Foreign companies use Chinese manufacturers to produce all kinds of goods. These local companies can produce almost anything for western importers, which is why having a solid Manufacturing Agreement that includes a warranty is fundamental to protect your investment.
A product of inferior quality can have a negative impact on your reputation with consumers and the image of your brand in the long run. But how can you make sure that your Chinese manufacturer will adhere to the standards of your company.
It is crucial to sign a valid manufacturing contract with a China supplier that includes a warranty.
In the past, many manufacturers in China insisted on no product warranty. Today, more and more are willing to offer product warranty against product defects for which the manufacturers are responsible but exclude design defects for which the buyer is accountable.
The warranty period is usually measured from the date of shipment since it is difficult for the manufacturer to know the date of sale.
As part of the supply agreement, you should include detailed product (and packaging) specifications and quality control and inspection procedures. It’s common to have an inspection both before and after product delivery, and this is particularly important if the ultimate delivery destination is far from the Chinese manufacturing center.
Think about what an inspection will entail—every product vs. sampling, parameters for an epidemic failure, etc.—and link payment to the manufacturer with the inspection result.
There are two separate warranty issues. The first is the warranty for defects in the product as delivered, while the second is on defects that appear only after use.
There are three options commonly used in China for warranty for defects that can be discovered on inspection before or when delivered.
In the first option, the Chinese manufacturer warrants that the product will meet certain specifications and is inspected in China prior to shipment. If a defect is discovered, the defective product is not shipped. In some cases, you can request the product to be destroyed or recycled.
The financial shortfall that results from this situation can be handle in two different ways: the manufacturer is required to reduce the amount of its invoice by the amount of product rejected or the manufacturer is required to make-up the shortfall with compliant product within a specific time frame.
In the second factory warranty option, the product is inspected when it arrives to its final destination (US, Europe, etc.) No payment is made until after the product has been inspected.
Under this agreement, the product is inspected within a specific time frame, usually 60 days. If defects are discovered, the items are discarded. This approach is normally adopted by “big box” retailers. However, Chinese manufacturers agree to this system only when there are large purchases in fixed amounts for a specific time period.
In general, manufacturers will not agree to this for unspecified “per purchase order” arrangements.
In the third option, the product is inspected when it arrives to its destination, but payment is made prior to shipment. Under this approach, the Chinese manufacturer warrants that the product will meet specifications and 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 nor 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 majority of “per purchase order” transactions from China. The problem is that you cannot collect on your credit without making a subsequent purchase, which means that you are trapped working with a supplier that manufactures defective products.
Chinese factories usually do not offer any after purchase warranty. If you fail to find a defect at inspection, you are typically responsible for the loss. U.S. companies counter by demanding an extended warranty for one or two years and the manufacturer repairs or replaces the item.
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.
Even when they agree to this extended warranty, many Chinese factories will not live up to the commitment. Currently, due to the economic situation, many local manufacturers are facing financial troubles and may be forced to shut down their operations in the next year or two. They may agree to your terms, but chances are they won’t execute them.
The warranty issue for China is quite complicated and much of the procedure depends on payment terms and place of inspection.
To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at kristina@woodburnglobal.com.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.