Can my Chinese supplier deliver to my potential customer in China?
Let’s say you have developed a great supplier in China that ships affordable products, on time at the agreed quality level. You are aware that the Chinese domestic market is full of potential customers.
If you want to explore the opportunity to leverage your Chinese supply chain to capture China-based customers, then this article is for you!
Here is a typical email I received last week from somebody in that exact position:
Hi Mike,
We are considering a new project which will include sales within China. Basically, the project entails sourcing products (mainly smart phone accessories) from China manufacturers & delivering them to various International Companies based in/around China.
Based on my research, China factory only want to deliver to HK so they can get refund of the VAT tax (13%) or they will need to charge us the 13% if we want the goods to be delivered to a China location.
Can you let me know how this all works based on us doing the invoicing outside of China?
Dear Bill,
Thanks for your email. In my previous career running a sourcing agency in China for 20 years we helped overseas clients manage their supply chains. Mostly “Made-in China/ 100% for export”, but as the consumer base in China grew, so did the requests for delivering a portion of production to Chinese end users.
On the surface it sounds like a slam dunk, but the vast majority of projects didn’t succeed due to the following common road blocks:
- The VAT rebate system is designed to promote exports. It can actually be more expensive to sell a made-in-China product in China than to buy the same product outside of the mainland.
- Some try to export the product from China then immediately re-import it. It’s no easy task to re-import, unless your scale is quite large or you have thick margins that can absorb the duties and transport costs.
- Made in China products targeting the domestic market have a whole new set of regulatory hoops they need to jump thru in terms of local language packaging, safety standards, customer service and warranty, to name a few.
- Mainland Chinese businesspeople are remarkably crafty at cutting out the middleman, especially when that intermediary is neither based in China nor Chinese. After a few orders, somebody will give a bribe to the delivery truck driver to find out which factory made your products. As the middleman, if you don’t have a strong relationship, IP registered in China or an NNN in place, you are likely to get cut out.
- Blackbox Manufacturing:
In my previous career running a sourcing agency, we solved that challenge by leveraging a 3rd party warehouse in China as a firewall/ Blackbox, and leveraged the lawyers at AsiaBridge to draft NNN agreements with teeth.
- Blackbox Manufacturing:
- A whole different set of headaches is waiting for you when it comes to getting funds out of China in RMB, let alone foreign currency like USD. The type of parallel invoicing you describe is possible if you can find a partner (supplier/buyer or broker) that has:
- Large scale operations on both sides of the HK/China border
- Import-export rights
- Licensed to coordinate VAT rebate
but first you need to remove the road blocks of 1,2, 3 and 4.
The other big issue is invoicing. Gone are the days of a porous Chinese boarders where gray channels could be arranged on the Hong Kong or Vietnam land boarders. Meaning it is not easy for you to accept your payments outside of China and ship the product into China minus the paperwork. Gray channel via air is next to impossible for large orders. Small Fed Ex style deliver via gray channel is possible but not scalable. In 2021, unlike 2001, orders need to be on the books, taxes are paid and transfer pricing is even enforced.
Notes on Product Testing and Registration in China
Product Testing and Registration in China (including the application for CCC mark) can be a complex and lengthy process. In most cases a local registration agent is hired to help prepare the documentation and submit the application to the appropriate government agencies.
In particular, you will want to be fluent in all the issues relating to the China Compulsory Certificate mark (also known as “CCC Mark” or “3C”) which is a compulsory safety mark for many products imported, sold or used in the China market. The CCC mark is administered by the CNCA (Certification and Accreditation Administration) and includes a review of both the product and production facilities.
For example, we had a client that wanted to sell dog food into China. This is a hot product as the pet market is booming and Chinese consumer don’t trust domestic brands. Here were the direct “set up costs” (excluding the legal fees):
- $28,000 Product Approval
- $7,000 Local Language Packaging (Translations & Design)
- The client was also surprised to learn that every contain load would be subject to a random lab testing by the Chinese authorities before being released into the market. And the costs of that testing would be the burden of the brand owner.
Long story short, it certainly is possible to have foreign products registered and re-branded for the Chinese consumer, but the costs can be prohibitive for sellers with limited budgets.
Bottomline:
Having said all that, it certainly can be done. Made in China iPads, Shanghai Buicks and Samsung phones are readily available. But the smaller the scale, the harder to implement domestic sales.
You could make the argument that the entire system is designed to make it easy for Chinese companies to export and hard for non-Chinese to access the domestic market. It is possible, but not easy for SME’s.
Related Content:
I write extensively on the issues of China VAT and distribution in my blog, book and sourcing tutorials. Here is a popular one: VAT Leak in China Manufacturing.
As a consultant, I have also been retained to advise on this issue of “Made in China, by non-Chinese, for Chinese.” As much as I’d like to send you an invoice for business advisory services, I don’t think now would be the right time to spend a bunch of money on consulting. I’d like to suggest you flush out the opportunity in regards to the potential roadblocks above. If the project still is viable, I can certainly help you tie down the loose ends.
Glad to be of continued service.
Best Regards,
Mike Bellamy
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).