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Costly mistakes when sourcing from China

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Last Updated on by Noni May

The relation between Chinese and American business has always been a big talking point, both in business circles and the media at large. While many consider cheap Chinese labor and commodities to be a threat to American prosperity, the most successful entrepreneurs have learned not to try competing with China, but rather to make greater profits by working with it. Modern-day China is bursting with great business opportunities for American business owners who seek them. However, like any economy, it’s not exactly a paradise. Anyone who plans on dealing with Chinese suppliers needs to be able to manage and reduce the risks that come with it, while knowing how to recognise and capture the best opportunities. Here are a few big mistakes a lot of western business owners make when sourcing goods from China. 

Lacking a Solid Strategy

When you’re planning to source anything from Chinese suppliers, you need to go in with a solid strategy; a road map to your success. Very few small companies exercise the necessary due diligence when finding new suppliers in China, and many end up cheating themselves out of finding the supplier who’s best for their specific needs. A methodical and well-defined sourcing strategy is essential to make sure you get the best deal in terms of quality, price, functionality and delivery. A great sourcing strategy will typically include identifying prospective suppliers through company websites, trade shows, social media, and similar channels, ensuring your payments and managing quality control measures, deciding on the sourcing method which is the best fit for your business’s needs, and verifying specific suppliers. As that old maxim goes, failing to plan is planning to fail!

Lacking Well-Defined Standards

Before you start liaising with any suppliers, you need to have some well-defined standards that you’re going to stick to. The standards you set for your search will determine whether or not you’re ultimately successful. Let’s say that an American business started off buying a small order of electronic components from a Chinese supplier, and the higher-ups are happy with the quality of the product. However, they soon find out that the delivery on any larger follow-ups are going to be delayed due to the supplier’s capped production capacity. If the buyer needs those parts delivered by a certain time to accommodate for a particularly high-demand season, it will risk losing profits, simply because they didn’t think to cross out prospective suppliers with limited production means. Having established your expectations, only reach out to suppliers who can meet those standards. This will keep you focused and steer you away from all kinds of frustrating complications. Aside from the production capacity and capabilities, you need to be thinking about the supplier’s geographic location, price range, quality standards and their technological capabilities. If you jump into the supplier sourcing process without setting firm standards, then you’re effectively asking for a big disappointment.

Neglecting to Protect Yourself from Payment and Quality Problems

Because sourcing from China is an international transaction, you’re going to need to protect yourself from any disputes that can come up regarding payment and product quality. Fail to do this, and you’re simply going to put yourself at risk of losing a lot of money over a petty disagreement. When you’re setting out a plan for buying from suppliers, consider finding a safer method of payment, such as escrow services or a bank line of credit. Methods like wire transfers and credit cards can be pretty risky when buying from any supplier, but are especially dangerous when you’re buying from suppliers based in China. If you settle on an escrow service, make sure you take the time to understand how it works, as well as any time limits and other rules that you’ll have to stick to in the event of a dispute where you’ll want to recover your money. It’s also very important to include a clear definition of “quality” when drafting your contracts with your suppliers. What are the exact standards they’ll have to meet with the products they deliver? What are the delivery terms? Setting this out clearly will establish clear expectations for both you and the supplier in question, and may come into play when determining whether or not you can get your money back in the event of a dispute. When you do settle on a single supplier, I recommend placing a small, initial order for some samples, rather than making a big first purchase. If you’re satisfied with those samples, start to place a series of gradually larger orders from the supplier over a given “probation period”. If they continue to deliver high-quality products in a timely manner, then it’s probably safe to go ahead with even larger orders. While we’d all like to have a small number of suppliers who always deliver as we’d like them to, this obviously isn’t always going to be the case, so take the time to identify a few different sources you can get your goods from. This will ensure that you have a safety net to fall back on in the event that your supplier seeks a drastic price increase, or their quality goes downhill overnight.

Operating Without a Contract

Oral agreements and invoices may not be enough to protect your interests, especially when you’re dealing with a cross-over of cultures and languages. To get around this issue, you need to make sure you’re operating under a detailed, codified contract. Start off by reading up a little about the enforcement options and legal structure in China, and the main differences which set it apart from the US. Supplier contracts need to include details about the parties involved, specific terms regarding samples, price, quality management and logistics. It’s also important to include any rules about liability for breaching the terms of the contract. I’m sure you’ll agree that dealing with the legalese between you and a new supplier isn’t the most exhilarating thing in the world. Wanting to get it out of the way, you might want to download a template contract from an online source, or simply dig out an old contract you’ve used at some point in the past. While most of the provisions will be more or less the same, the devil is in the details. Make sure you’re getting the help of an experienced attorney to draft and negotiate the contract for you. A good attorney who’s dealt with cross-border transaction contracts before will be able to draft contracts with more favorable terms for the buyer, and provisions to protect your big interests. For example, they’ll be able to explain all the pros and cons of the provisions you’ll be operating under, which will dictate which laws apply to any contractual disputes that could arise. They’ll also outline what your best options are in terms of resolving such disputes, such as arbitration. Any one of these decisions will have different implications for you if and when an actual dispute comes up, so it’s important to make sure you understand them as clearly as possible.

Operating Without a Mandarin Speaker in your Camp

Ask a cross-section of experienced sourcing agents, and you’ll hear time and time again that having a Mandarin Chinese speaker as part of your team is extremely important. When you’re making large, cross-border transactions, there’s no room for uncertainty. It’s no good kind of understanding what you and your supplier expect of each other. The smallest bit of confusion within these transactions can lead to massive losses on both sides of the table, which is going to be undesirable, to say the least! As you can imagine, having a fluent Mandarin speaker in your camp isn’t a necessity in every case. If the upper management for your supplier speaks competent English and can understand your communications fairly well, then you’ll probably be able to get by without an in-house interpreter’s help. In any other situation, you should find a Mandarin speaker, preferably a native who knows a little bit about the business culture in China. This will ensure that the suppliers you end up dealing with understand all your expectations clearly and in detail. A fluent Mandarin speaker is most essential when it comes to the truly crucial stages of the transaction, such as clearly setting quality standards for whatever product you’re planning on buying.

Ignorance of the US’s FCPA

While you’re drawing up contracts with your attorney, it will be useful to talk through the different laws which will affect your transactions with Chinese businesses. One law which you absolutely must not overlook is the FCPA (Foreign Corrupt Practices Act). This essentially prohibits you from paying any foreign government authorities for their help in obtaining or keeping business, with no exceptions. You may have heard that gift giving is a big cultural staple of Chinese business relationships, but this can land you in hot water in certain cases. Go over your all the legalese, and talk to your attorney about anything you’re unsure of, long before sending them that new golf bag!

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