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Path: Sourcing News & Advice
>> Import from
China Advice >> How to return defective
merchandise to China

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How to return defective merchandise to China

Posted: August 27, 2014

by Mike Bellamy

Hello,
I’m Mike Bellamy, founder of PassageMaker Sourcing Solutions and blogger at http://www.anotherchinablog.com/.

I’ve
been living in China full time now for over 12 years, and it is my pleasure to
let you behind the bamboo curtain and offer some practical tips to help you
source with confidence.

If
you are not worried about doing quality control because you think you can send
the defects back to China. Think again. Unfortunately, this is one the biggest
headaches in China sourcing.

The
system in China is designed to make it very hard to get defective goods into
China, even if the overseas buyer has clear paper trail and full support of the
original supplier in China.

For
your reference, a Chinese friend of mine who worked at the port in the customs
office told me that the Chinese government was concerned that if they allowed
defective merchandise to be returned to China duty-free, some companies would
take advantage by declaring legit imports defective to avoid paying the
tax.

So, as
far as I know, there is no official channel for sending back the goods and
avoiding VAT and duties as they cross back into China. Adding insult to injury,
the goods may be subject to China outbound taxes again when the re-shipment
taxes place and perhaps inbound US duties/taxes will apply when the re-shipped
goods arrive in USA.

Did I
just hear you scream in frustration? Don’t give up just yet, I have some ideas
for you.

Obviously,
we should do our best to avoid quality problems by auditing our suppliers before
we place the order and doing product inspections before the goods ship out and
before final payment is made. Keep in mind companies like AQF (http://www.asiaqualityfocus.com/)
can conduct independent audits and inspections for only a few hundred US
dollars, so that you can check the quality of your orders before the goods clear
outbound China customs.

Another
good idea for the future is to have clear terms in your contracts about how
defective merchandise is to be handled. If you need support in that area, let me
know and I would be happy to introduce local English-speaking lawyers who can
help draft terms for Chinese suppliers. I can also recommend providers of vendor
coordination that can do 100% QC before goods leave China if you
need additional support.

But
despite the best intentions, what to do if problem product gets shipped? Well,
here are some tools.

First
step is to clearly define the following costs:

·How
much would it cost for the supplier to replace and ship the defects via a new
shipment?

·Do the
defects that have already arrived have any value as scrap or “B” grade
goods?

·How
much would it cost for you to fix the defect items (if even possible) in your
home market?

With
those numbers on hand for reference, here are a range of options, hope one helps
you.

·Send
the defects back, supplier gives you credit on future order and they eat the
cost to return, rework and replace. Be very careful that this supplier will be
around to complete the transaction and that you have a lot of leverage and
history together. I have seen more than a few suppliers simply pass on doing
business with the client ever again rather than do what is right and replace the
goods.

·Rework
the goods in your home market with local technicians.

·Send
the goods to Hong Kong and have the re-work take place there. Labor and
warehouse is much more than in PRC, but still much less than USA for example.
Most important, Hong Kong is more flexible with the duties and you most likely
won’t have to pay VAT and duties to export back to China.

·Once
the goods are in Hong Kong, you could also arrange for a “gray shipment” to
China for re-work. Don’t try to arrange it under your name, but there are third
parties who will leverage their relationships with the boarder officials to
bring your product into China at a reduced tax rate. This is very much a “gray
area” practice, but very common nonetheless. Often, the third party will
reclassify your goods under an HS code that is not taxed at importation. The
reason I suggest you ship to Hong Kong first, is that it is very hard for these
third parties to arrange “special channels” for international freight, but the
Hong Kong-Shenzhen boarder is much more porous and things are flexible as trucks
cross back and forth overland. As this is not black and white, your supplier may
not have experience either, especially if they are not based in S. China near
Hong Kong. So if you do explore this gray channel, make sure you deal with a
firm that does have experience and structure your payments so that they get paid
AFTER the delivery is made.

·If all
else fails and your supplier isn’t stepping up to the plate to fix the problems
or saying “they can’t afford to fix it”, know that I have had many suppliers
“suddenly” come up with the cash once a lawsuit was pending. Check out this blog
post I wrote last month if you want to learn more about your options (Resolving
a dispute: Demand letters and legal options). Keep in mind that
in China you can sue for lost revenue. Since you probably were expecting to add
a healthy margin when you sold the goods to your clients, this lost revenue is a
big stick you can use as leverage over your supplier. If you want to read up on
my experience with the courts in China, do a key word search at www.ChinaSourcingInfo.org
of “court,” “legal” or “lawsuit” and you will find a bunch of my blog posts on
this subject.

See
you next time. Wishing you successful China sourcing!

Mike
Bellamy is an Advisory Board Member & Featured Blogger at the not-for-profit
China Sourcing Information Center.
He is also the author of "The
Essential Reference Guide to China Sourcing" and founder of PassageMaker
Sourcing Solutions.

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