I was recently asked by a client about the warranty it should seek from its Chinese manufacturers to put into the Manufacturing Agreement I’m drafting for this client. I responded as follows:
There are two separate warranty issues. The first is the warranty for defects in the product as delivered. The second is the warranty on defects that appear only after use. I will discuss each in turn.
For warranty defects that can be discovered on inspection before or when delivered, there are three options commonly used for China:
1. China Factory Warranty Option 1
a. The Chinese manufacturer warrants that your product will meet certain specifications.
b. The product is inspected in China prior to shipment.
c. If a defect is discovered, the general procedure is as follows:
i. The defective product is not shipped. In same cases, it makes sense to require that the product be destroyed. In your case, with your product, it seems the best route will be to require that the product be recycled.
ii. There are two possible responses to the financial shortfall that results from defect:
a) The manufacturer is required to reduce the amount of its invoice by the amount of product rejected.
b) The manufacturer is required to make-up the shortfall with compliant product within a specific time frame.
Option 1 is the preferred option in your situation.
2. China Factory Warranty Option 2
You inspect your product when it arrives in the United States and in Mexico. No payment is made until after the product has been inspected. Under this approach, the product is inspected within a specific time frame, usually 60 days. If defects are discovered, the procedure outlined in Option 1.c. above is followed. This is the approach the “big box” retailers typically take. However, Chinese manufacturers normally agree to this approach only where there are large purchases in fixed amounts for a fixed time period; They normally will not agree for unspecified “per purchase order” purchase arrangements. Because the quantities you will be buying are quite large, I suggest we try to get your manufacturer to agree to this option.
3. China Factory Warranty Option 3
The product is inspected in the United States and in Mexico, but payment is made prior to shipment. Under this approach, the general procedure is as follows:
1. Your Chinese manufacturer warrants that your product will meet your specifications.
2. You have 30 days to inspect the product. If you discover defects, you are given a credit against future purchases. The factory does not repair, does not replace and does not provide a cash refund for the defective product.
Though there are many possible variations, the above approach is used in the vast majority of “per purchase order” type purchases from China. The problem with this approach is that you cannot collect on your credit without making a subsequent purchase. This means you are trapped into making purchases from a company that makes defective product.
Chinese factories usually do not offer any after-purchase warranty. In other words, the traditional approach in China has been to say: you must find the defect on inspection and if you fail to find one, that’s on you. U.S. companies typically counter by demanding an extended warranty on the following terms [for the particular product our client would be buying]:
1. One- or two-year warranty.
2. Warranty to repair or replace at the expense of the Chinese factory. No cash payment made from the Chinese factory and credit against future purchases are at the option of the buyer.
3. If the defect rate exceeds 3%, this is considered an epidemic failure and under these circumstances, the factory is liable for all costs incurred by the buyer in response to the defect, in addition to repair and replace.
Though many Chinese factories will agree to this type of extended warranty, it is not typical for them to live up to the commitment, and with so many Chinese factories in financial trouble these days, there is also a risk that your factory will not exist in one or two years.
The warranty issue for China is quite complex and much of the procedure depends on payment terms and place of inspection.