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Send a shipment to a fulfillment center with a 10% defect rate and it’s game over.
In other words, your business stand and falls based on the accurate reporting of quality issues and defects, from your QC partner.
Now, what if QC partner accepts payments from your supplier – in order to not report quality issues that can potentially shut you down?
That’s a nightmare scenario for everyone importing from China.
But there are things you can do to save your business, before it’s too late.
Renaud, why is bribes a problem in the QC industry?
Many buyers are quite afraid of this, because the inspector does not report all of his findings. As a consequence, a batch of products that presents a serious and widespread quality problem is accepted.
It means the buyer pays entirely for an order, and (in the worst case) might be unable to use or sell the products. A lot of money is lost, and credibility is lost on the market. Materials have been processed and shipped across the ocean but have to be thrown away. It is a huge waste!
To make matters worse, as the buyer, you likely have no leverage over the supplier. Typically, the order has been paid in full at that point. Not many buyers have a strong enough contract and accompanying documentation that allows them to sue the supplier for the loss.
More than 95% of Chinese suppliers actually use the fact that you did a quality inspection before shipment to their defense.
They will say ‘oh, but even your inspector hasn’t found about this issue, so how were we supposed to find it?’. That’s frustrating, to say the least.
Now, let’s distinguish between two types of bribes.
First, there are the ‘real bribes’. The inspector gets a kickback, usually monetary. This happens roughly the same way in China, in Egypt, or in Mexico – it is not a ‘China issue’.
These bribes typically happen when there is a clear non-conformity, and all parties know that a failed report would have economic consequences for the manufacturer.
‘Real bribes’ also happen when the quality department of a buying office acts outside of any close supervision and simply extracts money because they are in a position of power. This has happened, including within the largest of companies. I heard fewer stories of that nature about inspection companies, but it happens too.
Second, there is ‘gentle pressure’. The inspector feels comfortable with the factory reps, gets a nice lunch, is driven around, etc. and doesn’t enforce the QC procedure into the details. He might ‘forget’ to record a few defects, or he might report an issue as less serious than it really is.
Note that ‘gentle pressure’ is probably stronger in China, but it happens all over the world. Robert Cialdini calls it the rule of reciprocation. In his words, “the rule says that we should try to repay, in kind, what another person has provided us”, even if this favor is uninvited.
How common are these practices?
If I were to guess, I would say this about China:
a. ‘Real bribes’ happen, maybe 1 – 2% of the time, be it in inspection agencies (as a whole) or buying office staff. The proportion goes up exponentially with the value of the order being inspected.
b. ‘Gentle pressure’ issues are much more common – maybe 15% of the time, overall and across all companies.
Take these numbers with a grain of salt, though. They are wild guesses.
That’s quite concerning. As a buyer, if I knew nothing about the organization employing an inspector, I would not trust their QC reports.
However, it is not as widespread as what many people in the business of importing from China tend to imagine.
I heard many people give very high estimates that are simply not credible. It’s not true that most Chinese QC inspectors get bribes every week. Not even close.
I am pretty confident that the proportion of purchasing managers working in Chinese factories and getting kickbacks from their suppliers is considerably higher than the proportion of inspectors getting bribed at least once a month.
Fortunately, the trend is toward fewer bribes, for several reasons:
1. Manufacturers make less profit than 15 years ago. They are more reluctant in handing out cash for favors.
2. Mentalities in China are changing. There are more and more young people ready to defend the customer and ignore all tactics from the supplier’s side – including shouting, threatening, and corruption.
3. Technology helps. QC reports have been illustrated with many photos for 10-15 years. And the new generation of apps (more about that later in this article) helps further.
How do QC companies follow up and verify that their inspectors don’t take kickbacks from suppliers?
I would say, the most important is to send the right type of inspector to the factory in the right conditions, in the first place. It implies a number of things, among which:
a. Hiring the right profile.
b. Conducting awareness training to ensure they know what is acceptable and what is not.
c. Employing them with a proper labor contract that includes a clear code of conduct.
d. Ensuring the inspector has a good relationship with his manager – that’s very important in China.
e. Having a clear quality standard that the manufacturer already confirmed (to be done way before the inspection).
f. Not putting excessive pressure on the supplier to ‘pass’ the inspection.
g. Whenever it can make sense, sending 2 inspectors on the same day rather than 1.
h. Whenever it makes sense, sending inspector(s) at different stages during production. (Performing only a final inspection, when the supplier hopes to ship the goods out and be paid fast, raises risks markedly.)
Being very clear with the manufacturer that corruption is illegal, is not tolerated, will be reported to their customer, and will have serious consequences.
Rotating the inspectors, in case there are repeat inspections in the same factory. As I wrote above, the risk is higher when the parties feel comfortable with each other.
With the level of technology employed by most inspection companies and buying offices, there is not much that can be checked during the inspection. Some companies track where their staff is with a GPS module on their phone (are they in a KTV at 7pm?), but it only goes so far.
With a modern QC application, everything the inspector does is logged and can be checked by a manager. If, for example, some defects are saved and then modified or deleted, it is a red flag to investigate. There are multiple ways technology can help in similar ways.
At the end of the inspection, it sometimes makes sense to send another inspector to have a quick check on the samples that have been unpacked. If done in a truly random manner, it can help a bit. It will catch the worst cases, but many cases of misconduct will go unnoticed.
I don’t go out to factories anymore, but when I did, I was never offered a bribe. Not even once. That being said, I am not Chinese. But how common is it that suppliers even offer bribes?
I am not surprised you were never offered a bribe. In the case of the manufacturer initiating the bribery process, they tend to use subtle signals. Between 2 Chinese people, the message is clear.
However, they are often at a loss as to how to convey that message to a European, and it keeps them from trying.
This is not always the case, though. I remember a desperate factory sales person who kept asking me ‘what can we do to pass this inspection?’.
After I ignored his openings, he said ‘my boss would like to have fun tonight in the city, would you like to join?’.
That was at the start of the 2009 crisis and they knew the buyer was ready to cancel the order at the first sign of poor quality. And, their production was far from acceptable.
In some cases where I was working with one of my employees, the factory staff would pass messages to me through my staff. They were shameless, as they thought I might set such a bad example in my company.
In the worst cases, if the inspector insists on reporting the issues, the factory can keep him or her hostage. Or resort to physical violence. It seldom happens in China, but it can’t be ignored.
In the case of what I call ‘real bribes’ (as defined above), I think the factory is usually the party that signals an opening, but sometimes the inspector is the one pressuring them for money.
With all that game of subtle signaling, not surprisingly, there are many misunderstandings between the Chinese parties. When an inspector follows a quality standard stricter than the factory staff is used to, the factory rep tries to see if a small bribe would cause a readjustment.
When the inspector does not respond and keeps working the same way, the factory people believe the amount of the proposed bribe was too low. In the end, they are mad because they think the inspector wants to extract a very high amount of money from them!
That’s why complaints from Chinese suppliers about an inspector trying to get money from them, when the inspection report shows many issues, can’t be taken seriously. However, the supplier sometimes invents details (‘he asked for 5,000 rmb’) and the buyer starts to be very suspicious – which I fully understand. Sometimes there is truth to those accusations.
Say that a supplier offers a bribe, and the agent rejects it. Does the agent normally report this back to the head office?
Unfortunately, 99% of Chinese inspectors are shy about reporting situations where the supplier made a clear opening. My interpretation is that whistleblowing is widely seen as being over-zealous and actively disrupting the social fabric.
The ‘honor code’ of many American institutions is at odds with many Chinese values, and to be effective here one needs to move away from black-or-white considerations.
As I wrote above, things are changing for the better in mainland China. The next generation might be more forthcoming. We shall see.
Another reason why whistleblowing happens so seldom is a simple cost – benefit analysis. The inspector is usually unable to prove the proposal happened.
There is very little for him or her to be gained. And what if, 6 months from now, an inspection has to take place in the same factory, where the managers might still be mad? Again, physical violence is not an abstract risk in this job.
One thing I find appalling is the lack of awareness of Chinese manufacturers and trading companies, and the lack of efforts their customers spend on this issue.
Let me explain why.
The typical Chinese supplier, when caught in the act of trying to give a kickback, often claims it is a “normal business practice”, and the goal is to “express gratitude. They pretend not to understand the gravity of their actions.
A simple way of avoiding this? In your sourcing process, ask a manager of the supplier to sign a short letter acknowledging that
1. Corruption is illegal in China,
2. Any gift or payment to a member of your company is a cause for stopping the business relationship,
3. The staff of inspection companies is also to be considered as a member of your company in this context
4. All people who might be in contact with an inspector are fully aware of this policy. Then, ask them to sign it again every 6-12 months.
Are these bribes in the form of cash, or something else?
Yes, predominantly in cash. A ‘red envelope’ changes hands.
There are exceptions, of course, the main one being the offer of sexual services in a nearby hotel, spa, or KTV. Female inspectors can also be tempted, for example in a fancy jewelry showroom, but overall I would venture they are a bit more honest.
I heard of some very elaborate schemes. The worst offenders are usually the auditors of quality systems or, even worse, social compliance.
Think about it – the supplier depends on a positive report to start a new business relationship that might make them millions. The risk of kickbacks is very high.
Some of those auditors call the supplier’s staff and say ‘oh, I have lost a Rolex watch in the factory, can you help me and look into this?’. Naturally the watch of the said model gets purchased and sent by courier promptly…
Is this only a problem among smaller QC companies or also larger ones?
First, let me write a few generalizations. The wider consensus among people who have long been in the trade is that briberies are more likely in large QC firms, actually.
Here is an example of the stories one commonly heard in China.
A manager in a trading company told me he was frustrated with a factory’s inability to pass an inspection mandated by the ultimate buyer. He instructed the factory’s owner to have “maximum 1.5% of major defects” in the re-inspection.
When the inspection company, one of the largest and the most famous ones, issued the report that showed exactly 1.5% of major defects, he knew what had happened…
Stating that large QC agencies are dirtier is a bit harsh, but there is a key reason for why that may be true.
Large QC firms have a lot of systems in place to control corruption risks. However, whatever reliability they gain that way, they often lose through the lack of ‘ownership’ the local managers feel in their jobs.
A Chinese QC team that works for a local manager that is not fully invested in his/her role will generally perform poorly.
The fact is, they need to feel a connection for their manager, and they virtually never feel so for the company as an entity on its own. Personal connections still run strong in this country.
Now, let’s try to be more accurate. Bribery is a serious problem in some of the large QC agencies, and is not in others. And, similarly, some smaller players have been very good at keeping standards high, while others have struggled.
To be sure, it is much more a result of good versus bad management, than large versus small company.
So it comes down to rogue employees only, or are there corrupt QC companies that systematically look for kickbacks while doing quality control?
To my knowledge, in inspection companies, it comes from rogue employees. I never heard of a case where the managers would encourage that behavior.
Such a company would run out of business very fast, as customers leave one after the other.
In the buying offices of large retailers, in some cases, the whole QC staff (including the managers) has been working together to extract money from suppliers. However, this is becoming rarer, it seems.
What can businesses do to make sure they don’t end up with a ‘corrupt quality control firm’?
Here are a questions to ask a QC agency:
a. Do they have a system in place to warn the suppliers about practices that are not tolerated?
b. Do all their inspectors sign a code of conduct?
c. Do they openly admit it is a reality of the business that has to be managed, or do they dismiss it as a myth that has never happened in their company?
The buyer should also wonder, ‘is there anything we can do, in order to decrease the risk of corruption?”.
Here are a few examples:
a. If you write “pass this inspection or I will cancel the order”, the supplier will feel a lot of pressure and might attempt to succeed whatever the means.
b. Another way you can shoot yourself in the foot is by failing to provide a clear standard. If the factory doesn’t know you won’t tolerate visible dots on the side of your product (for example), and your inspector catches that type of defect, you are placing him/her in an unhealthy situation.
Is it possible for Importers to follow up and verify that no QC related bribes have been paid?
This is very, very seldom possible.
I have a number of friends in the industry, and I have heard a few stories where the bribe was proven. For example, the manufacturer says they have no cash, and they use an electronic medium for the payment, which means they keep a trace.
If the payment is done by bank transfer, Wechat, or Alipay, directly to the inspector’s personal account, it is easy to trace. If it is sent to a cousin of his/her, it is much harder to ascertain.
In some cases, the inspector could record the factory rep and prove he was offered money. This is also very rare, for reasons I evoked above but also because, from what I was told – the offer would often be typed on a calculator rather than said out loud.
If the inspector uses our mobile application, it is possible to track if some of the findings were altered at the time of the final meeting (when a supplier/factory rep is asked to sign and confirm on the list of issues). It should be a straightforward process, but sometimes it turns into a negotiation.
Thank you Renaud. You have also launched Syncontrol.com, a software platform that helps QC agencies in China manage inspections and save time. Can you tell us a bit more about that?
SynControl supports the needs of inspection agencies, and also those of the quality departments of buying offices. The information about products (data & files, checkpoints & equipment, defects…) and suppliers is saved in the cloud, and inspectors work on a mobile app.
They follow a workflow that matches the company’s processes, and are less likely to take shortcuts. A lot of information is logged and can be reviewed by a manager.
Findings can be seen in real time in the office. Report generation is automated, freeing a considerable amount of time. More information is available at SynControl.com.
Co-founder of Asiaimportal (HK) Limited and based in Hong Kong. He has been quoted in and contributed to Bloomberg, SCMP, Alibaba Insights, Globalsources.com, China Chief Executive, Quartz Magazine and more.