Despite the pandemic’s numerous lockdowns during 2020 and 2021, one positive result has been a boom in sales for a lot of businesses as many consumers have chosen to upgrade electronic, exercise, and home office equipment, furniture, home and kitchenware, etc, due to spending more time at home and outdoors than before.
If your sales have been on the up you may be placing larger orders with suppliers in China than before, and with larger orders comes higher risks and more money at stake.
If you want to reduce your risks, several approaches may make sense for you, and I’ll outline four here…
1. Vetting a supplier very carefully
A bad supplier will keep causing issues. Spending more time to define what profile of supplier you need to find, to search for that profile, and to screen most of them off is really worthwhile.
Related 👉 Listen to our comprehensive podcast series on vetting Chinese suppliers that takes you through the entire process.
You will also find this episode of the podcast helpful: DIY Sourcing From China Part 1: Good Fit, Sourcing, Vetting, & Backups [Podcast] because we go into detail about how to define what a ‘good fit’ supplier is and sourcing and vetting them yourself.
If you are currently stuck with a ‘bad supplier,’ it’s a good idea to consider switching to a new and better supplier before your business is damaged even more!
2. Getting the supplier to sign a development & manufacturing agreement
An enforceable agreement that covers the main risks you are facing is useful. It brings you two benefits, mainly:
- Commitment from the supplier to behave in certain ways and to hit certain performance levels (with clear definitions, hopefully)
- Leverage in case things go wrong and the relationship with the supplier is pretty close to broken – most importers never get a lawyer involved for litigation on their Chinese supplier, as it is really a last-resort solution, but it is good to have that option.
Sofeast provides a standard manufacturing agreement template customers can purchase (consulting a contract lawyer with China experience is always suggested, as we are not legal professionals). It provides you with moderate protection that is adequate for a small/medium company buying consumer goods from China, but of course, giving more protection to the buyer’s side always creates more resistance on the supplier’s side and at one point it becomes unreasonable and can kill a good deal.
If you have specific development and manufacturing agreement questions, the best thing to do is contact us first to discuss your specific case and we can provide focused feedback.
What if you already have an existing agreement with your supplier/s?
If you have already been working with your supplier/s using a development and manufacturing agreement, but now your needs and order sizes are changing, is it still fit for purpose?
Possibly not if your needs have changed. For example, if it was configured for an ODM purchase (of an existing product) but you now buy OEM (your own design to be developed by the supplier), the agreement might work against you!
You now need to reassess whether it covers all your major risks. There is a difference between a relatively simple template that is configured at the margin by non-lawyers, like our template, and a template drafted/adapted by a lawyer for your specific situation. Of course, the latter is always better. It comes to a tradeoff between cost and risk tolerance.
Related 👉 You can learn more by listening to these two podcast episodes about development and manufacturing agreements:
- Exploring Product Development Agreements For Importers [Podcast]
- How & why to create a valid China manufacturing contract [Podcast]
3. Negotiating for better payment terms
If you can pay a lower advance payment (say, 15% instead of 30%) and if you can pay the remainder after shipment, your exposure gets reduced quite a lot. But the risk on the supplier’s side goes up a lot, and their cash position deteriorates accordingly, so they will tend to resist.
I explained the traditional payment method by bank wire (T/T payment) in detail in How to Pay Chinese Suppliers by T/T Payment (Bank Wire Transfer).
You can also see a T/T payment being filled out in this video:
4. Paying by letter of credit
This one is a tough one. But, if you purchase a large amount and you are seen as a relatively “safe” buyer, some suppliers may accept this payment term if they are financially sound and don’t require cash upfront in order to even start production (a good sign).
It allows you to avoid paying a deposit and provides you with a lot of protection in terms of pushing the supplier to diligently follow the correct procedures in order for the payment to go through (such as providing the required documents per the Letter of Credit’s requirements) and allowing you to ‘pull the plug’ by cancelling the LC if the quality doesn’t reach your standards after inspections are performed.
Related 👉 I wrote a couple of blog posts you may find useful here:
- Letters of credit when buying in China: the basics
- How to get a Chinese supplier to accept a letter of credit
There are, of course, other ways to reduce your risks. Please comment and share any tips that you have, please.
Here at Sofeast, we are not lawyers. What we wrote above is based only on our understanding of the legal requirements. We do not present this information as a basis for you to make decisions, and we do not accept any liability if you do so. Consider consulting a lawyer before making legal decisions.
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