How to make sure your Chinese seafood customer pays you

Published on
October 1, 2015

Getting paid: It was a surprisingly pervasive topic on the floor at the recent Seafood Asia Expo in Hong Kong – or rather, not getting paid. Such has been the rush to grasp opportunities in China in the past decade that many foreign seafood suppliers appear to have dropped their guard in terms of the normal credit checks and due diligence they would do on new clients.

The problem seems most acute among small firms with low capacity to collect pay. Take the case of the small-to-medium-scale U.S. shellfish supplier which early last year bagged a major deal with one of China’s largest restaurant chains. The chain, based in one of China’s east coast provinces, simply refused to pay for several large shipments of premium oysters.

Thankfully there was a Chinese American partner involved in the business who knew his way around the Chinese court system and ways of doing business. And while the court in the Chinese customer’s hometown ruled against the U.S. firm’s claim for payment, the judge in a higher Chinese court ordered the restaurant chain to pay up. It took nearly a year, but the oyster supplier got the money.

Most problem clients simply ignore requests for payment, assuming the overseas supplier will never go to the expense of coming to China to chase the money. From what SeafoodSource has heard from exporters, some of the Chinese buyers who flat-out declined to pay did so on spurious grounds – such as claiming the foreign supplier didn’t have the right licenses or paperwork in order. Shippers then should be very clear and thorough on having the right red tape for exporting to China. Be sure of who’s responsible for clearing what with the Chinese import authorities – and have it in writing.

But before agreeing to any deals with new business partners there are several simple, inexpensive ways to probe your new customer. Get someone with Chinese language ability to call the numbers on the customer’s name card. Try to send a fax to the listed fax number. This writer was asked for advice recently by a U.S. supplier who’d secured a large order from a Chinese customer she didn’t know, with payment due only after delivery. Calls to the Beijing numbers given by the Chinese side (all of the communication up to that point had been by email) showed one of the numbers was disconnected while the other was for a company in an entirely unrelated industry. The deal fell through.

Another way to do a rudimentary but useful check on your new customer: Provincial and national offices of China’s State Administration of Industry & Commerce (SAIC) are required to publish online records on corporations in China. If your potential partner doesn’t check out there and can’t explain why then think twice about doing the deal.

With slower economic growth and weaker sentiment curbing consumption we are now in a period of debt accumulation in China with many corporations grappling with debt loads accumulated in times when credit was more loosely available.

But compounding the problem for seafood suppliers is the number of Chinese firms entering the seafood sourcing business. Very attractive margins on seafood sales have drawn firms from sectors such as steelmaking and chemicals (which currently don’t offer attractive margins) to open subsidiaries that trade in imported food, for which there is still much demand in China.

Some of these firms enjoy ample access to Chinese bank credit and nice office space thanks to their (usually state owned) parent company. Crucially they also trade on the name of the parent company when doing business – but in most cases are run as separate entities with little oversight of the parent firm. The newness of their business means there’s little in the way of credit history records on which to judge them.

Large western corporations are usually able to hedge and protect themselves against Chinese defaulters. There are files stacked high on the desks of the China offices of risk advisories such as Kroll and Control Risks. But small-scale seafood trading companies may not be able to afford these services.

And yet a veritable cottage industry has mushroomed around the rectification of China’s debt situation. There are local firms who will run credit checks and try to collect debts on behalf of corporations.

One way that seems to work for small-scale seafood exporters to protect themselves in China is to employ a China-based western agent – many of these now exist, usually one-man bands in big cities like Beijing and Shanghai – who show up at the offices of Chinese clients who’ve not paid for the seafood they ordered. A visit from a Chinese-speaking foreign representative of the far-away creditor seems to work wonders in many cases.

Several such agents say in more difficult cases they frequently sell the debt, cutting losses by handing over the debt to a local firm who’ll know all the best methods of extracting payment from local defaulters.

There are many honest buyers in China but the apparent margins offered by imported seafood attracts lots of unscrupulous characters. In any case it’s worth being wary. One western European crustacean supplier was last year driven to near bankruptcy by a failure to collect payment in China. “The accounts receivable desk at the company just didn’t keep pace with the business development side and before we knew it we were owed half a million euros in China which put the company in peril,” said an executive from the firm. About half of that outstanding debt remains, and is unlikely to be collected in full. It needn’t have happened.

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