Doing Business in China on Your Terms

Benjamin Jurken

Over the last decade, more and more companies have looked towards China to expand their production capabilities and gain a competitive advantage over their peers – capitalizing on low-cost manufacturing. While many companies have since established a footprint in the region over this time, few have fully reaped the benefits of these trade relationships. As a result, it is common for companies to be profitable across their Asian operations despite continually facing high claim rates, delayed shipments, and limited product development.

This, however, poses a dilemma for many business leaders, wherein their Chinese suppliers provide enough value to merit remaining in the region but require increasing manpower and investment to manage. To further complicate matters, with increasing pricing pressure and currency appreciation, simply identifying these suppliers is no longer sufficient when looking to create long-term value.

In this more challenging and complex business landscape, maximizing return on Chinese supply chains must now focus on creating sustainable relationships rather than simply looking for low-cost suppliers. To do this, US companies need to create a framework that not only protects their interests but also enhances efficiency and reduces waste, as well. Below are four cornerstones that every company should institute with any new or existing trade partner:

  1. Establishing Terms and Conditions:
    Conveying your company’s expectations to a prospective trade partner is crucial to fostering a long-term and a mutually beneficial relationship. To do this, companies should begin by outlining a Terms and Conditions agreement. The actual content of these agreements can vary considerably across industries and company sizes, but some key areas to include are: payment terms, penalties for contract infringement, IP protection, workplace conditions and industry certifications. When drafted appropriately, Terms and Conditions should successfully balance the goal of creating greater understanding between parties while also being punitive enough to dissuade deviation from the agreed-upon guidelines.
  2. Defining Clear Quality Standards:
    Even with well-structured Terms and Conditions, it is essential to clearly define not only your company’s foreign supplier expectations, but also your various quality standards. These standards must be abundantly clear, and outlining acceptable goods and rejected goods in the most quantitative way possible is suggested. Additionally, providing physical samples of rejected and acceptable items for reference is often beneficial.
  3. Establishing Corrective Action Procedures:
    Unfortunately, from time to time, even most competent trade partners will produce a product that does not conform to your company’s quality control standards. In these cases, it is best to have a pre-determined course of action to settle potential claims. A complete Corrective Action Procedure should include a claim verification process, a system to identify the cause of the claim, remedies to avoid recurring claims and financial compensation.
  4. Performing Regular On-Site Inspections:
    One of the biggest challenges facing importers and exporters alike is the fact that their trade partners may be located in a country or region that is not conducive to regular face-to-face meetings. As a result, the majority of business is conducted via email or telephone which, while being affordable and seemingly omnipresent, can drastically impede progress on complex issues due to translation and cultural barriers. The only way to truly resolve multifaceted challenges, such as resolving a claim, product development, or strategic changes, is with in-person interaction.

When a company can successfully institute these four measures, they will be poised for increased profits and long-term success. Obviously, monitoring quality control is not a static process that can be solved solely through these measures, but this framework will allow claims to be avoided and resolved quickly when they do arise.