China today is full of incredible business opportunities for American entrepreneurs and business owners, but like any country in the West, it is not a perfect paradise. You must accept the risks of sourcing goods in China while embracing the opportunities that come with it. The good news is that you can manage and reduce these risks with a methodical approach to sourcing in China.
This article is second in a series exploring how U.S. companies can source goods in China, and it discusses eight common mistakes U.S. businesses often make, with a focus on small businesses.
Here are the eight common mistakes U.S. companies should avoid when sourcing in China:
1. Lack of a Well-Defined Strategy
When sourcing goods in China, you must have a well-defined sourcing strategy or “road map,” including locating the best supplier for your particular needs. Too few small companies do the proper due diligence when shopping for goods in China. As a result, they may not get the best deal in terms of price, quality, functionality, or timely delivery.
To avoid this mistake, you must have a methodical sourcing strategy. Successful sourcing strategies typically include:
Identifying suppliers through the Internet, social media, and trade shows
Verifying and vetting suppliers
Insuring payment and managing quality control
Deciding which sourcing method (direct purchase, commission-based sourcing agent, using a sourcing provider or a trading company) best fits your needs
2. No Well-Defined Standards for Suppliers
Before searching for suppliers, it is important to have defined standards. Well-defined standards can determine whether sourcing efforts are successful. For example, a company might initially purchase a small order of electronic parts from a Chinese supplier and be happy with the product quality only to learn that delivery on larger follow-up orders would be delayed due to the supplier’s limited production capacity. If the company needs the parts delivered on time to capitalize on the holiday season sales rush, it runs the risk of losing profits, all because it did not eliminate potential suppliers with limited production capacity.
Once supplier expectations are identified, only suppliers that can meet those standards need to be contacted, which can keep you focused, save a lot of headaches, and avoid disputes down the road.
The following is a checklist to consider when identifying supplier standards:
Geographic location. China is a big country. Does it matter where the supplier is located in China? Does it have to be in or near a big city? Would it matter if it is located in a smaller city or even in a rural area?
Production capacity. You need to figure out what your company’s needs are at present and in the near future. Then, you can choose the right size of a supplier. If the supplier is too small, it may not be able to ship your products on time. If the supplier is too big, there is a risk of not getting enough attention.
Quality standards. What is the quality standard you expect from a supplier? What is your expectation of the quality control and verification process from a supplier?
Price range. What is your price range for the products you are sourcing? Create a list of suppliers to compare, then cross out the ones whose prices are too high.
Technology and communication capabilities. What is your tolerance level for a supplier’s lack of technology and communication capabilities? The reality is that many good Chinese suppliers may not be equipped with the most advanced technology to assist with logistics and communication. You have to run a risk-benefit analysis, balancing a supplier’s track record and reputation against its technology and communication capabilities.
3. Inadequate Due Diligence Performed on Suppliers
Due diligence is perhaps the most important step when sourcing in China, yet many companies fail to perform adequate due diligence and end up being scammed. Some fail to perform due diligence at all!
The following is a list of resources to consider when performing due diligence on suppliers:
Check online reviews. If you located a supplier on an Internet sourcing platform, you may be able to read reviews from past customers to see if there are any complaints.
Review supplier websites and follow up by telephone. You should review the information on the supplier’s website, but do not forget to pick up the phone to call the number listed on the website and ask for additional information.
Verify its registration and certification. If you obtained a list of potential suppliers that were verified by a big B2B platform, you may not need to verify the actual existence of the suppliers.
Ask the supplier for a copy of its business license. Suppliers that refuse or are unable to provide their business licenses are probably not worth your time.
Visit suppliers yourself. During the meeting, you can inspect their facilities, ask questions about their production capacity, product quality-inspection process, R&D capacity, and other important business aspects.
4. Lack of Protection for Payment and Quality Issues
Sourcing in China is, after all, an international transaction. Before you make a payment, you need to think about how you are going to get your money back if there is any dispute over product quality or delivery. Otherwise, you are at the risk of losing your money.
5. No Written Contracts
To adequately protect your interest, you must have a detailed written contract. Any oral agreements or invoices may not adequately protect you, especially when different cultures and languages are involved. You should understand that the legal structure and enforcement options in China are different than in the U.S.
Well-written contracts typically include the following provisions:
Terms on samples, price, quality management, logistics
Definition of product quality, quality satisfaction, timely delivery
Liability for breaching contract
Choice of law
6. Written Contracts Not Reviewed by Attorneys
Some people download a copy of a form contract from the Internet or simply use a form they used in the past. Sure, most provisions are similar for a typical sales transaction, but the devil is in the details, so it is likely in your best interest to consult an attorney to help draft and perhaps negotiate the contract for you.
A good cross-border transaction attorney can draft a contract with more favorable provisions to buyers (namely, you) and better protect your interests. For example, your attorney may explain to you the pros and cons of contract provisions that dictate what law applies to contractual disputes between you and the supplier, or the method in which such disputes are to be resolved, like arbitration. Each of these decisions will have its own ramification if an actual dispute occurs, so there is real value in having the options explained to you clearly, not to mention the peace of mind that comes from having a well-written contract in place.
7. Ignorance of the U.S. Foreign Corrupt Practices Act (FCPA)
It is also useful to consult an attorney about what laws will impact your business in China. Both Chinese and American laws need to be considered and depending on your business dealings, many legal issues can be involved, including labor law, trademark law, IP law, anti-monopoly law, and commercial law.
One law that U.S. companies often to fail to pay attention to is the U.S. Foreign Corrupt Practices Act (FCPA), which broadly prohibits payments to foreign government officials to assist in obtaining or retaining business and has no exception for local customs. You may have been told or read that gift giving is viewed in Chinese business culture as polite and friendly, a way to build a business relationship. An attorney can help you understand when giving a box of Godiva chocolate to your potential suppliers in China can land you in hot water. When in doubt, consult an attorney.
8. No Mandarin Speaker on the Team
The importance of having a Mandarin Chinese speaker on your team is second only to due diligence on Chinese suppliers. In cross-border transactions, you cannot afford to settle for “maybe” or “probably” by saying that you and your supplier kind of understand each other’s expectations, which can lead to failure, to say the least. No guessing games, period!
If your supplier speaks fluent English and can understand your English well, you may get away without a Mandarin speaker’s help. Otherwise, you should consider engaging a Mandarin speaker, preferably a native speaker who also knows the business culture to help make sure your suppliers understand your expectations clearly and completely. At minimum, you need a fluent Mandarin speaker on your team, at least at the crucial stages of the transaction, like clearly setting product quality expectations. Finally, it is generally preferable to find your own Mandarin speaking team member, rather than relying on your supplier’s interpreters.