Sourcing Stories: An American buyer offers insights on avoiding trade fraud in China
By David Lindley
President, EXIM LLC
Factories sites inspected: more than 100
first and oldest rule of capitalism is “caveat emptor,” which is Latin for “buyers
The simplest advice for sourcing in China is this: See the product being made because the buyer is always responsible for inspecting what he or she purchases.
Sourcing in China can give you the greatest trust and confidence in human goodness. My good experiences are more numerous than negative ones. China can also leave you feeling bitter and low. What is important is to manage your expectations and remember that your eyes are usually telling you the truth. In most cases, what you are seeing is what you will get.
Lindley deals with major suppliers, including Bao Steel of Shanghai.
In all fairness to suppliers, it is important to point out that many foreigners have behaved badly in China. Chinese factories have their own long lists of abusive buyer practices, and they have also lost serious money working on trust for orders that never came or resulted in partial or late payments. Remember, poor communication is not always the fault of the Chinese, and making money here has a cost, just like anywhere else.
If you are a victim of fraud in China, it could be your own fault. You may have seen the warning signs but failed to take notice and act. You may have been lured by low prices, big promises or exotic locations. Few deals are perfect, but there are some situations you could encounter that should raise a heightened sense of caution. When it comes to combating fraud, look for the warning signs.
1) The pieces of the puzzle don’t match
It’s a beautiful day. The factory car comes to pick you up, and the BMW 7 series leather feels good and smells even better. You know that the BMW cost about $180,000 USD. The boss’s assistant speaks great English, even though she doesn’t seem very informed about your drawings. Finally, you think, you have found a player who appreciates you as a global buyer of an important international company. When you arrive at the factory you see a line of machines and a building that only cost $40,000 USD. If the car that picks you up costs more than the factory facilities, there likely will be a problem.
2) Where are the workers?
You go to visit a factory and there are some nice looking nearly finished pieces on the floor, but it’s for other customers. Or, it’s 2 pm, but there are no (or very few) workers on the floor. The factory’s bike shed can only hold about 50 bikes, but the factory says they have 300 employees. When asking where the workers are, the answer might be that they work at night to save on electricity costs. Ask to see the factory at night. Regardless of time of production, make it your business to watch the entire production process.
3) There are not enough problems.
You come to China, and not only is the price attractive, but you have been working on the designs for three weeks now and there are still no questions or problems. The factory says samples should be ready in a week and your deposit for the mold is due today. If there are no questions, glitches or even expressions of slight concerns, there is probably a major problem lurking.
4) You hear: “Oh, we did not make that here.”
The sample looks great. You are so pleased. So you say, “Let’s go se the factory and see how they did it.” When you go the factory you notice that much of equipment needed is not present on the floor. They say, “Don’t worry, that is handled by a contractor a few minutes away,” making for the first time you’ve heard of a sub-contractor on the project. Therefore, make sure production (and any subcontracting) responsibilities are understood up front to avoid this sort of surprise.
5) You hear: “We need a deposit.”
You are ready to make the samples. The factory wants a full deposit for the mold and pre-payment for 50% of the first order for materials. They tell you that the material lead time is 40 days and that if you don’t order it now you will miss another three weeks’ production due to an upcoming national holiday. Do not be pressured by this tactic. Follow your own production and turnaround standards.
6) You hear: “You wanted it with that too?”
You have had drawings in the factory for 8 weeks. After some hard rounds of price negotiation, you are ready to see the product. You like what you see and ask for a container load. The discussion comes up about how to package it for shipping. It’s in the contract wording, but not in the deal because it wasn’t figured in that you would learn. It looks like your cost went up by 2.5 % for packaging. And you learn the quote wasn’t really FOB port, but Ex-Works. You are already four weeks behind schedule and need to get the run going. Read the fine print and make sure shipping costs and terms (along with all other considerations) are unmistakably clear.
7) You hear: “We cannot get that material until production.”
You are inspecting samples and you notice that a few pieces seem lighter than their weight on the drawings. The answer might be, “We had to substitute materials for these samples as the production samples have a large order minimum for this kind of material. The production items will have the right material. We cannot order the correct material until the production purchase order is issued.” If this is the first you have heard of this, it should be the last time you’ll be doing business with the factory that says it. Make sure the materials used in samples are the same ones that will be used in orders.
Of course, there are numerous variations on all seven scenarios, but the best rule of thumb is this: When it starts feeling strange, it probably is. Again, watch every part of the process and, most of all, trust your instincts.