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How can my company recover its losses from substandard water dispensers and water filter bottles imported from China?

Posted: 2011-11-18

Full Question

Our company manufactures home appliances in Pakistan under the brand names of Admiral Home Appliances and Maytag Industries. We have been doing business with China for the last 10 years. We are already importing air conditioner, gas hobs, gas hoods and washing machines from various companies in China. We recently imported water dispensers and water filter bottles from a company named "cixibest.cn". Regrettably, nearly 50% of the water dispensers are damaged or have gas leaking from them so they're not cooling properly. Moreover, the dispensers are not balanced, as the doors of the dispensers are not properly fixed. The water filter bottles are also leaking too as low quality plastic has been used. I have complained to the company, but it is not co-operating with us. We requested the Ministry of Commerce to order the factory engineers to personally visit our factory and repair or change the faulty product. Our goodwill, which we made in so many years, has been destroyed as our end retailers and customers are complaining too. Can you help us recover our losses? Please tell us where we should complain about this company and its products.

Answer

Unfortunately there is no effective Better Business Bureau in China where you can take your grievances. Also, you will find limited support from government agencies, unless your case has pressure from your government's agency on the Chinese agency. That pressure can actually work, but is very hard to arrange unless you have high-level government contacts already.

So let me offer some practical steps.

If you have the following items in place, then there is a decent chance of negotiating a resolution that is acceptable:

  • A signed / chopped contract that clearly defines what is the acceptable level of quality
  • A clear paper trail showing proof of payment
  • The seller named on the contract matches the receiver of the payments. (With so many trading companies out there it is a common mistake to have a contract with a supplier but pay a trading company!)
  • Your supplier has physical and financial assets (small "one-man bands" disappear as soon as they feel a lawsuit is on the way)
  • The jurisdiction on the contract matches the location of the supplier's assets at a city, province or country level.

It is always nice to have future orders you can leverage as well.

Also, before placing the PO did you or a third party do an audit / due diligence at the factory to confirm they were legit? If yes, please keep that report on file, as you may need to refer to it later.

Before the factory shipped the goods, did you or a third party perform and inspection on the products? If yes, please send me the report for review.

If you answered "no" to the questions about audit and inspection, for your future orders know that most inspection companies only charge a few hundred US dollars to do audits and inspections. So it is money well spent. Furthermore, for a reasonable fee, companies like www.CBIconsulting.com.cn will conduct due diligence on the potential supplier to ensure they have a good reputation and have actual assets (unlike a small trading company for example) so that if things go wrong a lawyer can attack those assets.

I see from the note you sent me that the supplier has a gold member status. As you now know from first-hand experience, a gold ranking on does not guarantee that the supplier is legitimate. It's a good start, but the buyer still must audit and do due diligence. BTW, read here for an overview about the scam Alibaba's staff used to fraud foreign buyers.

Here are my suggested next steps.

The first step is to define the damage and put a value on the costs to repair or replace.

Second step is to negotiate with your supplier on your own.

If that fails, many buyers think going to court or issuing a demand letter is the next best step. But actually, bringing in a third party that can help facilitate dispute resolution.

Keep in mind that a demand letter or threat of court action can lead to a complete communications breakdown. Once this letter is sent, walls are put up by the supplier and getting to the facts of the situation becomes very difficult. In many cases they simply stop responding to the buyer and "call the bluff" if they suspect you are not willing to go to court, which is often the case when the orders are small or the 5 items mentioned above are not in place.

To bring in a third party to help mediate after the legal letters have been sent out makes it very hard for this third party to be effective as any goodwill on the seller side has been lost.

For your reference, "SP Shenzhen" is a team of US and Chinese mediators who work in conjunction with the not-for-profit China Sourcing Information Center. They've done a good job for me in the cases when I couldn't solve the problem on my own. I would be happy to make a personal introduction if you are in need of support.

If the third-party assisted negotiations are not successful, then consider getting an English-speaking Chinese lawyer to write a demand letter.

KEY POINT: Unlike most nations, in China you can sue for lost revenue. Since the price you sell to your buyers is certainly much higher than the price you pay to your suppliers, your demand letter can "swing big" and put the fear of God into a supplier!

Last resort. Go to court.

I have been involved directly or indirectly with 8 court cases during my 12 years in China. In all eight, the foreign party was victorious, BUT in all cases the buyer had the 5 critical items mentioned above in place.

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