China Business Scam Week, Part 1: Bricks for Products

baking powder. One very savvy chemical industry client once told me that “more than 95% of the China companies selling chemicals online are fraudsters and many of these companies are not really even in China.” I have no doubt this person was exaggerating for effect, but another such person I know insists the percentage does scrape 50 percent.

What is also old news is how there is a long history of Chinese fishing companies (much fewer than 95% — that I know) sending over large amounts of spoiled fish and then claiming the fish went bad en route due to no fault of theirs.

But here’s the “new news”.  The sending of “junk” instead of real product has spread to pretty much every industry in China and ordering your products from reputable online sites provides little to no protection. Our China attorneys have consistently found that ordering products from a Chinese manufacturer listed on a site that claims to screen its vendors or claims to provide you with recourse provides little to no added protection.

The below email (modified so as not to reveal anyone) is 100% par for this new course:

Hello, Not sure what to do here with my situation, I’m very flustered here. I worked with a reputable company in China to manufacture window awnings [I made this up] on which I have a U.S. patent pending and also have trademarked.  I received samples from them and all was good. I placed an order for 5000 pieces and they are of the wrong material, warped and the sections that are supposed to open freely do not operate correctly because of the wrong material. I spent hundreds of thousands on this order and now they will not get back to me. They told me they were going to rework the products because they knew there was an issue. Now I have all this product that is useless that I cannot sell and I am paying storage on all of it because I am hoping still to be able to return it. I did use ______________ to find them and but it seems they cannot do much to help me. I’m out so much money and yet still trying to get a new product to market but that is proving really difficult because I have been hurt so badly financially. Can you help.

My response to these sort of emails is usually very short and it consists of my explaining that the odds are overwhelming that we cannot help them and that they should think long and hard before throwing good money after bad. I then mention something along the lines of how they should not order from China again without doing a lot of things differently than the first time.

But here I can say a more about why this sort of thing happens and what you can do to prevent it from happening to you.

1. These things happen because the buyer does not conduct due diligence on the seller. It is most of the time that simple. I swear, half the time when I get an email like the above and I spend 2 minutes searching out the Chinese company on the internet I find multiple instances of fraud committed by the same Chinese company.

2. These things happen with companies that want to make a few final sales before they file for bankruptcy or just shut down and disappear. Just imagine the profits to be made from three $350,000 sales for which no product is ever provided. No just imagine the incentive for the owners of the Chinese manufacturing company to sell and not supply to foreign companies right before (or sometimes even right after) they shut their doors for good.

3. Almost always the Chinese company that committed the fraud does not really exist. In other words, it is not registered anywhere in China or if it is registered as a real company in China it is registered for something like plumbing repairs, not for manufacturing window awnings.

4. These fraudsters are smart and there are good reasons why they spend the money to send you something instead of nothing at all and why they at first claim they will remedy the problems and why they so often continue to make that claim. The reasons are usually two-fold. One, sending even really bad product is less likely to lead to criminal charges than sending no product at all. If the police come by the Chinese fraudster can say, “I sent them the product they ordered. It’s not my fault those Americans/Europeans/Australians are so picky.” Two, by stalling they can keep their scam alive for much longer. They’ve paid for advertising and for a website and they’ve even bought the really bad product (be it spoiled fish, baking powder or bottom of the line window awnings) and they want to maximize these expenditures

5. Be careful when establishing business relationships with a new company. Do as much due diligence as you can. Send people you trust to do a site investigation of the manufacturing site.  Do a site inspection on goods before payment. Make sure the company exists and is legally able to conduct the business for which you will be paying it.

6. Use a contract that actually works for China and that sets forth clearly what you are buying and what happens if your China supplier fails to comply. See China Contracts: Make Them Enforceable Or Don’t Bother.

7. Know the market price of whatever it is you are seeking to purchase before you purchase it. Do not trust a company that gives you unreasonably low price quote.

8. Consider a small trial order to reduce your risk. The problem with this though is that many scammers will provide you with a good trial and then scam you when you order the full amount. But if you combine this with a contract that works for China and proof that the company actually exists and is operating legally, you will be lowering your risks.

One more thing that warrants its own special mention. Do not buy product from China without first registering your trademark in China because many of the fraudsters sending out bad product are also registering YOUR brand names and/or product names and/or logos in China as THEIR trademarks in China and then coming back later seeking to sell you these trademarks (for a lot of money) under threat of blocking your products from leaving China for violating THEIR trademarks. See 8 Reasons to Register Your Trademarks in China.

An ounce of prevention is worth a pound of cure.