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Dealing with business issues: Domestic vs a China-based lawyer (2)

 

Many of us are lucky enough to have engaged great lawyers back home who have successfully guided our domestic businesses over the years. But now that you are going global, are you sure your domestic lawyer has the China chops to guide your international business as well? 

Obviously, doing business in China is radically different from conducting business in your home country. To illustrate that point, in this blog post we’ll offer an inside look at some “China issues” that hometown lawyers often get wrong.  A professional, experienced China-based lawyer will understand in great detail each of the points below.  But the typical hometown lawyer, and maybe a few readers, will be left with your head’s spinning after reading this blog post. You have been warned….

Last week, we explained the real reasons “Why Chinese suppliers keep shipping defective merchandise?”

This time around, let’s look at another important issue:

Issue 2 – Q: My Chinese supplier say’s they have me covered if the product I am buying from them hurts somebody. Am I safe?

dealing with business issues domestic vs a china-based lawyer -part 2

Domestic lawyer’s (wrong) answer:  “It says in the contract with the supplier that they will cover you, I guess we are safe, plus the jurisdiction of the contact is in our home country so we can easily take them to court if needed. And it’s in English which is good for us.”  Wrong, Wrong, Wrong.

Experienced China lawyer’s explanation:

Regarding Liability

Unfortunately, it is very rare for a Chinese supplier to actually have coverage for liability in the USA or EU for example.

Even if the factory finds a way to get liability insurance, if God forbid a child in the US gets hurt on your product or there is a recall situation, the US lawyers aren’t going after an overseas supplier. They will come knocking on your door as you are the importer of record and it is your responsibility to ensure the product is safe and compliant with US standards. And it will be another fight all together for you to deal with the factory and their insurer to try to get compensation out of them.

To be safe, consider: 

  • Arrange your own US based coverage. Perhaps you can pass on this cost to the seller if you have buying power.
  • Make sure the designs are fully compliant and you don’t have a safety issue. The major labs can do the testing and give you piece of mind. Contact the author if you need an introduction to a design firm.
  • It’s not enough to complete the lab testing and product certs.  You also need to make sure actual production matches the sample which passed the safety tests. So ongoing production inspection is essential.

Learn more about the key steps of product certification and compliance here! 

Regarding Jurisdiction

Lawyers back home like to see the jurisdiction close to home for the following reasons:

  • The assumption that a local court will be sympathetic.
  • They can conduct the case in native language.
  • A familiar legal environment.
  • Most important: the local lawyer gets to charge the client fees. If the case is overseas, the local lawyer isn’t involved and doesn’t make any money!

Sadly, these 4 reasons above are often the wrong reasons for selecting the jurisdiction of your contract with a Chinese entity for the following reasons:

  • Your Chinese defendant most likely doesn’t have any assets in USA.
  • How are you going to get the overseas defendant to voluntarily come to USA for a court case? Most likely they will just ignore the court order to show up!
  • Even if you win in a USA court of law, there is no treaty between the USA and China which would enforce the US court’s decision in China.

In my experience, for most cases, putting the jurisdiction in China, where the assets are found is the best option IF the contract is well written!

Do you have any legal issues in China that you need help navigating? Find affordable legal help here!

Regarding the official language of the contract

For the record: regardless if you are selling to China or buying from the PRC, bilingual contracts are essential!

A bilingual contract makes it a lot easier for the Chinese courts to rule in your favor. Here is why:

Many Chinese companies have various English names for marketing purposes, but their legal name is in Chinese and found on the business license.

The only language allowed to use in any Chinese court is Chinese.

So the English name, or whatever they call themselves for marketing, is not an official name.

You can’t sue some company named “Best Good Star Mfg.” in China. But you can sue “最好星有限公司”. 

You are probably saying “But can’t I get the Chinese side to agree to use English only contracts?”

If your key documents are in English, it complicates things a lot.

For example, before the courts can make a decision, the English documents/ supporting evidence will need to be translated into Chinese by a court approved translator for the court’s review. This can be expensive and very time consuming. Plus the defense can employ a stall tactic of fighting over the wording of the translation itself. It’s much better to have your attorney structure the wording in advance in Chinese rather than hope the court’s translation will be accurate.

That’s it for this post. Stay tuned to our China Law Blog for regular updates on navigating legal issues in China, and avoiding them before it’s too late!

Dealing with business issues: Domestic vs a China-based lawyer (1)

 

Many of us are lucky enough to have engaged great lawyers back home who have successfully guided our domestic businesses over the years. But now that you are going global, are you sure your domestic lawyer has the China chops to guide your international business as well? 

Obviously, doing business in China is radically different from conducting business in your home country. To illustrate that point, in this two-part blog post we’ll offer an inside look at some “China issues” that hometown lawyers often get wrong.  A professional, experienced China-based lawyer will understand in great detail each of the points below. But the typical hometown lawyer, and maybe a few readers, will be left with your head’s spinning after reading this blog post. You have been warned….

Issue 1 – Q: Why does my Chinese supplier keep shipping me defective merchandise?

what a china-based lawyer will tell you about defective merchandise

Domestic lawyer’s (wrong) answer: Chinese suppliers are bad, they don’t care about quality, find a new supplier.”

Experienced China lawyer’s explanation:

Because the margins are tight, the seller wants to lock in the buyer for multiple orders. But the buyer won’t promise to place additional orders until the first order arrives. Sadly, too many buyers forgot to have clear terms in the PO/Contract about how defects will be handled. Sellers can exploit this to their advantage in the following way:

When the seller ships out the order, the seller “makes an error” and under-ships the number of units and/or they make sure a certain percentage are defects (on purpose).

Since the novice buyer didn’t have a contract that would clarify what happens in the event of defects or under-shipment, the seller is now in the driver’s seat. Mr. Li will say “sorry for the defects, it was a mistake, won’t happen again, we’ll give you replacement products on the next order”. Just like that, Mr. Li has his buyer locked in for the next order!

It’s easy to avoid this kind of drama. Here is how:

  • Have a well written,bi-lingual contract, under official chop. A custom contract can be done up by an English speaking Chinese lawyer for just a few 100 USD.

So in my opinion, a buyer is just plain crazy to skip this important step.

  • Apply a level of independent QC at the factory or consider having the product inspected 100% at an assembly/inspection facility.

More on contracts, payments and purchase orders here!

That clears up the first issue! Next week we will take a look at another (wrong) answer that a domestic lawyer may give about coverage for liability in China.

Any VAT rebate in China on tooling made here?

vat3

Claiming VAT rebate in China

A foreign buyer of Chinese plastic products asks:

I am aware that VAT is applicable for the tooling owned by the customer at the supplier’s location in China to product a plastic part and export to Japan. Is there any option is available to buyer (Tool owner) to recover the VAT? If we request, supplier to amortize the tooling cost as piece price on manufactured goods, who will get benefit by VAT?

vat3

Thanks for your question. If I understand it correct, the tooling will stay in China, but the product made from the tooling will be exported. If that is the case, then the tooling itself will not be exported and since it is not exported, there is no VAT rebate and thus no easy way to recover the VAT.

But, while it is in the gray area of tax code, sometimes the supplier will offer the tooling at a “w/out taxes paid and w/out official receipts” price. That could reduce the price a bit, and while it is common in China, technically it is not 100% legal as the supplier should be paying tax, but in practice, most suppliers don’t.

You should also be warned that it’s quite common that suppliers charge the overseas buyers for VAT, but they don’t actually pay the VAT and end up putting the money in their own pockets!

If you pay the supplier inclusive of VAT then they dance around and avoid showing you the receipts…then you know they are keeping the VAT. I’ve even seen supplier send fake receipts!

Why it’s a bad idea to amortize tooling and molds

BTW, you talked about amortization of your tooling. I would advise you to be very cautious. On my YouTube channel I explain why in more detail, but in short, if you amortize the tooling then technically you don’t own it. If something goes wrong and you need to pull the tooling from the supplier, you will find it very difficult to extract the tooling. In my contracts, I like to own the tooling outright from day one. You should also consider having the tooling looked after by a 3rd party. See Tool & Die steward service for reference.

China sourcing: Negotiation, Contracts and Payments

China sourcing negotiation contracts and payments

Exclusive recording of Mike Bellamy’s Sourcing Tutorial at the April 2014 Global Sources Trade Show in Hong Kong.
Learn the key factors and actionable knowledge that will help you prepare for “Chinese negotiation” and place safe orders!

Without a good foundation, your China sourcing project is likely to fail!

Mike Bellamy (PassageMaker founder) offers tips and best practices to ensure you are well positioned before the PO is even placed. Learn how to negotiate contract terms, and structure your payments, to protect your interests when doing business in China. The video tutorial covers some of the most important areas to consider before investing time and money on a China sourcing project. The recording of this seminar covers:

● The dos and don’ts of quality control, logistics and payment methods

● How to protect intellectual property

● Cost drivers and cost breakdown analysis

● Proven negotiation techniques

● Insight into the thinking of your Chinese suppliers

How to organise an effective RFQ in China

How to organise an effective RFQ in China

My friend and fellow CSIC contributor Neale O’Connor is a Visiting Associate Professor at the National University of Singapore. As part of a research project, he had his students contact almost 50 suppliers in China to get quotes on USB drives.

You can find the data below. Here are my suggested takeaways from the research. While the pricing points may be of interest if you are a buyer of USB’s, for me the most interesting aspect is the way in which the quotes were received from the suppliers.

Keep in mind that the students asked all the suppliers to quote on the same specs and counter sample. Yet you can clearly see below that no two quotes share the same format. Every price is different, just as every quote format is different. Currencies, MOQ, Specs are jumbled together in way that makes it impossible for a buyer to conduct an apples to apples comparison of the supplier simply by price.

Lead times, MOQ, Specification (quality level) all impact the price. Picking the lowest price offer is most likely not the best option from the 45 choices below.

Since China doesn’t have a standard format for the factory quotes, how to plan an effective RFQ in China (request for quotation)?

Here is a behind the scenes look at how companies like PassageMaker conduct the research to find factory direct sources for our clients. The single most important factor in determining the success or failure of your sourcing program will be finding the right supplier. It sounds obvious, but making apples-to-apples comparisons of vendors at a national level can be daunting. Just look at how messy the data is from the USB suppliers below.

Phase One “Defining”

The “right supplier” is unique to each buyer. Force yourself to list all the desired attributes of the product and factory and rank them. Beyond the holy trinity of price/quality/lead-time also think of attributes like location (do they need to be near a certain port or in area where you have other vendors), Capacity, Service Attitude, Language, Intellectual Property, Warranty Terms, Factory Ownership, Equipment, Export Experience and so on.

Phase Two “Initial Research”

Initial research generates a list of 50-100 potential Chinese suppliers using existing vendors in the AVL (approved vendor list) and web directories and industry/trade show directories.

Assume the vendor is a middleman until proven otherwise, not the other way around.

Avoid factories that refuse to list the name or location of the production facility- they probably don’t own the PRC factory and are a middleman of some sort.

Focus on those factories that can clearly show production experience with your particular product or production method.

Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.

Review the 50-100 candidates’ websites and brochures against client’s desired attribute list. But hold off on asking for price or even contacting the potential suppliers until step 3. If you start asking about price too early you will subconsciously gravitate to the vendors with the lowest price. That may or may not be the best overall option. Narrow the field down to 15 to 20 candidates based on non-price attributes.

Phase Three “First Contact”

At this point, “first contact” is initiated with 15-20 vendors in the following 5-step process.

Step one: Send an e-mail to ask for a quote. That sounds easy enough, but if you don’t follow some simple tips, you will most likely get a mess like the students got when researching the USB prices below.

Time Saving Tips:

a) Give the supplier your RFQ form to fill in which specifies the attributes you care about. That way all the suppliers are filling out the same form with the same fields. This will make it a lot easier for you to compare options.

b) For reference, also ask them to offer a quote in the standard format they use. If they don’t have a formal quote sheet, run away. That’s a red flag that they are not professional.

c) Be as specific as possible in the product description. Ask the supplier to quote to your spec. If they quote off-spec, ask them to explain in detail where their quote differs from your specs.

Step two: Are samples available? If they don’t have samples readily available, they probably don’t deal in your product on a regular basis.

Step three: Granted the sales team will be the most polished in terms of English skills, but how is their understanding of your basic requests? If you ask for information on a red umbrella and get sent a sample of a blue shoe, you are going to have problems with communication down the road!

Step four: Don’t be seduced by the siren’s song of low price. The lowest unit price can be the most expensive supplier after you factor in the cost of defects, missed deliveries and operations headaches!

Step five: Confirm the actual production location and ask for ownership papers of the factory. Be explicit that the production location may be audited and that this location cannot be changed w/out approval of buyer. (You would be surprised at the number of middlemen who will take the buyer on a visit of a factory only to change the location to a less expensive and poorer quality option after the buyer leaves)

The above research should narrow the field down to about 5 highly qualified candidates. As that point you can, with confidence, move to the final steps of negotiation, due diligence/auditing and sampling.

Related Content and Reference Material

Data from Prof. O’Connor’s research on USB pricing is listed below.

How do we choose a good manufacturer in China?

Video 1: Finding Suppliers

Video 2: Evaluating Suppliers

Video 3: Negotiations

Video 4: Project Management and Quality Control

Video 8: Avoiding Scams

QuoteNamePriceMin. OrderDelivery TermsEssential Details
1ISINO Industrial Development Co.LtdSGD4.0310002 years warranty
2Nextkey Technology Co. LtdUSD3.499100Delivery date is 2 to 3 working days after order is confirmed. Shipping cost depend son the total quantity and delivery address.12 months warranty. Quotation price valid for 4 days. Payment is made through T/T to company account. *Price quotation based on 1000 pieces.
3Hongkong Xinkang Industry Co LimitedUSD2.65Shipping fee of 1000 pcs is US$100 with door to door delivery. EMS, DHL UPS and TNT available for shipping. Delivery within 3 to 7 days.5 years warranty.
4ShenZhen Wing Digital Co.,LtdSGD0.9200Shipping terms: EMS,DHL,UPS,FedEx; FOB Price; Delivery time 4-7 days; 5 Years WarrantyFor order of 1000pc, additional 10% off with free 50 pcs
5Shenzhen Kongs Technology LimitedSGD3.431000$120 DHL delivery
6Shenzhen Full USB Co. LtdSGD1.00500 pieces– 3 Days – Free Delivery– Free printing of logo – 2 year warranty – Return/Refunds if broken along delivery
7Shenzhen Alpha Technology Co LtdSGD3.3nil-7 Days – USD 238Logo engraving included
8Zhenghong (HK) Technology Co LtdSGD4.15nil– 3 Days – Free Delivery– One Year Warranty – Logo Engraving included
9East Sky Industry Co.,LimitedUSD 3.27/USD 3.54100 units– Mass production will be done within 4-5 working days(after our Chinese New Year Holiday) – We are on Chinese new Year holiday from Jan.,25,2014 to Feb.,8,2014 and start to work on Feb.,9,2014. ***Production and delivery is 15-20 days depending on the complexity of the design (info from company website)– Our price is for 100% genuine memory capacity,if you find any upgraded USB from us, you can send back to us and we will send back to you new one. – Our quality is very good, we can control RMA rate as 0.1% or below.
10 Shenzhen Ninesong Technology Co. LtdSGD3.5503-4 days, Free ShippingPayment by Western Union, T/T, Letter of Credit, Alipay, Paypal, 3 years warranty
11Fortune Port Technology LtdSGD2.002005-7 days3 years warranty, 30% deposit in advance, Western Union, TT, LC, Alipay, Paypal
12Fuzhou Everkings Import & Export Co LtdSGD1.51003-7 days after order made, plus free samples2 years warranty, L/C, T/T, Western Union, MoneyGram, Paypal, Escrow
13GIGAFLASH LIMITEDUSD3.751000NAPrice valid 2 days from now
14VTD Technology International Co., LtdSGD4.1100Door-to-Door Delivery;Incl. of shipping insurance (coverage unstated);Excl. Singapore Import TaxPrinting on one side only;Payment must be made through Western Union;Part payment allowed:at least 30% before production begins;remainder pior to shipping out of the factory (photo verification provided)
15Nantai TechnologySGD4.251000 pcsDelivery charge $100Warranty of 2 years
16Flason Electronic Co.,LimitedUSD4.05100Not specified– Flash price is not very stable, so the final price will be subject to the day’s market price you confirm the order. – Payment terms: TT or Western Union – Warranty Term: 2 Years
17Weterm International Co., LtdUSD3.47Not specifiedFedEx shipping cost:US$135 *delivery time: 5-6 working days*both sides full color logo included *each in a poly bag *price valid before Chinese New Year Festival
18Shenzhen Baizhi Electronic Co., Ltd.USD4.841000 piecesFOBFree engraving, data pre-load and autorun
19Shenzhen Oriphe Technology Co., Ltd.USD3.181000 piecesUSD216 via FEDEXFree engraving under 3 colours
20Shenzhen Dingsheng Electronic Co. LtdUSD2.80100 PiecesLead Time: 3-4 days, Free deliveryFree packaging, Free samples
21ISINO Industrial Development Co.LtdSGD4.031000Delivery Not included2 years warranty
22Gigaflash Limited (Vida Design Ltd)USD3.851000 piecesFOB Port (HK SAR)Laser Engraving of Logo Included, 1 year warranty, With RoHS, CE and FCC marks, 7-8 day Lead Time
23Nextkey TechnologyUSD 2.598500pcsLead time for mass production: 3-4 days after payment received. Shipping cost: depends on the order quantity and delivery address.1 year warranty The price is valid for 2 days Lead time for sample: 3-4 days after payment received. Sample price is USD10 more, but we will return sample cost when you place order with us. Payment: T/T to company account
24FlashbaySGD7.841000 pieces6 days from receiving payment10 years warranty
25Industrial Co., Ltd / Shenzhen Alpha Technology Co., LtdSGD3.31000Shipping cost by DHL, CIF Singapore: $2383. Lead time: We only can provide usb to you about 2/16, as we are in CNY holiday now ,and we will come back to work on 2/9, thanks.Payment: T/T in advance to our bank account
26Bestar Industrial HK LimitedUSD4.051000 pcsFOB ShenzhenFree warranty: 2 years. Payment via TT: 30% deposit in advance, balance due before shipment.
27East Sky Industry CoUSD3.271000 pcsFOB ShenzhenProduction time: 4 – 5 working days
28SHIXIN Venture Trading Co., Ltd.USD3.55No MOQFOB Shanghai, delivery within 3 – 7 working daysPayment via TT: Before shipment.
29Xiamen HuachangUSD2.191000 pcsFOB Taiwan via EMS / DHL / China Post / HK PostInternational warranty: 5 years.
30New Rich Industry Development Co., LimitedUSD2.501000 pcsFOB Shenzhen, delivery within 3 – 5 working days
31Shenzhen USB High Electric Co., LtdUSD3.001000 pcsFOB ShenzhenProduction time: 3 – 5 working days
32Shenzhen USB High Electric Co., LtdUSD3.10100 PiecesDelivery way : DHL , UPS ,EMS and FEDES;3、Lead Time : Money can be received later 10days can delivery 4、Sample lead time : 1~3days
33 Shenzhen Honorwell Technology Co., LtdSGD3.901000 pcsusd 170 for DHL deliveryProduction time: 6-7days
34Weterm International Co., LtdUS3.22FedEx shipping cost:US$135; delivery time: 5-6 working daysprice valid before Chinese New Year Festival.(we will on holiday from 25th Jan to 6th Feb for CNY)
35East Sky Industry Co.,LimitedUS3.271000 pcsShipment cost by DHL (door to door) to SingaporePlastic box (95*45*21mm): US$0.12/pcs added on above quotation.
36SHIXIN Venture Trading Co., Ltd.USD3.55 NO MOQDelivery time :3~7 working days
37EbayUSD$4.031000 piecesAddress to be per the one on the PayPal or Credit Card (this is according to the policies PayPal and Credit.Do not ship to any international addresses à But upon enquiry (see above), they are willing to ship to30 days have receiving the item; Money back; Buyer to pay for return shipping
38Lion City Gifts located in SingaporeSGD$5.7550 piecesFree local delivery to 1 locationNett price. Free white cardboard box.
39 itforlessusa from eBay located in New York, United StatesUSD$4.031,000 piecesShips to SingaporeReturn policy within 30 days of receiving item with money back but buyer has to pay for return shipping. Payment to be made through wire transfer or western union. 1 year warranty.
40Flason Electronic Co.,LimitedUSD 4.66Within China, paid by customerWarranty Term: 2 Years
41晟济旗舰店SGD3.7No MOQWithin China, paid by customerUnconditional return within 7 days, money back within 2-3 days
42深圳市泰达兴科技有限公司SGD0.810Within China, paid by customerWarranty: 3 years
43Xia Men Hua ChangUSD2.991000 piecesFOB shanghai by EMS/DHL/China post/HK postinternational warranty . 5 years
44New Rich Industry Development Co., LimitedUSD2.50Not specifiedDelivery time :3-5 work day;DHL (CIF to your door by DHL)
45FlashbayUSD16.2725Delivery is $55.00 for any quantity to Singapore.All product prices include branding with your artwork on both the front and back (where possible). There are no origination/setup charges.