From sourcing to contracts to payments, the experts from Gowling WLG explain what you need to know about maintaining successful supplier relationships in China
In recent years, rising labour costs and Covid-19 control policies have meant that some Western buyers are eschewing China for India, Vietnam or Cambodia. However, China remains an unavoidable choice for sourcing sophisticated products where buyers can rely on stable and dependable talent, equipment and logistic infrastructure. More importantly, China is by far the largest market capable of serving as both a manufacturing base and a massive consumer market. This article discusses some common questions that people have before dealing with Chinese suppliers.
How to source a trustworthy partner in China
There is no doubt that finding a trustworthy partner requires considerable effort. Apart from the usual way of searching suppliers via Google or Baidu and alibaba.com, 1688.com –currently in Chinese only – is another large scale B2B sourcing website run by Alibaba and is a more time and energy-efficient B2B platform where you can find thousands of Chinese suppliers at the touch of a button. In addition to Alibaba, websites like hhtdc.com, endorsed by the Hong Kong Trade Development Council, could also be a useful resource for searching for suppliers in China.
As a general rule, highly ranked suppliers on a credible platform may be reliable partners. However, like all types of online rankings, these rankings may be influenced by factors other than their actual reputation. That said, searching online platforms is the very first step in the sourcing process. It might help you narrow down a few potential suppliers. More reference checking is still required.
How to check a Chinese supplier before working with them
Other than engaging a third-party investigator or checking the certifications granted to the suppliers, British buyers may also carry out audits on potential suppliers by going through the relevant suppliers’ registration information. Legally speaking, if a supplier is a legally registered entity basic corporate information must be disclosed by the registration authority, i.e., the State Administration for Market Regulation.
According to Chinese Company Law, a company must register with the Administration for Market Regulation in its place of residence and submit a range of details about its operations, such as the name of its legal representative (similar to the managing director under UK law), the address, and the capital that shareholders subscribed for and paid in. The National Enterprise Credit Information Publicity System contains basic company information. Other third-party private e-platforms, such as Tianyancha and Qichacha provide more information about the company by capturing data from open Internet resources (note that the information on these websites is only available in Chinese). An experienced adviser may be required to help filter and interpret this information.
You may also want to conduct due diligence on the suppliers’ financial information. These details are not publicly available, but you could ask the suppliers to provide audited financial statements, records of VAT payments, and sales performance, among other things, before engaging in substantial negotiations with them.
Furthermore, in practice, factory visits and face-to-face meetings are always useful for investigating the capabilities and relevant experiences of the partners.
How to set up a contract with a Chinese supplier
A legally binding contract with appropriate terms will reduce the risks to which you may be exposed. Here are some essential legal terms to know:
The contract must specify the precise entity you are contracting with. The information to identify an entity includes the official name, legal representative, Unified Social Credit Code, and registration address.
Intellectual property (IP) rights
Disputes over IP are very common in sourcing contracts. Here are some practical tips on drafting IP clauses:
Firstly, ensure that your patent and trademark have been registered with the China National Intellectual Property Administration and attach the relevant certificates as an appendix to the contract. Legal protection of IPs is territorial. Without a valid IP registered in China, the chance of successful legal protection is low. It is necessary to make sure that the supplier is aware of the ownership of IP and that you are serious about protecting it.
Secondly, you should confirm in the contract about the ownership of any improvement and relevant contractual arrangements to ensure the enforceability of your owning the improvements. Please keep in mind that these arrangements should be reviewed by a lawyer because some commonly used restrictions in the West that benefit IP owners may be deemed invalid under Chinese law.
Thirdly, if you want the supplier to manufacture a product labelled with your brand, you must license your trademark with the supplier in order to legally use it. As a result, the contract should specify whether this trademark license is transferable, sub-licensable or has a limited territory/scope of use. Furthermore, the contract should grant you the right to monitor your supplier’s use of your trademark.
You should consider the way of resolving disputes. Your home law and courts are not always the best choice. Foreign court judgments may not be recognised and enforced in China unless the country in question has signed a bilateral treaty with China. China currently does not have such treaties with the UK, but it has signed treaties with certain European countries such as France and Spain.
Non-disclosure, non-use, and non-circumvention (NNN) obligations should be included in the contract. Suppliers must not disclose the confidential information you provide them in order for them to continue R&D and manufacturing. Non-use means that they will not use your confidential information for purposes other than the project at hand. Non-circumvention means they do not try to sell your goods to your own customers.
Other important contractual terms that the buyer should be aware of include penalties, delivery and after-sales obligations. Since these are dynamic commercial terms that require tailored solutions, we recommend that you consult with your advisers before committing to any contract obligations or establishing any obligations for your partners.
How to hire and pay Chinese suppliers
The payment clause in any contract is critical. Before making any payment, you should request that the supplier allow you enough time to inspect the product that has been shipped to you, and that no payment will be made unless you approve or accept it. If your supplier requests a down payment, you can negotiate the exact percentage of the down payment, keeping in mind that the maximum down payment under Chinese law is 20% of the total purchase price.
Furthermore, payment is the primary obligation of buyers under a sales contract, so buyers are advised to review the payment terms thoroughly in order to avoid terms that impose additional and unreasonable contractual obligations.
This article is part of a series on importing from China. See all the articles in the series below.