China manufacturing contractsOur China lawyers have been getting an uptick in calls from foreign companies seeking help on quality control problems with their China manufacturers. We usually tell them there is little we can do to help with the quality problem that necessitated their call, but there is a lot we can do to help prevent such problems in the future.

In a long ago but still highly relevant WSJ blog post, China auto industry expert Michael Dunne discussed how quality fade occurs when initial production meets all applicable standards, but later production level deliveries are defective. The defects are in hidden components not easily discovered by surface inspections. Over time, the problem gets worse, hence the description “fade.” Though the quality of China manufacturing has risen considerably since Dunne wrote his blog post more than four years ago, the likelihood of quality fade has risen as well. As China makes increasingly more complex products, their ability to engage and get away with quality fade increases as well. To put it bluntly, it is easier to hide a reduction in material quality in a massive and complex product than it is in a pair of socks. As the goods made in China become more complex, the risk of hidden defects only increases.

What can you do to minimize your China quality risks?

  • You can never relent in constantly monitoring quality. Most foreign companies with whom we work assume that Chinese manufacturers will improve over time. The whole premise of quality fade/quality creep is that the opposite is true. The first few deliveries are likely to be the best delivery. Without active intervention, you should expect each subsequent delivery to be worse than the previous. Since this result is counter-intuitive, you need to be constantly on guard. Active intervention is costly and mentally exhausting. Most foreign buyers eventually tire of the process. However, such active involvement is the price of purchasing from Chinese manufacturers.
  • Do not take current success as an indicator of continued good performance. Many Chinese companies will perform well for several years, causing the foreign buyer to drop its guard. After the guard is down, a sudden drop in quality will occur, causing extreme damage. The fact that you have not had a problem with your China manufacturer for many years means only so much in predicting future quality.
  • Do not expect that a desire for a good commercial reputation will act to control the behavior of your Chinese manufacturer. Most manufacturers in the OEM world operate under shockingly thin margins and are in a constant struggle to survive. Many are too busy focusing on day-to-day survival to think about the long term. The stronger state owned enterprises are protected by the state. A bad reputation with foreign entities is not important to their long-term survival
  • Do not assume you know where problems will occur. It is not uncommon for a Chinese manufacturer to make the primary and expensive component just fine and then ruin it with non-standard and defective accessories. This happens often in the home furnishings sector: an otherwise well made sink set is ruined with substandard faucet fittings.

Again though, what is the solution? The main point I want to make is that there IS a solution. The solution works as follows:

1. Choose your China manufacturer wisely. Conduct due diligence before you buy.

2. Make all of your purchases from China under a well-drafted contract enforceable in China. Purchases under informal purchase orders do not work for China.  For more on China OEM Agreements, check out the following:

3. Your contract with your Chinese manufacturer must provide for a mechanism that allows you to exercise constant control over the quality of your product. Liability for defect must be made clear and it must fall hard on the Chinese side. If possible, no defective product should ever be permitted to leave the Chinese factory. If defective product is discovered outside of China, the Chinese side must be absolutely liable for dealing with the problem. The standard procedure (in China, anyway) for dealing with defects through a discount on future purchases must not be used.

4. You must actually follow through and constantly monitor the quality of your product. The best contract with the best procedures is no good if you do not implement the procedures outlined in it.

I am often asked if China product quality is getting any better. I usually give the standard lawyer answer: yes and no. Chinese manufacturers are not doing a better job on their own at maintaining quality. But China’s legal system and foreign company knowledge about how to deal with Chinese manufacturers have progressed to the point where Chinese manufacturers are more often being forced to operate in a reasonably acceptable manner.

And just in case you think the above is too harsh, I strongly urge that you read Chabuduo! Close enough. How China became the land of disastrous corner-cutting.

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Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.