The Supplier Messed Up! What Do I Do?
Q1 2019 China Business & Law Update for Busy Executives
Topic 1: “Outsource the Sourcing”: Tips for engaging 3rd parties to help find & manage suppliers in China.
By far, the most common question I get asked is some variation of the following:
“Mike, I’ve got a great idea for a product, I have even lined up buyers and financing, and now I want to get it to market. Can you recommend somebody to help me on the China side.”
I’m always happy to do my best to get folks pointed in the right direction. And most readers of my blog and newsletter know that I ran a company called PassageMaker for almost 2 decades in China. But many readers may not be clear about the differences between sourcing agents vs consults vs other options.
So the following is the template I use to explain the situation in a transparent and easy to understand way when friends and relatives ask me that very question.
Thanks for asking about China. I’m happy to give you my two cents, based on 20 years living there. I’d love for you to become a client of PassageMaker, but let me give you all the options, so you can decide which fit it right for your situations.
1. A Sourcing Agency is a common option if you need help to find and manage suppliers in China.
Note on Good vs. Bad Agents:
Most sourcing agents charge between 7 and 12% commission. Their incentive is to actually increase the costs of production so they can make more money! Those agents often hide the supplier’s identity because they are worried the buyer would go direct and cut them out of the loop. In my opinion, if an agent is not transparent, it is because they have something to hide (like a commission from the supplier!). It’s very important to know the identity of the supplier if you have IP to protect or plan to do onsite project development and QC.
The agency I’m comfortable recommending is run by an American based in China. His team is affordable and honest and can provide a high level of service/communication. They charge a very small commission (3%, the last time I checked) combined with a very fair per-hour rate for project work. In this fashion, their fees are based on performance and the clients only pay for the support they need. No hidden costs. Absolute transparency in terms of the suppliers’ identities, pricing and the tasks conducted!
2. Virtual Sourcing Office/ Virtual Factory
If you would like to have direct control over your supply chain, but not have the headache of setting up your own office in China, then please check out the company I founded almost 20 years ago- PassageMaker, at http://www.psschina.com/services-fees-contact-us/services-and-pricing/.
PassageMaker can create the client’s virtual team in China by hiring and managing local staff who can be assigned a range of tasks related to finding suppliers, developing products and managing global supply chains. We also can set up a team in our warehouse to offer assembly, inspection & packaging.
PassageMaker vs Sourcing Agency
If your project is stable, your order size is over 100,000 USD per year or you need at least 1full time person in China, then PassageMakerisgood fit and would end up saving money for you in the long run. PassageMaker sets up teams as small as 1 or as large as a few 100! Please watch the video here and fill out the short questionnaire on the same page to have PassageMaker work up a quote for you.
If your project is one-off or small in scope, then that sourcing agency would probably be a better fit and I’d be happy to make an introduction.
3. More Options
If you are unsure which option is best or you find yourself on a very tight budget and unable to hire either of the service providers above, please keep the following resources in mind:
- Hire a consultant to help you figure out the best strategy for your particular project. If you have some general questions, feel free to send me an email and I’ll do my best to get them answered (no charges needed). If you are looking for more formal support to answer questions specific to your situation, please keep our Business Advisory Service (BAS) in mind. The BAS is explained in detail at http://www.asiabridgelaw.com/business-advisory-services/, the rate sheet can be downloaded. I’m one of the advisors and would be happy to help you.
- Take an online course offered by ChinaSourcingAcademy.com.The China Sourcing courses to range from free to a few $1000. I joined Prof. Neale O’Connor in launching the Academy a few years ago. I’m proud to say we have helped hundreds of buyers learn best practices and avoid common pitfalls in China.
- My book (“The Essential Reference Guide to China Sourcing”) is available on Amazon, but if you purchase it via the author’s website, you will be able to access various business templates and checklists as well.
Hope this helps you understand your options. I welcome any questions you may have.
Topic 2: Why most sourcing agents do more harm than good.
A few years back I attended a trade show in Mainland China where I stood in the main hall, held up a sample of a complex product and said in English “can anybody here make this item.” In the blink of an eye I had 15 interested parties. All claimed “mei wenti” (“no problem”) and boasted of their factory direct connections and great pricing. If only it was this simple to find a supplier.
After interviewing all of them, it became obvious that these were people (both western and Chinese) with only loose connections and no industry experience. They were essentially just middlemen. One was even a cab driver who carried the brochures of factories in his trunk and claimed to be a factory representative to any buyer who got in his taxi.
In order to have a more perceived value, they may claim an intimate relationship with the factory, but if they don’t allow you to communicate directly with the factory, then you are dealing with a middleman. If the intermediary is providing legitimate value (for example logistics, project management or quality inspection) then perhaps there is a place for them in the supply chain. But if the intermediary is not transparent in where their margin lies, then most likely the actual value for their inspection or project management service has been greatly inflated.
Before you sign up with an agent simply ask that they separate the costs for their “service” from the “production costs.” If they fight this, then you know his or her actual value to you is minimal. Why go factory direct?
To avoid the buyer cutting the agent out of the loop, the bad agents will do all they can to keep the buyer from knowing the identity of the actual manufacturer. This extra layer increases communication lead times and prevents the buyer from talking directly to the people who have the most knowledge about the product—the engineers on the production line. This muddled line of communication is particularly troublesome when technical problems arise in production and the factory engineering team and the buyer must communicate via a middleman who may not have the technical understanding to explain issues properly.
Topic 3: The supplier messed up! How to use lawyers vs collection agents to get your money back.
Because demand letters are fast, effective and a lot less costly than court cases, sending a demand letter (in Chinese, from a Chinese lawyer) is the logical next step for the vast majority of situations where buyer-supplier negotiations have broken down. If the demand letter fails, back up options may include a court case or even the engagement of a collection agent.
Below are the typical steps and costs for a benchmark.
Demand Letter Work Flow & Costs (per the ABL rate sheet) as performed by a Chinese Lawyer
Case Review & Strategic Planning: 1725 RMB
In the event the case review indicates a demand letter will not be an effective option, the lawyer should offer suggestions on the next steps and an ethical lawyer will return the fees for the “issuance of the demand letter”.
Due Diligence: 2828 RMB
It does not make economic sense to issue a demand letter to a company that has no assets or has closed. In the event the due diligence indicates that the target company has no assets and/or no longer in business, the fees for the “issuance of the demand letter” should be returned to the client.
Issuance of Demand Letter: 3738 RMB
This step is inclusive of demand letter drafting, review with the client, delivery to subject company, follow up call with the subject company and client updates. Recovered funds are sent from the target company directly to the client. The demand letter service is offered for a set fee and does not receive a commission on the funds recovered.
What happens if the demand letter is not successful?
Demand letters fail for a number of reasons, but the most common three are:
- the target company has gone out of business, is broke or doesn’t care about its brand/reputation
- target company gambles the client will give up before going to the next step
- client’s demands are excessive
If the demand letter is not successful in meeting the client goals, the lawyer who reviewed the case and issued the demand letter should advise, at no extra fee, on the remaining options available to the client. A suitable next step will depend on the case, but the following options are available:
Litigation in many parts of Asia is actually fairly straightforward and affordable compared to the US and Europe. Overseas companies can indeed win against local firms and individuals when they have the right lawyers and a solid case.
What makes a solid case?
In simple terms, it helps a lot when you have a contract that is signed by the supplier, proof of payment to that supplier and clear evidence that the terms of that contract were broken. This may include missed delivery dates or delivery of a product that is not fit for function.
Thugs aren’t hired to break legs, but aggressive tactics are engaged. This route is an option for clients who have a strong moral/ethical argument, but face a low chance of success in a Chinese court of law because they have a weak case from a Chinese legal perspective (usually due to missing documents like signed contracts). The downside is that collection agents in China retain 30 to 50% of the recovered funds for their fee! Most collection agents also charge an upfront deposit which may not even be refundable depending on the agent.
Why not start with litigation or the collection agent option in the first place?
The simple answer is that those options require a deeper investment in time and money. Demand Letters are far less costly and can be enacted in a matter of days/weeks rather than months/years. While not always successful, they do provide the “most bang for the buck”.
Topic 4: The supplier messed up! How to use lawyers vs collection agents to get your money back.
I’m an avid reader of www.SupplierBlacklist.com because it helps me stay away from the bad suppliers and the tricky scams. Here are a few examples:
“Goodsuppliergone bad”. Here is a case of a supplier that did great work for 4 years. Then suddenly they ship a load of electronics using knockoff components that were not to agreed spec. Thanks to the trade war and rising costs of labor in China, suppliers are tempted to cut corners. Protect yourself with a bilingual contract that spells out the BOM, quality, and penalties for violation of agreed terms. Double down on pre-shipment inspection to be safe!
This buyer ordered hiking boots and got a shipment of fake sunglasses. I’m sure the buyer thought “this is a small order, I’ll take a gamble and save money by not doing any due diligence or QC”. IMHO, if the order is large enough to place direct to China, then it’s worth doing right. If you can’t afford to verify your supplier, have an actual contract and do some QC, then you shouldn’t be buying from China in the first place.
What could go wrong buying a simple industrial machine from China?
Read this to see how 29 mistakes cost the American buyer 30 grand!