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Archive for December, 2013

When a contract is not a contract ………..

Posted by ckwok2013 on 20 December 2013

This summer I had the good fortune and opportunity to interview the Managing Director of a medium-sized foreign-owned subsidiary firm, Jupiter Ltd (name changed) that manufactures conveyor belting in China for coal mines. With  factories located in Shanghai, sales offices in the north and northwest of China and 300 personnel, this subsidiary company boasts an annual turnover of  RMB 400 million for its Chinese operations.

Most of its customers are coal mining companies in inner Mongolia, ShanXi, Anhui and Shantong, which belong to state-owned enterprises. With more than 100 competitors in this segment of the worldwide conveyor belting manufacturing industry, Jupiter has positioned itself successfully as a boutique supplier of high technology and precision engineering solutions customized to the safety needs of demanding work conditions.

As Managing Director, Ben (name changed), himself an overseas Chinese, leads a small management team of well-educated professionals: a Director of  Operations, a Technical Director, a Finance Director, a Sales Director and a Marketing Director.

Ben related to me that Jupiter once signed a contract with a state-owned customer to sell goods and services for a total sum of  RMB 40 million (USD 6.5 million) over a year’s duration. The terms of the contract were rather vague but Jupiter management thought it would be possible to work out things along the way. As it turned out, the customer did not make any purchases at all during the entire year. A post-mortem analysis suggested that for the customer, the contract merely signaled the intention of having a business relationship with Jupiter and it was up to Jupiter to develop and build the relationship to such an extent that the customer was ready to purchase.

Questions to think about:

  1. Why would the Chinese sign an ambiguous contract like this? What is the benefit for them? Do they do this with competing suppliers too so they can play off one supplier against another?
  2. Why would Jupiter agree to signing a vague contract that doesn’t lay out precisely in black and white what equipment or service package the customer would order, and within a specified timeline? Are you feeling simply forced to do what others are doing? When in China (or Rome), do as the Chinese (Romans) do?
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