by Mike Bellamy
Hello, I’m Mike Bellamy, founder of PassageMaker Sourcing Solutions and blogger at www.AnotherChinaBlog.com.
I’ve been living in China full time now for over 12 years, and it is my pleasure to let you behind the bamboo curtain and offer some practical tips to help you source with confidence.
If you are not worried about doing quality control because you think you can send the defects back to China. Think again. Unfortunately, this is one the biggest headaches in China sourcing.
The system in China is designed to make it very hard to get defective goods into China, even if the overseas buyer has clear paper trail and full support of the original supplier in China.
For your reference, a Chinese friend of mine who worked at the port in the customs office told me that the Chinese government was concerned that if they allowed defective merchandise to be returned to China duty-free, some companies would take advantage by declaring legit imports defective to avoid paying the tax.
So, as far as I know, there is no official channel for sending back the goods and avoiding VAT and duties as they cross back into China. Adding insult to injury, the goods may be subject to China outbound taxes again when the re-shipment taxes place and perhaps inbound US duties/taxes will apply when the re-shipped goods arrive in USA.
Did I just hear you scream in frustration? Don’t give up just yet, I have some ideas for you.
Obviously, we should do our best to avoid quality problems by auditing our suppliers before we place the order and doing product inspections before the goods ship out and before final payment is made. Keep in mind companies like AQF () can conduct independent audits and inspections for only a few hundred US dollars, so that you can check the quality of your orders before the goods clear outbound China customs.
Another good idea for the future is to have clear terms in your contracts about how defective merchandise is to be handled. If you need support in that area, let me know and I would be happy to introduce local English-speaking lawyers who can help draft terms for Chinese suppliers. I can also recommend providers of that can do 100% QC before goods leave China if you need additional support.
But despite the best intentions, what to do if problem product gets shipped? Well, here are some tools.
First step is to clearly define the following costs:
· How much would it cost for the supplier to replace and ship the defects via a new shipment?
· Do the defects that have already arrived have any value as scrap or “B” grade goods?
· How much would it cost for you to fix the defect items (if even possible) in your home market?
With those numbers on hand for reference, here are a range of options, hope one helps you.
· Send the defects back, supplier gives you credit on future order and they eat the cost to return, rework and replace. Be very careful that this supplier will be around to complete the transaction and that you have a lot of leverage and history together. I have seen more than a few suppliers simply pass on doing business with the client ever again rather than do what is right and replace the goods.
· Rework the goods in your home market with local technicians.
· Send the goods to Hong Kong and have the re-work take place there. Labor and warehouse is much more than in PRC, but still much less than USA for example. Most important, Hong Kong is more flexible with the duties and you most likely won’t have to pay VAT and duties to export back to China.
· Once the goods are in Hong Kong, you could also arrange for a “gray shipment” to China for re-work. Don’t try to arrange it under your name, but there are third parties who will leverage their relationships with the boarder officials to bring your product into China at a reduced tax rate. This is very much a “gray area” practice, but very common nonetheless. Often, the third party will reclassify your goods under an HS code that is not taxed at importation. The reason I suggest you ship to Hong Kong first, is that it is very hard for these third parties to arrange “special channels” for international freight, but the Hong Kong-Shenzhen boarder is much more porous and things are flexible as trucks cross back and forth overland. As this is not black and white, your supplier may not have experience either, especially if they are not based in S. China near Hong Kong. So if you do explore this gray channel, make sure you deal with a firm that does have experience and structure your payments so that they get paid AFTER the delivery is made.
· If all else fails and your supplier isn’t stepping up to the plate to fix the problems or saying “they can’t afford to fix it”, know that I have had many suppliers “suddenly” come up with the cash once a lawsuit was pending. Check out this blog post I wrote last month if you want to learn more about your options (). Keep in mind that in China you can sue for lost revenue. Since you probably were expecting to add a healthy margin when you sold the goods to your clients, this lost revenue is a big stick you can use as leverage over your supplier. If you want to read up on my experience with the courts in China, do a key word search at of “court,” “legal” or “lawsuit” and you will find a bunch of my blog posts on this subject.
See you next time. Wishing you successful China sourcing!