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Back door shipments. What to do?

How can I be sure that my China supplier is not selling via the internet or backdoor, the products I am purchasing? I want to be sure they are selling only to me and not to the public at the same price.

ANSWER:

Based on my experience dealing with these issues in China, I would like to suggest you look at the problem from two perspectives.

1.     Communications & Contracts

Is the supplier clear about your position? Did they agree contractually?

2.     Tools for monitoring the supply chain

What actions are you taking to verify that the supplier is respecting the terms of your agreement?

Communications & Contracts

If you have not set up a Non-Disclosure Agreement/ Non-Compete (NDA/NC) clause, you can assume that the supplier is going to run extra shifts and try to sell products out the backdoor or online.  This can cause significant gray channel problems for you.

So if you are serious about a NC or NDA, the first step is to have it in writing and signed.   Here is what my Chinese lawyer; Sophie Mao at www.ChibridgeLaw.com has to say about this topic:

No matter how well drafted, an NDA is still a piece paper and cannot enforce itself.  Do not expect too much protection from an NDA. However, I think an NDA is necessary if Intellectual Property is involved. Beyond the obvious desire to state directly that IP infringement is forbidden, letting the supplier know you are serious about IP, an NDA is a good tool to protect yourself if the following item is included in your NDA.

The NDA should specify the legal consequence of breaching the agreement.   As long as the penalty is reasonable, liquidated damages, provisions are enforceable in Chinese court.  It will save you lot of trouble as it is hard to prove how much loss you have suffered when IP is breached.  A pre-agreed contract makes it easier for the judge to give a ruling in your favor.

More tips:

You want to avoid the supplier coming back to you in a few years saying they didn’t read it, or didn’t really understand your terms. Therefore:

1.     The contract should be bi-lingual and simple.

2.     Go through the key points in person; get verbal confirmation section by section. Sign off on each section.

3.     Explain the benefits of respecting the contract. If you are a client who pays on time and not too small of a buyer (from a supplier’s perspective), then the supplier will think twice about risking your business.

4.     Arrange your budget to include international travel to the Chinese factory.  This way you can monitor the practices of the supplier and build rapport. If travel is not in your budget or you do not want to make the trip, get an agent to represent you.

5.     Use travel and communication to build rapport with your suppliers.  If you are the, “annoying client,” who only speaks to the supplier when there are problems, you may find the supplier all too happy to sell your designs to another buyer.

6.     If you have a brand or logo, PLEASE register it in China AND your home market under your name.  Registration is not expensive.

Tools for monitoring the supply chain:

Once your NDA/NC is in place, you should “trust but verify”.  Here are some tools.

1.     There are third party investigators like, www.CBIconsulting.com.cn who will monitor your supply chain for infringement. Check out Behind the scenes Q & A re: costs of conducting undercover business intelligence in China for an interesting article on the subject.

2.     If  members of your team can read Chinese, check out sites like TaoBao.com and TMall.com to see if your product is for sale.

3.     Pay attention to the supplier’s website and trade show booth, to see if your items are out in the public.

4.     Have someone you trust pose as a potential buyer.  Have the person call the supplier to see if the supplier offers to sell your goods.

5.     If your products are made with tooling/ molds which you have paid for and belong to you, visit the factory (or have a 3rd party) monitor the tooling.  If you paid for 100,000 units, but the wear marks indicate 200,000 units, most likely you are getting ripped off.

Black Box assembly option

If your product can be compartmentalized, consider setting up a “black box” assembly operation. Here is an article from the Financial Times about the black box I set up in Shenzhen.  Essentially, the third party warehouse serve as a black box and quality gate. The components and finished goods can be shipped to our Assembly/Inspection center where we perform assembly and final packaging.  All of this is under a secure US management system but at local China labor rates. As the suppliers don’t see the finished product and assembly schematics, they are not in a position to knock off the product. Quality control issues are dealt with on-the-spot before goods are shipped out of China.

Suggested Reading:

To get a feel for how the law works, in China, subscribe to Sophie’s China Law Blog.

Here is a video about protecting Intellectual Property: http://chinasourcinginfo.org/2011/11/26/protecting-your-intellectual-property-2/

Visit here for service details and pricing for the black box mentioned above.

Let me know how things work out for you.


Question answered by Mike Bellamy, an Advisory Board Member & Featured Blogger at the not-for-profit China Sourcing Information Center. Mike is also the author of "The Essential Reference Guide to China Sourcing" and founder of PassageMaker Sourcing Solutions.

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