A European buyer was dealing with a European trading company for over eight years that purchased sports equipment from a manufacturer in China on the buyer’s behalf. However, the relationship with the trading company went sour and the buyer has been dealing directly with the Chinese manufacturer for the past two years.
Over this two-year period, the Chinese manufacturer mismanaged the business to the point where the buyer was experiencing long delays with orders, missing products that had been paid for, increasing quality issues, and more.
The buyer has found a new manufacturing partner in Taiwan and wants to transfer production from China, including the transfer of a suite of tools the buyer owns and paid for (value of US$100k). There is also an outstanding order for products that need to be paid for and shipped out. The buyer is worried they will not be able to get the tools transferred or even get the last shipment of goods sent after they pay for them.
What the Chinese manufacturer is saying
The European trading company owes the Chinese manufacturer around US$70k from previously ordered material for sports equipment ordered on the buyer’s behalf. This was an order direct from the trading company, therefore, no obligation is placed on the buyer.
Regarding any orders placed by the buyer, they are happy to send out goods if the buyer pays for what they want, a value of US$30k worth of products, for example, needs to be paid in full before goods are shipped.
As for the transfer of tooling, they are demanding a US$3000 fee to release them as they claim this was part of the deal when the mold tools were ordered. The cost of the tools only included the materials to produce the molds, but there was no development cost or profit built into the quotation for the mold tools. The US$3000 fee is the charge for the ‘development fee.’
They made these points very clear and were not willing to negotiate on these, claiming that if they did not charge the development fee, it would set an example where other customers might take advantage and they would be in a big loss situation.
Too many cooks spoil the broth
With the buyer starting out using a trading company that acted on their behalf with the Chinese manufacturer, it meant that placing orders and arranging shipments including payments was handled within Europe and communication was easy. However, when the trading company started to second guess what order quantities the buyer wanted and placed material orders with the Chinese manufacturer accordingly, things started to spin out of alignment. The buyer did not always order what the trading company had blindly forecast and the Chinese manufacturer was left with material in stock that was not paid for by the trading company nor was even wanted by the buyer.
This three-way relationship was a mess by the time the buyer finally understood the bigger picture and separated from the trading company. Dealing directly with the manufacturer meant orders were placed that were actually needed, however, a financial obligation remained between the trading company and the manufacturer to the tune of US$70k, and this has placed additional pressure between the buyer and the manufacturer today as it was material for sports equipment products the trading company ordered but didn’t pay for. As it stands today, the buyer does not want to use it as they are going to switch manufacturers to a new one in Taiwan.
As for the tooling costs, these were invoiced through the European trading company which included the development costs of US$3000. Now the Chinese manufacturer is saying this has not been paid so, clearly, the trading company made a little more profit here.
How Sofeast helps you in this situation
To start with, the buyer approached us to carry out a Final Random Inspection on the goods which they paid for and required shipping to Europe stating it was their last order to be shipped from their supplier and wanted everything to go as smoothly as possible. They also discussed the possibility of booking a Packing and Loading Supervision service to ensure all the goods ordered were loaded safely and completely into the container.
Upon further discussions with this buyer, they discussed the need for us to oversee the mold tool transfer which is when the information above came to light.
Our initial outline plan was:
A Sofeast project manager would communicate with the supplier in China and suggest a deal where the following steps are implemented:
- Sofeast carries out an inspection of the products ordered, and at the same time, we take a few photos of the tooling.
- If all is OK, the manufacturer can arrange shipment of the products, FOB, and they bring the products and the tooling to the buyer’s forwarder’s warehouse.
- Sofeast would supervise the loading, with special attention to safe packing & loading of the tooling.
- Shipment of the products to Europe takes place once the inspection has been approved.
- Tooling is sent to Sofeast’s warehouse in South China from the forwarder’s warehouse and is stored securely.
- The buyer sends the full payment for the products to the manufacturer.
- The manufacturer sends the bill of lading and other documents needed.
This plan provides a clean and secure method of getting products shipped and the mold tools transferred out of the manufacturer’s factory and stored ready for transfer to Taiwan.
Also, our project manager will get their Chinese supplier’s side of the story and will make sure they know that the buyer has totally stopped working with the European trading company.
So, what should the buyer do?
The latest situation is that the Chinese manufacturers are digging their heels in with respect to any negotiations and are insisting that for anything to happen, the buyer must pay upfront and in full for any goods they want to be shipped and the US$3000 mold tool development fee must be paid. This is a package deal and everything needs to be paid in full. That was their statement.
The relationship with the European trading company is absolutely finished and the buyer will have nothing else to do with them. Any outstanding obligations they have with the Chinese manufacturer will be their responsibility and theirs alone.
The buyer has a few options here:
- Continue to negotiate to try and get the best deal possible with the least amount of risk. Paying for goods 100% upfront is never a good thing to do as you lose all control and have no leverage with your manufacturer. In this case, there are bad feelings from the manufacturer as they have been left high and dry by the trading company that was acting on the buyer’s behalf.
There is a risk here that the products will not be shipped and the tooling never be released as the manufacturer may use this opportunity to claw back some of the money owed by the trading company.
- Accept that the tooling will not be released and just start from scratch with the new manufacturing partner in Taiwan. Once new tooling has been fabricated and approved, production can start and the supply chain will be clean with direct communication between two parties only.
At the same time, pay the original Chinese supplier only for the products that are required and get these products inspected both at the finished goods stage as well as the packing and loading to ensure the products are actually sent.
- The last option, which is a big hit financially, is to walk away from this manufacturer without receiving the products that have already been made and not worry about transferring any tooling. At least then you have a totally clean break, although there is a risk of the manufacturer deciding to try and claw back some money by selling your products as they have the mold tools and the knowledge on how to produce your branded sports equipment.
This is a difficult choice and one that the buyer needs to make based on their best judgment and the costs they’re willing to pay. Walking away risks their IP being infringed by a disgruntled former manufacturer, so they may perhaps prefer to bite the bullet and pay the ‘development fee’ in order to at least be able to pull the tooling with a minimum of friction, thereby taking control of the ability to replicate their products in the future.
Dealing with a similar situation is all included in a solution we provide that you can purchase: Tooling Custody & Management (in China) – take a look and request a quotation for your situation if you’d like one.
Do you find yourself in a difficult situation with a Chinese supplier? Let us know and we might answer your questions in a post like this! Contact us here.
Other helpful content
You may also find these posts and podcast episodes helpful in this case:
- Read this FREE eBook: How To Find A Manufacturer In China: 10 Verification Steps
- Tooling Custody & Management solution.
- What are the best practices for tooling management – find out here.
- Listen to our Plastic Injection Mold Tooling Management & Risk Reduction Podcast
- If all else fails and you need to switch to a new supplier, read this FREE eBook: How To Switch To A New Chinese Manufacturer And/Or Develop A Backup Supplier