How to settle factory claims in China more successfully

1. Late or incomplete deliveries
2. Major quality issues
3. Copyright violations
4. Patent infringements
5. Non-compliance with laws of the destination countries

Let me give you more information about the likely background of these claims:

Late or Incomplete Deliveries claims can easily be avoided if your company exercises the necessary due diligence to monitor the production progress at the factory. If your factory was unable to produce the ordered quantity on time or could not supply part of it on time, you should have known this weeks ahead of time. It should not come as a surprise to you at the last minute. If this happens, it is likely your company's control systems either are not yet in place or need refinement
1. Major Quality Issues are another claim that could probably have been avoided if your QC department and your inspection company had done their homework correctly. The exceptions are hidden defects that can be only discovered after products reach a certain manufacturing operation (properly operating technical products for instance).
2. Copyrights Violations are the worst case scenario and in general very costly. Since it is not a quality issue there are only a few precautions that you can take but they will not always prevent these claims. Chinese manufacturers have a different understanding of copyrights and from their point of view, everything looks alright. Unfortunately, it is still very common for factories to take famous brand name products and apply marginal changes in the hope that the design will be sufficiently altered to avoid copyright infringements. Most often, the design changes are not sufficient. My only advice to you is to carefully check the copyright or patent in your home country and do not rely on statements made by the factory, regardless of how convincing they may seem. You may want to contact a patent lawyer if you are in doubt. If you have the slightest doubt that your product(s) might violate copyrights, it is best to drop the products so you can enjoy a much better night's sleep.
3. Patent Infringements are another worse case scenario and can be even more costly than copyright violations. Patent infringements are sometimes very difficult to determine because they are at times only subtle modifications applied that can make a big difference. Trying to bypass existing patents without being an expert would be the same as playing with fire. You will be burned and will lose a lot of money on top of it. It is inevitable that you seek the help of an experienced patent attorney to avoid the many pit falls here. On the other hand, these lawyers are very expensive and you may wonder whether your effort to import a risky product (that's what bypassing existing patents are about) is worth all your time and money. The key point here again, is that you cannot simply trust what your supplier tells you. He is not familiar with the patent laws in your country and frankly, he simply does not care. That means you are all alone and you are the one that will be held fully responsible if you import a doubtful products.
4. Non-Compliance with the Laws of the Destination Countries is also a serious situation but different from points 3 and 4. You may be lucky and can prove to the authorities that their findings were wrong. If a problem does exist, it is very important that you can prove the problem did not happen through your negligence; meaning that you took all necessary precautions. What makes the case more serious is that you will be dealing with government authorities who are very powerful and can enforce a nationwide sales stop or even a recall of all distributed products. If that happens you will lose a lot of money and even more serious, your reputation as a high quality importer. Usually the government authorities will contact your customers first because that is where they will retrieve testing samples. Since your customers are distributing the non-compliant products, they will be liable. Still, you cannot escape your responsibilities because most retailers have clauses in their buying contracts that pass the liability for damages or claims to purchased products themselves to the importer.

All these claims are usually about huge amounts of money and avoiding them by taking the rights precautions is surely the right thing to do.

With Whom Should You Negotiate at the Factory?
Talking to the right or wrong person in your supplier's hierarchy can be the key for successful or failed negotiations.

I can only advise you to go right to the top decision maker. That means you must talk to the company owner. This can be several people if it is a shareholder owned company. You may need to meet with the chairman of the board, the chief executive, or the president. I think you get the point that your negotiations partner should not be the sales manager or a lower member of the staff. They may help prepare the meeting and assist their boss but their help is limited if they cannot make a final decision.

It may prove difficult to get directly in touch with the supplier's decision maker because they are usually shielded by their staff. Knowing the background of your supplier is essential to pinpointing the right person if your supplier has thousands of employees.

It may pay off now, if you visited that supplier before and already know the company hierarchy.

I have discovered on various occasions that decision makers in China go into hiding and cannot be reached by your company when there is a major claim. This might seem strange but if you do not nail down an appointment with your supplier's decision maker, you may end up talking to the people that shield him and end up just wasting more time and money.

Analyze Your Supplier's Compensation Proposals
After your successfully negotiate a compensation settlement, you need to step back and analyze any impact it will have on your business relationship with the supplier.

A Typical Supplier Proposal
Factories are usually very, very reluctant to provide any cash refunds to customers. For one thing, there are government controls in place that do not allow them to remit larger amounts of foreign currency to an overseas banking account.

Therefore, they will prefer to offer you a solution that does not involve cash. A typical proposal is to reduce the future sale price to your company for the product in question by a few cents per unit. Eventually you will receive the full value of your damages but you will have to buy a lot more products to receive it. This actually works to their advantage by keeping your company as a customer for considerable time until the total amount has been "refunded".

They might offer to deduct US$ 0.20 per unit from the current price of an electric toaster. If your claim compensation is US$ 200,000, you will have to buy 1,000,000 toasters to recover your compensation. To your disadvantage, you will be bound to that supplier for a long time and have a diminished ability to react to changes in the marketplace. If another supplier enters the market with a more competitive product, you cannot react because you are committed. Your competition will grab the opportunity and take away sales back home.

On the positive side, if you do agree to this arrangement, your factory will survive and it will improve your long term relationship with them.

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One person has commented on this article.

 1. ceo importer
william j curtin, Unregistered

i am expieriancing the exact problems you are talking about in your article about doing buisness with the chinese mfgs.i after several attemps to even get samples am reluctant to give the salesman my cash.i cant believe after 20 emails to one mfg. i still dont have the samples. i live in the usa and have lost many hours sleep because of the time difference. is it really worth it?.well tune in next article and i will tell you. william j curtin ceo william j curtin ltd.

 Posted 2009-01-04 23:49:35

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