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Problems with unauthorized gray channel imports

by Mike Bellamy in 'China Sourcing Information Center'

We buy products in China and sell around the world. The brand is under our name. We don’t sell in China, yet I recently discovered my products for sale online in China and now face problems with unauthorized “gray channel” imports into my primary markets. Any suggestions?

ANSWER:

Unfortunately, this is not an uncommon problem. Fortunately, there are ways to fix this problem. The sourcing agency that I own (www.PSSchina.com) was recently brought in by a client to investigate a case and present a solution to the same problem you have raised. Here are some of the highlights for your reference.

Can you look at the products in the gray channel and know where they were made? In our case, investigations confirmed that the majority of products in the gray channels were directly linked to the batches of production in China which were rejected by the buyer due to quality issues.

Strategy implemented:

  1. Purchase Order Templates were adjusted to clarify that rejected goods must be destroyed by supplier at their cost.
  2. 3rd Party Inspectors would be hired to record the destruction.
  3. Client’s brand was registered in China. Previously registered only overseas. With the IP now protected in China. The brand holder can take legal action in China if needed.
  4. 3rd Party Investigators were retained to monitor both Chinese and English language websites like TaoBao.com and T-mall as well as the websites of the contract manufacturers to look for unauthorized products.
  5. 3rd Party Investigators were retained to monitor tradeshows in China and HK to look for unlicensed products.
  6. Brand holder clarified its marketing materials and product packaging to state that only product purchased from authorized distributors are under warranty. In this fashion the demand side could also play a role in preventing gray channels.
  7. Between production runs the tooling was removed from the factory and stored at a 3rd party facility in China to avoid unauthorized production. (Visit http://www.psschina.com/about/virtual-tour/services-and-pricing/tool-and-die-steward/ to lean about the “Tool & Die Steward.”)

Important Concepts:

Before the adjustments above, the suppliers were essentially selling rejects out the factory back door to subsidize their costs of production. In some cases, because of the tight quality requirements of the buyer combined with the poor quality system of the supplier, this back door income was a significant source of revenue for the suppliers. Cutting off this source of revenue was hard medicine for the supplier to swallow. Two methods proved successful to remedy the situation.

Some suppliers were dropped and a sourcing feasibility study was conducted to find more professional replacements suppliers who could meet targets for price, quality, lead-time and trust.

The suppliers worth continuing to do business with were given a sit down to explain why it was good for the supplier as well as the buyer to cut out the gray channels. Key points included:

  • Unlicensed products cannibalize revenue of the brand owners. If they lose money, they can’t place as many orders to the factory.
  • Brand holder is no longer tolerating unlicensed products and the parties involved face significant financial risk when caught.
  • The defective goods finding their way into the market is hurting brand reputation. If the brand reputation is gone, the orders for everybody will be lost.

Perhaps the most important message conveyed to the suppliers is that the brand wanted to have stable long term relationships with partners who could be trusted. To show their commitment to the suppliers, and to help the suppliers, the brand owners provided the following:

  • Accurate annual forecasting and projections. Suppliers love stability almost as much as they love volume.
  • Technical support and training to help suppliers upgrade their quality systems and finally understand that avoiding defects in the first place, not selling defects out the back door, is the best way to protect the supplier’s margin.
  • Periodic engineering reviews with suppliers to look for ways to reduce costs in production methods and materials, yet not compromise quality. These saving were shared between the factory and brand holder.

Wishing you successful China sourcing!


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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