China Sourcing 101: Social & Regulatory Compliance

China sourcing tips on maintaining social & regulatory compliance

During my 20 years living in Asia, I’ve owned a number of different business entities in greater China, ranging from China WFOE’s to HK holding companies to service companies. I’ve represented fortune 500 companies as well as startups in their dealings with Chinese suppliers. In one of our recent busy years at PassageMaker, my team was responsible for sourcing over 200 million USD worth of goods in China.

I was the point person for negotiations and contract review with the suppliers. I’ve taken Chinese companies to court (and won!) over disputes arising from poor quality, broken promises, pirated goods & late deliveries. The legal system has come a long way in China. Foreigners can get a fair shake if you know how the system works.

I have taken the liberty of creating a short series including video tutorials and expanded transcripts that goes into some detail about how foreigner buyers can protect themselves in China.

Let’s dive right in to today’s installment: “ Contracts And Negotiations: Social & Regulatory Compliance.”

What should be included on the code of conduct statement for the supplier?

Core items:

Child Labor, Involuntary Labor, Disciplinary Practices, Non-discrimination, Health and Safety, Environmental Protection, Wages and Benefits, Working Hours, Freedom of Association, Legal Requirements, Monitoring of Compliance, Corrective Action

Here is a sample Code of Conduct for your reference. I would advise you have it in Chinese if you’re dealing in China.

How does China compare to the rest of S. Asia in terms of Social Compliance?

Compared to the rest of Asia, the average Chinese factory is more developed in terms of infrastructure, regulations and enforcement. There are of course great suppliers out there in other parts of S. Asia, but the further you go from the developed ports of China, the harder it is to find factories that care about Social Compliance. Monitoring things in places like Pakistan and Bangladesh is a lot harder than in China. And China’s not easy.

Why should I have a written social compliance program?

God forbid somebody gets hurt or a banned substance is found in your product and the case goes to court. If you don’t have a written code of conduct and a file full of compliance records, the press and lawyers will eat you alive. They love it when they catch someone like that does not even have a system, because it’s so easy to put the blame on you, even if it wasn’t your fault.

Unfortunately there is no standard for what that system should look like exactly. Should you audit suppliers every ten days? Or every ten years? There’s no standard. But at least if you have a written manual of how you are going to manage the code of conduct, ethics, sustainability and so on, if God forbids your product is picked up by the press, at least you’ve got some protection.

Reality: The supplier’s “global coverage” doesn’t really have you covered!

The supplier might say to you “don’t worry, we have global coverage for product liability”. But say some child gets hurt wearing your baby wear that you just imported into Australia. Is the Australian lawyer and the local government going to sue a factory in Bangladesh? No. They are going to come after you as the importer of record.

If you are a small company and just getting started are you going to spend a couple percentage point getting liability insurance? It’s your call- what do you have to lose in the worst case? If you are a start-up, maybe you want to “wing it” at first.

But if you are a stable business, and you’ve got real assets and a reputation that you want to protect. Then you need to get serious about arranging your own liability insurance and more importantly putting a system in place to ensure the product is compliant in the first place.