China Trends (Part 2): How to spot the red flags of good relationships going bad before it is too late.
China Trends (Part 2): Increase chance your “good supplier” will turn bad in the next 12 months. Learn how to spot the red flags before it is too late.
Red Flag Assessment: Want to make sure you are safe?
Why now?
Spot the red flags before it is too late!
Background:
Beijing continues to aggressively pivot away from an economy based on manufacturing-for-export.
How will China’s move towards a consumer-oriented economy
impact its exports?
In simple terms, for consumerism to work in China, it needs a middle class with disposable income in their pockets. Beijing feels the best way to get there is to continue to raise the minimum wage, year after year. It’s working … consumption is on the rise and if the US-China trade war ever cools down, US exporters will benefit from a rising Chinese middle-class.
But if you are in the China sourcing game, the sad fact is that China is no longer a low-cost manufacturing base for a growing list of production categories. Faced with increasing costs of manufacturing, Chinese factories essentially have 4 options:
- Find ways be more efficient
- Pass the increased costs on down the supply chain
- Move out of China
- Close up shop
The Trump tariffs exacerbate the situation. Increasing efficiency on the production line or passing costs to somebody else are easier said than done. As a result, I am seeing a substantial increase in the number of long-term suppliers who suddenly decide to move or close.
Case Study
Let’s take a look at the case of a European buyer that recent contacted me for help.
They had been buying from a company called “Together Trading” in Qingdao China for many years without incident. They had a good contract in place that had penalties for quality defects and late shipment. They regularly visited the vendor. They even had preferential payment terms. On the surface, it felt like they were sourcing safe.
However, unbeknownst to the European company, their “good supplier” was preparing to close up shop on short notice. The buyer had two huge gaps in their contractual due diligence that the seller would use to exploit the situation resulting in great financial hardship to the buyer.
BIG Mistake 1: Right Contract/ Wrong Signature
The contract in question had two chops representing the seller. Unfortunately, neither was the right one!
- The red chop is shaped like a mainland Chinese chop, but as it has no Chinese language on the chop, it may not be legally binding in a PRC court of law.
- The blue chop is not the chop of the target company. It is the chop of a related Hong Kong company.
- The signature “William Gao” is not as legally binding as if his signature was in Chinese.
BIG Mistake 2: Right Type of Account/ Wrong Location
The contract in question had two chops representing the seller. Unfortunately, neither was the right one!
The buyer was wise not to send money to a private account. They insisted on a corporate account. But if you pay attention to the banking details above, you will see that the place where the money eventually ended up is with a different company at a Hong Kong address. Remember- HK is a separate legal entity- “One Country- Two Systems” as they like to say.
Neither the corporate name (Qingdao Together Trading Co.) nor the official address of the Qingdao company are found on this bank account. “Qingdao Together Trading Company” not “Together Trading Company Ltd (HK)” is the actual supplier.
Lessons Learned
Turned out to be another case of “good supplier gone bad” and I am already seeing a lot of them this year!
The seller didn’t initially set out to scam the buyer when the buyer first started doing business with them years ago. But faced with a recent economic downturn, the seller made the decision to exploit the client’s naivety and extract as much money as they could before going into hiding.
In these cases, it is common for the seller to enticed the buyer with a fat discount in exchange for a “big, year-end order”. The seller gets paid, then they shipped a load of defective items.
Sadly, the European buyer’s lack of due diligence and poor contract terms made them a soft target when the supplier decided to “go bad”. Luckily, the seller was not a professional scam artist and left a trail of evidence, but the loop holes explained above make it harder (but not impossible) for the lawyers to hold the Qingdao seller accountable.
Red Flag Assessment: Want to make sure you are safe?
- Option 1: Do a self-assessment of your sourcing practices.
Here is a complete tutorial on how to do it. It’s a recording of 1-hour seminar I gave in Hong Kong to a paying audience on behalf of Global Sources. But I’m offering the tutorial at no charge to readers of this newsletter. I hope you find it useful.
- Option 2: Outsource the assessment using AsiaBridge Law’s Red Flag Assessment
It usually only takes about 5 days and a few hundred dollars for our team to check for red flags using proprietary, yet fully legal, methods & technologies developed during my 20 years in China. The subject company will not know the assessment is taking place. Visit here to download a sample Red Flag Assessment.
Additional Resources
- More whitepapers & video tutorials on related subjects can be found https://www.asiabridgelaw.com/resources/
- 10 short videos covering 10 Common Mistakes when conducting business in China.
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ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/
Mike is the author of “The Essential Reference Guide to China Sourcing”
(available on Amazon).