Many companies continue to purchase container load quantities of product from small manufacturers located on the southern coast of China. This trade has developed a standard form of payment, often termed 30/70 TT. This means: 30 percent down payment on placement of the order, with the remaining 70% due upon shipment. This means 30% of the price is paid before the product is manufactured and 100% of the price is paid before the product is shipped.

Here are some common results of this system:

  • Product arrives in the United States. Upon inspection, it is determined that a substantial percentage of the product is defective. The buyer demands a refund and the Chinese manufacturer refuses. In the alternative, the manufacturer offers a discount on the next order. If this offer is accepted, the buyer is forced to continue to do business with a manufacturer that makes defective product.
  • The buyer arranges for an inspection during the production process or prior to shipment. The inspection reveals a substantial number of defects. The buyer demands a refund of the deposit and the manufacturer refuses, stating that they have already spent the deposit to manufacture the disputed goods. In the alternative, the manufacturer offers to correct the defects and provide a discount on the existing order. If this offer is accepted, the buyer is forced to continue to do business with a manufacturer that makes defective product.

The foreign (usually U.S.) company buying the product then contacts my law firm about filing a lawsuit against the Chinese manufacturer, rather than accept the unacceptable terms. In virtually every case, however, the buyer ultimately determines that the cost of litigation is not justified by the amount of the potential recovery. The buyer is then forced either to abandon the manufacturer and take its losses or accept the terms proposed and continue to work with a bad manufacturer.

We continue to see this problem on almost a weekly basis. We can now describe the situation with a general rule: If you pay in advance in China and a problem arises with the product, you will likely be unable to succeed in defending/prosecuting your rights through legal action unless you have a sealed contract from the manufacturer that has been written (in Chinese) to protect you. That is, once you have made payment, the money is no longer yours. It belongs to the manufacturer and you are not likely to ever get it back.

Though this general rule may seem obvious, it does not seem to be well understood by many foreign companies outsourcing their manufacturing to China. They come to China to obtain a low price for manufacturing their product, but in analyzing the price that they will pay, they fail to account for the risk that they will make payments that will never be recovered.

I am not suggesting that the 30/70 TT system be abandoned. Frankly, for small, container load manufacturing projects there really is no viable alternative in China. What I am suggesting is that the foreign buyer realistically assess its risks and the prices being offered based on those risks. The buyer should also mitigate its risks as much as possible by doing the following:

  • Do not make the second, 70% payment until after an inspection of the goods. In this way, the buyer’s risk is limited to the 30% down payment.
  • Inspect the product as early possible. Time is a major factor in China business. If you find defects early, it is possible that you will be able to resolve the issue in time to save the shipment. If the issue cannot be resolved, then you at least can probably move on to a different manufacturer early enough to obtain acceptable product in time to meet your business needs.
  • Treat the 30/70 TT method as the price for testing out the Chinese manufacturing system. As soon as possible, move to a different method of payment. Use one that does not require payment of any funds until after an inspection has been made. There are many alternative methods of payment in China. Of course, the use of such a method will require a quantity and timing commitment from the buyer that extends beyond the spot, single container type of purchase that is typical for the 30/70 TT method of payment. If you are not Wal-Mart, you are not going to get Wal-Mart like terms.

Risk cannot be avoided in any international business venture. Due to the long history of business operations in China, the risks can be determined in advance. For success, foreign companies operating in China must account for these risks in their business planning.

What are you seeing out there?


A story I always tell — heck I told it earlier this week — about China revolves around toilet paper. My story is as follows:

A year or so ago I was in Vietnam visiting my daughter, who was there studying.  We were in an airport when I walked away to go to a rest room. As I neared the rest room, I realized I did not have any toilet paper on me so I walked back to my daughter and asked her for some.  She looked at me like I had two heads, stated that she had none, and suggested I just get some from the bathroom. I then queried whether there would be any in the bathroom, to which she replied, “of course, why wouldn’t there be.” I then told her of how the toilet paper gets stolen from virtually every bathroom in China.  She looked at me puzzled. Later I asked her about poison being put into food in Vietnam and she said she told me she had never heard of such a thing.

Just this week, I got into a long discussion with a reporter for a U.S. based national newspaper. This person is now the China reporter for the paper, but he previously lived in Vietnam and he has lived in various Asian cities over the last decade. We talked about differences between Vietnam and China, including poison in food. He said China was the only country in which that was a problem. I then relayed how I used to believe that China’s poor record regarding product defects was grossly overrated and due only to the fact that China made so many products. But my view changed someone very high up in the United States’ Consumer Protection Agency empirically refuted my theory.  This person told me that year in and year out, China’s defect rate (at least those that make it to the agency) is six times worse per product made than any other country.  Wow.

I am bringing this all up today because though the whole toilet paper thing is my story, dammit, it seems the Wall Street Journal’s Real Time Blog is the first to go to print with it. The post “Toilet Paper Abuse Prompts China Morality Debate” starts out by asking “What does abuse of free toilet paper at public bathrooms say about the state of a country’s public morality?”

It seems that linking morality to toilet paper has become a big issue in Qingdao, where the city is stocking toilet paper in the public restrooms for tourists:

That’s the question Chinese people have been debating since news emerged late last month that an experimental free toilet paper program in a coastal Chinese city had resulted in users making off with as much as two kilometers of the gratis paper per day.

In a story discussed widely on provincial TV stations, as well as on Chinese social media sites, sanitation authorities in the picturesque city of Qingdao say they have spent around 1.5 million yuan ($236,000) since June 15 installing and stocking free toilet paper dispensers at public lavatories in 24 locations – part of an effort to make things more convenient for tourists during the peak summer months.

How is it that the city has spent nearly $10,000 on toilet paper per location in less than a month? It’s not just about overuse, according to those responsible for maintaining supplies.

“Most people take some before they go into the toilet then grab some more on their way out,” Zhu Xincong, who oversees one of Qingdao’s public toilets, said in an interview with Shandong TV.

So what is it with the toilet paper in China?  Poverty? Morality? Something else?  And serious question, is rampant theft of toilet paper common in any other country? And what about poisoning food? Is that a related question or a completely separate one.  And does any other country have the same sort of problem? Does product defects relate at all to either of these things?

And what about the cleanliness of the restrooms in a country?  How does China compare and what does that mean? A very recent (and very thoughtful) Harvard Business Review Post, “Of Clean Toilets and Competitive Economies,” talks of how Singapore’s spotless restrooms evidence its competitive advantage. Is there some truth to that?  And if there is (or even if there isn’t), how do China’s restrooms rate on the world scale? Who gives a crap?

Have at it people…