Chinese Factory Nightmares Part 1

Richard Morgan
February 12, 2018

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Gary Huang comes back to join the series. Gary is based in Shanghai China since 2008 and is sharing his Chinese factory nightmares situation, what went wrong and how he addressed it.

First product is an exercise bike, had a client in Brazil who was opening a gym…

Ordered a batch of 100 bikes

Gary placed the order
Visited the factory
They sent him a sample
They tested the bike and it seemed okay

Nightmare 1 – Customs

Wanted to give the client a 1st-hand look at the bikes
Sent a sample bike to the customer in Brazil
It was held up at customs
The customer was asked to pay an exorbitant customs duty on the bike (several times the cost of the bike!)
Tried for weeks with emails back and forth to explain it had no value and was just a product sample
Sent customs the commercial invoice paperwork but no joy
Dumped the sample in the end otherwise it would have cost the client a fortune

What happened?

It wasn’t the factory’s fault – they can’t be import experts
Onus is on the client to know what the ‘import duty’ is
A lot of Sellers overlook the cost of import duty and get stung
A smart seller finds the HS (Harmonised System) code to identify the classification of the product and find out what the duty is

Import Process and Duty – Chinese Factory Nightmares to avoid

FOB cost of the bike was mid $100 dollars
For Brazil the import process is very complicated and they are very ‘protectionist’ on imports
It’s hard work and you need to do your due-diligence to make sure it clears
They [customs] wanted to charge over $1,000 on a $100 Bike
Danny hit a similar problem importing into Japan and he had to be careful not to hit a ‘westerner/tourist’ Tax that they can sometimes apply
Brazil has had a lot of Presidential scandals for corruption
So it makes sense to hire a professional freight forwarder or customs broker to help you navigate and sort things out

How did Gary fix it?

The sample didn’t go through
So the Brazilian client accepted Gary’s judgement on the product
Gary released the shipment from the factory
The supplier got paid for the shipment

Nightmare 2 – unfit for purpose

Once the client received the shipment, then the chinese factory nightmares real problems started
The Bike stability was a problem
The Brazilian users were a lot taller and heavier than the Chinese factory
The Bike made noises when they were riding them and customers complained
It seemed the Bikes were just not able to cope with the users
The client demanded the factory fix this problem
Gary was the intermediary between the factory and the client
He had to communicate the problems
Try and figure out the solutions and get the replacement parts

Koreans are not like Brazilians – consider your users

The factory complained and said they had shipped lots to Korea and had no problems
But the Koreans are a different body shape to the Brazilians who are quite big
So you’ve got to make sure your products fit the market
After several weeks back and forth Gary was able to negotiate a deal
Agreement with Factory on replacement parts, defects and replacement work compensation
Very difficult to get a factory to compensate you – usually a credit but Gary negotiated a compensation payment
Took a lot of time to get replacement parts and repair the bikes

Lesson learned

Engage in a thorough test
Consider the local markets
Think about the users (Asian versus Latin America users weight and body shape)
Zara Spanish brand when they arrived in China, the dresses were for tall Europeans and were way too long for Chinese girls…big brands hit this problem too!

Key 5 Lessons

Find a way to test the bike more extensively – not a quick test ride
Consider the local market and how people will use the bikes
Use the ‘country test’ – Gary asked the factory where they ship to, they said Korea and it should have been a red flag to Gary then
Do your due-diligence on the local markets (in Germany the email follow-ups are not allowed and you can be fined)
Negotiating compensation is possible but was a pain in the but, had to talk to the factory manager (and Gary speaks Chinese and it was hard work)
Always catch problems before the product leaves the factory floor – it’s cheaper to get it fixed in China than overseas