Are vendor shakedowns on the raise in China?

Are intimidation tactics on the rise to settle labor and trade disputes in China? Consulate officials, insurance companies and businesses engaged in protection and evacuation all report a definite yes.

During such an experience, I was informed that the number of incidents involving aggressive intimidation in China had increased alarmingly.  From one event every three to four months five years ago to three to four episodes per week now. With local authorities remaining impartial or disinterested until disputes turn violent, business executives are vulnerable to employees and vendors taking matters into their own hands to resolve disputes to their satisfaction regardless of legalities.

Below is a recount of my experience from an event that occurred in 2012 working for a major UK retailer.

The lead up to the events from 3rd to 7th February 2012 began mid-December 2011. Recently employed as an Interim General Manager by an organization listed in the Forbes top 2000 businesses, I was confronted with a disgruntled buying team and products delivered to the UK Distribution Centre that were not visually fit for purpose. As the two managers responsible for this product group were on Christmas leave, it was left to me to review the current situation, take action with the vendor and put into place processes that would produce goods to an acceptable commercial standard. This process revealed some form of complicity between the vendor and the two senior managers with the result being shipped product that was not visually or commercially brand compliant. The outcome of this finding was the dismissal of these two managers.

Late January: Stock at retail was found to have significant health and safety concerns. This resulted in a significant product recall, and as a flow on effect, on the 31st January 2012, US$1.5million of orders with the fore mentioned vendor were cancelled.

2nd February 2012: The vendor had a meeting in the Dongguan office to request further details of the cancellation, and it was at this point that they discussed payment settlement due to the cancellation. It was agreed to respond the next day.  At this, no claim had been issued.

3rd February 2012, 2.30pm: The 2 vendor owners (husband and wife), who were accompanied by two unknown representatives, arrived at the Dongguan office and demanded the settlement of their liability. It was explained that they were required to wait until 5.00pm provoking a heated discussion.  Once calmed, I return to my office to seek the official claim stating all orders were cancelled from the UK, and what action would be taken to recover the cost of goods previously shipped, in transit and currently held in the distribution centre. The value of these goods was stated at US$1.8 million in addition to the US$1.5 million previously cancelled.

3.00pm: The four individuals were getting restless and an additional 30 ‘vendor representatives’, some of whom were armed, arrived and positioned themselves outside the office doors, waiting for a signal or opportunity to enter the office. Later information revealed that these representatives were, in fact, hired local mafia to threaten and menace the organisation and staff.

Returning to my office to alert Head Office Asia of current events I was followed by the two disgruntled, malicious vendor owners and two unknown vendor representatives who barricaded the desk demanding I secure an appropriate settlement from Head Office. I was unable to remove myself from this situation without inciting an incident.

4.00pm: With my security detail I was able to move out from behind the desk. The female vendor owner in my office was sitting with her legs on the desk and as I pushed past I knocked her legs off the desk. The vendor owner then grabbed me to stop me moving away, and she was in turn seized by security to stop her actions. It was at this point that the additional 30 vendor representatives overwhelmed the office, attacked my security detail, detained me and ensured I was once again barricaded behind the desk and unable to move. My staff rang for extra building security who, on arrival, terminated the incident.

5.00pm: Negotiations began as it was considered imprudent to proffer the Legal Documentation to the vendor as it would potentially further inflame and already insecure and dangerous situation.

These negotiations included an offer of US$100,000 payment as a gesture of good faith and also stated that we would provide further details of the cancellation settlement within five days. The vendor rejected this offer as they wanted to secure an amount of US$600,000 immediately. I was unable to agree to this sum.

A single representative from the local police force arrived and, after accessing the situation, asserted that the ‘vendor representatives’ were allowed to be in the office as it was an Economic Dispute. The police officer left after a private discussion with the female vendor.

6.30pm: My staff contacted the police officer to assist in my withdrawal from the situation and office. On the police officers return, I ascertained that I was allowed to leave the premises without harassment and was escorted, by the police officer, to the company vehicle.

8.00pm: I had still not entered the company vehicle. ‘Vendor representatives’ had surrounded me and created an impenetrable wall so I could not leave the immediate area. I was detained and kept out of the vehicle and any attempt to enter the vehicle was met with resistance. At one stage, half in the car, the ‘vendor representatives’ held on to me, preventing any ingress or egress and a scuffle ensued when the escorting police officer tried to pull them off. After this additional police arrived and I was helped into the vehicle. However, five ‘vendor representatives’ invaded the vehicle and the police ultimately refused to act in any way to remove them. I instructed my driver to proceed to the police station, under police escort, as there were no other secure options at this point in time. At no time did the ‘vendor representatives’ act against my security detail, driver or staff.

8.15pm: At the police station in discussion with police, my accompanying staff members deduced that the police were sympathetic to the vendors as the female owner, also the main instigator, was crying. Meanwhile, a growing number of ‘vendor representatives’, now more than 30, gathered at the entrance to the police compound. Head Office Asia advised me to tell the police that I felt my life was in danger, and I needed assistance. The police maintained that the problem was an Economic Dispute, and they were only able to intervene if events turned violent. A police report was written but only after reasserting, to prompt the action, which I felt my life was in danger.

4th February 2010,12.00am: The police cleared the ‘vendor representatives’ from the compound entrance, and I was told it was safe to leave.

12.30am: On proceeding home,  we were pursued by three cars containing approximately 12 individuals. As this was a dangerous precedent, it was decided, for safety purposes to continue instead to a 5-star hotel. Before reaching the hotel and with expert precision, the three pursuing cars barricaded the company vehicle, preventing any further travel. To calm the situation, the pursuers were informed of my destination and they escorted me to the hotel, all the while maintaining the barricade. I checked into the hotel accompanied by my security escort who checked into the room next to me. The vendor and their entourage checked into three rooms and maintained 2-4 representatives at my hotel door as well as a 3-12 motor blockade outside the hotel.

2.00am: The vendor informed me that if I tried to leave the hotel, they could not guarantee my safety. I advised Head Office Asia and the company CEO of the situation. They engaged an international security agency to evaluate the circumstances and plan an evacuation.

8.00am: The international security agency advisor and a team of 4 arrived and having assessed the situation concluded that the ‘vendor representatives’ were a hired group of thugs who were experienced in detaining people. The ‘vendor representatives’ were overheard saying that if I were to leave the hotel, they would use one of their vehicles outside the hotel to run me down. It was believed that evacuation without inciting an incident or breaking the local laws would be difficult to impossible.

Later that afternoon a committee was established to assist in resolving the issues.

5th February: It was agreed with the vendor to open negotiations commencing 2.00pm, 6th February 2012.

The negotiations were to consist of 3 representatives for each side. The representatives for the vendor were the two vendor owners and their lawyer. The representatives for the organisation included myself, our local China lawyer and a security representative introduced as an interpreter for the lawyer and myself.

The local consulate was appraised of the proceedings and they, along with our local lawyer, pressured the police into authorising two police officers to also attend the negotiation meeting.

6th February, 2.00pm: On exiting my room to attend the negotiations I was confronted by a hoard of yelling, screaming, crying and (attention seeking?) downstream vendors who had been informed of the pending negotiations and were concerned they would not get paid if the ensuing cancellation was not overturned. My security and hotel security were able to keep them at bay but as negotiations progressed their numbers increased. It was also reported that some of these suppliers were carrying gasoline as a scare tactic.

9.00pm (approx): Up until this point the negotiations had been progressing well.  However, the downstream vendors were becoming impatient and anxious and continually interrupted the meeting.

9.45pm: Negotiations reached a stalemate. An ultimatum was stated that all offers would be off the table by 10.00pm was given.

10.00pm: Offers were taken off the table. This incensed the downstream vendors, and they broke through security and became violent.

With the advent of violence, the local police finally reacted sending in 20 reinforcements and eventually pushing the mob back numbering more than 100.

11.00pm: Agreement was reached, and the lawyer began drafting the settlement agreement. As part of the initial discussion and agreement the mob was to leave the building. The mob agreed to this request.

7th February, 4.00am: Negotiations again stalled as the vendor reneged on certain details and walked out.

5.00am: Withdrew from the negotiation room and were pursued by a larger and growing mob who withdrew to linger outside my hotel room door.

7.00am: As evacuation was difficult to impossible and had the potential to stymie any further attempts at negotiation it was decided to reopen existing negotiations. This would also assist in establishing credibility with the vendor if I evacuated before negotiations concluded it would have been impossible to reopen them.

11.30am: Negotiations reopened, and terms were immediately agreed.

2.00pm: Agreements were signed, and I was permitted to leave the hotel without incident.

Lessons learnt.

As this example shows, cancellation of orders and the claims that result carry large risk and are fraught with uncertainty. Both sides have the capacity to act and react poorly and without the support of the local police or government these situations have the potential to get out of hand.

Precautions can be taken to minimize potential threat, including;

  • Maintain a calm and confident demeanor at all times. Take this with you into all meetings and use it in all discussion with suppliers, advisors and co-workers.
  • If you are being provoked, and the situation is getting out of hand, stay calm and quiet with your hands in your pockets so as not to further inflame what is going on.
  • Good relationships are vital, have good local contacts and develop strong relationships with the local police and authorities.
  • Be patient. When negotiating, be prepared to take your time, the Chinese will die for money and or family.
  • Always try to remain in a neutral, controlled environment like a police station or large international hotel, never go home.
  • Establish a good team, both local and international, to assist with the negotiations. Be prepared for outside co-workers, in another country or state, to take decision-making away from you to lessen the potential for you to make inappropriate decisions under duress.
  • Have only the necessary participants on the conference calls – decision makers.
  • Ensure your lawyer is quick and responsive, and funds are available to make the necessary payment.
  • Good communication devices are invaluable to all the negotiation team. Have and carry a phone, laptop, iPad, etc and necessary battery chargers.

Points of Caution;

  • If you look for and use cheaper suppliers there are more risks involved, do your due diligence.
  • Suppliers talk and will be acutely aware of all cancellations and settlement agreements the company has made with other local enterprises.
  • Dongguan and other 2nd or 3rd tier cities can be lawless. If you are working in offices such as Dongguan, ensure there is enough security available and on hand to assist with volatile situations, have a contingency plan ready.
  • Local police and authorities are disinterested and tend to side with the local enterprises until violence erupts, relationships with local government members are a must to enlist cooperation from the bureaucracy.
  • Evacuations at any cost are potentially risky, and it may be best to calmly and continually offer to negotiate. If a security agency is brought in, make sure you carefully evaluate their suggestions.
  • The supplier ultimately only wants payment; they don’t want to hurt you. Remain focused on closing the deal and be patient.

Are you getting what you ordered from your vendor?  Regardless of your current vendor matrix, are you getting a compliant, fit for the market product at a value price?

ID Global Concepts has been involved in vendor management across raw materials, components, finished goods and services for consumer goods for ten years. We can add value to your sourcing operation either through consultancy or management contract to ensure your business is using a vendor that is the right fit for your business and meets your value expectations.

Below are the retailer’s ID Global Concepts has delivered apparel and accessories to over the last ten years;

Macy’s, Urban, Sears, Marks & Spencer, Myer, Kmart US & Kmart Australia, Dunnes Stores, Debenhams Monsoon Accessorize, Asos, Witchery, Brown Sugar, RM Williams, Coles, Chloe, John Lewis, Disney, Next, Firetrap, Lonsdale, Postie, ASDA, Harris Scarf, River Island, Tesco, Woolworths, Walmart, Glassons, Babies’R’Us, New Look, Target US & Australia, Primark, David Jones, Best & Less, Sophie, Yakka, Top Shop, BHS, Burlington, BigW, Oasis, JayJays, Blue Illusion, Driza-Bone, Just Jeans, Volcom, House of Fraser, Pumpkin Patch, Suzanne Grae, Pelaco, Laura Ashley, Sportsgirl, Ted Baker, Truetex, TableEight, French Connection

If you would like to learn more or wish to discuss other supply chain opportunities, please email us at info@idgc.co.

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