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Returning Substandard Products To Your China Factory: In Another Lifetime, Brother.

By Dan Harris and Steve Dickinson

David Dayton at Silk Road International Blog did a post on a topic near and dear to my heart, "Returning Products to a Factory in China" (h/t to Source Juice). I deal with this issue quite often when Western companies seek my law firm's assistance in securing a refund for bad product from a Chinese company that is not budging. I will first set out Silk Road's excellent business advice to a friend interested in returning a container of product to his Chinese supplier. My comments are in italics.

1. This will kill any good will you may have developed with your supplier. You will need to find a new supplier. My belief is that Chinese style ?cooperation? means that you allow for a few mistakes/problems and still accept the product for the purchase price. Now you are calling their bluff and asking them to actually put up cash (redoing the order is cash out of their pocket). All true. 2. You may not get the product back into the country?especially if it?s defective or already opened because of import restrictions. There are limits to what China (and all countries) will allow into their country. Rejected product and or second hand items are often not allowed into China. You need to confirm with a freight forwarder before you start negotiations with your supplier that this is really an option. All true. 3. You must decide who will pay and where the cash will come from before you take any unilateral action (?I?m just going to send it right back to them, dammit!?). Phone calls and verbal commitments from your factory rep are ABSOLUTELY not enough. You need to get a written, stamped document from a factory manager/owner that says exactly what you agree to. Completely true. I had a Polish client who returned playground equipment to a manufacturer here in the United States (how is that for a reversal) and the equipment just sat and sat. For all know, it is still sitting. 4. There is really no such thing as ?credit??the cash for the redo has to come from somewhere. Be careful. If your factory says that they?ll ?credit your account? you?d better know how much actual cash and what that will buy next time. If you think that you?ll get another order for free (especially if you can?t send it back) you?re probably wrong. True. And what is it that makes you think that your supplier who got it all wrong when you were actually paying in full is going to get it all right when you are paying it even less this time? 5. You will see the returned product again, somewhere. If the product is usable and if you can send it back into China and if you are getting a second order for free I can guarantee you that the factory will sell the stuff to cover their costs. They don?t care about your reputation in the industry?they are concerned about their bottom line, first and foremost. Be prepared for customer service calls from Karachi. This too happened to a client of ours, who gave very explicit instructions (but did not go monitor) to destroy the inferior product. Only in this case, the goods did not go to Karachi, they came to Seattle, where a retailer called our client and asked how a distributer was able to sell our client's normally $100 item (wholesale) for $35. Our client tasked us with researching whether they would need to honor their warranty on the grey market defective goods but then called us off the project the very next day after making the business decision to honor the warranty no matter what..

Dayton rightly calls for a balancing approach in determining whether to return your product:

What will it really cost you in terms of time, shipping costs lost clients due to the production flaw, etc? You need to balance the nature of the problem with the fact that giving the product back will destroy your factory relationship and your product will still find it?s way into the market and you?ll have to pay costs (return shipping at least) that you don?t have now.

Dayton then sets out the only real solution:

DON?T EVER SHIP BEFORE YOU (YOU PERSONALLY OR SOMEONE OTHER THAN THE FACTORY) APPROVE IT. It doesn?t matter how ?good? your relationship with the factory is. It doesn?t matter if you?ve shipped the same thing a dozen times before. It doesn?t matter how big your order is or how many other future orders rely on this shipment.

He's right, but seeing as how this admonition is violated more often than note, and oftentimes because the buyer has no real choice, I will add the following: 1. Get your China supplier to sign a really good contract with you. 2. Most of the time, your contract with your supplier should be in Chinese. If it is in English and you need to use it in a Chinese court, you do not want the Chinese court doing the English to Chinese language translation. 3. Most of the time, your contract should provide for arbitration, with a carve out provision allowing you to pursue injunctive relief (for instance, to stop it from manufacturing your product) in the Chinese courts. 4. Your contract (and this is the key here) must be unbelievably explicit about the product standards your product must meet. Good supplier contracts serve two main purposes. They make transgressions by your supplier far less likely and they increase your chance of prevailing should a transgression occur.

Full post as published by China Law Blog on March 25, 2008 (boomark / email).