Expert Perspective: Liability Insurance for Products Imported from China

While acting as a broker and sales representative for suppliers and importers in China and the US, we commonly deal with product liability insurance requirements, who should be responsible, and how to minimize fees. I found the following post by Dan Harris at China Law Blog to be very concise and informative. Thus, I will share it with you: 

A few months ago, I was speaking with Michael Perry, a Vice President at DLD Insurance Brokers in Los Angeles. Micheal has a wealth of experience in placing international insurance policies and I was picking his brain regarding product liability policies for U.S. companies that get their product from China when I realized Michael’s knowledge would be very helpful to some of our readers. So I asked Michael to write a guest post on product liability insurance for companies sourcing from China and he was kind enough to provide the following:

If you are a retailer or wholesaler sourcing product from China, it makes sense for you to secure product liability insurance to protect your company from liability if your product injures someone or is recalled. Unfortunately, this sort of insurance is becoming more difficult and expensive to obtain due to increasing publicity surrounding recalls and injuries arising from Chinese products.

The most straightforward way for an importer/retailer to secure this sort of insurance is to buy it directly for themselves. The problem with doing this, however, is that the insurance underwriters will assume they are the first and probably only line of defense in a product liability claim and that there will be no recovery from the Chinese manufacturer. Underwriters will assume that they will get stuck holding the bag for the entire loss arising from a faulty product and they will price their insurance accordingly. They will have little to no information on the Chinese manufacturer’s operations or quality assurance and they will just assume both of these are subpar.

Importers/retailers can lower the price of their product liability insurance (and oftentimes increase their protection as well) by requiring their Chinese suppliers indemnify them for costs arising from faulty products and by requiring those suppliers secure their own product liability insurance naming the importer/retailer as an additional insured on these policies. If the importer/retailer is named as an additional insured on the Chinese manufacturer’s insurance policy, the importer/retailer itself will be able to file claims agaist the policy.

Usually when Chinese manufacturers secure insurance, the insurance company issues a certificate of insurance to the importer/retailer showing the Chinese manufacturer’s products are covered by the policy. Due to the differing laws and realities on the ground between China and the United States, it is absolutely essential that the coverage under these policies be reviewed closely to ensure that it conforms to what is necessary for real protection in the United States. I mention the United States here for a number of reasons, with the most important one being that it is the United States where product liability risk is by far the greatest.

My company has reviewed a number of Chinese-based insurance policies to determine the level of protection the Chinese-based insurance policies give our U.S. clients and in most instances that protection has been sorely lacking. Just by way of one example, many Chinese-based product liability insurance policies cover only those claims brought within three-years of the policy’s effective date. This sort of coverage is not adequate for a United States importer/retailer since most states give an injured party two to six years after their injury to bring their claim. In other words, if you secure product from China and someone is injured by your product ten years after you sold it, you can still be sued and you can still lose and lose big. Many states permit children to wait until they are adults before having to sue for bodily injury claims.

The best way for American importers/retailers to protect themselves from product liability risk is usually to have their Chinese manufacturers secure a U.S.-based product liability policy. These policies can typically be secured if the following three requirements are met. First, the Chinese manufacturer is reputable and has appropriate ISO certifications. Second, the Chinese manufacturer can show it consistently produces a quality product. Third, the Chinese manufacturer must be able to show a five+ year favorable loss record. The goal is to make the U.S. underwriters comfortable writing a policy for a Chinese manufacturer.

Surprisingly, the overall cost to the Chinese-manufacturer/U.S.-importer-retailer for the Chinese manufacturer to carry the U.S. policy will usually be less than any other method and the coverage will usually be better for both parties as well. Doing it this way thus becomes a win-win for both parties.

 

China City Tier System: How it Works and Why its Useful

I have gotten many questions relating to the meaning and differences of first, second, and third tier cities, and how this affects strategies for doing business in China.

First off, it is important to note that the commonly referenced tier system is broadly up to interpretation. While originally stemming from the Chinese government’s classification system, many economists, consultants and businesses use slightly different methods for classification including the government classification, GDP, population, retail sales, etc. Also remember, China’s extraordinary pace of development has led to massive changes across China that aren’t spread equally across this list.

Why do tiers matter?

In my experience, this is one of the most effective ways, when used alongside regional market clusters, to slice China into specific local categories for the sake of understanding consumer behavior, income level, and local trends, therefore enabling companies to tune their strategies to suit local conditions.  On regional market clusters, McKinsey has a great article entitled Is your Emerging Market Strategy Local Enough? (Link), or  see Patrick Chovanec’s article titled The Nine Nations of China (link).

By the numbers:

According to Nielsen’s Winning in China, Insights and Strategies for 2011 (link):

Tier 1 Cities:

  • 16 million households, 1 trillion income value

Tier 2 Cities:

  • 38 million households, 2 trillion income value

Tier 3 Cities:

  • 75 million households, 3 trilllion income value

Tier 4 Cities:

  • 86 million households, 3 trilllion income value

Tier 5 Cities:

  • 169 million households, 4 trilllion income value

Based on this breakdown, it is easy to see the market potential of lower tier cities, but keep in mind that these are spread out across China, making them more difficult to access than the Tier 1 megacities that most people associate with China. Consumer habits, disposable income, and even lifestyles are very different across this spectrum, not to mention the costs of doing business locally, including labor costs, land, rent, operating costs of a retail store, etc. Among foreign firms with a retail presence in China, many subscribe to a philosophy of “Look pretty in Tier 1, make money in Tier 2 and 3”. 

Without further ado, here’s the rundown by tier:

Tier 1 Cities:

Large densely populated urban metropolises with huge economic, cultural and political influence in China. Tier 1 cities attract great attention from foreign enterprises due to income levels much higher than the national average, and larger middle class representation and increasing consumption habits. Cities that fall within this category represent China’s most developed markets in terms of consumer behavior. 

  • Shanghai
  • Beijing
  • Guangzhou
  • Shenzhen*
  • Tianjin*
  • Chongqing*

* Due to their size and government classification, many will also include these in the Tier 1 category, although it is up for debate.

Tier 2 Cities:

These are generally made up of Provincial capitals, sub-provincial cities, SEZs, and other more developed cities with cultural and economic influence. Over the past decade, Tier 2 cities have received increased attention and investment from foreign companies due to lower labor costs, less competition, lower operating costs for retailers, and rapidly increasing consumer spending habits. It is important to note that not all Tier 2 cities are created equal, and with a large number falling into this category, there are substantial differences in the economic, population, and consumer habits in each. It could easily be argued that many of these could fall into the Tier 3 city category based current levels of economic development. The list includes: 

  • Changchun 
  • Changsha
  • Chengdu
  • Dalian 
  • Fuzhou
  • Guiyang 
  • Haikou
  • Hangzhou 
  • Harbin
  • Hefei 
  • Hohhot
  • Jinan
  • Kunming
  • Lanzhou 
  • Lhasa
  • Nanchang
  • Nanjing
  • Nanning
  • Ningbo 
  • Qingdao 
  • Sanya
  • Shantou 
  • Shenyang 
  • Suzhou 
  • Taiyuan 
  • Urumqi 
  • Wuhan 
  • Wuxi
  • Xiamen 
  • Xian
  • Zhengzhou
  • Zhuhai 

Tier 3 Cities:

These are generally made up by open coastal cities, high income cities, and cities with significant economic development which you may not have heard of. The list includes:

  • Beihai
  • Changzhou
  • Dongguan
  • Foshan
  • Guilin
  • Huizhou
  • Jiangmen
  • Jiaxing
  • Jinhua
  • Lianyungang
  • Nantong
  • Qinhuangdao
  • Quanzhou
  • Shaoxing
  • Shijiazhuang
  • Taizhou
  • Tangshan
  • Wiehai
  • Wenzhou
  • Xining
  • Xuzhou
  • Yantai
  • Yinchuan
  • Zhangjiang
  • Zhenjiang
  • Zhongshan
  • Zibo

Tier 4 and 5 Cities:

I am leaving out a lot from these categories, however would like to touch on some of the more well-known cities. It’s also important to note that this is not necessary a scientific classification at this point, and the rapidly changing rates of development across China have great potential to change many of these lower classifications. Nevertheless, I will throw these in. 

Tier 4:

  • Anshan
  • Baotou
  • Chaozhou
  • Daqing
  • Datong
  • Fushun
  • Handan
  • Huzhou
  • Jilin
  • Liuzhou
  • Luoyang
  • Qiqihar
  • Weifang
  • Wuhu
  • Yangzhou
  • Zhangzhou
  • Zhoushan
  • Zhuzhou

Tier 5:

  • Leshan
  • Lijiang
  • Mianyang
  • Nanping
  • Putian
  • Rizhao
  • Taian
  • Taizhou
  • Xiangfan
  • Xiangyang
  • Yan’an
  • Yichang
  • Yueyang
  • Zhaoqing

 

6 Key Provisions to Include in Your International Licensing Agreements

The following is from a post by Santiago Cueto at International Business Law Advisor regarding the important provisions of international licensing agreements. I will follow up in future posts with more on our experience with licensing agreements and China.  I will include my own comments in italics. Please note I am not a lawyer, and my comments should not be taken as legal advice. 

In basic terms, a licensing agreement is a contractual right that gives someone permission to do a certain activity or to use certain property owned by someone else. Increasingly, these agreements are being reached between companies located in different parts of the world.

An international license agreement doesn’t have to be long or complicated. It can be straightforward and enforceable. However, many issues come up when drafting a license agreement. Laws relating to intellectual property can be extremely complicated. An attorney can provide invaluable help with drafting your agreement and enforcing it.

Exclusive Property Rights

Preliminarily, before you start negotiating a license agreement, make sure you have exclusive property rights. While the law often changes in this area, the best way to lock in your rights is to register for any or all of the following that apply to your situation:

Copyrights – original works of authorship fixed in any tangible expression form 

Patents – inventions

Trademarks – words, names or symbols identifying goods made or sold, distinguishing them from others

The application process can be rigorous, and you may have to disclose your ideas publicly. So you may also want to further protect your intellectual property by relying on laws.  Generally, these laws protect internally guarded ideas, formulas, codes or other information giving a business competitive advantage. A good example is source code to software.

6 key provisions 

Now that you’re sure you have exclusive property rights, you’re ready to start drafting the licensing agreement. To give you some guidance, I’ve selected 6 key provisions that should be included in your foreign license agreements:

1.  Approval of licensed goods. 

When major U.S. manufacturers license products to companies abroad, they often arrange periodic inspections of the manufacturing facilities to ensure the quality of the goods (and also to monitor whether the licensee is siphoning off products or engaging in illegal labor practices). This offers you some assurance of consistency and quality for your work.

2.  Royalties and accounting. 

Payment of royalties from a foreign licensee can get tricky, especially when you consider issues like:

• currency conversion rates (probably best to always insist on payment in U.S. currency)
• how the money will be paid (best to use wire transfers), and
• what taxes may be applied against your sales or royalties (before signing the license, inquire into national or local tariffs or taxes that may apply).  Also, it’s wise to include an audit provision (which allows you to inspect the foreign licensee’s books).

We strongly recommend front-loading your payment terms so that you get the majority of your royalty and licensing fees up-fornt or significantly in advance of the expiration of the agreement. We have seen and heard of many cases where the licensee company will miss the final payments when the agreement will not be renewed. 

3.  Jurisdiction. 

Sometimes referred to as personal jurisdiction, jurisdiction is the power of a court to bind the parties by its decision. Unless the company does substantial business in the states, the only way to get a foreign licensee into a U.S. court is to include a provision in the license agreement that requires the licensee to consent to U.S. jurisdiction.

Generally, when licensing products into China, you should consider where the Licensee does the bulk of its business, and what jurisdiction makes the most sense if enforcement of the contract is necessary. Take into consideration that Chinese courts don't recognize US law or the English language. Although many companies prefer the US, we most frequently see compromises for arbitration in neutral jurisdictions such as Hong Kong or Singapore. 

4.   Choice of law. 

Every country (and every state) has laws as to how contracts are interpreted. The licensee will want the disputes to be resolved under the laws of its country. Try to include in your agreement that disputes will be resolved under U.S. law for copyright purposes and the laws of your state when it comes to contract issues.

5.  Arbitration.

In arbitration, instead of filing a lawsuit, the parties hire a neutral arbitrator to evaluate the dispute and make a determination. You’ll almost always benefit by agreeing to have disputes arbitrated and inserting this in your agreement. If possible, your agreement should award attorneys’ fees to the prevailing party in the arbitration.
Try to get the licensee to agree to arbitrate the matter in the United States. If the licensee does not agree, there are three popular spots for international arbitration:
London (The London Court of International Arbitration)
Paris (The International Court of Arbitration of the International Chamber of Commerce), and
Stockholm (The Arbitration Institute of the Stockholm Chamber of Commerce).

Hong Kong and Singapore are often selected for business agreements of western companies in Asia. They have strongly developed legal systems stemming from their colonial histories under Britain, and the official language is English. 

6.  Foreign registrations.

If your works are protected by U.S. intellectual property laws like copyright or design patent law, you should determine whether it’s worth your while to obtain foreign copyright or patent registration in the countries where your work is being manufactured or distributed (this will be the subject of a future post).You may be able to require that the licensee handle these administrative tasks 

This is absolutely necessary for doing business or any kind of Licensing agreement in China. We also recommend including a No Registration term in your licensing agreement that stipulates that your Licensee cannot register your IP in the local or other jurisdictions.  

Include these provisions in your international licensing agreement and you’ll be well on your way to international business success.

8 Tips and Expectations for Working with a Sales Agent

1. Have a good contract.

This is obvious but extremely important. Business relationships across geographic, linguistic and cultural borders function much more smoothly if all parties thoroughly understand and have agreed upon detailed key terms prior to beginning sales or operations. Many companies will use contracts containing parallel versions of English, and the local language. But be advised, this can sometimes present issues with discrepancies in translation and specifics of local law. In any case, we highly recommend using an experience lawyer with direct experience in the local country. For example, if your doing business in China, use a good lawyer on the ground in China.

The contract should cover price, volume, commission, geographic jurisdiction, exclusivity or non-exclusivity, duration of contract, payment terms and acceptable payment methods, service and support, etc. The more specific and clear it is, the more useful it will be for enforcing everything you expect done.

2. Decide if you will grant your sales agent exclusivity.

This is a key part of your sales strategy, and should be considered carefully. There is no one-size-fits-all approach to this question. In any case, you should protect your interests by ensuring that in any exclusive relationship, the sales agent is responsible to meet agreed-upon volume requirements, over a set term, in a specific territory. If they do not meet your mutually agreed upon targets, the contract should default to non-exclusive. To start, we recommend using a non-exclusive relationship or a shorter term length, to make sure you and your distributor can work together successfully and meat your sales targets. Don’t feel pressured to concede exclusivity right away, as you can often benefit from using multiple sales/distribution channels, and often times there are markets within markets that are better served by different sales agents.

3. Decide upon an effective commission structure.

A sales agent generally earns a profit through commissions paid directly by the manufacturer based on unit sales, and therefore this term of the contract will be very important to them. Just like a distributor, the sales agent should be knowledgeable about the market, including local laws, and have mastery over the industry within which the product is being sold. It is generally prudent to find a sales agent who is familiar with local and industry specific regulations to minimize risks. More established sales agents with significant domain expertise will tend to command higher commission rates, but it may be well worth to your bottom line profits due to higher overall sales volume.

4. A sales agent generally does not stock the product in his local warehouse.

A sales agent typically does not stock the product in his local warehouse. He primarily serves as a go-between for the end-user customer and the manufacturer. All inquiries and offers are received by the sales agent and forwarded to the manufacturer for either acceptance or rejection, with final billing and shipping taking place directly between the manufacturer and the end-customer. The manufacturer has the authority to specify a price at which the sales agent sells a given product to the customer, and can also restrict the sales agent from selling at an inappropriate price. These concerns should be addressed in the contract.

5. The sales agent will market and promote the product in the local country.

A sales agent will be responsible for actively promoting and marketing the products via all appropriate online and offline marketing channels. Generally, local methods may be different from what you are used to, and the sales agent’s marketing experience and awareness will be critical to the successful achievement of your sales targets. This may also require the creation or translation of a wide variety new marketing materials, and it is important reasonably assign people and responsibilities in order to develop a working relationship that can execute and effective marketing strategy. This will likely require significant flexibility to cater marketing materials and promotion to the local market.

6. Regular communication and progress reports are key.

As the supplier, you can choose the frequency with which a sales agent reports sales or market updates. This should be included in the contract, but generally we think the most important thing is to maintain regular, active, and even casual communication sufficient to maintain interpersonal relationships between key people involved on both sides. This will enable healthy discussion and tuning of your sales strategy, timely feedback of local market trends, and the ability to share ideas regularly, such as adjusting the marketing strategy or the possibility for expanding into new products.

7. Clarify expectations for after sales support and service.

It is important to determine who will be responsible for after sales support and service of your product. Generally, the sales agent will be responsible for part, but not all. In addition to sales inquiries, the agreed upon service and support, the sales agent should also, at a minimum, forward the rest of customer requests or complaints to the supplier. Depending on the product, there will be very different issues to consider, including warranties, guarantees, technical issues, troubleshooting, training, repairs, and even replacement parts and components. The responsibility split should be considered and included in your sales agent agreement. You should make sure your sales agent possesses the capacity (personnel, facilities, resources, etc.) to fulfill the agreed upon support obligations.

8. Your sales agent will not absorb tax liabilities or credit risks in the local country.

A sales agent does not incur credit risks and tax liabilities in the local country on behalf of the manufacturer. Using a sales agent does not allow a supplier to abdicate responsibility for knowing and complying with local regulations and taxes. Therefore, the supplier must take these issues into consideration when determining the viability and obligations (both financial and legal) of a business using a sales agent in a given foreign market. 

China Importing 101

The following is a repost of a great series written by Sean Mahoney which was featured on China Law Blog. Sean has extensive hands-on knowledge in the area of customs compliance, and provides a lot of relevant and valuable information. Although a bit long, it is posted in full below: 

There are thousands of stories, many of which we’ve read at China Law Blog, of companies attempting to sell into China before understanding the legal and regulatory environment for their product. Importing into China is one of these often-overlooked areas, specifically, the rules and regulations as they apply to individual products. In my experience, the importation process creates more issues and lost revenue over time than any other day-to-day activity involved with selling into China.

From the inception of your idea to enter the China market, to the daily grind of fulfillment and sales, there are three keys to getting your goods into the commerce of the PRC.

First, understand the importation process and how it should be performed for your specific product before you ship anything (even samples). DUE DILIGENCE.

Second, if you are importing your own products into China, your relationship with China’s importation regulatory institutions is vital to your success. If you are not the importer of record for your product, see point one.

Third, always make sure your paperwork is correct before you ship, especially with samples and new products. This includes keeping up to date with new laws, regulations and enforcement rules for your industry.

The rest of this post will focus on the core concepts vital to understanding the Chinese importation regime. The next post will concentrate on understanding the ins and outs of the actual importation process, with the final two posts looking at the why and how of creating strong relationships with The General Administration of Customs (GACC) and The General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ).

When first selling your products to China there are a few core concepts, that if understood, will make speed bumps out of potential mountains.

1)      All products brought into China require an import license. The importer of record is not necessarily your customer, but the entity that has the import license (like a trading company).

2)      Many products require additional paperwork or special licenses to be imported.

3)      There is an actual list of products that require compulsory inspection (Import and Export Commodity Compulsory Inspection Catalogue).

4)      You cannot abdicate your responsibility to understand import regulations to the importer of record. Even if you have no operations in China and sell Inco Terms this side of the Water (or even CFR/CIF China port), your company is still liable and can be punished if your products are imported illegally or incorrectly.

5)      The law in China is always written to allow extensive leeway for Ministries and departments to enact their own regulations and enforcement mechanisms.

6)      There is an assumption behind all enforcement that you must prove your stated content or claims. For example, you cannot simply send an MSDS sheet with no testing to verify your claim of content.

7)      GACC and AQSIQ are the front lines of enforcement, many other agencies, departments and Ministries allow these two entities considerable freedom in how they enforce specific regulations at the border.

A good friend wrote me after reading last week’s post and asked me three questions. Why didn’t I discuss the Harmonized Tariff Schedule differences, similarities to US and EU laws and the Enterprise Classification and Management (MCME) system? I am sharing my answer with you the reader: The MCME is best discussed as part of my upcoming China Customs post as it is a GACC (The General Administration of Customs) program, and the other two are best discussed as part of today’s post. This post covers the seemingly mundane basics of the importation process in China.

China’s laws and regulations regarding imports are very similar (sometimes exactly the same) to US and EU laws and regulations. It is important to note this similarity while simultaneously understanding the differences in China’s real world enforcement and execution. A great example of this is HTS (Harmonized Tariff Schedule) codes. For those in the trade you know HTS codes are virtually the same in the US, Europe and elsewhere. In China, there is a slight difference; small enough to go unnoticed by many exporters, but large enough to cause issues when utilized incorrectly. You see, though the first six digits are the same most of the time, the 7th and 8th digits, and the 2-digit suffix, are often different from what we use in the US. To add to this confusion many items that use a full 10 digits in the US, only use 8 digits in China and vice-versa.

I guarantee some are reading this right now and saying to themselves, we use the same HTS and we have never had a problem. I am sure this is true. The question is not are you currently having a problem, the question is are you properly classifying your goods? This is important for obvious reasons, since if your goods are misclassified, you may not be paying the correct tariff and duties. If you are not paying the correct tariff and duties and you get audited, you may owe GACC a lot of money. This end result is very similar to the US, in that you will not escape without large amounts of money being spent on attorneys, fines, over due tariffs or all of the above.

In addition to the correct HTS code, there are certain items required on all shipping documents (yes even samples!) to China. If any of these is wrong or differs from the other documents you have provided (more on this in my upcoming post about GACC), it is a sure-fire way to get your shipment stopped. On all your shipping documents to China you need the following:

  • The correct HTS code
  • The importer’s CR (Customs Registration) Code
  • Product name with description
  • Product quantity
  • Country of Origin
  • Quantity of units, boxes, and pallets
  • Unit Value and Total value
  • Weight
  • Sometimes you also will need:
  • Part Number
  • Lot Number – Production date – Expiration date

A quick sidebar on CR Codes, the Customs Registration Code is a unique number given to every importer in China as part of registering with GACC. No company can import anything, except documents, into China without a CR Code/Number. Many foreign companies are unaware this number is required or that all companies must have this number to legally import anything into China. I will discuss in my upcoming posts the importance of understanding these types of requirements in your interactions with GACC and AQSIQ.

Knowing what to put on your documentation for selling into China is only part of the battle. Knowing which documents are required is equally, if not more important. All shipments to China require the following documents:

  • Invoice on Company Letterhead (address must be included)
  • Packing List on Company Letterhead (address must be included)
  • Certificate of Origin
  • Airway Bill/Ocean Bill of Lading
  • Documents that may be required (product dependent)
  • US Department of Agriculture Health or other Certificate
  • Local Health, Sales and Operations Licenses
  • Certificate of Analysis
  • MSDS with Proof of Content (also applies to food, wine and other categories, in these cases content must be on letterhead with no MSDS)
  • Certificate of Free Sale
  • Bottling/Production/Manufacturing date on Letterhead
  • CCC Mark or other special import license documentation

There is also a difference between shipping your goods for the first time and all subsequent importations. First time imports usually require greater documentation than all repeat importations. This is typically true for products where additional licensing is required (retail products, food, chemicals, items requiring CCC mark etc.).

Labels are the final area I will cover in this post. Chinese language labels are required for all products that will end up on retail shelves. What is required varies from product to product with the standards for electronics and food/beverage being the most stringent. One requirement that crosses all product lines is that the Chinese label cover the foreign language label.  Common requirements include:

  • Product Name
  • Raw Materials/Ingredients
  • Country of Origin
  • Date of Production (Year/Month/Day)
  • Expiration Date (Year/Month/Day)
  • Storage Condition
  • Distributor Name and Address

The core to any interaction with GACC and AQSIQ is relationship building. My good friend Professor John Osburg writes, “Information in China flows through personal relationships. These relationships are best viewed as communication channels which equal resources for assistance.” It is vitally important to the success of your ongoing China importations to create communication channels with both GACC and AQSIQ in a legal and legitimate manner.

One of the complaints I consistently hear is about the capriciousness and unpredictability of Chinese customs officials. The reality is China’s system is no less capricious than in the US. Both countries provide ample flexibility for customs enforcement of ambiguously written laws. In the end, dealing with China customs is a person-to-person interaction and there are some people, regardless of country, that are harder to deal with than others.

In many ways, dealing with China Customs is no different from dealing with US customs. They are not your friends, but if you take the time to treat them as humans and to create a relationship, they typically will not make your life any harder than it has to be as an importer. No one likes it, government official, vendor or customer, when you only talk with them when you have a problem that needs to be solved. In our experience if you follow three simple rules, your interactions with GACC should be greatly improved.

Understand the laws and regulations as they pertain to your specific product. Whether you are acting as the importer of record (IOR), or another organization is the IOR, it is yourresponsibility to make sure all documentation is accurate and correct. There is no faster way to get on a custom official’s bad side than by you or your IOR importing goods incorrectly, especially if you are not using accurate information that is basic to any importation in China.  Guanxi, or relationships, will not excuse you or your importer from failing to import goods under the laws and regulations of the PRC. In the end, it is your product and your brand name that will be negatively impacted by importing goods incorrectly.

All the knowledge in the world only goes so far when dealing with an individual government official. Someone in the importation chain must have a working relationship with China customs. Whether you are importing for yourself, using a broker, or relying on your customer to import, it is vital to build a legitimate relationship with your local GACC office. The best way to do this is via the Enterprise Classification Management (MCME) system, which I will discuss below. We always advise to maintain a wide breadth of contacts at your local customs office, as part of your ongoing transactions and for maintaining or improving your AEO (Authorized Economic Operator) status. Additionally, even if your volume of imports cannot meet the requirements for AA status (see below), it helps more then it hurts to maintain these lines of communication with GACC.

Always approach customs officials from a position of mutual respect (this is also vital when dealing with AQSIQ). If you approach the conversation angrily, accusing the official of ineptitude or any other manner of disrespect, things will not go well. Even if the governmental body has clearly incorrectly applied the law, find a way to make the conversation positive and use it as an opportunity to build a relationship, rather than turning the interaction into a confrontation. This is true in the US, but holds even more weight in China. Individual customs officers are accustomed to being approached with a lack of respect from the importer and are typically ready to react accordingly.

The MCME system in China incorporates an Authorized Economic Operator (AEO) classification system. All information on how to achieve and maintain status and the current status of each importer are publicly available. There are five (5) management categories of AEO in China:

  • Class AA:               AEO Certified
  • Class A:                  Preliminary AEO Status
  • Class B:                  Normal Status
  • Class C:                  Easy to obtain, Subject to Intense Scrutiny
  • Class D:                  Beginner, Subject to Intense Scrutiny

Within classes AA and A there are very tangible benefits:

  • Customs Account Manager (AA only)
  • Trust Release (AA only)
  • Electronic and Paperless Clearance (with release prior to physical arrival at port becoming more frequent)
  • Early Clearance Against Cash Deposit
  • Expedited clearance schedule
  • Prioritized access to GACC including after hours service
  • Lower rate of deposit for GACC Bank Guarantee Deposit Account System
  • Allowed to participate in GACC pilot programs

Though just about everyone is aware of China Customs (GACC), many foreign companies doing business in or with China know little or nothing about the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ). This lack of knowledge is dangerous, as AQSIQ has more power than GACC in many aspects of importation approval. In today’s post I will introduce AQSIQ as an institution, with some brief advise on how best to interact with them.

AQSIQ is most widely recognized for its oversight of food/beverage products and scrap materials, yet it controls, directly or indirectly, thousands of products including:

  • Chemicals
  • Cosmetics
  • Any item which requires a CCC Mark
  • Items that require compulsory inspection
  • Specialized machinery like Refrigerators

All told, AQSIQ has 19 internal departments and 15 separate “affiliates” and it manages the administration of the Certification and Accreditation Administration of China (CNCA) and the Standardization Administration of China (SAC). AQSIQ has 35 Entry-Exit Inspection and Quarantine Bureaus (usually known as CIQ’s), nearly 300 branches, more than 200 local offices, nearly 3500 laboratories and tens of thousands of employees in China to assist with its mandate. To quote AQSIQ’s own website:

AQSIQ participates in the planning and checking of national ports opening up to the outside world. According to the relevant law, AQSIQ formulates the List of Entry-exit Commodities subject to Inspection and Quarantine of Entry-exit Inspection and Quarantine Agencies. AQSIQ administers the inspection and quarantine clearance for the entry-exit goods related to environment, health, animal and plant health, and human safety, and for transportation means and personnel. At ports, an inspection and quarantine clearance management model is applied to entry-exit goods, that is, “Inspection application first, and customs declaration second”.

According to the Law of the People’s Republic of China on Import and Export Commodity Inspection and its implementation regulations, AQSIQ carries out inspection and supervision on import and export commodity and its packaging and transportation means. AQSIQ conducts legal inspection, supervision and administration over commodities included in the List of Entry-exit Commodities subject to the Inspection and Quarantine of Entry-exit Inspection and Quarantine Administrations, and conducts sampling test over the non-listed commodities.

As evident from its own description, AQSIQ is responsible for inspecting and supervising the import and export of ANY product specifically listed under its authority and for sample testing non-listed commodities. I am always saying “Inspection application first and customs declaration second” to clearly signify how AQSIQ has greater relevant authority than GACC for all products in which it has been given statutory oversight. Yet virtually every month a company already exporting products to China will contact me with no knowledge about AQSIQ and no idea why AQSIQ has authority over their products.

Much like GACC, AQSIQ has become a much more efficiently run and managed institution over the last decade, especially in the last five years. However, it has not developed a professional relationship infrastructure like the Customs MCME system. This only heightens the importance of discovering in advance if AQSIQ has oversight over your product(s) exported to China. If it does have that authority, it is vital to learn as much as possible about the specific law and regulations pertaining to your product before you begin exporting it to China. Once you have acquired this knowledge, it is important to reach out and create a relationship with AQSIQ in the Chinese ports and cities in which your products will be imported and used. Depending on the circumstances, your WOFE office or your customer would work on creating this relationship.

Although there is no MCME system in place for directly working with AQSIQ, several laws have recently been enacted requiring registration by all exporters and importers in certain product categories, with the most notable being all food and beverage imports starting in 2012. This required registration allows foreign companies a foot in the door to create a working relationship with AQSIQ.

I will leave you with an example of the value in knowing the regulatory details regarding your product and in having a relationship with the appropriate branch of AQSIQ. A few years ago, I was working with dozens of customers in a specific part of the food industry. One customer in particular had an ongoing problem exporting one of its more valuable food products to China. Over the course of five years, AQSIQ had rejected every sample and order shipped by our client. Even though both the importer and exporters tests showed they were in compliance, AQSIQ continually claimed the product was outside the allowed limits for nitrate and nitrite.

We offered to assist our client in finding a workable solution to this ongoing problem. We quickly identified the AQSIQ standard allowing only three testing methods for nitrates and nitrites, two of which were never used in the US. Our next step was to approach a customer outside of the largest ports with a good working relationship with their local CIQ. Via this relationship, we approached the local CIQ and after several days we were able to agree among the three parties to:

  • Use the exact same testing method (the one we use in the US),
  • Use the same quantities of solution
  • Use the same fluid to create the solution
  • Share all test results

In the end, all tests came back nearly identical and all showed that the product was well within China’s standards for both nitrate and nitrite levels. Because of this, our customer was able to ship its product to China on a consistent basis for the first time in six years. This result would not have been achievable without the intercession of someone with an ongoing relationship with AQSIQ and a thorough understanding of the rules and regulations pertaining to that specific product.

 

8 Tips and Expectations for Working with a Local Distributor

There are many important aspects to building a successful relationship with an international distributor or local distributor in a different country. Managed correctly, this can be a win-win method of expanding sales of your products into foreign markets while saving you significant time and resources. Here is our list of tips and expectations for you to consider. 

1. Have a good contract.

This is obvious but extremely important. Business relationships across geographic, linguistic and cultural borders function much more smoothly if all parties thoroughly understand and have agreed upon detailed key terms prior to beginning sales or operations. Many companies will use contracts containing parallel versions of English, and the local language. But be advised, this can sometimes present issues with discrepancies in translation and specifics of local law. In any case, we highly recommend using an experience lawyer with direct experience in the local country. For example, if your doing business in China, use a good lawyer on the ground in China.

2. The distributor generally buys your product outright, takes title, and assumes re-sell risk in the local country.

When products or commodities are shipped to distributors across international borders, it usually involves large volumes and considerable time and money to arrange logistics, transport, customs, documentation, etc, and thus makes it very expensive and difficult to send things in reverse. Your distributor generally and assumes all re-sell risk, and sets the mark-up they will earn from re-selling your product locally.

3. The distributor should take on all tax liabilities in the local country.

A local distributor should be an “independent contractor”, and thus incur related tax liabilities and credit risks in the local country. Generally, tax liabilities will vary by country, and it is very important to understand that as a seller that you are responsible for abiding by the law of whatever country you are selling into. In general, we strongly recommend stipulating in your distribution contract that the tax liabilities and responsibilities for meeting them will all fall to the local importer/distributor, including import, sales, and other taxes. Being local, they are much more aware of local laws and regulations, and exponentially better prepared to deal with them. Although this may seem like a given, it can be a critical issue and should not be overlooked.

4. Determine if the distributor will have exclusive distribution rights.

This is a key part of your distribution agreement, and should be considered carefully. There is no one-size-fits-all approach to this question. In any case, you should protect your interests by ensuring that in any exclusive relationship, the distributor is responsible to meet agreed-upon volume requirements, over a set term, in a specific territory. To start, we recommend using a non-exclusive relationship or a shorter term length, to make sure you and your distributor can work together successfully and meat your sales targets. Don’t feel pressured to concede exclusivity right away, as you can often benefit from using multiple distribution channels, and often times there are markets within markets that are better served by different distributors.

5. The distributor will stock the product in their local warehouse.

Distributors will be responsible for having products on hand in their local warehouse, handing sales inquiries, selling, and distributing products to the local market. Before signing any distribution agreement, we recommend thoroughly vetting your distributors to make sure they meet legal standards and have adequate facilities, systems, and employees for the sales and distribution of your product according to the terms of your distribution agreement.

6. The distributor will market and promote your product locally.

A distributor will be responsible for actively promoting and marketing the products via all appropriate online and offline marketing channels. Generally, local methods may be different from what you are used to, and the distributor’s marketing experience and awareness will be critical to the successful achievement of your sales targets. This may also require the creation or translation of a wide variety new marketing materials, and it is important reasonably assign people and responsibilities in order to develop a working relationship that can execute and effective marketing strategy. This will likely require significant flexibility to cater marketing materials and promotion to the local market.

7. Regular communication and progress reports are key.

As the supplier, you can choose the frequency with which a distributor reports sales or market updates. This should be included in the contract, but generally we think the most important thing is to maintain regular, active, and even casual communication, that maintains an interpersonal relationship between key people involved on both sides. This will enable healthy discussion and tuning of your sales strategy, timely feedback of local market trends, and the ability to share ideas regularly, such as adjusting the marketing strategy or the possibility for expanding into new products.

8. Clarify expectations for after sales support and service.

It is important to determine who will be responsible for after sales support and service of your product. Generally, the distributor will have this responsibility, but depending on the product, there will be different things to consider, including warranties, guarantees, technical issues, troubleshooting, training, repairs, and even replacement parts and components. These considerations should all be considered and included in your distribution agreement. You should make sure your distributor possesses the capacity to fulfill the agreed upon support obligations.

What do you think? Feel free to contact us!

Selecting a Distributor or Sales Agent: What to Consider

The following checklist originally appeared in A Basic Guide to Exporting, and has been slightly revised here. I believe it goes without saying that considerations should be tailored by each company to its own needs. There will also be some other key considerations necessary depending on the products and countries involved.

Size of Sales Force

  • How many field salespeople does the representative or distributor have?
  • What are the short- and long-range expansion plans, if any?
  • Would it need to expand to accommodate your account properly? If so, would it be willing to do so?

Sales Record

  • Has its sales growth been consistent? If not, why not? Try to determine its sales volume for the past five years.
  • What is the average sales volume per outside salesperson?
  • What are its sales objectives for next year? How were they determined? ?

Territorial Analysis

  • What sales territory does it now cover?
  • Is it consistent with the coverage you desire? If not, is it able and willing to expand?
  • Does it have any branch offices in the territory to be covered?
  • If so, are they located where your sales prospects are greatest?
  • Does it have any plans to open additional offices?

Product Mix

  • How many product lines does it represent?
  • Are these product lines compatible with yours?
  • Would there be any conflict of interest?
  • Does it represent any other U.S. firms? If so, which ones? (names and addresses)
  • If necessary, would it be willing to alter its present product mix to accommodate yours?
  • What would be the minimum sales volume needed to justify its handling your lines? Do its sales projections reflect this minimum figure? From what you know of the territory and the prospective representative or distributor, is the projection realistic?

Facilities and Equipment

  • Does it have adequate warehouse facilities?
  • What is the method of stock control?
  • Are its IT systems compatible with yours?
  • If your product requires servicing, is it equipped and qualified to do so? If not, is it willing to acquire the needed equipment and arrange for necessary training? To what extent will you have to share the training cost?
  • If necessary and customary, is it willing to inventory repair parts and replacement items?

Marketing Policies

  • How is the sales staff compensated?
  • Does it have special incentive or motivation programs?
  • Does it use product managers to coordinate sales efforts for specific product lines?
  • How does it monitor sales performance?
  • How does it train its sales staff?
  • Would it pay or share expenses for its sales personnel to attend factory-sponsored seminars? 

Customer Profile

  • What kinds of customers is it currently contacting?
  • Are its interests compatible with your product line?
  • Who are the key accounts?
  • What percentage of the total gross receipts do these key accounts represent? 

Principals Represented

  • How many principals is it currently representing?
  • Would you be its primary supplier?
  • If not, what percentage of the total business would you represent? How does this percentage compare with other suppliers? 

Promotional Thrust

  • Can it help you compile market research information to be used in making forecasts?
  • What media does it use, if any, to promote sales?
  • How much of the budget is allocated to advertising? How is it distributed among various principals?
  • Will you be expected to contribute funds for promotional purposes?
  • How will the amount be determined?
  • If it uses direct mail, how many prospects are on the mailing list?
  • What type of brochure does it use to describe the company and the products that it represents?
  • Can it translate your advertising strategy and materials?

 

Selling Your Products into China through Distributors

With the increasing size of the Chinese market coupled with rapidly expanding consumer spending, many companies have added the Chinese market to their list of strategic priorities. It often starts along the lines of “We should be selling into China”. But many companies tend to assume that their options are limited to setting up an operating company in China (WFOE), or entering a joint venture with a Chinese company. Unfortunately, both of these options often present significant challenges to a small to medium sized companies due to the required commitments of time, resources, and personnel, not to mention the significant upfront investment and associated risk.

Another increasingly common option however, is selling goods into China via Chinese distributors. The benefits quickly become apparent, enabling many companies to expand their sales in China, without requiring heavy upfront investment. Using this model, many Fortune 500 companies allow specialized Chinese distributors to leverage their existing distribution and marketing networks to sell their products. Yes, under this model, a cut of the final selling price will be allocated to the distributor, but this model is often a win-win for both parties involved, and the percentage allocated to a distributor can be extremely attractive when weighed relative to the cost of setting up and operating company in China to handle the full marketing, sales, and distribution process. As many companies have found out the hard way, this is an enormous undertaking, especially in a country such as China with vast language, cultural, and regional differences.

Many managers also point out that no one knows the different regional markets of China and how to reach them better than successful local Chinese distributors.

It is generally accepted from a legal perspective, that distributor relationships are much more straightforward (and less risky) than a joint venture, and far less time consuming and costly than opening an operating company in China.

It should be noted that it is still very important to find the right fit for your distributors to build a healthy and successful long-term business relationship. Although this is not always simple or easy, some firms do exist, like ours, with linguistic and cultural fluency in China, that can assist you to find, establish a relationship, vet, and manage your Chinese distribution channels.

Overall, there are many benefits that can be attained through leveraging Chinese distributors to sell your products into China. At Nexus Pacific, we have seen this model to be increasingly employed by foreign companies of all sizes and nationalities selling into China as part of a “China-lite” trend, where companies seek to limit downside risk from operations in China, while still achieving high sales volume and market penetration. Is this type of model right for your company?

If you have any questions or comments, please feel free to contact us!