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?

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.

I am a sucker for checklists. Doubly so when they are incredibly helpful, comprehensive and well done. Quality Control (QC) Inspector extraordinaire Renaud Anjoran recently did a “Checklist for importers in China and low-cost Asia” that sets out the steps one should be taking when sourcing product from China.  

I am loathe even to highlight portions of Renaud’s checklist because its strength really is the sum of its parts. So I will merely state that if you are sourcing product from China or from anywhere else, or even just thinking of doing so, you must read this post in its entirety. 

What do you think?

Co-blogger Steve Dickinson and I had a wonderful dinner the other night with Renaud Anjoran. Renaud Anjoran is the founder of Sofeast, a quality assurance firm that assists small- and-medium importers with China quality control. Renaud has been based in Hong Kong and Shenzhen since 2006. He writes the Quality Inspection Tips blog, of which I have been a huge fan for a long time. See e.g.,  the following posts, where I extensively cite from one of Reanud’s posts:

During our dinner, we spent a lot of time talking of how in buying product from China, “everything is tied together.” In other words, a company that is buying product from China is “only as good as” its weakest link among supplier selection, payment terms and penalties, quality control, communication and contract. Therefore, to succeed, one must have an integrated strategy in place from the start. At the end of the dinner, I asked Renaud to write a guest post on the things on which he had been talking.

Here is Renaud’s guest post:

If you import product from China, there are five basic steps you should be taking to maximize your chance of receiving the right products at the right quality. A shipment of defective or dangerous products can almost never be returned to China and your supplier is not likely to re-do your products for “free” either. Taking these five steps will save you time and money.

1. Find a Suitable Supplier.

Many importers find a nice sample at a trade show, get a good quotation from the company believed to have manufactured the sample and then think their supplier search has ended. It is very risky to choose your supplier in this way. Online directories (e.g. Alibaba) and trade shows are only a starting point. Suppliers pay to be listed or to exhibit, and they are not rigorously screened.

If your contact claims to own a factory, you can run a background check on his company to confirm this claim. Then you should go and see the factory or order a capacity audit (around USD$1,000). Try to get some customer references and call them. Make sure the factory is familiar with your market’s regulatory standards.

If your orders are small, it is usually best to avoid very large manufacturers because they will probably quote high prices and not care about your orders. However, smaller factories usually need closer monitoring, especially on the first production run. Be forewarned: showing a nice factory and then subcontracting production to a smaller workshop is very common and the source of many quality problems. Your contract with your supplier should prohibit subcontracting.

2. Clearly Define Your Expected Product.

Some buyers approve a pre-production sample and a pro forma invoice and then wire the deposit. This is not enough. What about your own country’s safety standards? What about your product’s labeling? Will the packaging be strong enough to protect your goods during freight? These are just some of the many things on which you and your supplier should reach written agreement before money changes hands.

I recently worked with an American importer who had told its Chinese supplier that “the quality standard should be the same as that of your other US customers.” Of course when this American importer started experiencing problems, the Chinese supplier replied by claiming that “our other US customers never complain about this, so it is not a problem.”

The key is to write your product expectations into a detailed specification sheet that leaves no room to interpretation. Your methods for measuring and testing these specifications, along with the tolerances, should also be included in this document. And your contract should set forth specific dollar penalties if the specifications are not met.

If you are developing a new product with a Chinese manufacturer, you should be sure to document the resulting product’s characteristics and production processes as you cannot count on your supplier to give you this information if you later choose to switch to another factory.

3. Negotiate Reasonable Payment Terms.

The most common payment method is T/T (Bank Transfer). The standard terms are a 30% deposit before the components are purchased with the remaining 70% to be paid after the supplier faxes the bill of lading to the importer. It can get a bit more complex if a mold or special tooling is necessary during development.

Those vendors who insist on more favorable terms are usually seeking to trap you. I recently worked with a buyer who was so confident he would receive a good product he paid the full price before production. Needless to say, delivery came late and there were quality problems. He had nothing to use to leverage appropriate corrective action.

Another popular method is to pay by irrevocable L/C (Letter of Credit). Most serious exporters accept an L/C if you specify reasonable terms. You can send the draft to your supplier for approval before the letter is formally “opened” by your bank. Bank fees are higher than when you pay via T/T, but you are much better protected. I advise using an L/C for new suppliers or for very large orders.

4. Control Your Product Quality in the Factory.

How do you make sure your supplier met your product specifications? By going to the factory yourself and monitoring for this or by appointing a third party inspection firm to manage this process for you (for most shipments, third party quality control companies charge less than USD$300).

The most common type of quality control is a final random inspection of a statistically valid sample. This statistically valid sample gives professional inspectors enough to quickly and cost effectively draw conclusions about an entire production run.

In some cases, quality control should also take place earlier so as to catch problems before all production is complete. In these cases, an inspection should take place either before the components are embedded in the final goods or when the first finished products just get off the lines. In these cases, some samples can be picked up and sent for lab testing.

To take full advantage of QC inspections you should first have defined the product spec sheet, (see section 2 above), which then becomes your inspector’s checklist. Second, your payments (see section 3 above) should be tied to quality approvals. If you pay by T/T, you should not wire wire the remainder of your payment until your product passes final inspection. If you pay by L/C, the documents required by your bank should include a certificate of quality control issued by your appointed QC firm.

5. Formalizing the Previous Steps

Most importers are not aware of two facts. First, it is possible for an importer to sue a Chinese supplier, but it only makes sense to do it in China — unless that supplier owns assets in another country. Second, your purchase orders will aid in your supplier’s defense; they almost certainly will not help you.

To minimize your risks, you should buy your product pursuant to an OEM agreement (preferably one that is in Chinese). This contract will decrease your chances of problems and give you greater leverage should a problem occur.

My last bit of advice is that you be sure to put this entire system in place before you start negotiating with potential suppliers. Doing this will let them know that you are a professional importer and they will respect you for this. They will be more likely to agree to your requests because they will know that you can easily find another supplier. Perhaps most importantly, it will be much more difficult and much less effective if you start scrambling to put this system in place after you have already placed your order.

It has been awhile since we have written on China product quality issues. As regular readers of this blog know, we are of the view that companies outsourcing to China must focus on 1) choosing the right partner, 2) using a good OEM contract, and 3) constantly engaging in quality control monitoring. Renaud Anjoran’s always excellent Quality Inspection Blog (if you are directly or indirectly engaged in manufacturing in China you absolutely should make this blog a regular read) did a post, entitled, “Four Simple Steps for Starting to do Quality Control“, focusing on our third requirement.

1. “Establish clear expectations.” Renaud talks of how choosing a sample, negotiating a price, and then waiting for delivery is rarely good enough to ensure a quality product. In addition to the sample, you should have an agreed-to specification list. I completely agree, not only because such a list is important for quality control reasons, but because it can be critical for legal reasons as well. Without clearly enumerated specifications, it is difficult to impossible to prevail in a product quality lawsuit against a Chinese company. Chinese law typically will not find an implied reasonable quality standard anything near to what a Western company would typical expect and the reason for that is simple. What constitutes reasonable product quality in China is very different from what constitutes reasonable quality in the United States.

2. “Don’t focus on final inspections.” Renaud notes how final random inspections are a good tool for approving all aspects of production (total quantity, product specs, aesthetics, packaging…), but if problems are found, they are too late to fix. Inspections during production are better:

The risks for a factory that gets caught are pretty high: re-work of the goods, re-production, penalties, air freight, order cancellation… Instead of sending inspectors at the end (i.e. using them as policemen), try to send them when the goods are in process. Issues can get caught and corrected early: this is not only an extra safety for the buyer, but also a helping hand for the factory. This is how you should frame the discussion when you tell your suppliers about your QC intentions.

Early inspections (during production) have several positive side effects. They are a way to ensure that production is taking place in the right factory. Samples can be picked up randomly for lab testing. And it can prevent long shipment delays if the factory corrects course immediately after quality issues are noticed.

3. “Inspections are not an option. Renaud calls for the following:

  • You should write “Quality inspection required prior to shipment” on your P/Os.
  • If you pay by letter of credit, you can require a passed inspection report from your nominated QC provider.
  • When you develop new products, ask extra samples for the inspector’s use.
  • Keep track of the final inspection date and the shipment date, not just the shipment date.

4. “Find the right balance between helping and arm-twisting.” Anaud discusses how large buyers have the leverage to play it “tough,” but smaller buyers have to be more creative. True.

For more on enforcing quality control in China manufacturing, check out the following:
— “Why you MUST Have a China OEM Agreement
— “China OEM Agreements. Why Ours Are In Chinese. Flat Out
— “Let Me Tell You About China Due Diligence
— “China Products: Forget Trust, Just Verify