China Product Sourcing: Being There

In both my speeches on product outsourcing and in my discussions with clients, I always emphasize the importance of visiting your Chinese manufacturer. In my speeches I do it by first showing a Powerpoint slide of what looks like a great facility, maybe something like this:

Top tier China factoryI label that slide “China factory per its website. I then show them a picture of the following, labelled, “China factory in real life”:

China factory

I then stress the importance of visiting your factory, preferably before making your first product order. I then discuss how it seems like 95 percent of the time when our clients have major problems with a factory, it is one they have never seen. And if you are not going to visit your potential product suppliers (which is usually best), pay someone qualified and trustworthy to do so.

There are a lot of reasons to visit your China product supplier(s), and not just before you start with one. I for one am convinced that the mere fact that you the buyer make the trip (and not just someone you pay, though this is definitely a lot better than no visit at all) turns you into a human being who cares and that makes it less likely the factory will try to mess with you.

I also frequently emphasize the value of visiting your China suppliers periodically after you have established a relationship with them. We have one client who sends someone to visit the factory a few days to a week after placing every order. This client pays this visit because it is convinced that these trips serve to make sure that the product is of high quality and delivered on time.

A few weeks ago, Bloomberg BNA did a story entitled, China Waging ‘Unprecedented’ Pollution Crackdown. A few days ago, the South China Morning Post did a story entitled, China vows big winter air pollution cuts in northern cities. But what is really happening on the ground in China and what relevance might all of this have to you?

China sourcing agent Jacob Young tells us in his post China Factory Closures for Pollution Review:

Whilst they’re under [environmental] review, they are closed.

No business going in or out.

Out to lunch, gon’ fishin’.

That’s what I’m hearing on the streets. Well not the streets but from my network there, suppliers and wife who’s constantly on WeChat getting the scoop.

If anybody has the dirt on what exactly’s going on with these closures, please comment or DM me.

One of our RFQ’s from this week…

Went forward just fine. Then after discussing with the vendor, they THEN let me know they’re under review. Good thing I asked, right?

Factory closures are all around them too.

Yes this is happening. One of our China lawyers got the following email yesterday (modified to hide any identifiers):

I just learned that my factory in China has been shut down for environmental reasons. They have no idea how long this shutdown will last. Just my luck but I need to get a very large order to me in the next three weeks or I will owe a downstream customer a lot of money for late delivery on my part. What can I do? Can I get all of my damages from my supplier? Should I start looking for another factory?

Our response was somewhat along the following lines:

Much will depend on what your contract says with your current supplier and whether or not it is an effective contract. If it makes clear (in Chinese) that your supplier is liable for any delays and if it also does not have a force majeure provision that would apply to a shutdown like this (and it shouldn’t, because it is your supplier that is polluting, not anyone else and a shutdown for excessive pollution could have been anticipated) and your supplier has enough assets to pay on any judgment you might receive against it, then you have a chance of getting damages from your supplier. But the mere fact that you have written our firm out of the blue makes me think you either did not use a qualified China attorney to draft your agreement with your supplier or you do not have any such contract at all. And if that is the case, your chances of ever collecting against your China supplier have probably just gone way down.

What can you do now to make sure that what happened to the company that emailed us does not happen to you? Two things, above all else. One, find out what is going on with your China factory(ies). Are they in one of the many areas the Chinese government is targeting for pollution closures? Two, go and visit your China factory as soon as possible to see exactly how it operates. Is it a high tech low pollutant or is it a low tech high pollutant? If it is the latter, consider lining up another factory instead of or in addition to your existing one. Three, use good manufacturing contracts with your suppliers going forward. These can both help prevent problems and better position you for resolving them if they occur.

How can a contract help you from your Chinese supplier being shut down for pollution reasons? It can’t. But what it can do is prevent you from doing business with a Chinese factory likely to be shut down for pollution reasons. It can do this because the factory worried about being shut down will be less likely to agree to work with you if your contract will put it on the financial hook for a pollution shutdown and it can also mean that if your Chinese supplier has multiple factories, it will produce your products in the one least likely to be shut down.

But really, the key here is to know your factory.

What are you seeing out there?

 

This article was written by Dan Harris and published on China Law Blog. Original Post: http://www.chinalawblog.com/2017/08/china-product-sourcing-being-there.html      

View the original article here.

Dan Harris

Dan Harris is internationally regarded as a leading authority on legal matters related to doing business in China and in other emerging economies in Asia. Forbes Magazine, Business Week, Fortune Magazine, BBC News, The Wall Street Journal, The Washington Post, The Economist, CNBC, The New York Times, and many other major media players, have looked to him for his perspective on international law issues.