A Bankruptcy Story Of A European Importer
Below is a true story.
In 2009 a German importer purchased a batch of aprons from China.
This importer will be called Mr. A hereafter.
Mr. A was close to his retirement.
He was the Procurement President of that company with extensive purchasing experience and a thorough understanding of the supply chain in China.
One of Mr. A’s heavy customers had an apron project that totaled 70,000 pieces almost amounted to US$140,000.
Mr. A won this project and placed an order with a trading company in Guangdong, China.
Trading companies can be big or small.
In most cases, foreign importers are far away from another continent, they assess suppliers through emails and their tones on phone calls to judge whether the supplier is trustworthy or not.
The basis of their judgments is mostly on the sample quality. In their minds, most Chinese suppliers are honest and trustworthy.
The apron is a product that many importers may not know about the regulations in Germany.
To export aprons to Germany, it is mandatory to pass LFGB (Lebensmittel- und Futtermittelgesetzbuches).
Almost all apron suppliers Mr. A contacted quoted a price above his target, even though none of them mentioned the LFGB report.
After Mr. A asked them for it, they didn’t have it but kept emphasizing that they chose environmentally-friendly materials and that their aprons met the requirements of the US FDA, so their quality should be good enough for the German market.
What those suppliers didn’t know was that without LFGB, Mr. A wouldn’t be allowed to import and distribute it in Germany.
In the end, one of the ‘trading companies’ replied to Mr. A’s inquiry and claimed that they were very familiar and professional with the German Market for aprons.
Sure they confirmed that they had the LFGB report.
Most importantly, this trader quoted a very attractive offer.
Mr. A sensed that this was it, this supplier was the perfect match for this order.
Whether it is the email exchange the conversations on the phone, or the trader’s knowledge of the German market for the apron, all made Mr. A firmly believe in and trust this trader. Mr. A was 100% sure he had found the right supplier.
Later apron order was given to this trader and goods were shipped punctually without any problem.
Everything looked good so far, so this deal should have come to a happy end, right?
Unfortunately, during the selling process in Germany, one official of consumer product quality surveillance, disguised as a consumer, bought the apron and tested the quality in a lab.
This was only a routine random quality inspection.
The testing result turned out to be a disaster.
The testing item of heavy metal migration failed, even the basic test for phthalic acid failed.
Those aprons were not qualified to be sold in Germany.
Later a total product recall was enforced by the authorities.
And all the losses caused to the customer would be borne by Mr. A’s company.
Because Mr. A was the importer of it and consequently their company shoulder all responsibilities for it.
The cost of the total recall, with associated costs caused to the customer plus punitive fines by authorities, amounted to about 1 million euros.
Though 1 Million Euros was not an astronomical number, it was heavy enough to collapse Mr. A’s company.
Mr. A, of course, could not believe the testing results and thought it must be a misunderstanding.
He applied for second testing from a third-party facility.
Of course, the testing facility gave the same failed testing results as the official lab.
Even more, the third-party pointed out that the report provided by the trader belonged to another supplier, different from the company name on the certificate.
In other words, this report was fabricated by the trader.
Mr. A was shocked.
He took a flight to China trying to sit down with the apron supplier in person and make him take the relevant responsibility.
He also planned to file a lawsuit against the supplier in China.
What he didn’t expect was that the apron trader just vanished.
His emails to the supplier were not replied and the phone was out of service.
Later it seemed even impossible for Mr. A to go to court with the trader: he could not find the defendant.
Because the trader was a Hong Kong-based company, aprons were produced on China’s mainland, It would require cooperation between the mainland and Hong Kong police to validate the proofs, and then catch the bad guy.
It was very difficult for Mr. A to collect all the solid evidence, not to mention to bust the guy.
This matter dragged on and on to the end, and nothing was done by the police.
Pretty soon Mr. A’s company officially filed for bankruptcy.
To sum it up, how did this happen to Mr. A?
1. He failed to verify the certificate provided by a new supplier but chose to believe in the new supplier by his instinct and experience.
2. He didn’t visit the trader or the factory before the order due to urgent lead time.
At least he can ask one of his old suppliers to do a background check.
3. The offer by the trader was lower than the majority of the suppliers and suppliers claimed good quality.
Mr. A didn’t pay much attention: the product price for the German market can’t be very low.
I guess that Mr. A didn’t bother to know why the trader’s price was so good either.
4. Mr. A didn’t get a safe payment term for the first order.
Technically no exporters are willing to give credit to new buyers, as the credit term is only for regular customers who have built their credit through year-long orders.
But he can try l/c 45 days if 60 days is too long for the exporter.
So, here is the question for importers in the pharmaceutical industry: how can the certificate-fabrication case be avoided?
Mutual trust between supplier and buyer is required to do so.
Then how can we build mutual trust between importers and exporters?
Importers should sign a contract or an agreement to lay obligations for buyers and suppliers clearly: Suppliers will only supply goods from GMP manufacturers the same as shown on the GMP certificate and CoA.
After the manufacturer’s docs are provided, buyers should not contact manufacturers to skip the trader. Or there will be punitive clauses for parties who broke the rules.
Though the story above was not one of the cases in the pharmaceutical and chemical industry, it was alarming enough to have all importers’ attention.
For international trade, certificate fabrication has been going on for a while and many suppliers have their reasons for doing it.
There is no doubt fabrication is also happening in the chemical trading business and we hope this story will serve all pharmaceutical ingredients importers as an ALERT: verify the Chinese GMP certificates before you place the order and make the payment.
You can verify Chinese GMP Online or you can simply contact us, we will help you to verify GMP for free if the Chinese FDA website is too complicated for you.
Also, all good ideas are invited, and please leave us a message so we all can have a simpler and healthier trading environment.