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Penalty Clauses: Do they work when sourcing from China?

In today’s blog:

  • we’ll answer the 3 most common questions surrounding penalty clauses,
  • offer a case study on penalties
  •  explain one big mistake you certainly want to avoid when dealing with Chinese suppliers.

Will Chinese suppliers be off...

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Managing Quality When Sourcing From China: Tips & Best Practices

Can high-quality affordable goods be “Made in China”?

We have all heard horror stories regarding made in China products and their quality control problems. While “Made in China” may have a bad reputation to some, there are many misconceptions about what can actually be accomplished with th...

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China Sourcing: What Are Reasonable Payment Terms?

Negotiating Payment Terms: Medium Sized Orders

The following blog post is to give some tips if you find yourself negotiating reasonable payment terms for the first time with a supplier.

Quality, lead time, price and payment terms. You only get what you are able to negotiate.

The target audience are buyers who are purchasing between 10K USD and 100K per given order.

If you are larger, you may wish to explore more sophisticated payment mechanisms such as  letter of credit.

A smaller operation may not have much leverage with the seller and may end up receiving less acceptable payment terms. If that is the case, it’s essential that you conduct Due Diligence and other measure to protect yourself.  You’ll find plenty about Due Diligence on our website and blog.

New at Negotiating Reasonable Payment Terms

So for the purpose of this blog post, let’s say you are buying from China for the first time and in the middle of negotiating the price/terms with a new Supplier.

A supplier may ask for 100% payment in advance, so do not let this come as a surprise. Realize this is negotiable, just as you wouldn’t necessarily accept the first offer of price without a negotiation. Terms such as “30-40-30 terms” are an acceptable middle ground on reasonable payment terms, fair to both parties.


Under 30-40-30 terms, the initial 30% of PO value is a deposit. This allows the supplier to buy materials and lock in the price (especially important if you have a long lead time or deal in materials which face great price fluctuations, or example metals.) The second payment, of 40%, occurs at shipping upon confirmation of quality. Then they pay the final 30% upon receipt and inspection at the final destination. Let’s look at this 30-40-30 from both the buyer’s and seller’s perspectives to find why it was an acceptable middle ground.


The seller is worries that the buyer will default on payment, so getting 70% (40+30) before the goods leave port limits their exposure. As the average factory in China makes between 10 and 30% mark up, the 70% covers at least the majority of his internal costs, so even if the buyer defaults it won’t put him out of business.


The buyer’s biggest concern is that the goods will have quality issues or not arrive at all. By holding out on the final 30% until delivery, the buyer has leverage if quality problems require re-work or replacement parts. It is also important to remember that the 40% is not paid until they inspect the goods in China. So quality confirmation must be a key part of the payment process if you want to be safe.

Need Help Negotiating Reasonable Payment Terms

If you need additional help with the reasonable payment terms and other contractual issues, consider the following services:

Business Advisory Services:  Help structuring the relationship and negotiations with your supplier.

Bilingual contract templates & customization: Help putting an appropriate bilingual and legally binding contract in place in China.

About the author:  Mike Bellamy   ABL advisory board member

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Q&A on China Sourcing and IP at the Australia International Sourcing Fair

For the past few years, I have had the pleasure of being invited to Australia to speak at the International Sourcing Expo in Melbourne and Sydney.  You can find information on the Australia International Sourcing Fair and seminars (past, present and future at http://www.internationalsourcingexpo.com/seminars/.

Sourcing in Asia Today at the Australia International Sourcing Fair

My most resent presentation at the Australia International Sourcing Fair was entitled “Sourcing in Asia Today: Effective and affordable strategies for overcoming challenges old and new”.  You can watch the recording on my YouTube Channel.  The audience asked a bunch of great questions during the Q&A so I decided to share them in this blog post.

Australia International Sourcing Fair

Below you will find 5 of the questions they asked here at the Australia International Sourcing Fair and my responses to each.

Topic:  Intellectual Property Registration in China

Question: Can I register my IP in China on my own?

In China you can’t register the IP on your own online, but it is pretty easy. You just need to engage a Chinese patent attorney. Someone that you authorize to submit these documents in Beijing on your behalf. They’re pretty easy to find and affordable- a couple hundred Australian dollars to register a brand. A bit more if we’re talking about a utility patent or other types of intellectual property.


Question: I have been buying from China for many years. But I never got around to registering my brand. I want to change suppliers, but now I learned that the supplier registered my brand without telling me! What can I do?

Yeah, now you have your hands full. You’re in an uphill battle. Especially if it was predatory where a supplier, and this happens a lot, registers your brand as a means of manipulating you. For example, Australian company does not register their brand because they say “hey we got the brand registered in Australia, we don’t sell anywhere else in the world, who cares about China”. Then your Chinese supplier registers that brand a couple years later. One day you want to switch suppliers and now you can’t export your product out of China with your brand on it because the supplier owns the IP. So if you are in that situation, then it might be best to go to dispute resolution. Manage your expectations. The law is clearly on the supplier’s side as China is a first to register rather than first to market system.

Question:  I know somebody else owns the right in China for the brand for the item I want to buy, but I also know that the brand is not in control by that party in Australia and I want to produce an item under my brand in China to sell in Australia.

Know that the Chinese party could stop you if they knew that you were doing it. Maybe they are not savvy enough to tell the customs authority that they own that brand. But if it is in the marketplace and they see that “hey, you’re doing a good job, making a lot of money, going to trade shows”. Eventually they are going to figure it out and try to stop you. Maybe you’d want to sort this out in advanced, either by changing your brand if you are a startup maybe or negotiating a solution. Lesson learned, it is a lot easier to trademark first and then the system is working for you.


Topic: Buyer Protection when sourcing from China

Question:  Why doesn’t everybody use Alipay and similar services to protect the buyer?

Good points, let’s take Alipay, I’m pretty sure there’s caps to how big of an amount you can transfer at any given time. In my experience, it is mostly for buyers who are purchasing orders under ten thousand dollars. Once you get larger than that then you’re dealing with bank transfers and maybe even letters of credit. So while that service seems pretty good at protecting your money on small orders it’s not available for normal and large orders.

If you are going to use those payment process facilities. It is still good to have a contract because it validates that the supplier understands your key terms. You might have a non-compete clause, you don’t want this supplier to sell to your competitor in New Zealand. So that payment processing is not going to have any protection for that. So the payment services you talked about, protect your money from disappearing but they don’t really help with the relationship with the supplier. It can’t hurt.

Topic:  Strategies for protecting IP and business secrets.

Question:  I’m pretty sure my competitors back home are trying to reverse engineer my product and have it made in China.


Maybe you have got a great Australian brand. You are worried that this American with a lot of money is going to knock off your products in China or India.

One way to stop them is, you’re going to register your product in the location where production is going to take place. After you register your brand you own the intellectual property. You can actually go to Chinese customs authorities at the ports and say “this is my authorized supplier”. All other exporters are unauthorized products that should be confiscated and destroyed.

If you want to shut down a knockoff artist who is cannibalizing your business. The best way is to hit them in the pocket book. So I would wait until your competitor places a purchase order in China and has paid deposits. That way they have money in the pipeline. Then work with the customs authority to grab the container at the port before it leaves China. It will mess up the competitors supply chain big time. No one gets paid when they confiscate the goods or at least hold them up at the port. It really hits them hard and destroys their relationship with the suppliers. Especially if their supplier did not even know that it was a counterfeit product that it was infringing upon.

Keep in mind that it costs less than a 1000 USD to register your brand. The cooperation of the custom’s authority is free of charge if you know how to go about it!

I had a great time at the Australia International Sourcing Fair. If you would like to reach out to me and AsiaBridge Law, click on the link below.

About the author/speaker:  Mike Bellamy   ABL advisory board member

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How to Do Due Diligence on Chinese Suppliers?

Often I’m asked about how to do due diligence on Chinese Suppliers and how to be sure it’s safe to do business in China.

Some of the short questions I’m asked are things like:

  • How do I know if it is it safe to do business with this supplier?
  • Are there ways to tell if this seller is legit?
  • Is it a good factory to do business with?

How to Do Due Diligence on Chinese Suppliers

In today’s blog post I want to offer simple, effective and affordable ways to conduct due diligence.

When we talk about verifying the legitimacy of a factory we are really taking a look at 3 distinct levels of security which fall under the general category of Due Diligence.

Scam Assessment:  Is the company real?

If yes, move to level 2:

Corporate Assessment:  Who owns the company? Does the seller have a good reputation? Are they financially stable?

If the research findings are positive, we move to level 3:

Quality Assessment:  Does the supplier have the ability to product the products I want to buy?

Who Conducts Due Diligence and How Much Does It Cost?

While Scams Assessments, Quality Audits and Corporate Research all fall under the general category of due diligence during the supplier verification phase, they each require radically different skill sets to conduct and are generally offered by different service providers. At each level, there are tasks which you can do on your own, so let’s look at both the “Free do-it-yourself (DIY) options” first.

Free/DIY options for Scam Assessments

Have you heard about SupplierBlackList.com?

www.SupplierBlacklist.com is where buyers are helping each other in their due diligence on Chinese suppliers (and other countries) by basically exposing suppliers that did them wrong.

It’s no secret that most of the online supplier directories like Alibaba and Global Sources make their money from the sellers that list on their directories.

I would argue that Global Sources does a much better vetting process than the other major platforms, but at the end of the day, the suppliers are paying to be listed, so there is a built in conflict of interest.

According to the Supplier Blacklist website:

Online supplier directories receive listing fees and sometimes commissions from the suppliers. As a result, there is little incentive to delist poorly performing suppliers even when buyers are abused.

The legitimacy of so-called “verified supplier” directories is highly debatable.  To complicate matters, there is no functional Better Business Bureau or government entity willing to crack down on scams and unethical practices overseas.  SupplierBlacklist.com is a free, user-generated platform designed to fill this void in the marketplace assisting you in performing due diligence on Chinese suppliers.

If you have developed a good supplier, keep that secret to yourself. But if your vendor has done you wrong, tell the world about it!

SupplierBlacklist.com tracks suppliers (factories, brokers, trading companies and other forms of sellers and service providers) around the globe who have under-performed in the following areas:

√  Poor Quality

√  Missed Lead Times

√  Compromised Intellectual Property

√  Lack of Labor & Environmental Compliance

√  Contract Violations

√  Scams & Other Unethical Activities

Since SupplierBlacklist.com is free, it is a good place to start your anti-scam research when performing due diligence on Chinese suppliers.

Affordable options for Scam Assessments

A Red Flag Assessment (RFA) is the ideal tool for clients who are buying from Chinese suppliers.  The RFA will help you source safe, avoid scams and confirm that the terms of the deal are fair. Visit here to see a sample RFA and learn more about the service/fee structure.

Free/DIY Options For Corporate Assessments

There are some free and do-it-yourself options for corporate assessments. Below are 2 of those options:

  • Ask for References
  • Visit the Factory

Ask For References!

Most buyers skip this important step. But it doesn’t cost anything to ask for references and follow up with an email or phone call.  Suppliers are unlikely to hand out their entire customer list, but if they can’t give you one or two happy clients…run away and find a new supplier!

Visit the Factory

This may be the single most important step in finding the right supplier when doing your due diligence on Chinese suppliers.

Sales people in China are very good at telling you what you want to hear.  So visiting the factory can be a real eye opener and while you are there pick up a copy of the business license and verify that the name on the license is the same name as on the purchase contracts and matches the name on the bank account.

If you have a contract with the same company you are paying, it will protect you should something go wrong later.

Get a friend that speaks Chinese and have them plug in the name of the factory into the business registry of their given city in China.  In most parts of China you can find out of the business license is still active and who is the legal owner/representative of the business.

Affordable Options For Corporate Assessments

AsiaBridge Law’s Corporate Assessment (CA) service is the ideal tool for clients who want viability into the stability, assets & reputation of a target company.

This report is particularly of value if you are:

  • Thinking about entering into a business arrangement with a Chinese company to buy or sell goods.
  • Exploring a JV or investment partnership with a Chinese entity.
  • Considering litigation against a Chinese company. If a company doesn’t have assets, it’s not worth the effort to fight and win only to remain uncompensated!

It is recommended to conduct the CA on new business partners and have follow up reports done periodically (at least once per year) to expose any changes in the stability, assets and reputation of the target company. Discounts are available for multiple reports if booked in advance.

Visit here to see a sample CA report and learn more about the service/fee structure.

Free/DIY Options For Assessing the Factory’s Quality Systems

Without visiting the production site in person while doing your due diligence on Chinese suppliers, it’s hard to assess if the seller has the means to product the given product you want to buy. Do not just make it one time, but make it over and over again at the quality level, lead time and pricing point you need.

But if you visit the seller in person and get a look at the manufacturing, here are two video tutorials that will teach you what to look for:

Comprehensive 1 hour 7 part video tutorial on how to spot a good factory and avoid the bad ones.

Affordable Options For Assessing the Factory’s Quality Systems

Most simple factory audits (SFA) cover the following:

  • Quality System: on-site visit to confirm if there is a QC system in place. If yes, what is the auditor’s general impression of the system?
  • Employees and Workforce: An overview of HR policies, management style and workers situation.

Quality Systems Auditing is outside the scope of services at AsiaBridgeLaw.com, but contact our friends at www.SourcingServiceCenter.com and they can make some introductions.  For your reference, most SFA’s can be conducted in 1 day and cost around 500 USD if you hire a professional firm.

If the auditor charges a very low fee it probably means they make their money by receiving kickbacks from the factory. So select your auditing firm very carefully.

Related Blog Posts on Quality Auditing

Managing Expectations about Due Diligence in China

Things change fast in China. If key managers leave or the product line is changed, good suppliers can go bad overnight.

So if you are paying for due diligence, ask how “fresh” it is!

In my opinion, substantial due diligence at all three levels is essential when sourcing from China.

Perhaps I am jaded after living here in China for a long time. Maybe sometimes I assume the worst unless proven otherwise.

Remember, do the following…

  1. Scam Assessment (Level 1):  Is the company real?
  2. Corporate Assessment (Level 2): Who owns the company? Does the seller have a good reputation? Are they financially stable?
  3. Quality Assessment (Level 3): Does the supplier have the ability to product the products I want to buy?

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How To NOT Get Knocked Off When Sourcing From China

Knocked Off When Sourcing From China

Do you want to learn How To NOT Get Knocked Off When Sourcing From China?

If you are asking these kinds of questions, this article is for you!

I got a great idea, but I worry that it will get knocked off by the factory? I’m not sure if I should file the patent first or use an NDA to protect me? Who owns and controls the idea when you jointly develop it with the factory? If I sign an agreement am I locked in to buy from this unproven supplier? What is the time frame to get my contracts and IP protection in order?

Below is the Q&A with a buyer who was stuck in an awkward situation with their supplier. Basically, they started cooperation on a project with a China supplier without agreement in advance on the costs involved to finish the idea and who ones the IP.  Shame on the buyer for not sorting these items out in advanced. But, sadly, it’s a common mistake, so in this blog post we share the Q&A.  We also offer some related resources at the end of the blog post.


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Can a Foreigner Register IP in China?

Here is a short Q&A for a very common question about foreigners registering Intellectual Property (IP) in China

With regards to the certificate of incorporation, can the company holding the IP rights in question be registered in the UK? Otherwise, what options do we have?


The applicant for the IP in China could be any entity or individual, regardless of physical location. A lot of people don’t realize. You need not be Chinese to register IP in China.
Related Content:

China Sourcing Crash Course

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If the black and white logo is registered. Is my IP protected in color?

Here is a short Q&A for a question that gets asked sometimes regarding IP registration for logos.

At this stage we are interested in registering the attached logo, as we are already pushing through a PCT application that will buy us a couple of years extra time. As the logo is in black and white I presume the trademark protection will cover its use in any colour?

Yes, but it’s better to check the application date of the patent, so you will know for sure when the PCT will expire.

Yes, correct. In China, protection will cover its use in any colour?

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How to structure office hours in your Chinese company

Client writes in to ask about labors laws and how to set up the office hours for his Chinese staff.

As this question gets asked a lot, here are some basic points for your reference:

Just wondering if I could borrow your brains and experience and get some advice on a decision that’s been on my mind for a long time now.

We currently work every alternate Saturday (so a 5.5. day work week) like a lot of other sourcing companies in China. I have been seriously thinking about cutting it down to 5 days instead. What are your thoughts on this? How are you dealing with this now? I feel, in order to attract the best people and to compete with “large companies” (outside of sourcing industry too) it is critical to offer something more than what a lot of Chinese companies offer and this seems to be one of those things, especially in terms of hiring married employees. However, at the same time, as we are in an industry with such tight margins, I wonder if this would be make us less competitive/productive.



If you need your people to be flexible and come in on evening and weekends when clients are in town or heavy workload, then you can’t be too pushy with set work hours or you will end up paying a lot of over time.  If your business is such that people can do their jobs during normal work hours, then a more structured format like the current one you have it sound.

In the other email you mentioned your business is slow at the moment. Know that another option is get out from under all those HR/ Admin headaches to focus on marketing and outsource the project mgmt. to a 3rd party like this one.

As you have AsiaBridge Law on retainer, we would be happy to come over to your office to review your HR policies and make some practical suggestions on how to optimize your office hours while staying compliant with local labor rules.



Related Content:

Is it Legal & Safe to Hire a Freelancer in China?

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How to motivate a non-responsive supplier?

When is the best time to initiate a legal course of action?

Below is a typical case for reference if you are considering legal action against a Chinese entity.

I am in the middle of collaborating with a Chinese company which is located in Dalian China.  The total order is for about $67,200usd (3×40’hq Containers)  So far I have sent them about $16,800usd (25%) as advance.  As of today, they are far behind on the delivery date, among many other issues I am facing in dealing with this company such as quality issues, false promises, deceits and lies and so on.  I can give you further specific dates, documents & details later.  The delivery date for all 3 containers was on March 15th or before, but as of today only one container has been shipped (which was also delayed shipping).  My reason to contact you is to find out when would be the best time to initiate a legal course of action and your legal assistance?  Should I wait for them to finish all the good and ship it out?  Should I wait until I have received the goods and release documents in New York?  If and or when should I pay the balance payment?  What is the proper course of action?  I would appreciate your response.


We see a lot of cases like that and offer some suggestions:

A diplomatic and carefully crafted demand letter and follow up from a Chinese lawyer in Chinese to a Chinese company usually has two outcomes:


Possibility 1: the seller realizes you are serious and the dispute is resolved

Possibility 2: the seller stops all communications with you/lawyer and prepares for a court case.


Key points:

If the seller knows a court case is coming, they will probably try to use the remaining 2 containers as leverage.  If you can risk a delay in having those ship until the dispute is resolved, then I would suggest you move forward with the demand letter and follow up conducted by our Chinese lawyers on your behalf.


I almost forgot, have you heard about www.SupplierBlackList.com?  It’s a free website where buyers like you and I can post bad suppliers and expose them to the world.


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About the author: Mike Bellamy

Guest Blogger & Chibridge Advisory Board Member

Based in Asia since 1993

Founder of the PassageMaker family of companies

Business Lecturer at the China Sourcing Academy

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