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Restricted substances: 5 challenges when buying from China

by Fredrik Gronkvist 

 

 

Restricted substances such as lead and formaldehyde are the invisible enemy of importers in developed markets. At one end, the Chinese manufacturers struggle to ensure compliance with overseas legislation, in a non-transparent supply chain. On the other, American and European importers are subject to increasingly strict substance regulations. It’s a highly potent mix, resulting in a heavy burden for both parties.

 

In this article, we explain how your business is affected by substance restrictions, and how you can migrate your risks, when buying from China, and other Asian countries.

 

Which industries are affected by substance restrictions?

Which substance regulation/s applies depends on the product, its usage, and the market where they’re sold. We’ve already covered many of them in previous articles; below follows a recap:

 

REGULATION

REGION

PRODUCT SCOPE

REACH

EU

All consumer products

RoHS

EU

Electronics

EN71 Part 3

EU

Toys / Children’s Products

CA Prop 65

USA (CA)

Most consumer products

CPSIA

USA (All)

Toys / Children’s Products

FHSA

USA (All)

Household products / consumer products

21 CFR

USA (All)

Food contact materials / additives

 

As illustrated by the table above, substance regulations affect American and European importers, in largely all industries. Follow the links below, to learn more about substance regulations:

 

California Proposition 65 Compliance: What US importers must know

REACH Compliance Explained: What every EU importer must know

CPSIA – Importing children’s products from China to the US

EN 71 & Toy Safety When Importing from China

Australian & NZ Product Standards – What importers must know

 

Challenge #1: In most industries, compliance with foreign substance regulations is rare. Sometimes, very rare.

Far from all suppliers in China are able to show a solid compliance track record. In fact, most of them are not even able to present a single test report, acting as evidence of compliance with a certain standard. That said, the compliance rate in, for example, the toy, textile and electronics industries are growing.

 

Yet, compliance with some regulations is far more common than others. REACH, introduced in 2008, is far more common among suppliers in the textile industry, compared to California Proposition 65. Based on our experience, less than 10% of China’s (export-oriented) textiles manufacturers can show previous compliance with REACH. With that in mind, you can just start to imagine how hard it can be to find one able to prove previous compliance with, the much less known, CA Prop 65.

 

Normally, we advise our clients to only select suppliers that can show an extensive compliance track record, for the specific regulation/s, applicable to their products. However, as hinted above, there are situations when this approach disqualifies virtually all suppliers, in a given industry.

 

A supplier that can, for example, ensure REACH compliance, is much more likely to be able to ensure compliance with “similar” regulations, including CA Prop 65. That said, a supplier that has never even heard of the former, is very unlikely to possess the necessary expertise, and subcontractors, that can ensure delivery of compliant items. Thus, buyers facing a situation where making a supplier selection entirely based on compliance, for a specific standard, may instead choose to select suppliers based on compliance with a “similar regulation”.

 

Challenge #2: Compliance is often out of the suppliers direct control

There are reasons why Chinese suppliers struggle to ensure compliance with overseas substance regulations. Most materials and components are not manufactured in-house, but purchased from subcontractors. To say the least, the supply chain is all but transparent, and compliance issues can start deep down – far beyond the control of most assembly suppliers. To sum things up, your Chinese manufacturer don’t fully trust that their subcontractors supply compliant raw materials and components.

 

Today, it’s rather common that suppliers, including those that can show a very strong compliance track record, require the buyer to submit material samples to a third party testing company, before paying the deposit. A few years ago, we never heard suppliers making such requests. But things have changed, and they are wary of being left holding the bag, in case they would produce a large batch that later turns out to be non-compliant.

 

But it’s not all about trust. There are also technical factors to take into consideration. For instance, excessive application of machinery lubricants, or chemical remains from a precedent batch, may accidentally “contaminate” a fresh produce.

 

Challenge #3: Compliance testing costs are covered by the buyer, not the supplier

Chinese manufacturers operate like low cost airlines, no extras included. As such, never expect your supplier to “throw in extras”, including product development services, quality inspections, and compliance testing.

 

Third party testing is expensive, often starting from US$400, for a single material. However, most products consist of much more than one material, and may also come in different colors – each affects the chemical composition. Assuming your company importers ready made consumer products, testing costs quickly adds up to hundreds, sometimes thousands, of dollars.

 

Regulatory compliance is by definition mandatory, but third party testing is not always required by law. Instead, it’s about risk management. How much are you willing to spend for of peace of mind? In the EU, retailers must provide a substance declaration within 45 days, if requested by a consumer. That’s right. If anyone sends you an email, or walk right into your store tomorrow, asking you for a complete substance declaration, you’ve got 45 days to prove that the items are compliant.

 

In the future, low cost equipment will enable quality to verify compliance on site. However, today, there’s only one way to reduce your testing costs: by streamlining the usage of colors, materials and components. As such, small businesses, with limited resources, must use a reduced number of different materials, colors and components, on several products.

 

Challenge #4: Reference samples are easily rendered irrelevant

As mentioned previously in this article, many buyers, as encouraged by their suppliers, decide to submit reference samples for compliance testing – before mass production begins. As you may have figured out, the purpose is to verify compliance, prior to the “point of no return.”

 

Compliance testing is expensive, so you better get it right the first time. In addition, you certainly don’t want to end up in a situation when the reference sample pass compliance testing, while the mass produced batch of products turn out to be non-compliant. Yet, this is exactly what can happen, if you are not very careful when submitting a pre-production sample, for an initial compliance test.

 

The pre-production sample, must be made of the very same materials, components, and in the same colors, as the submitted batch sample. If the latter is made of different materials and components, its chemical composition is not identical to the, assumed, compliant pre-production sample.

 

That may not sound like much of a challenge at first, but things tend to get a bit more complicated. It’s rather common that suppliers lack the specific materials requested by a buyer, before the deposit is paid, and production can begin. Therefore, the supplier may be forced to use whichever materials and components they have in stock, while the actual materials can only be purchased in a large quantity, from the subcontractors.

 

The most comprehensive strategy is to first submit a pre-production sample, and then submit a batch sample for a 2nd compliance test. While this may turn out to be a very costly strategy, it’s all about risk management.

 

Challenge #5: Non-compliance penalties

When it comes to substance control, there are not certainties. Even the best manufacturer, with a strong compliance track record, may turn out a failed batch at some point. The only way of preventing the issue to spread beyond the factory floor, is a comprehensive and consistent testing strategy. After all, importing non-compliant items, knowingly or not, is illegal – and the importer is responsible. Not the manufacturer.

 

The first thing to happen, if your company is found selling non-compliant products, is a forced recall. In short, you are not allowed to sell the items under any condition, and may even be forced to refund a large number of customers. For most Startups and Small Businesses, this means instant bankruptcy. To make things worse, you may also be subject to fines, starting at a few thousand dollars, or euros, for minor offenses. But that’s only the bottom of the scale. Deliberate, and/or repeated offenses, may result in six-figure fines.

 


Fredrik Grönkvist is the co-founder of ScandinAsian Enterprise in Shanghai. Since 2010, he and his team have helped hundreds of companies worldwide, primarily in the EU and US, to develop and manufacture products in China. He is also the main contributor on www.chinaimportal.com, a leading knowledge base for small- to medium-sized enterprises importing from Asia. For further questions, you can contact him on www.chinaimportal.com/contact-us/.

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