever happen.

The Chinese government wants foreign trade but does nothing to protect us. They only protect the Chinese even though it is blatant to see how they let them get away with such dishonest business practices.

My typical response is something like the following:

I disagree. You have chosen not to spend the money upfront to protect yourself and now you are complaining about the inevitable problems that result from that.  You are choosing to do business with China as though it has not changed in the last twenty years, when in fact it has and the smart ______ companies (even the smaller ones) are using contracts and other legal protections to account for that. It is on that which I will write.

The China lawyers in my firm have done literally hundreds of contracts (mostly NNN and OEM Agreements) with Chinese manufacturers in the last three years, not a single Chinese company has refused one.  There are three main reasons for having a contract with your Chinese manufacturer

1.  To create clarity.
2.  To avoid litigation.
3.  To win in court.

You are focusing only on the third, when it is the second one that is most important. The right contract causes the Chinese supplier to comply because it wants more than anything to avoid being sued because it knows if it is sued that it will lose.
But in the end whether it makes sense for you to have a good contract drafted with your Chinese suppliers depends on how much you are spending and how much you are losing due to problems. But generally, if you are not going to do what it takes to protect yourself from all of the problems you describe, you should seriously look into moving your production back home or to some other, cheaper country. Because doing what you are doing seems no longer to be working and, if anything, it will only get worse.

 Nuff said….