Buyers-Bridge is a fee-based sourcing company with a focus on China. Its January 2011 newsletter had six basic tips for companies that have Chinese vendors, all good for thought and refinement. In the newsletter’s order, here are the six recommendations:
- Use a written supply agreement in a bilingual format.
This is beyond just a good idea. Starting a supply relationship with only a purchase order, followed by the vendor’s invoice, invites a battle of forms if anything goes wrong. It probably means no recourse for the buyer, as a practical matter. The concept of a bilingual agreement is not required, but is good practice, and can minimize disagreements later on. Two points to add:
- Use a really good translator, and do not allow your Chinese business chain partner to have the only hand in drafting the Chinese version. A client recently entered into a 100+ page multi-million USD contract with a substantial Chinese company, with everything negotiated in English. The Chinese company was the buyer in this case, and had the leverage to insist on China as the governing law, China as the place for dispute resolution, and the Chinese version as the governing instrument in case of differences from the English language version. The Chinese party sent the US party the Chinese version as a final step. Had the US company not sent the agreement for a “legal translation” (including linguistic and legal review), it would not have known that the Chinese version omitted whole sections of the English version that protected the US party and twisted other wording beyond recognition and in favor of the Chinese party.
- An initial supply agreement can be very simple. The “legalese” style of supply agreements with UCC terms and conditions is not appropriate in China for the vast majority of cases. In starting a vendor relationship, covering the most important points in simple language is preferable. A client taught me that the simple initial approach to building a supply chain relationship pays great dividends and is consistent with the point that in China (as in most of the world) business relationships evolve over time and are based on a pyramid of trust.
- Use Chinese or Hong Kong arbitration.
A Chinese vendor will be far more comfortable agreeing to dispute resolution through arbitration in Asia than with exclusive jurisdictions of a court in a Kansas or Florida county. And a US court judgment, probably obtained on a default basis, is virtually worthless against a Chinese vendor. Agreeing to arbitrate through CIETAC or HKIAC (both highly reputable organizations, with panels that include non-Chinese arbitrators) can ease agreement and guarantee a practical mechanism for resolving major disputes.
- Use clearly written specifications.
Here there is a balance to be struck. With initial purchase orders to a vendor, there is concern that the vendor could counterfeit products later on or become a competitor. This is certainly true for spare parts manufacture, but even for production of an entire item. Nonetheless, it is essential to provide very specific requirements for how a product is to be made. Remember lead paint used in toy manufacture? So, use detailed specifications for what must be used and also what may not be used in manufacture.
- Register trademarks and URL’s.
The registration of websites beyond the US form of company.com should be considered before launching any serious Chinese project. Adding the .cn suffix to the list of domain names is an obvious step. And the concept of obtaining domain registration through China[company name].com does not cost much either. Do not respond to emails from unsolicited sources that claim to be able to protect your trademarks for you. Do the job yourself. It’s not that hard.
Trademark registration is another matter. If the only concern is protecting against exports back to the USA or North America, you may not wish to have your particular US trademark registered in China. Filing and registration fees are significant in China, and the classes for which you obtain protection mean you may not obtain total protection for a name. Nonetheless, China is basically a first-to-file jurisdiction, so if you plan over time to protect your trademark within China, it’s best to file for key trademarks before entering the market there.
- Bypass trading companies.
The Soviet-era use of trading companies has faded quickly from the Chinese landscape. But import-export companies still abound and can be helpful for early-stage companies that are not equipped for foreign transactions. Some Chinese vendors, particularly those in inland locations, may not be set up to pay in US dollars, and for these, a trading company is probably worth the 1-2% fee that will be paid to it. In most cases, however, it is good advice to avoid trading companies, with the extra cost and complications they can bring.
- Know your supplier.
This is obvious. Prevention is better than cure – a lesson from kindergarten. But Buyers Bridge’s specific advice on this score is very sensible. Use vendor score cards – being frank but respectful. Use regular audits. If your company cannot afford regular visits, there are inspection and auditing companies for hire in China that do this well for buyers. Certify the vendors’ ability to meet specific standards. This is a form of benchmarking, not simply demanding ISO or other credentials from suppliers. Perfection is not the initial objective. One can use agreed margins for defects, rather than insist on perfect compliance, and build this factor into price. There are many ways to adjust to Chinese sourcing opportunities.