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How to Sign a Purchasing Contract in China

30 January, 2008

More than in any other country in the world, signing a purchasing contract in China has a very peculiar character, because of the multiple aspects one must carefully deal with. Directly following the Sourcing process, whereas the contract edition must reflect the results of the first facts gathered during this first phase of work, but it must also try to establish in advance the conclusions of the purchasing order for which it has been written. Although the technical charateristics of the purchasing contract are standard, nevertheless it is necessary to add-up to it quite some extra clauses that are supposed to give more guarantees of success of the order, while protecting the buyer at the same time. The importance of those clauses comes from a strong willingness to anticipate the eventual future discrepancies that could be due to the environmental inter-culturality of the contract ‘s signature and of the way of dealing with the purchases.

Extremely high is the number of cases where the import of Chinese products ends up tragically for buyers. There exist, indeed, technical risks, but most of the time problems start with buyers ‘s lack of accuracy. These buyers have lots of difficulties to accept the idea that the Chinese have different ways of thinking and doing things, and that the approach of a contract ‘s signature must take these differences into account.

When can you decide to sign a purchasing contract ?

Before formulating a purchasing contract, you must have concluded beforehand to the faisability of your project, and all elements in its regard. In order to do so, work on your first quotations by adapting (if needed) the specifications of your product, audit several factories to qualify them and compare them, minutiously manage the process of samples development, negotiate again the prices, confirm the production time, discuss payment terms and logistics arrangements, and finally provide the manufacturer with a sum-up of all points mentionned just above.

How to be sure that you can sign ? A sourcing process correctly followed-up and done always gives more guarantees that you have qualified the most suitable manufacturer. However, this will unfortunately not guarantee that you will go through the production and delivery of your order without any incident. Of course, if the « feeling » you have toward the supplier confirms your technical choice, it means that in case of problems you will be able to more easily find together the appropriate solutions. By the way, this can be verified before signing the contract, along all negotiations process, if both parties are able to make important decisions by consensus. Therefore, before you sign, make sure you meet the three most important people for you, as they will be your main contact persons in case of technical matter or in case of conflict : the manufacturer ‘s sales person, his/her big boss, and a technician in case some specifications or technical issues must be discussed. Finally, before signing an order, it is recommended to verify, when it is possible and when conditions can apply, the terms of the letter of credit, which often are more detailed than the purchasing contract iteself.

Control of the Risks

Before the contract signature, the risks inherent to four main categories must be known by the buyer so that he can anticipate them better and control them.

First of all, there are of course risks that are linked to cultural and linguistic differences. If these seem obvious in theory, the skillfull buyer must make sure all along all discussions that his supplier understands his requests as well as his procedures. The buyer ‘s daily activities ‘s rythm is heavy as he must everyday, whatever happens, give himself as an obligation to repeat and repeat again all important points and all details, even unsignificant, until the manufacturer delivers the goods. One must understand that this activity is even more important before the signature of the contract. We can also include within the cultural differences the frequent mis-knowledge of the products ‘s applicable norms of security by Chinese suppliers, that’s why buyers must inform his manufacturer – indeed the responsibility of producing goods according to the norms is a responsibility of the buyers when he buys FOB, so is the success of going through the customs without loosing the goods.

Next, the buyer must be aware of risks linked to the intellectual property of the goods he is having produced. If you import an existing item, you are in charge of checking whether this product is patented in the country of distribution or not. Suppliers are not supposed to know and check out about all patents in the world, and once more, as an importer, you must get more responsibility about the task of checking about patents. If yourself hold a patent in the country you will sell the item, you can notify it to the manufacturer so that he refrains from producing it and sell it to oother customers from the same country as the one you will distribute the item. However, this will not prevent him from producing and selling to importers from other countries, as only a patent hold in China can guarantee that you have have (in theory) the exclusivity of manunfacturing this product.

The most important risk for a buyer who is almost ready to sign a purchasing contract obviously lies over the fact that it is clearly impossible to foresee the final quality of the goods that are about to be produced. In China, there is no “risk-zero’. The difficulty to manage this risk comes from the fact that the pre-production sample that has been confirmed to “win” the order is always perfect, but anything can occur during the mass production itself. Quality issues are generally speaking due to 4 main factors :

- You have not confirmed in a written form your last major or minor instructions

- The suppliers have not taken into account these last instructions

- You have bargained the prices too low, forcing the factory to use materials of less quality

- The supplier has decided at the last minute (or from the beginning but without telling you) that he will sub-contract a part of the production to another factory (not as good as them but cheap, and that you have not audited, so not qualified !)

Another major risk, production and delivery delays. On the Chinese side, this risk can come as a result of bad production planning, or quality issues, electricity cuts in the region (governmental restrictions a few times a year, especially during summertime), or other issues that would occur just before or right after the tri-annual national holidays periods. On your side, risks of delays are always a result of the fact you have send your order too late to the supplier, your first payment is also late, or you have decided at thelast minute to amend the quantities to be produced. Lots of buyers often forget to anticipate their own actions and to modify their planning with 2 or 3 more weeks than the usual schedule, and therefore most of the risks a buyer must deal with are actually the ones that he creates himself…

Form and Content of the Contract

The contract, in its most complete format, includes 3 types of documents : the PO (« purchasing order ») , the détails of payment terms if you pay by other ways than regular bank swift, and the extra specifications sheet.

- The order includes all the details that represent the product and its basic technical details, as well as the quantities, prices, incoterm, freight conditions, payment terms and date of the goods ‘s departure.

- If the payment is done by letter of credit, it is interesting to be able to first write down a draft in order to confirm its content before signing the purchasing contract, but only if you have enough time to work on it at that time. This document mentions, among other things, the special conditions of the payment, as well as amendments terms and penalties terms.

- Finally, the extra specifications sheet is a document that nobody ever takes the times to write down, which is a mistake. This sheet shall include :

o The product ‘s technical characteristics

o The detailed list of all product ‘s modifications that have been confirmed

o The copy of some emails between you and the supplier, in order to summarize shortly the important points that have been discussed and confirmed (all will therefore be traceable).

The Cultural Environment around the Signature

In China, at all time, it is an absolute necessity to respect the culture and local habits, and this is even more true when signing a contract, especially if it occurs soon after a face-à-face negotiation.

Before confirming your order, you may show that your person and your intentions are good and sincere, because you shall gain the trust and the « complicity » of your supplier. Then, in order to remain professional still, alternate between being funny and firm. At this stage before the signature, you may lead all conversations but also always respect your Chinese partner ‘s time of speech (do never interrupt him). And, as more and more Chinese companies start to do it, think about long-term relationships, talk about the future together.

At the stage of last negotiations that mead to the signature of the contract, show interest for Chinese culture, simply by drinking tea with your manufacturers if they offer you to do so, make compliments about Chinese porcelain, etc. The attitude you may adopt is to show a professional mind, smart and liking precision, as well as a real desire to develope a stable cooperation. Look for balance, you take but you give too, the final contract must sound as a “win-win”.

This is it, you have signed your contract ! You can now tell your supplier how impressed you have been in front of such great abilities in the negotiation (negotiation that you have led of course from the beginning to the end…), you can encourage him to go further in his efforts, and finally inform him that from now on you’ll be very often in touch with him, because this is what we call a great and real cooperation. Now, relax, your supplier is going to invite you to have a drink together to celebrate this nice contract signature !

Sophie Rebibo - Consultante Objectif Chine - sophie.rebibo@objectif-chine.com

 

 

Vous partez bientôt en Chine, un projet d’implantation, une négociation à mener, n’hésitez pas à contacter Sophie Rebibo : +86 135 277 07 199

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