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In China, Service Contracts are not automatic
By andrew | May 15, 2007
I was on the Shanghai subway recently – which is looking a little less shiny and new these days. It is still damned impressive though - bordering on ‘Sci-Fi’ to a New Yorker who is used to standing on naked concrete platforms as the antique R train goes shambling past. But here, in the futuristic Huang Pi Nan Lu station, there was a crowd murmuring around a stalled train. One of the doors to the outer safety-barrier was stuck, and a conductor had to come out and manually PUSH the thing closed. It took a while, and did not build confidence.
A westerner sees this and says – “It’s poorly maintained. They didn’t take the service contract. They are cutting corners and skimping.”
A Chinese person sees this and says – “The western-made equipment is no good. They’re cheating us. They are taking advantage of the Chinese again.”
Chinese business people are motivated by price, and often by price alone. They frequently decline buying service contracts because service contracts are expensive and can usually be bargained away. The problem when you’re selling is that the claims you’ve just made about your product’s reliability, useful life and functionality are often dependent on a program of regular, high quality maintenance. It was factored into your ORIGINAL price, but those terms have long gone by the wayside. Now that your product is stripped down to the absolute bare-bones of functionality, you probably assume that all of the claims you made about normal operations and normal life have been forgotten about. Bad assumption. That’s why it’s such a good idea to have a clued-in lawyer involved in the process at some point to make sure the final language of the contract isn’t going to get you into deep trouble when and if the product is used or maintained improperly. Not a big deal for staplers or paper clips, but a potential quagmire for earth-moving equipment or medical appliances.
The same principle works in reverse, as well. I used to be a big fan of a certain well-known brand of boat shoes that will remain nameless – but rhymes with Perry’s Mopriders. I wore the same pair through junior and senior year of college, and then backpacked through Europe all summer after graduation. They got dusty. That’s a bit all. My most recent pair has needed to be stitched up multiple times. The basic materials are fine – but the glue and thread holding them together aren’t up to the same standards of quality. What happened? There’s no way to say for sure, but I’m guessing that somewhere in the supply chain some clever soul figured he could earn an extra couple of Fen (pennies) by swapping in sub-standard material. The famous brand’s QC people were probably doing a fine job testing the leather and rubber – but probably never thought to double-check such a low-value input. Their brand was compromised for the benefit of 0.01% of the purchase price.
The problem is that many ‘old-school’ Chinese business people really don’t see a connection between price and quality. They think that A) everything is negotiable and B) low price = high value. You walk in to a negotiation determined to achieve basic levels of quality, but your counter-party may genuinely not have any idea how to accommodate you.
What’s your solution? When selling, make it very clear from the outset what the product can and can’t do under NORMAL conditions and maintenance. Have an experienced international lawyer look over the contract – IN CHINESE – and be very frank with him about the product’s useful life and performance under the conditions of the final deal terms.
When buying, check references carefully and ASSUME NOTHING. It’s not a rule, but in China there have been many cases where certain counter-parties have destroyed an enormous amount of value in order to make minimal extra profits for themselves. AND DON’T COUNT ON THE PROSPECT OF FUTURE DEALS OR LONG-TERM BUSINESS TO KEEP ANYONE HONEST. To some counter-parties, every deal is a one-off here. Check references – don’t just ask for them. Make sure that your counter-party has the kind of experience and understands your target level of quality BEFORE you start engaging in negotiations.
Topics: China Business, Due diligence |
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