On March 28, in Buying Face Masks and Other PPE from China: Not For the Faint of Heart, we wrote about the difficulties inherent in buying PPE from China. On April 2, in Buying Face Masks and Other PPE from China Just Got a LOT Tougher, we wrote about how China’s new Order 5 had just severely limited who can export PPE from China and how that would make securing PPE from China that much tougher. On April 10, in How to Buy PPE from China Without Getting Ripped Off, we talked about the increasing risks of dealing with scammers and fakes. On April 14, in China PPE: Just When You Thought it Might be Safe to Go into the Water, we wrote about how China’s new Announcement 53 would even further reduce the PPE allowed to leave China.
If you don’t see the trend, let me make it crystal clear: buying PPE and getting that PPE out of China gets riskier pretty much by the day and today is no exception.
When China’s Announcement 53 came out, a number of people (clients included) told our China PPE lawyers that they’d heard that announcement had been revoked or stricken. We could find no evidence of that and we chalked this rumor up to PPE sellers who did not want their buyers and potential buyers to be scared off. The Chinese government officials were mostly telling us that they were unaware of anything countermanding the Announcement.
For us China lawyers, all this meant we would need to do what we’ve always done with China when a new law, regulation, order or announcement comes out — waiting to see what its impact will be in the real world. We’ve dealt with similar legal issues at least 100 times when it comes to China and our usual advise to our clients is that they wait a few weeks to see what happens and then they either move forward with their deal or not, all depending on what actually happened. That is logical and actionable advice to clients buying your ordinary widgets, but that is not terribly helpful advice for clients that need life-saving Protective Personal Equipment NOW.
What we are doing for these PPE clients is giving them the updated information as quickly as we can get it and the below is what we know so far. I will though do something we have virtually never done on here previously: throw out all sorts of caveats. First caveat. The picture we are getting is super recent and may or may not be representative of what is actually happening. We are getting this information from people we know and trust and so we believe what they are telling us, but they too are seeing only a small part of the big picture and they might just be wrong. But at this point — and with time being of the essence — even preliminary information is better than no information at all. The below is what we are hearing.
China customs is cracking down like never before on PPE leaving China. This means they have plenty of people checking to make sure that the manufacturing company is licensed to make the PPE product to be shipped and that the company exporting the PPE product is authorized to export that PPE product that the PPE product to be shipped has been correctly described in all of the customs paperwork and that the PPE product is of good quality and even that the PPE product can be exported to the particular country to which it is going and can be imported into that particular country.
If your PPE does not qualify under all of the above — no matter when you bought it — it will get blocked from leaving China.
This means if you want your future PPE orders to get through China customs you need to be certain of the following:
- The company that is manufacturing the PPE product you will be buying from China is licensed to make that product.
- The company that is exporting your PPE product from China is authorized to export that product from China. Note: Many PPE items that did not have this requirement a week ago have that requirement now
- Your paperwork is perfect.
- Your PPE product is of good quality and not counterfeit.
- The country to which the PPE product can legally be sent that particular PPE product from China and can legally receive it.
In the end though, no PPE shipment from China can be considered “safe” until it has cleared customs and been loaded on to the airplane or ship that will take it to the country you want it to go. But even after clearing customs, there is always a slight risk of a seizure. It is unlikely PPE product would be removed from a vessel that has not sailed or an aircraft that has not taken flight, but with all that is going on in the world surrounding the coronavirus and PPE, even that could happen in China.
So the best PPE contract you can have would provide for no payment until the PPE product you are trying to buy has cleared China customs and been loaded onto the carrier and that carrier has departed Chinese waters or airspace. In other words, no payment until the PPE product has “crossed the rail” in FOB terms. For air freight, this means no payment until the product has cleared customs and an air waybill has been issued.
The problem though is that virtually no Chinese PPE factories will accept these terms. A Letter of Credit can be set up to guarantee the factory will get paid, but virtually no Chinese PPE factories will accept these terms. An escrow arrangement can be devised, but no Chinese PPE factory will agree to that.
The typical Chinese PPE factory will seek to load all of the risk of its own government’s actions onto the foreign buyer and they can get away with this these days because of the global shortage of PPE products. So usually the best we can do for our clients is a contract provision stating that if the shipment is held up by Chinese customs, our client gets all or nearly all of its payment back. If this is going to be your only remedy, you had better be sure you are dealing with a legitimate and reputable Chinese supplier. This is why we recommend to all our clients that they have our lawyers conduct due diligence on their Chinese PPE supplier.
This due diligence investigation typically consists of our reviewing various Chinese government databases to confirm that the Chinese company from which the PPE products will be bought actually exists and is licensed to sell what it is proposing to sell. These investigations also seek to determine whether the Chinese company is well capitalized, is in good standing with the Chinese government regarding fines and taxes, and not involved in lawsuits that would make one doubt its reliability. We also look at the company’s ownership because that sometimes gives us additional good insight about the company. After we search the Chinese government databases, we do an internet search on the company in Chinese and in English to try to get information about its overall reputation.
I am often asked whether these due diligence investigations of PPE suppliers give comfort and the answer is yes. We have done PPE due diligence searches that have revealed the following PPE suppliers
- A PPE supplier that has been making medical products since 1972, has 8 factories throughout China and around $15 million in registered capital. This sort of company is a yes.
- A PPE supplier that was until three months ago a clothing manufacturer, but pivoted to make masks. It has one factory and about $1 million in registered capital. This sort of company is a probably yes, at least so long as the PPE shortage prevails.
- A broker that was formed two months ago. This sort of company is a no unless it will reveal the name of the factory and permit our client-buyer to contract directly with the factory (which now must check out).
Just in case you want to read more about the chaos that is the China PPE market, I suggest the following:
- Wall Street Journal: Faulty N95 Masks Hamper Hospitals on Coronavirus Front Line
- Los Angeles Times: Faulty masks. Flawed tests. China’s quality control problem in leading global COVID-19 Fight.
- South China Morning Times: Inside China’s “Wild West”, where mask machines are like cash printers
- Wired Magazine: Everybody and His Dog Is Trying to Sell Medical Equipment
- Japan Times: Politics aside, U.S. relies on China supplies to fight coronavirus
- Los Angeles Times: States battle for coronavirus supplies in a chaotic market
Oh, and not so by the way, two of our PPE lawyers and a hospital chain VP of procurement will on Thursday, April 23, be putting on a Webinar on how to navigate PPE purchases from China. We will be speaking for 45 minutes and then spending an additional 45 minutes answering audience questions. Go here to read more about that webinar and to sign up it as I am sure it will prove helpful to you.