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The objective of this article is to share our international paymen experience of Chinese suppliers.
To pay your orders in China, two prefered solutions:
It is by far the most common mean of payment, it has the advantage of being quick and simple and relatively not too expensive. An international transfer cost is minimum 50 Euro/USD. Usual payments are made under the “SHARE” term which means customer and supplier will both pay half of it (25 Euro/USD). For some small payments supplier may ask for the payment to be done under “OUR” term, in which case customer will pay 100% of transfer costs.
Please take into consideration that it will take 3 to 5 days for the supplier to actually receive the payment on his account.
Disadvantage of this method is even if the payment can be tracked and proved, there is no warranty if Chinese supplier business is based on deception, scam or the quality of goods have issues.
! Attention, in order to avoid delaying and paying more bank costs be sure that the complete name of the supplier appears on the bank slip, in case the space given to the name is not big enough, you need to write the full name in the commentary section. Chinese banks do check the names and will not accept to pay if any letter or word is missing or misspelled.
Due to it’s costs (consider between 200 & 500 Euro / USD) and it’s complexity to use, it is a solution to consider only for business of important amounts.
Letter of Credit is a warranty given by the bank of the customer to the bank of the supplier that if certain documents are provided payment will be made. Documents can include logistic documents (to validate the reality of an expedition), third party control (validate quality & quantity of goods) and are usually limited in time.
The whole process is very “administrative”, you should therefore not be afraid of paperwork and pay a lot of attention to documents details.
There are other ways of payment like Paypall or Alipay (amongst more), but they are more directed to B to C solutions than B to B.
Paying suppliers in China can be a headache, government do have a very tight control over bank transfers and particularly for those including foreign currency. Chinese legislation only allow the company that declared the exportation of goods to receive the foreign transfers.
In order to be able to export, a Chinese company need to have a Import /Export License which is not so common even for big companies. If the company doesn’t owns a Import / Export License she can use the services of a Import / Export agent who will be in charge of the documentation and will need to receive the international payment on its own account. It is so not rare if you send an order to a company called “Wang Manufacturing Limited” to receive an invoice from a company called “Lee Import & Export Limited”, the trading agent after receiving the foreign currency will transfer the payment in RMB to the manufacturer.
In some cases, suppliers may send an invoice from a Hong Kong company, in these cases it is often a trading company, Hong Kong companies not being able to act as an Export agent in mainland China, they act as intermediaries. (often to hide the name of the exporter)
It is also possible that the account on the invoice refers to a personal account, this is particularly seen for tooling fees, tooling not being exported there is no need of export authorization and this enables company not to pay taxes. These payments are illegal in China, we therefore don’t recommend to proceed.
Same with next door suppliers, payments terms will first depend on the trust relation between the buyer and the supplier and negotiating skills. Nevertheless, please find below some general remarks :
For a first payment, it will be difficult to make the supplier agrees to anything else than a 100% before expedition.
For toolings, classic payments terms are 50% at the order and remaining 50% after sample validation, knowing that if the samples are never to be ok if will be very difficult to get the first 50% back.
For parts it is very common to have payment terms 30/70 : 30% at the order, remaining before expedition, against document ( expedition is done, but in order to be able to claim the goods after arrival in the destination port, customer will need to receive the original Bill of Lading, document which will only be released after full payment of the order) or in some case after goods reception by the customer.
In order to understand the difficulty chinese suppliers agree to payement after reception of goods, it is important to remember that maritime freight between China and Europe will last for 30 to 45 days. In the case of a payment Net 60 days it means the supplier will only be paid 3,5 month after shipment with usually on top of that a currency risk.
Don’t hesitate to contact us for information on dealing with production / suppliers in China.
In spite of the increase in production costs, China has succeeded in keeping an overall cost advantage over other countries. This resilience is partially due to the fierce competition between Chinese suppliers.
For a given product, there will be tenths or hundreds of Chinese suppliers, often located close to one another and with very similar products, as the last factories to open where often opened by former employees of the first ones.
Naturally, the exacerbated competition is good for buyers that can use it to pressure down on supplier’s prices. The downside of it is that it is hard to identify which one will be the best match if you are not only looking for price but also for quality. This difficulty is enhanced by the plethoric offer of trading companies (also more commercially active and English speaking) that tops the offer of the already numerous factories.
It is important to act according to a methodology, which we propose in three phases:
The supplier research phase is rather simple, as one just need to browse what one is looking for, use specialized websites (Alibaba, made-in-china, global sources…), or search specialized fair listings where one can always find a fair share of Chinese suppliers.
The next step is to compare the known technical offer/ capabilities of suppliers, their pricing and response time. Following this comparison, a short list of 2 to 3 suppliers at max should emerge.
You then need to evaluate the credit you can give to this suppliers with background checking : documents (license), address, factory or trading company, percentage of production sub-contracted. It is here quite convenient to use a pre-established questionnaire and then conduct some verifications. You may also require 2/3 of them to provide samples to check quality and reactivity, Even if a little costly, it may be worth it and prepare you for a backup plan.
Needless to say, following this procedure takes time and a little bit of knowledge about doing business in China is needed in order to avoid usual Chinese suppliers tricks. Furthermore, if the size of the order or the complexity of the parts needs it, supplier visit or third party audit/inspection should be considered seriously.
What are Incoterms?
If your company trades on an international basis, or either ships or receives shipments from an overseas market, then you should be aware of
The International Commerce Terms (Incoterms) are standardized terms used in international trade.
Incoterms are rules of trade that essentially dictate the exact delivery terms between two parties.
These terms would include where and how the goods should be delivered, who pays for what – local charges, export charges, loading charges, … -, who is responsible for insurance, and who handles specific procedures such as unloading.
E terms (EXW): The seller makes available its goods at their premises in order for the buyer to collect. This is the minimum obligation for the seller.
F terms (FCA, FOB, FAS): The seller delivers the goods to a carrier appointed by the buyer. The seller will arrange and pay for delivery of goods to the carrier, but the buyer pays for everything after that.
C terms (CFR, CIF, CPT, CIP): The seller has to contract for carriage, but does not assume the risk of loss or damage after the shipment.
D terms (DAT, DAP, DDP): The seller bears all risk involved in bringing the goods to the buyer.
Is FOB valid for air transport?
Of the three terms contained within the F group two are intended for use only when the goods are carried by sea (but not containerized freight) or inland waterway transport, the other one FCA(Free Carrier … named place) is intended for use by any mode of transport.
If the shipper air freights a consignment of goods which have been ordered as “Free on Board Shanghai airport” the risk which should pass from the seller to the buyer when the goods cross the ships’ rail remains with the seller as there is no ships rail point for the passage of risk from one party to the other.
My name is Wenou Cai, I am a German intern and have worked for 4 and a half months at AGC;
Even though it was only for a short period I could find out and understand the most important aspects of the business world. Until the midterm, it was the learning and development phase. The good thing about a sales person is that you always get to know new people which extends your social network. At the beginning I was not even able to imagine having such a responsibility like calling people from higher positions and visiting suppliers. Because of this I also could travel around China a lot without spending any money. We have visited suppliers in Kunshan, Suzhou, Hangzhou and some in rural areas outside of Shanghai center. I could experience all the local dishes of these different cities in the presence of the GM. I am really grateful and feel honored for this great opportunity.
After midterm, I got to know the feeling of the work routine which means I did less mistakes and spoke more freely with people. First, I called manufacturers of plastic products, then manufacturers of castings and machined parts. Finally, in the last month, I got deeper into the area of PCBA and sensors which is more sophisticated than the other products.
My most important goal was to dive into the business world in overall, finding out the differences between the Chinese and the German market, understand the operation process and if the work fits me or not. Ultimately, I can proudly say that I have reached my goals. Now, I know how the process is working from customer to subcontractor to the supplier or vice versa. Knowing the products and its process is the key to success and it is the hardest but also one of the most interesting parts of that job. Before, I never cared about how and of which components all the products are made. Now, I know all the different specialization and characteristics of the products, how and of which components they are built and who made them. This is really interesting because I had no clue that there were so many suppliers for certain products.
AGC Shanghai Office
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