Many months ago, a friend of mine at Samsara Biopharma Consulting told me of a matter his company had taken on to try to help a company that appeared to have been scammed by a Chinese chemical seller. I frequently hear of such scams in the chemical industry so I asked my friend if he would write a post for us on this matter once it was concluded. The below is the first part of that post, written by Jennie Shi, Felix Zhang, Wendy Zheng and Robert Walsh of Samsara:

About 2 years ago we were asked by a friend of a friend to source some specialty chemicals for his US-based inks company.  As a courtesy, and because we were in the middle of a similar exercise for another client, we went ahead and added the request to the list of what we were already working on.

After a few weeks we found sources of what the inks company was looking for, and went a few steps further to vet the suppliers and get lowest reference prices.  When we passed these to the inks company, they pointed out that the prices were not that much lower than the suppliers they were currently using, and decided to pass on the offers.

A year passes, and we get a call from this same company, this time asking for help in untangling a mess they’ve waded into with a new set of Chinese suppliers.

It seems that the inks company had responded to an unsolicited offer from a pair of Hebei chemical companies, who’d contacted them through Alibaba.  The prices offered for the same subset of chemicals we’d previously sourced for them were significantly lower, say, by 30% or more.  The inks company requested and received samples from the Hebei companies. Needless to say, these samples were right on spec.

Subsequently, the US inks company places a sizable order with the two Hebei companies, and the terms demanded are payment by 100% irrevocable LC at sight, which the US company agrees to.

A few months later, a number of containers are delivered to the US inks company’s facility, and upon opening are found to contain 44 tons of some mysterious white powder (not what they ordered) and blue plastic barrels of water.  The US company initially contacts the Hebei companies to demand an explanation and repayment, but after a few email exchanges, the Hebei companies stop responding.

At about this time, the US inks company remembers our company, and calls us for help.  We don’t do this sort of thing, but then we are regularly asked to do stuff nobody else has any idea how to do.  We agree to help the US inks company track down the Hebei companies and attempt to get some resolution.

The inks company sent us all related documents, as well as email correspondence dating back to their first contact with the two Hebei companies.  A number of things stood out right away:

  • The seals/chops used by both companies were quite similar, and also in no way conformed to the legal convention for such instruments in China, so it was unlikely that either company was actually  registered.
  • The personalities at the Hebei companies seemed to change frequently, with everybody using weird foreign first names.
  • The companies’ websites were registered to a person who had also registered a number of other chemical company websites.
  • As for the shipping documents, we could see no indication that what was shipped had left China having gone through commodities inspection.  The classes of materials shipped should have gone through this procedure.
  • The inks company’s set of pictures taken after opening up the shipping containers revealed that none of the barrels or bags had been properly marked with product descriptions, which is another curious thing pointing to a lack of outbound customs inspection.

We initially tried contacting both Hebei companies, and at first had some success, but after a few days, all signs were that thei mobile and fax lines had been disconnected.  Elvis had left the building.

Eventually we decided to send people to Hebei to look into things.

We Visit AIC

Our first stop was the local office of the Administration for Industry & Commerce (AIC), to check on the validity and standing of the two companies’ registrations. The report from our AIC visit noted the following:

From Company #1’s registration information, we concluded the following:

  1. Company #1  is a small company established in year 2009.
  2. Company #1’s’s scope of business is limited to trade. They don’t have any manufacturing facilities, contrary to what is shown on their website.
  3. Company #1’s’s registration address is a small apartment in a residential community. The address on their website eliminates the room number and building number so as to make them appear to be a big company.
  4. If you look carefully at the picture of Company #1’s’s entrance on its website, you will see that they added the company name to the picture by Photoshop. “

From Company 2’s registration information, we concluded the following:

  1. Company #2 is a small company established in 2010 not 1994 as stated on its website
  2. Company #2’s scope of business is limited to trade. Company #2 doesn’t have any manufacturing facilities, contrary to what they show on their website.
  3. Company #2’s registration address is a small apartment in a residential community. Their website eliminates the room number and building number so as to look like a big company. fact easily.

So both Company #1 and Company #2 are real companies and their business statuses in Administration for Industry & Commerce’s records are normal. But their behavior is well-planned scammer’s behavior….”

We Visit Company Premises

We noted that the addresses on the websites and in the correspondence for both companies were different from their registered addresses.  We went to all four places to make sure we weren’t missing something.

In the case of Company #1, the address listed on the website turned out to be the staff activities center for a well-known power company, replete with all sorts of sports facilities.  The registered address was in a middle-class apartment complex. The actual apartment had no company sign and it did not appear to be occupied during business hours.

As for Company #2, the address listed on the website was in a decidedly down-market set of apartments Again, no sign on the door, but there was a lattice window through which we saw nothing but a table, some chairs, and a whiteboard.  No activity during normal business hours was noted.

We Visit the Commodities Inspection Bureau

We next visited the Chemical and Mineral Department of the local Commodities Inspection Bureau (CIB) where we were met with a genuinely warm and interested reception by the officers of this bureau.  What we found from this visit was the following:

  • Neither company submitted required samples for CIB inspection.
  • Neither company was even registered with the CIB as an exporter of the materials in question.
  • The CIB officers told us that the companies probably deliberately mislabeled the material to duck proper inspection.
  • The officers flatly rejected the idea that any Chinese company could manufacture or sell such material at the quoted price since the only qualified manufacturer of the material in China of which the officers were aware sold the same product at more than 30 percent more.

We Visit the Bank of China, Hebei Branch

The bank would not give us any information regarding either companys’ accounts without being under the orders of the police or the court to do so.

We Visit the Police

We next met with the Municipal PSB, who while sympathetic, referred us to the individual district-level PSB stations with jurisdiction over the two Chinese companies. With respect to Company #1, we met with an informative and helpful officer who immediately recognized the case for the commercial fraud that it is.  Interestingly enough, he had handled a number of similar cases, some for the very same chemicals involved in this one.  He provided us with a list of materials he’d need to initiate a case against Company #1 and to take action. He said we would need the following:

  • An authorization letter and copy of an ID card or passport of the authorized person
  • Purchase contract. In this case, that would be the Proforma Invoice
  • Documentary evidence proving that Company #1 recieved payment for the goods
  • The Bill of lading
  • The inspection report
  • Documentary evidence proving that the Inspection report is for the production sample of Company #1
  • Pictures of received material

We must translate all of the above documents into Chinese stamp them with the inks company’s company seal on every page. Notarization is not required.

The officer representing the PSB station in Company #2’s district gave us similar guidance.  As luck would have it, he had just cracked a similar case in which an Indian company was defrauded.  In this instance, the Indian CEO and an interpreter came personally to present facts and evidence.

In Part II of this series, Anatomy Of A China Scam. Part II. Conclusion And Advice, Samsara will discuss what ended up happening on this particular case, analyze how the inks company could have better handled this particular case, and give recommendations on how to prevent this sort of thing from happening to you.

Mr. McGuire: I want to say one word to you. Just one word.

Benjamin: Yes, sir. 

Mr. McGuire: Are you listening? 

Benjamin: Yes, I am. 

Mr. McGuire: Plastics.

From the movie, The Graduate

In a post entitled, “China Has Health Care Too,” I talked about health care as one of the great opportunities for foreign businesses in China:

A few months ago I was on a China panel at Northwestern’s Kellogg Business School where, among other things, we were asked to list China’s best opportunities. I stressed that because I am not a China business expert, I would have to answer the question based entirely on what I was seeing of my firm’s clients and, based on that, I listed health care, technology, and food.

If I had to pick just one of the three, I would pick health care and technology (I know I said one, but hey, it’s MY blog). I would pick these two now because even within just the last few months, China’s government has made clear, both in its policy statements and in its spending, that it is going to be increasingly emphasizing these two during the next few years.

And if I had to pick one part of health-care, it would be China pharma because it is booming for both domestic and international reasons. China pharma is growing because as China gets wealthier, its citizens can better afford drugs. China pharma is also growing because China is more and more being seen as a good base for pharmaceutical production and even research. Pharma in China is huge. Just one word huge. Plastics huge.

To assist those looking “to do China pharma,” I asked Robert Walsh, the founder of Samsara Biopharma Consulting,” to write a guest post on China pharma.  Samsara is “a Nanjing based company that works all over China trying to get Chinese and foreign pharma companies to play nicely with each other. Samsara has seasoned veterans in drug development, process development and scale-up, quality, and regulatory affairs, all of which skills are needed to drive effective collaboration between foreign and Chinese companies.” Robert accepted and he, along with Jennie Shi, Wendy Zheng, and Zhou Tong collaborated on the following, which is part one of two:

We have been asked to guest-write a post on the Chinese pharmaceutical industry, with the spirit being to advise on how small and medium foreign pharma can get into China: how to go about it, what to look for, and what to avoid.

Broadly, there are less than maybe fifty very large pharma companies in China, largely centered in the East, with thousands of small-to-medium sized pharmas scattered all over the map.

Technically, pharma is divided for regulation purposes into Traditional Chinese Medicine (TCM), small-molecule chemical synthesis drugs, and biotech. It is not unusual to find a Chinese company with divisions involved in all three; Simcere in Nanjing is an example. Some Chinese companies even include medical devices and diagnostics in their mix of products.

The Jiangsu Valley lays claim to being the hub of Chinese pharma, but we find amazingly competent Chinese pharma companies as far west as Lanzhou. One driver of regionalism in Chinese pharma is that the two largest and oldest pharma-focused universities are in Nanjing and Shenyang. As hyper-mobile Americans, we find remarkable that in most Chinese pharma companies, 90% or better of the management and workforce are locals. The effect of this is that a company’s management style tends to mirror local custom.

At a fundamental level, Chinese pharma companies are pretty solid in manufacturing and packaging of whatever it is that they sell. The major problem we see with virtually every Chinese pharma company is that their quality systems are generally very weak and devised to meet the very minimum standards set by the China SFDA. This creates a gap between “current Good Manufacturing Practice” (cGMP) as we find it in China, and what is expected in the rest of the world.

Compounding the quality problems is that the local city and provincial SFDA offices charged with enforcing SFDA standards are oftentimes ”too close” to the companies they are to be overseeing. If the local party leadership considers a local pharma company a key component of the economy or involved in a “prestige” project, oversight of that company can become somewhat lenient.

Chinese pharma sells large amounts of Active Pharmaceutical Ingredients (APIs) all over the world and upwards of a billion dollars worth to the US alone. Most Chinese API manufacturers have been, or will eventually be, inspected by teams from the US FDA, for compliance with cGMP. The US FDA currently has a significant backlog of Chinese companies slated for inspection.

Our having worked with both Indian and Chinese companies enables us to see a fundamental difference between the pharma companies from those two countries. For various historical reasons, India, unlike China, has built up large numbers of senior and middle managers knowledgeable about running pharma manufacturing operations to the standards expected in the US and Europe. It is also important that India naturally uses English naturally as its default language for pharma operations management. China does not have this same history

Western and other foreign pharma companies are operating everywhere in China, setting up their own WFOEs (wholly foreign owned entities), or continuing the legacy Joint Venture’s that were common 10-20 years ago.

There are real pharma business opportunities in China for foreign businesses. In the last few years, we have seen an influx of foreign Private Equity (PE) and Venture Capital (VC) firms investing in Chinese pharma companies, including many that sell only into China’s domestic market. In our view, their biggest concern should be to avoid investing in Chinese pharma companies that will be unable to comply with with the SFDA’s potentially increasingly stringent Good Manufacturing Practice requirements. There are many pharma companies all across China that will be unable to pass inspections under standards under discussion (and likely to come into place) and many of these companies will need to build new, compliant facilities, or be forced to shut down their operations.

Our Second part will offer advice to small-to-medium foreign pharma on how to structure their approach to the Chinese market.