Purchasing product from China

Many are very serious indeed; from tainted food, to toxic materials found in popular products. These can also lead to litigation from consumer groups or customers back home. Quality control is one issue of course, and being technically specific, I will not deal with it here other than to say that of course it is your responsibility as a buyer to ensure that the product you are purchasing meets the legal requirements of your own nation?s legal standards. But there are other issues that can and do affect the purchasing process and if understood and rectified, can reduce the risk.

Profit margins

With China joining the WTO, one effect has been to introduce increased competition into domestic industry. The Chinese tend to have a knee-jerk reaction to this and automatically reduce prices. It is also true to say that many international buyers perform highly aggressive negotiating and purchasing policies that are intended to get the best possible financial deal for the buying entity. Some indeed, are utterly rapacious. There is a link between aggressive purchasing and quality risks, and it has largely been ignored. But squeeze the manufacturers too much, with wafer thin or even no profit margin capabilities, and the pressure and incentive arises for the manufacturer or their supply chain to cut corners. I see it essentially as a moral issue ? you need to allow your supplier to make a reasonable dollar out of your business. If you do, it will keep them honest and more committed to you.

If not, there is a risk of the following equation occurring:

a) Aggressive Pricing x Reduced Profit Margins = Cost Cutting By Supplier

b) Reduction in Quality + Minimal QC Checks = Risk Of Contamination

a+b = c Toxic / Substandard Products

c = Risk of Litigation

Due diligence here can also be measured financially: the cost of litigation and award payouts set against purchasing costs. There are case studies, and if this hasn?t affected your business yet ? then you may well be wise to look at cases involving other unfortunate businesses who ignored this aspect.

Next :
Operational due diligence overview

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com


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