Many Chinse manufacturers have developed a standard form of payment, often termed 30/70 TT. This means: 30 percent down payment on placement of the order, with the remaining 70% due on shipment. This means 30% of the price is paid before the product is manufactured and 100% of the price is paid before the product is shipped.
Here are some common results of this system:
- When the product arrives in the United States or in Europe it turns out that a substantial percentage of the product is defective. The buyer demands a refund and the Chinese manufacturer refuses. Alternatively, the Chinese manufacturer offers a discount on the next order. If this offer is accepted, the buyer is forced to continue doing business with a manufacturer that makes defective product.
- The buyer arranges for an inspection during the production process or prior to shipment. The inspection reveals a substantial number of defects. The buyer demands a refund of the deposit and the manufacturer refuses, stating that it already spent the deposit to manufacture the disputed goods. Alternatively, the manufacturer offers to correct the defects and provide a discount on the existing order. If this offer is accepted, the buyer is forced to continue doing business with a manufacturer that makes defective product.
The foreign company buying the product then contacts my law firm about filing a lawsuit against the Chinese manufacturer, rather than accepting the unacceptable terms. In most cases, however, the buyer ultimately determines that the cost of litigation is not justified by the amount of the potential recovery. The buyer is then forced either to abandon the manufacturer and take its losses or accept the terms proposed and continue working with a bad manufacturer.
We continue to see this problem on almost a weekly basis and it is pretty much inherent in the 30/70 TT system. I am not suggesting the 30/70 TT system be abandoned because for many there really is no viable alternative in China. I am though suggesting that the foreign buyer mitigate its risks by doing the following:
- Do not make the second, 70% payment until after an inspection of the goods. In this way, the buyer’s risk is limited to the 30% down payment.
- Inspect the product as early as possible. If you find defects early, it is possible you will be able to resolve the issue in time to save the shipment. If the issue cannot be resolved, you at least can probably move to a different manufacturer early enough to obtain acceptable product in time to meet your business needs.
- Treat the 30/70 TT method as the price for testing out the Chinese manufacturing system and try to move to a different payment method as quickly as possible. You should move to a payment method that does not require making payment until after an inspection has been made. The use of such a method will require a quantity and timing commitment from the buyer that extends beyond the spot, single container type of purchase that is typical for the 30/70 TT method of payment.
What are you seeing out there?