Recently received an email from a US manufacturer with a link to a Global Sources article entitled, How to detect a trader from a manufacturer in China?  The email asked me the following:

  •  Does it really matter whether we go with an agent (a/k/a trader/broker) or a manufacturer?
  •  Is the information in this article accurate?
  •  Is it really that difficult to tell the difference?

Yes, yes, and yes.

The article was written by Renaud Arjoran of Quality Inspection Tips and it relates “an incredible” story Renaud heard from a friend who was searching China for a good manufacturer of LED lamps.  This friend scheduled two factory visits for the same day in Shenzhen. The friend visited a factory in the morning and then visited the exact same factory in the afternoon, but the second time the name on the wall was different and the prices were 25% higher.

What had happened?  One or maybe even both times, the friend was not meeting with the factory, but rather was meeting with a trader who claimed to be the factory.  This goes on all the time, but is not usually so easily discovered.  Renaud then discusses how to spot a trader/agent/broker:

Could he have spotted it before the visits? No. The company names were different, and one address referred to the area while the other gave a street address.

So, if you want to know whether you are dealing with a trading company or with a supplier that really owns a factory, what can you do?

As the above example shows, visiting the factory is not enough. You have to be curious and ask many questions.

Here are a few examples:

Some people who speak Chinese ask for the supplier’s name, and then they arrive by themselves (in taxi) and ask the security guard at the gate where that company is located. Guards only know the manufacturer’s name, not intermediaries.

It is also easy to ask for the name card of a factory manager, and to compare it to that of the supplier’s contact (same design? same company name?). This can actually be done by most third-party auditors if you ask for it.

A more reliable way of checking the nature of your supplier is to pay for a background check on their company. If they own no assets, they are probably a trading company. More about this topic in How to check a Chinese company’s activity.

Good advice, but back to the emailer’s questions.  Why does it even matter whether your China product outsourcing deal is direct with the factory or through an agent? First off, it usually matters due to price.  More importantly, however, it matters because if you deal with a trader/broker without knowing that you are not dealing directly with the factory, you do not have a contract with the factory.  Why does this matter?  I will give a real life example to explain.

Many years ago, a company called us after just having learned that its two million dollar order of Christmas tree lights would not be delivered to the United States until December.  We called the factory and they told us they had no idea who our client even was. It turned out that our client had unknowingly been using an agent (we figured it out by looking at some Chinese language documents) and so it had absolutely no contractual relationship with the factory.  So at that point, all it could do was to beg its agent to do whatever he could to get the factory to speed up the order.  There was no point in suing the agent because he was one guy in a small office with an old computer (we investigated).

As we have often said, there are some excellent sourcing agents out there and those agents bring a lot to the table.  A good sourcing agent will find you a good manufacturer and get you a good price.  Then, and depending on the nature of the relationship and the cost, many will stay with you and make sure that the factory continually provides you with good product in a timely manner.  Some will even work with you and the factory to improve aspects of your product or distribution or whatever.  However, every good agent that I have seen is upfront about the fact that they are an agent and not the factory.

Is the information in this article accurate?  Yes.  It can be very difficult to determine whether you are dealing with an agent or the factory and I have come across countless examples (beyond just the Christmas tree light one) where the US company had no clue that it was not dealing directly with the factory.

Is it really that difficult to tell the difference?  Yes and no.  Yes it is if you do not speak Chinese and you are not familiar with how China does business.  No, if you are able to go to the local corporate registry and simply check out the bona fides of the company with whom you are thinking of doing business.

 

This is a guest post from Renaud Anjoran. Renaud runs a product quality inspection business in Shenzhen and he also writes the truly excellent and perennially helpful Quality Inspection Tips. My firm has worked with Renaud on a number of China product matters and we have consistently found him to be highly knowledgeable about China product sourcing. This post arose from a long email “conversation” between co-blogger Steve Dickinson and Renaud, which ended as so many of those do: with me suggesting that it be turned into a blog post.

So here’s the blog post, written by Renaud Anjoran.

 

Most transactions with Chinese suppliers are done through bank transfers. This payment method was described in a previous China Law Blog post, China Manufacturing Payment Terms. Limit Your Risks.

Many importers/foreign manufacturers are not familiar with Letters of Credit (LC) as an alternative to bank transfers. Letters of Credit were designed to protect both product buyers and product supplier in international trade. In practice, they are usually more favorable to the buyer.

How a letter of credit protects the buyer

An importer that pays by LC does not have to wire a deposit before production and it usually has the option to cancel the payment in the following cases:

  • If a supplier does not ship at the right time.  Typically if this happens, the LC simply expires, but the buyer still has the choice to pay if it wants the goods.
  • If a supplier does not honor the product specification or if there are too many defects. One of the conditions of the LC should be that the LC will not be paid on unless and until the product buyer has signed off on product quality or a specified third party QC agency has issued its certificate of inspection.
  • If the seller fails to provide any document listed as required in the LC or the documents do not fully conform to the LC’s requirements.

Why letters of credit can be cancelled by the buyer in most cases

Even something as small as a typo in the LC, or the fact that a quantity is written in dozens rather than in pieces in the invoice is usually enough to cause a discrepancy in the LC, which in turn allows the buyer to cancel payment.

In practice, a small minority of LCs are “clean,” i.e., without any discrepancy. In all other cases, the buyer has the option to refuse payment and cancel the transaction, even if the goods are already on a boat (in which case the buyer will not get the documents to get the products out of custom).

CLB Note:  We are aware of a Seattle buyer company that refused goods that had already arrived in Seattle because the street address (which was irrelevant) of one of the parties in the letter of credit was off by a single letter.

Tips for negotiating payment by letter of credit

For the reasons mentioned above, Chinese suppliers typically refuse to accept Letters of Credit. Here is how you can increase your chances of finding a Chinese company that accepts this payment method:

  • When sourcing your product, try to identify as many potential suppliers as possible. This will at least increase your chances of finding one that will accept an LC.
  • In your first conversation with your potential suppliers, mention that you always pay by LC on your first order. Try to get the supplier to accept this payment method in writing
  • Sell your project to your potential suppliers. Good manufacturers are inundated with customer inquiries, so you need to make yourself stand out. Explain why they should work with you. Call the Chinese company’s sales manager if necessary
  • Send your potential Chinese manufacturer a draft of the LC before opening it. You will usually need the commercial invoice, the packing list, the certificate of origin and/or GSM form A, the bill of lading, and an inspection certificate. Try to avoid putting “soft terms” into your Letter of Credit that will make it even more difficult for suppliers to collect payment.
  • If possible, use a major international bank. This will tend to reassure your suppliers.
  • Unfortunately, bank fees are much higher for an LC than they are for a bank wire, so an LC only makes sense for transactions of at least USD$30,000.
  • Chinese exporters are good at guessing whether a project is likely to become a source of long-term business. When they see what they think will be a a one-shot deal, they generally insist on getting a deposit and will not agree to an LC payment arrangement.

In summary, Letter of Credit are a payment tool that makes it unnecessary to transfer a 30% (or more) deposit to your Chinese manufacturer. They are usually more favorable to the buyer’s side, and for that reason, many Chinese companies refuse to accept them. But some Chinese product suppliers have been paid via Letters of Credit from some of their foreign customers for years, and sometimes Chinese manufacturers will accept your Letter of Credit if they really want your orders.

 

What do you think?

Just got my third email this week from someone who bought tens of thousands of dollars worth of “iPhones” from someone in China only to receive rank fakes. All three emailers were so blinded by the idea of buying iPhones at ridiculously low prices that they did nothing to make sure the sellers were legitimate, which of course they were not. There is just no way to get REAL Apple products from China for any less than you can get those products from the United States. There just isn’t. If someone is offering to sell you an Apple product, be it an iPhone, iPad, MacBook Air, or anything else, for way less than you can get it elsewhere, it virtually has to be a fake or else you will never get anything at all. Get it through your head now: you ain’t gonna get Apple products for less than anyone else does. It isn’t going to happen. It just ain’t.

It is easy to buy Apple products at retail in China. You can buy them from the ever increasing number of Apple stores (if you are willing to bust through the crowds) and there are also many authorized retailers throughout China. So yes, one can absolutely buy Apple products in China. What do the retailers charge for their Apple products? Pretty much what you would pay for those products in the United States. My law firm just bought a couple of MacBook Pros for our people in China and the prices on them were so close to what we would have had to pay in the United States that I did not even bother trying to figure out if it would ever be cheaper to buy in one country for the other. We buy Apple products in China for our people in China and we buy Apple products in the United States for our people in the United States. There’s no point in doing it any other way.

The fake apple product problem stems from the strange belief by many in the United States that everything is cheaper in China. Or as the people who have gotten scammed on these things are always telling me, “I thought I was getting the China price.” They read about factory workers in China getting paid one tenth what factory workers in the United States get and then figure that the iPads in China must cost about one tenth of what they do in the United States.

That’s some really bad economics. More importantly, it is just flat out wrong.

Yes, most Apple products are made in China. But so what? Apple’s margin on those products is not 1000%, which is pretty much what it would need to be if they were to sell them for one tenth in China as in the United States. Also, what about arbitrage? Do you really think the market for iPads is so inefficient that there could be such an incredible price disparity for more than a few days? Trust me when I tell you that Apple would never allow such price disparities and that it does an amazing job overseeing its supplies and its pricing around the world. Is it possible that some iPad factory somewhere in China is making iPads during a secret third shift and then selling them at a discount out the side door? Of course it is possible, but I very much doubt that is happening and even if it were, that factory would not be selling its grey market iPads for much if anything below the real market price. Why would it not sell them for as much as it can get? Why would it reduce the price to shockingly low levels when doing so would only alert Apple to what it is up to?

This whole pricing thing reminds me of a counterfeiting case my firm handled a few years ago. We were retained by a large U.S. online tech selling company that was under a federal investigation for selling counterfeit products. Our client had purchased large amounts of a particular product from a Chinese supplier and my firm was handling the China-side issues. Our client had paid $190 per product from the Chinese supplier and that was pretty much the same price it would have had to pay had the product not been a fake. Working with a criminal lawyer, we were able to convince the Justice Department that either our client had to be incredibly stupid (which it clearly was not) or else it was telling the truth when it said it had no idea that it was buying counterfeits. Why would anyone in their right mind pay the full price for something they know to be counterfeit? The Feds dropped all charges.

If you think you have found someone in China (online or otherwise) who is claiming to sell Apple (or other name brand products) at a price way lower than you can get those products in the United States, do not fall for it. There has to be a catch. If it sounds too good to be true, it almost certainly is.

These product scammers are getting more sophisticated too. Their new trick is to assure you that they are for real by letting you pay only 30% or 40% upfront, making you think that they would never put their final payment at risk by sending you anything less than the real thing. But this payment delay offer should mean nothing to you.  30% of anything is a lot of money to someone with no intention of providing you with a thing and it isn’t all that bad for someone who plans to provide you with a near worthless fake either.

Oh, and if you do ever fall for one of these scams, please do not bother to contact my law firm because all we will tell you is the following:  (I am pulling this straight from the form email we use for these):

We get dozens of emails just like yours every year and though I wish I could tell you otherwise, there is probably nothing we can do for you. The odds are good that whoever sold you this fake product [failed to deliver your product] is long gone and even if we were able to find him, the odds are good that he has no real assets, or at least no assets subject to easy collection. You can pay us a lot of money trying to chase whoever took your money, but my advice to you is that you instead spend that money to conduct the requisite due diligence and quality inspections the next time you buy anything from China. If you still wish to try to get your money back, we would be happy to assist you on an hourly basis, with a hefty upfront retainer.

And then there are the cases where the scammed buyer has to deal with customs accusing them (rightly, of course) of dealing in counterfeits. What is their defense? I don’t know but I doubt it is that they thought they would be getting a real iPad for their $50?

Bottom Line: Don’t do it. Just don’t do it.