Buying heavy industry assets from China?
How do you know if you’re dealing with the manufacturer, a supplier or an agent?
You’ve been in discussions to buy heavy assets from China for months, detailing product specifications and standards, discussing potential delivery date windows, analysing and agreeing to the terms of the contract. Internal approvals has been signed off and you’re about to sign . . . Are you 100% sure you’re agreeing to terms with a party who has control over satisfying the conditions stipulated in your contract?
Let’s start off with some quick definitions.
A manufacturer is as described, they manufacture the products. They are the only ones who can definitively agree to the terms of manufacture, especially when it comes to meeting the required standards and specifications.
A supplier is a company that sells other manufacturers products (and sometimes their own). They usually have an official supplier agreement with the manufacturers or may purchase and on-sell the equipment as the manufacturers may not have their own distribution network.
An agent is person/company who is generally financially rewarded (often by marking up or by a fixed percentage of the total sale price) for selling a manufacturer’s equipment. They generally have very little influence over the manufacturer.
Using a supplier or agent increases the number of hands in the overall supply chain, increasing the overall product and contract cost, and they may not add any value to your project. In China, many manufacturers use an agent or supplier arrangement to achieve offshore sales as they do not have the expertise or language capability to deal with English speaking clients. More than a few of my past clients have made the mistake of entering into agreements thinking they were dealing with a manufacturer. They did not realised that they are not dealing directly with the manufacturer until the project has commenced and the contracts has been signed. This situation usually come to light once they do not receive specified deliverables or project milestone updates that were stipulated in the contract.
One client in particular did not know they had signed an agreement with an agent until we went to site and after a few probing questions I informed them they indeed signed with an agent who had then outsourced the manufacture. To make matters worse production of the products had already begun one-month prior to our arrival (for project kick-off) and the factory was using a specification from a different client based in a different country. Needless to say this setback the project by six months, resulted in numerous contract and compliance meetings and negotiations and significant time onsite to agree to and carry out compliance activities with the manufacturer.
There are two (2) critical activities that need to be carried out to ensure that your interests are being prioritiesed when manufacturing in China. They are:
Pre-contract Due-Diligence; and,
Onsite Manufacturing Oversight.
Carrying out due-diligence activities before you sign a contract in China is critical. During this step you can identify and put actions in place to mitigate the risks discussed above. It’s at this point you have leverage and can have the manufacturer agree to a risk mitigation plan and implementation activities before the contract is signed in good faith.
During manufacture many things can go wrong and they’re usually a function of untrained and inexperienced operators on the factory floor and ineffective management who aren’t able to identify compliance issues as they occur and influence change to ensure they don’t happen again. Onsite manufacturing oversight carried out by your employees can be an expensive task and can also be inefficient and relatively ineffective due to vast cultural and language difficulties.
Where to from here?
If your company is looking to begin manufacturing in China, purchasing heavy industry assets or sourcing fabricated steel and building products across the mining, rail and construction industries, give the team at manufactconsulting.com a call or drop us an email to discuss your requirements.
Your on the ground resource for procurement and manufacturing in China.
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