The risk-reward of sourcing from China
It has never been more attractive to source products from China for distribution within the EU.
Exports from China have still increased by almost 5% in the past year, recently giving China a comfortable trade surplus of over $382 billion. Within the EU, the UK is China’s third biggest trade partner, the second biggest investment source and the biggest destination for investment. The message from China is clear: they intend to be the worlds number one supplier of manufactured products and EU/UK companies can take advantage of this to great effect – if they manage their supply chain correctly.
So what are the risks?
To begin with, lets consider some historic data provided by IPEN. When IPEN tested 500 toys and other children’s products manufactured in China in 2011, 1 in 3 were found to contain toxins that would be unacceptable in the EU. Given that China produces two thirds of all toys in the world, some EU distributors may be surprised to find that the IPEN study found excessive traces of lead and arsenic in such a high proportion of Chinese produced toys. Although toys are subject to a higher standard of product safety due to the inevitable pattern of use they will be exposed to (rough handling, eating and so on) all products face stringent requirements if they are to be made available in the EU. Regulation 5 of the General Product Safety Regulations 2005 (GPSR) sets things out simply:
“(1) No producer shall place a product on the market unless the product is a safe product. For these purposes a producer can include an EU distributor. Given what we now know (see above) about products produced in China, procurement professionals would be minded to consider that a breach of Regulation 5 can result in imprisonment for a term not exceeding 12 months or to a fine not exceeding 20,000 or to both and that, even when working for a larger commercial entity, staff can face prosecution in their personal capacity.”
In addition to the regulatory offences that may be committed, tortious liability (the risk of being sued) can also arise as a result of a failing supply chain. Where it is within the power of an EU distributor to assess the safety or otherwise of a product they wish to supply, failing to meet the requirements set out in the regulations would be indicative of failing to meet any duty of care owed to a consumer. Given that the relevant European Directive (2009/48/EC) specifies maximum migratory levels of substances such as arsenic and mercury, a lack of compliance will leave you wide open to a claim.
On the subject of European oversight, many categories of products are required to meet relevant standards (EN (European) standards) and bear the CE mark (mark of European Conformity) identifying them as such products before they can be supplied within the EU and therefore the UK. For products such as toys, not only must the CE mark be affixed to the product in question, but such mark will be deemed as creating a presumption of compliance with domestic regulations such as the Toys (Safety) Regulations 2011.
So how does a manufacturer or distributor demonstrate compliance?
For the most part, the system is one of self-certification although in some cases (higher risk products such as heavy machinery) a formal approval from a recognised body may be required. This is where supply chain due diligence comes into its own. Ensuring that the manufacturer has met the relevant standard for supply within the EU is a good start. Where this cannot be ascertained or the manufacturer does not wish to deal with compliance, the burden falls on the importer/distributor. Identifying all elements and components of the production process is essential, supported by a system of uniformity assurance to check that all subsequent products meet the standard set by the test subjects. If we look back to the GPSR, due diligence is acknowledged as a possible defence to a breach of the Regulations 29:
“(1) in proceedings against a person for an offence under these Regulations it shall be a defence for that person to show that he took all reasonable steps and exercised all due diligence to avoid committing the offence.”
A supply chain manager with a clear paper trail evidencing regulatory compliance on the part of the manufacturer along with a well-documented assessment and monitoring regime will help. Further, a distributor should be sure of the quality of their due diligence before applying the CE mark to a product. Applying the mark to an unsatisfactory product may in itself lead to a prosecution.
One further benefit of good supply chain due diligence is the reputational risk of unethical sourcing: a hot topic with todays media. This is all the more important when charities are identifying suppliers. Although a charity may wish to save money on product costs, allowing more money to flow direct to good causes, an unwise saving could result in reputational as well as financial harm.
Gregg Latchams has been developing relationships with China over the last five years and through these relationships and those of the Bristol and West of England China Bureau, we have access to a wealth of trusted contacts across China. We have years of experience working directly with Chinese companies both in China and UK and can bring this to bear in assisting clients in their dealings with the procurement of products from China. We also have a dedicated China Desk in the UK comprising a team of lawyers dedicated to the market, two of whom are Chinese speakers. We can therefore provide clients with expert China-related due diligence services at every point in the supply chain. On our recent trade delegation to China, Gregg Latchams further strengthened bonds with manufacturing contacts, regulatory consultants and legal advisors working at the highest level.
Gregg Latchams can help organisations operating within the EC to navigate the regulatory minefield and focus on obtaining best value from their procurement process. We can obtain manufacturers testing and conformity reports and then advise on CE self-certification or type-approval by an authorised body. Our local contacts can also speed up the procurement process and improve overall supply chain efficiency. In summary, Gregg Latchams is a legal services provider that understands China and the requirements for taking advantage of the opportunities China offers.
If you would like to learn more about our work in China please contact Paul Hardman on 0117 906 9425.