Someone Owe You Money in China?

Tuesday, January 9, 2007 22:00
Comments Off on Someone Owe You Money in China?

In a the December issue of Inc. , Larry Kanter offered up to readers 7 ways to find out why a payment is late and what to do about it in his article Smart Questions for Late-Paying Clients.

The questions he asks are:
Question 1: Did you get the invoice?
Question 2: Was there a problem with my product or service?
Question 3: Why didn’t you let me know you’re behind
Question 4: How much are you short?
Question 5: Who is the best person to talk to about this invoice?
Question 6: When did you send the check
Question 7: Should I be worried about other invoices?

Reading the article and its findings reminded me of my time spent at Graybar Electric as a financial Assistant responsible for Asia Operations in 1998. It was 6 months after the Asia crisis and our customers were neck deep in infrastructural projects that had just been put on hold. Airports in Malaysia, power plants in Indonesia, and dam projects in other countries all came to a screeching halt as currencies melted down and governments diverted funds to support weakened economies. Needless to say payments were outstanding, and the finance department was worried about the status of more than one payment.
With collections of outstanding invoices, and preventing further outstanding invoices, one mf my responsibilities, I often ran into one or more of the above. Invoices had not been received, customers didn’t feel the need to pay us until we were paid, and supporting documentation often was not sent with invoices.

Fortunately with the bulk of our customers being large U.S. firms like Black & Veatch and Fluor Daniel, issues were quickly resolved and payments were executed once the issue was identified and addressed. .
In China though, there are hundreds of storied about invoices going unpaid, and for many the risk of outstanding payment is high due to the following:

  • China’s lacks credit agencies to properly assess the credit risk of customers
  • Understaffing of offices can lead to poor cash management and collection policies
  • Lack of middle management with credit risk management experience, and high turnover of those employees
  • The speed and circumstances by which relationships are made in China
  • Poor contract enforcement in the courts and few legal recourses otherwise
  • Poor understanding by senior management of the above issues

When working in China, the paramount thing that a company needs to remember is that those with leverage get paid, and those that give up their leverage do not.

Once products or services have been delivered, getting final payments can be difficult as customers will try again to then negotiate the contract pricing and payments. It is a phenomenon found more in the service sector than in the industrial sector, but none-the-less, once the customer possesses the goods/ services the provider will no longer have any leverage to bargain with.

In the case of one consulting company, nearly 40% of yearly contracted revenues were already late by more than 60 days. To make matters worse, the services had already been completed, reports had been published, and final presentations had been given. In essence, their position was a poorly leveraged one as the customers already had everything, and large portions of the contracts were at risk of not being paid.
A quick study of Chinese business offers a basic understanding of how Chinese firms manage this risk:

  • Work within the network
  • Cash is king
  • Get paid before final delivery

In the case of our raw material supplies (metals, wood, etc) industry standards are to pay 30% down with the balance paid before they ship. Of course for many this sounds risky, but the supplier’s know that if they let the shipment out the door they have lost their leverage. For buyers, this is risky though as one may receive a load of rubber ducks, but that is why we set up our final QC check at shipment (we take pictures of containers closing) and we use our own trucking companies to move the goods to prevent any switching later. In the end, risks are minimized on both sides.

When operating in China, the following 5 tips are offered as a means to minimize risks of nonpayment:

  1. Have a contract in place that has been reviewed by a lawyer and is sign in blue ink and chopped with the company seal
  2. Be clear and consistent in proposals and on invoices of payment terms, currency of payment, and provide all bank details
    • Manufacturers – if the program is long term in nature, insert a disclaimer explaining that prices may vary for VAT and RMB changes.
  3. Structure payment schedules that prevent large sums. Push for higher deposit rates and if possible work in a second/ third payment so that the size of the final payment is as small as possible
    • Manufacturers can use different stages of production and quality checks to tie payments to
  4. Identify the person who is ultimately responsible for signing the check, know who they must have approvals from, and understand what documents they need to release the payment.
  5. Sign contracts and accept payments outside of China (HK, U.S., E.U., etc) in jurisdictions that have strong court systems and consistent enforcement

Doing business in China is already difficult enough, but for some the added surprise of having to perform collection services is not a pleasant one. It is critical to develop and maintain a strong risk management system, and this should include strong credit risk and collection policies.

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