Going to War with your Chinese Supplier and 4 Ways to Prevent it

Todays post is an aggregation of two post I read last week that work well together:

1st Post
Last week I read an article on China Law Blog about a worrying trend that they are witnessing:
-In the past, when a Chinese factory provided bad product, they would usually admit it, and blame it on either a subcontractor or a supplier.
-Now they deny it and threaten to sue you if you do not pay whatever is still “owed”.

The explanation for current quality problems is the economic downturn and the fact that factories need to cut costs relying on lower quality components. But the key point in the article is the strategy shift on how to deal with serious quality problems with your Chinese supplier: (Read the full article here)

Today, the tactic is to threaten to prevent the American company from “ever doing business in China again” or, more specifically, to seize the American company’s product at the border. We take these threats very seriously and they have altered our approach to these sorts of cases.

In the past, if an American company was seeking $200,000 in damages from a Chinese company for bad product, we would most of the time seek to dissuade them from even bothering to pursue litigation. []

But the strategy changes if the Chinese company threatens to close you down. We have dealt with cases where US companies were unable to buy from any Chinese supplier without paying 100% upfront because their alleged failure to pay had caused China’s export insurance agency to refuse to insure payments from the US company. We have also dealt with way more than our share of cases where someone or something from our client was held hostage in China to secure payment.

If a US company is facing the situation above, our advise is that they sue the Chinese company somewhere, usually in the United States. Being able to show the Chinese insurance company, the Chinese police, or the Chinese border patrol agents, that you have sued can be invaluable. Your complaint against the Chinese company shows that the situation is not as simple as the Chinese company is making it out to be. Your complaint shows that the Chinese company is not necessarily owed anything at all and that you are not clearly someone who does not pay your debts.

Of course, if your company has no intention of continuing to do business with China and your personnel will not be going there again, then the best strategy probably would be to just walk away, just as in the old days.

2nd Post

When I read the article I left a comment with what I thought was the best (and obvious) advice you can give to anybody sourcing from China: “Quality Control ALWAYS, even with good suppliers”

And right afterwards, I read another article at the Quality Inspections Tips blog entitled “The 4 ways of checking product quality before shipment”. As preventing a problem is always better than having to fix it, I thought this post was a good extension to what we have previously read.

These are the 4 ways Renaud Anjouran describes in his blog (you can read his complete post here)

1.Inspections by external inspector(s) in the factory
The final random inspection is the “standard” way of checking quality. Suppliers are used to it.
It is easy to set up and relatively inexpensive, even with many different suppliers in many different places.

The supplier might interfere in several ways: only showing a part of production (usually because they are late), bribing the inspector, or shipping other products if the inspector does not stay until the container is sealed.
If the purchaser only sends an inspector after production is over, and if the inspection is failed, the supplier might refuse to rework the goods. He might wait until the purchaser is obliged to deliver his own customers’ orders.

2.Final inspections on a platform
This solution is popular with some large buyers.
Inspectors are more productive (no need to travel), and the goods can be shipped immediately after acceptance.
No risk of supplier interference.

Suppliers often resent this solution. If the inspection is failed, they have to pay for the transport back to the factory, sort & re-work the goods, and submit them again.
Not suitable for small and irregular volumes.

3.Piece-by-piece inspection in the factory -If you want to check 100% of production
The defect rate in the shipment is very close to zero after this 100% check.
The manufacturer sees what is rejected and needs to re-work it.

Suitable only for large and regular volumes in one geographical area.
Can be expensive, depending on the number of inspectors to station in the factory

4.Training & auditing internal inspector(s) in the factory
Much lower cost than sending third-party inspectors
In addition to controlling the products’ quality, the inspector can report on production status

You need a high level of cooperation from the manufacturer (no interference at all)
There might be many complications if you purchase through a trading company

What is your experience? Is it getting tougher to negotiate quality problems with your suppliers? Do you always check quality before shipment?

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One comment

  1. You are absolutely right. Better catch problems before shipment. And, even better, qualify the supplier carefully and don’t hesitate to pay a bit more to work with good people.
    Thanks for the link.