We found this interesting story posted on LinkedIn recently, in which product founder Daniel Rees shared his unfortunate experience with a Chinese supplier who was producing his company’s products, helmets.
The supplier, knowing that they relied on him for production, took the opportunity to pressure them to pay him more over a longer period or risk him pulling the plug on their project, leaving them in real trouble.
It serves as a cautionary tale, so we reproduce it here with thanks and provide our comments.
What happened to cause Daniel’s supplier to act like this?
This is Daniel’s story which raises some interesting points for importers with Chinese suppliers:
What we can learn from this case.
This supplier had previous experience with helmets, producing thousands of units per day, so how could things go so wrong with them only being able to produce 30 per day?
The helmets they were used to producing were a lot simpler and for customers with lower quality demands. Maybe the supplier realized that the assembly was going to be more technical and complex than expected and would lead to a higher reject rate, so they decided that they’d need to increase prices and push for that longer contract.
Essentially, once they had all of the customer’s bespoke tooling (worth $400k) in place, and had already started production with the components, etc, they knew that they had them ‘on the hook.’ Threatening to kick them out (and who knows if they would release the tooling, parts, and other IP or not when requested) unless they signed a long contract with increasing payments was, according to Daniel, a form of blackmail. If they were suddenly left without a supplier, they wouldn’t be able to function, fulfill their orders, etc; a disastrous situation.
That the supplier was empowered to insist on Daniel signing a contract with them that was not in his favor suggests that a manufacturing agreement hadn’t been created and signed by all parties from the get-go.
If this is the case, we’ve written before about why such legally enforceable agreements are crucial for preventing situations like this. Not setting out your expectations, each party’s responsibilities and any legal penalties for breaking the contract leaves you particularly exposed to blackmail, IP theft, and other problems. It reduces risks.
Switching to a new supplier under these circumstances, especially with a shaky and adversarial relationship, would be either impossible or very costly and risky due to needing to source new suppliers, possibly re-certify the products, and maybe fabricate new tooling again. Therefore, the only option to safeguard production with a supplier who was by then able to effectively perform was to cave into their demands.
Of course, after a while when they were able to, they kicked the supplier to the kerb. Maybe the Chinese supplier ‘Mike’ didn’t care, he’d gotten his several years of production and rising invoices during that period. Or maybe he looks back with regret that he trashed a potentially long-term beneficial relationship for short-term gain.
Ultimately, Daniel set up his own factory to produce their helmets, losing Mike his business.
What could you do to avoid this unpleasant scenario?
Even if you can’t set up your own factory to avoid rogue Chinese suppliers like this, there are some steps you can take to avoid working with someone who will treat you poorly.
- Start by sourcing the right supplier: Finding a suitable manufacturer is not only about whether they have the expertise and capacity to produce your products, it’s about assessing if they’re the type of company you’d feel confident working with. Our customers usually start with this sourcing work.
- Once suitable suppliers have been found, run a battery of checks: You will have a shortlist of possible suppliers, and to weed out those who may be untrustworthy, running various checks is advised which can include a request for quotation and further analyses, background check, to vet a supplier, factory audit (also helps vet suppliers), and sample evaluation and comparison. In this case, for example, suppliers that are used to making much simpler products would be screened out.
- Create an enforceable manufacturing agreement: Daniel isn’t clear on this point in his story, but if one was not written and signed, it’s a problem. Use a lawyer experienced in Chinese law to draft the contract so it is enforceable.
- Make your QC checklist clear: Creating your QC checklist will help the supplier understand what is and is not acceptable, providing boundary samples and images to illustrate these points. This may be delivered with the agreement above, as the supplier may be contractually obliged to agree to fulfill the quality standard.
- Keep the supplier accountable when you’re working together: Once work starts you’re probably far from the supplier (in a different continent), so it’s important to keep on some pressure and ensure you have visibility over what is happening. You may also choose to take these actions: Order follow-up, product inspections to ensure that quality is where it needs to be, and logistics management.
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