I always appreciate when other experienced practitioners offer up their wisdom and warnings about the risks of operating overseas. ChinaLawBlog offers some input on Avoiding the China Buyer Scam. I hear far too many sob stories from small businesses who threw away money, ideas, and time because they got scammed or chose a poor partner to do business with.
Check out a few warning signs by Dan Harris of ChinaLawBlog. If these red flags come up when looking for a sourcing partner overseas, become more skeptical and keep investigating.
- Company is just a few months old
- Company is ready to spend several million dollars
- Company has no trade references
- Company is good on technical questions, but lacks market knowledge
- Company is in an odd location
- Company's business scope does not match the current deal
- Company has no website or has a suspicious one
- Company has no online listings promoting its sales
- When you Google the company, questions from other potential suppliers appear on BBs.
A few examples of what can happen in overseas sourcing:
- After months of product development, sourcing, production, and shipping, a small business owner received his first large shipment of product only to find that when the supplier ran out of the color red for a major piece in the middle of an order, they simply continued on in orange. No...the order from their customer did not specify half the pieces in orange. Tough break.
- Many inventors who have tried to go direct through a trading website get a fair way down the pipe with a vendor. They find a vendor who responds to them in English and tells them they can positively make their product. The inventor puts down money for tooling. But, when the tools are finished, all of sudden the minimum order quantity that was agreed upon early on is not sufficient, and the supplier says they will not continue unless the inventor puts up more money for a larger order. Then, the angry inventor tries to regain their tooling from the manufacturer, and good luck on that. Or, the supplier delays shipment until the buyer is in a crunch, and then increases the price when the pressure is on.
For those going it alone, be careful and please do your due diligence.
Hey Ashton and Roger. Great post. As a person who's interested in doing business in China, I've been doing my share of learning Chinese culture and Chinese way of doing business. I often come across stories regarding businesses and companies getting ripped off or cheated in China.
But I am wondering:
Are there actual statistics on successful ventures in China vs. failed ones?
Are these stories blown out of proportion and people go into China with the wrong expectation or it is really that bad?
And what is the main cause of businesses and companies doing wrong in China? Are they just not doing their due diligence before going into China or they are doing their research but due to the complexity of cross-cultural communication problems that it is just too difficult for the inexperienced?
Thanks in advance.
Posted by: China Dream | January 31, 2007 at 10:28 PM
Your story of the orange versus red is just classic. I have seen similar things happen so many times I cannot even begin to tell you and so many times that I am starting to lose sympathy for the American or European company that sources product to China without a good contract. As someone said at a China seminar I recently attended, "there are too many good people out there doing China work for ignorance to hold as an excuse.
Posted by: China Law Blog | February 01, 2007 at 01:14 PM
@China Dream --
The statistics of my law firms clients AND near clients is that about 90% of those who do things correctly in China from the very beginning succeed and about 5% of the rest do. I think arrogance is the leading cause of problems. It is someone thinking that somehow their China experience will be different than everybody else's.
Posted by: China Law Blog | February 01, 2007 at 01:17 PM
@China Dream --
The statistics of my law firms clients AND near clients is that about 90% of those who do things correctly in China from the very beginning succeed and about 5% of the rest do. I think arrogance is the leading cause of problems. It is someone thinking that somehow their China experience will be different than everybody else's.
Posted by: China Law Blog | February 01, 2007 at 01:17 PM
China Dream,
Thanks for the comment. Good questions. I personally haven't seen any stats on the success rates of China ventures. I think ChinaLawBlog gave a good estimate/analysis. Of the ventures that are successful, I'm sure they have their war stories as well. The bottomline is it's going to be a challenge.
For some reason, it seems that every time I fly to Asia, I'll meet someone going over for the first or second time with the plan of getting off the plane and finding a partner or factory. After talking to them a little bit, it becomes apparent that they have no idea of what they'll most likely run into. They say they know about the tricks and scams, but I think the majority of knowledge comes from a few Businessweek or WSJ articles about such things taking place and how much money corporation XYZ spent to get out of it. Smaller companies usually don't have those kinds of resources to spend their way out of the problem over a long period of time. I think people underestimate the differences in the environment their working in. Perhaps the first step when going into a situation like that would be to acknowledge that "I don't know what I'm doing". Then, you can start from scratch to build your understanding, rather than trying to apply a western perspective to what you're dealing with. If you pursue the latter course, you'll apply the same strategy but be baffled when you get a completely different outcome. So the first issue is probably the attitude/arrogance that people carry over there with them. And the second, is that as a result, they don't do enough due diligence before they really get going.
Posted by: GSS | February 02, 2007 at 09:36 AM
China Law Blog,
In addition to good contracts, I think people also miss the necessity of meticulous quality control. So much time and money could be saved if people would have their goods inspected by credible inspectors BEFORE they accepted them and had them put on the boat. Try getting a chinese supplier to take goods back for rework after they've already arrived in the States and you've paid for the goods. It's not a position I like to start negotiating from.
Posted by: GSS | February 02, 2007 at 09:44 AM
China Law Blog,
I think you're very right about the thought that somehow your experience will be different than everyone else's and that yours is going to work out.
Posted by: China Dream | February 02, 2007 at 08:49 PM