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I'm purchasing ExW from a Chinese supplier and their appointed export agent is causing logistics problems. What can I do?

Posted: 2011-03-22

Full Question

I'm purchasing ExW from a Chinese supplier and their appointed export agent is giving me logistics headaches. For example, they are very slow in getting me the documents I need and they almost never ship at the target release date. Do you have any idea what is going on and what are my options? (Note: in a follow up phone call, the enquirer explained to "Ask the Experts" that the ExW purchase was "without receipts". This bit of information plays a key role)

Answer

As you may know, in China when one factory buys from another factory (plastic comb maker buyer plastic pellets from sub supplier for example), they have two options.

  • Pay a slightly lower price and get the goods w/out receipts (price low because no tax paid)
  • Pay a slightly higher price and get the receipts

Only if the exporter has the formal receipts, he/she can apply for the Value Added Tax (VAT) rebate at export.

For the "w/out receipts" orders, a 3rd party's export license is "rented" to clear the export. This 3rd party is the appointed agent you mention above.

Even after hiring the 3rd party, the "w/out receipts" method results in a slightly lower price as because the tax savings from "w/out receipts" are greater than the VAT rebate. While the "off the books method" is very common in China, as you are experiencing, the down side is that it complicates the export process from a logistics standpoint when things are done "off the books". The problem is that this is very much a gray area transaction and the 3rd party needs to leverage special contacts at the port to ensure the order ships and is not red flagged at the port. In some cases, the 3rd party needs to find a 4th party! Having a 3rd party depending on special contacts of a 4th party often leads to a messy supply chain and loss of control for shipping dates. Just too many parties.

I believe your logistics would be made easier if the goods were purchases "w/ receipt" and export processed in strict accordance to rules and regulation rather than gray channel explained above. But that would probably add costs to your bottom line (because tax is now part of the equation) and is the primary reason why so many transaction are conducted "without formal receipts." In short, the pros of "w/out receipt" often outweigh the known cons (some of the often unknown cons are explained below).

In my opinion, if you felt the logistics problems were substantial, then there are two common solutions.

  • Put the pressure on the sub suppliers to provide "ExW w/ Invoice". It may add to the cost, but if you have leverage as the buyer, perhaps you could beat the price down a bit.
  • Find new suppliers who can match or beat the current pricing, but provide invoice as well.

However, if you decide to stick with your current method and just accept the logistics headaches in exchange for the better pricing, you need to be aware of a few common problems:

  • Sooner or later your 3rd or 4th parties will make a mistake and the delivery of your goods could very well be significantly delayed. In some rare cases I have seen the goods confiscated and seller disappear with buyer's funds. So try to build in as much extra lead time as you can and be sure to structure your payments so as to minimize your risk should something go wrong with a particular export.
  • Often the buyer is not made aware of the identity of the 3rd or 4th party involved in the gray channel export. This is very dangerous if you have propriety information such as pricing details or intellectual property that you worry about falling into the wrong hands.
  • What most foreign buyers who purchase via this gray channel don't realize is that there no clear paper trail of documents (Purchase Order/ Contract/ Warranty/ Proof of Payments) between you and your supplier when 3rd and 4th parties get involved. Imagine if your supplier sends you faulty product and you want to take them to court in China. I have seen blatantly guilty suppliers walk away from the courts without even a slap on the wrist, because they can simply say "we didn't accept an order or receive money from the buyer. There is no signed contract in place and we have no responsibility." Don't blame the courts, blame the buyers for not knowing who is the real exporter of record and making sure the buyer's contracts are signed by the right parties. While it is a bit tricky, the good news is that it is possible to set up a contract with a supplier who is using a 3rd party to export, but the buyer needs to be very careful. Also, since the buyer's recourse is limited if quality problems are discovered after the goods ship out of China, it is ESSENTIAL that quality control is conducted by a trusted party (you or your appointed inspection agent) BEFORE final payment is made to the supplier and before the goods are put in the container for shipping.

Know that there is a list of endorsed service providers at http://www.smartchinasourcing.com/service-providers.html

if you need support protecting intellectual property, finding reputable suppliers, drafting contracts or conducting quality assurance.

Also, when you are looking for new suppliers, focus on the suppliers found at www.GlobalSources.com who state they have their own import-export license. Leveraging Global Sources verified supplier's star ranking system is also wise. Do ask your suppliers straight up "do you have your own export license?" and then verify their answer by talking to some of the supplier's clients overseas. If the supplier won't tell you the names of a few customers, they may be hiding something.

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