In a recent post by Renaud Anjoran, entitled, Bad relationship with a Chinese supplier: just end it!” Renaud asks when a buyer of goods from a Chinese manufacturer should end its relationship with its Chinese supplier. I often wonder the same thing.
Let me explain. 
I often get called by buyers of Chinese product who want me to write a killer manufacturing contract with their Chinese supplier right after their Chinese supplier has provided them with poor quality product and refused to give a refund for it or to provide new product at no cost. In these situations, I always tell the buyer that, at minimum, they should also be looking for another/backup supplier. Many times their response is that they do not have time. I then tell them that I have real doubts about their supplier and that even the best contract can only do so much in such a situation. See e.g., the Powerpoint of a recent speech I gave in which I set out the two key factors for avoiding a dispute with your Chinese partner: 1) a good partner, 2) a good contract.
I am always concerned about these situations because I have always felt (I am intentionally using the word “felt” here because I lack empirical evidence on this) that once a Chinese supplier provides bad product, things rarely, if ever, get better from there.
Now back to Renaud’s post.
Renaud seems to be thinking the same way:

Many importers have a bad relationship with their key Chinese supplier(s), but they don’t look for other companies. Sometimes it leads to unbelievable situations. For example, some buyers got screwed on 3 orders in a row by the same manufacturer!

On the face of it, it is surprising, especially given the thousands of Chinese exporters competing for buyers’ attention. When one supplier is not performing as expected, the importer should terminate the relationship, right?

Unfortunately, things are not that simple.

Reanaud then goes on to methodically set out why this is so often the case:

  1. It takes time to develop perfect samples, and some materials/processes have to be adapted to the factory’s capabilities.
  2. Buyer does not check quality until delivery in importing country (i.e. after full payment).
  3. Quality issues are discovered; buyer asks for a compensation.
  4. Supplier only promises a discount on the next order; buyer has no leverage to negotiate a better deal.
  5. Importer is upset, but places a second order to get the discount.
  6. Manufacturer finds a way to increase the price after the deposit of the second order is wired; importer has no choice but to accept.
  7. This time, buyer checks quality before shipment. Some issues are noticed. Supplier refuses to repair. Importer’s customers are asking for the goods. Shipment is authorized, and part of it is by air (at buyer’s costs).
  8. Buyer looks for another factory, finds a few candidates, is very wary this time.
  9. Production has to start again fast. New developments with a new factory would take 2 or 3 months. Importer gives a last chance to the same supplier.
  10. Third order is even worse than second order; buyer gets really upset and desperate; production is canceled and deposit is lost.

Renaud notes how the buyer did many things wrong in this situation, including having failed to qualify the supplier properly, failing to have followed quality closely, and failing to have secured a back-up manufacturer. It is a no-brainer for me to agree.

Renaud then asks when in a bad situation should a buyer of Chinese goods cut off its Chinese manufacturer for good:

But, after he was engaged in this situation, when should he have stopped the relationship? Just after the first order? Or maybe the second order should have been smaller? There is no right answer.

In any case, a back-up source should have been developed right after the first quality problems were found (and after difficult negotiations led nowhere).

Am I right?

Is Renaud right? I think he is and, in fact, it is easy for me as a lawyer (as opposed to someone who needs product right now) to say that the best time to walk away from your Chinese supplier is at the first hint of trouble. But at the same time, I also recognize that no Chinese supplier is perfect and that some of them must recover from their problems.

So here’s my question. What percent of the time does a Chinese supplier who has provided bad product and not owned up to it provide good product the next time? What has your experience been? Please speak up.