Don't Get Shanghaied!
Scams and Tricks to Avoid in China

By Bill Quarless
May 2008

{Note: This column appears in the May 2008 issue of Response. Click here to read it on the Response site.}

After years of developing and manufacturing DRTV products in China, I've seen all the tricks factories play. While most factories are managed by good people, all are looking to make more profit.

If your DRTV products are made in China, here are some of the most common scams and tricks you need to know about:

1. The shell game

This scam begins when you look at a factory's catalog and/or Web site. What you see is its factory sign atop a sprawling, high-tech campus. What you don't know is the image was superimposed using Photoshop - you're looking at a factory that won't be producing your goods. Often, there are so many company names that trying to discover exactly who you're working with is like trying to guess which shell is hiding the nut. Don't be fooled: make a personal factory tour, and see for yourself what you're getting.

2. Tool gouging

This trick starts with an unbelievably good quote, often at or below the factory's cost. It's intended to beat out any competition and lock up your business. Sounds great - until they hit you with tooling and mold charges marked up four or five times the normal cost. It takes a million units for you to realize the cost savings you thought you were getting. The solution? Get competitive mold quotes and inform the factory that you are doing so.

3. Free tooling!

This trick is the opposite of tool gouging. Be wary of any deal where the tooling and molds are "free." There's no such thing as a free lunch, even in China. Molds are never free. They are simply amoritized into the cost of goods. There's nothing wrong with thatper se, but you must make it clear that what you pay for, you own. In China, "free" really means "free to use," the assumption being you don't own the molds, and the factory is "free" to use them for other clients.

4. The ol' bait-and-switch

This scam is hard to catch because it's a scam of omission. A classic example: the factory gives you an amazing quote to secure your business. You assume the quote is "free on board" (FOB), or delivered to the port, since that's the standard. But the factory is quoting you "EX-Works," meaning the cost of transportation to the port has yet to be added on. It's a classic bait-and-switch. Your protection is a quote confirmation. After receiving a quote from a factory, confirm with a document detailing the product, packaging and terms. The factory must sign and return it. You'd be surprised how often "corrections" are made.

5. Money games

This scam takes advantage of some unfortunate economic facts. One, the U.S. dollar is dropping and the Chinese yuan is rising. Two, the cost of oil and raw materials is going up. Three, the Chinese government is removing or reducing value-added tax (VAT) rebates. All three are making everything from China more expensive. It can all be very confusing, and some factories are using that confusion to make their wallets fatter. Your defense: staying current on China issues, and letting your factory know about it. This will make them less likely to exaggerate price increases. For example, your factory is less likely to pursue a 6-percent increase based on "currency changes" if you're able to inform them the Chinese yuan has only appreciated 4 percent since January.

Awareness of these five tricks and scams is a good first step toward making sure you don't get "Shanghaied" in China. Of course, the single best way to protect yourself is to work with an experienced sourcing and production management firm that knows all the tricks and has already developed the appropriate counter-measures.