Nov 28, 2018 11:25 AM

Paid in China: Bill Collecting Poses Big Challenge for Foreign Firms

About a decade ago, a smug American friend boasted to me that his expensive Washington law firm had helped a Chinese battery-maker successfully defend itself against a patent lawsuit bought by a U.S. rival. The implication was his firm had used legal maneuvers to win the case. I didn’t think much of it at the time, except perhaps to feel a tad of sympathy for the American firm that might be put out of business because an unscrupulous Chinese rival smartly turned to a U.S. law firm to fight its legal battle.

I learned about a year later that the Chinese firm was even savvier than I first thought. That’s when I ran into my friend again and he updated me on the case.

“Those bastards didn’t pay,” he informed me.

Many Chinese companies have a poor reputation for paying their bills. This evergreen ‘Made in China’ topic was in the headlines last week after reports that Ofo, the struggling bike-share operator, was failing to pay back deposits to thousands of customers who had plunked down between 100 yuan ($14.40) and 200 yuan to use its trademark yellow bicycles.

Struggling companies in more mature Western markets might behave similarly when faced with a cash crunch. But what this story highlights is the somewhat reckless attitude that many Chinese companies seem to have toward paying their bills.

My battery-maker story is about a decade old, so I polled some business contacts to see if the situation had improved since. China’s business climate has matured somewhat in the intervening years, as market economics continue to take root in a country once dominated by a planned economy with no profit incentives. But my queries to a number of foreign-owned product and service providers, large and small, yielded a surprisingly unified response.

It seems the Chinese corporate penchant for ignoring one’s bills was just as strong as ever. All that had changed was foreign firms were wising up to the practice and taking a range of steps — some rather creative — to make sure they got paid. I’ll detail some of those shortly, which can hopefully help the uninitiated to navigate this highly complex market. But first a few of my own quick musings on why this problem persists even as China’s economy booms and the private sector thrives.

My own theory is that Chinese companies frequently ignore their bills simply because they can. They face few or no major consequences. The notions of credit and credibility here often seem close to zero, especially in the corporate world, where getting away with whatever you can seems to be the norm. This view is more pronounced among the older generation but many young people share it. It’s likely the result of an earlier, less prosperous era when trust was a luxury many simply couldn’t afford.

Getting Paid

We’ll spend the rest of this column looking at the wide array of things foreign businesses in China now do to ensure they get paid. The most obvious? Demand payment up front.

One of my contacts spent decades in China working for a string of major multinationals selling everything from chicken to spirits. He was quite direct. He said he always took full cash payment up front before delivery of any goods. “No one does anything but cash on delivery,” he said, saying the practice was common among most multinationals. “It would be suicide to give your customers terms in China. The only credit terms customers want is ‘Buy now, pay never!’”

Others I spoke to were less evangelical about taking full payment up front, mostly because many Chinese buyers would balk at such terms. One new-energy consultant said he typically demands 30% of the payment up front — and as much as half if he can get it. He typically tries to get additional payments as the project continues, and structures deals so there’s something left for him to withhold until the final payment is made.

Outside of upfront payments, the people I polled offered a number of other tricks for getting paid. An American lawyer with years of experience working in China said he typically requires an official engagement letter signed by the head of all of his corporate clients, which must then be stamped with the company’s seal. Such typical Chinese bureaucracy might be useful for something after all.

Another contact who brokers foreign investments in Chinese firms said he typically structures deals so the foreign investor ultimately pays his fees, even though the Chinese firms are typically his first point of contact. What’s more, he often requires such payments be made through an offshore-based entity set up by the foreign investor, leaving the Chinese side less room for financial mischief.

My favorite tactic, though, came from a contact in the industrial equipment sector who has turned to the high-tech realm. Like many, his company typically requires all customers to pay 50% upfront and the rest within a year. But unlike others, in his case buyers who fail to make their remaining payments could suddenly find their equipment failing. The company has installed high-tech GPS-based systems that can render equipment inoperable if bills go unpaid. “At the end of the day, no payment = no usage,” he said.

Despite the difficult landscape, I personally believe things are improving — not just in companies’ willingness to pay their bills, but also in supporting infrastructure like collection methods and credit-rating systems. That said, the problem of unpaid bills looks set to persist for the foreseeable future, and any foreigner looking to do business here would be well advised to come up with a strong bill collection strategy before hanging out a China shingle.

Doug Young has lived in Greater China for two decades, including a 10-year stint at Reuters, where he led China corporate news coverage. Send your questions or comments to

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