Quality assurance and Compliance in the machinery sector in China

By Richard Hoffmann, ECOVIS Beijing

When asked about the biggest challenges while doing business in China, European machine builders particularly often mention two terms: The assurance of quality as well as cultural differences in business practices/compliance. Situations and business practices which are usually taken for granted in Europe, might lead to complications and misunderstandings in China.

Two of the biggest challenges of European machinery manufacturers in China

The fear of declining quality is a common reason among foreign machinery builders not to move the entire production to China. Even though the German VDMA (German Engineering Association) believes that German engineering companies produce too sophisticated and premium machinery for most Chinese customers, machinery builders in China mention a required shift in the level of adaptation to the Chinese market while maintaining original quality. Such adaptations generally include same standard product with reduced supplementary features.

Put differently, this means more adaptation to the real needs of Chinese customers – true to the maxim: “German quality made in China”.

Quality assurance requires companies to shift their focus and invest more heavily in respective measures. In this context, companies repeatedly consider training of staff with experts of the headquarters, installation of video surveillance, inspection of samples in the German headquarters and close monitoring of suppliers including strict entry inspections of goods.

The omnipresent topic of copying/ counterfeiting is another important issue for European SMEs in China. Especially family-run enterprises place great emphasis on the protection of intellectual property, as innovation and patents form a substantial part of their competitive edge. Hence, particularly important parts and core components are often delivered directly from the headquarters.

An extreme example represents the technology transfer associated with joint ventures. In the long run, these setups equip Chinese partners with Western know-how and innovations. Following this line of reasoning, a WFOE (wholly foreign owned enterprise) is often the preferred type of establishment for most foreign machine builders. In any case, strict control mechanisms and enhanced caution towards these practices seem advisable.

An additional challenge represents the loyalty of own employees:

For instance, it is possible that sales personnel also provide other companies with orders within the same industry. These and similar sales practices are difficult to track and even harder to prevent. Occasionally, SMEs try open communication and mutual exchange, but also apply a higher level of control and caution.

Finally, the omnipresent issue of compliance belongs to the obstacles that European SMEs face. Due to the different mentality towards this notion, problems can easily arise.

According to U.S. China Business Council (USCBC) decision-makers can thus be confronted with a variety of favors in regards to business transactions, approvals and the like. The council provides the following examples:

• Paid visit to the headquarters and other locations abroad
• Jobs / Internships for relatives
• Sponsorship of an association or institution
• Contracts for a third party involved
• Gifts and Gift Certificates

To counteract such practices, a global corporate strategy is required which includes both a general and deeper awareness of the topic of compliance and a mutual control mechanism. A commonly applied tool is a company wide annual compliance audit. Many European SMEs also employ holistic in-house control systems.

Every company confronts the above mentioned cases differently depending on the situation in order to prevent risking the business relationship or a breach of law. However, in extreme cases some European SMEs also choose to forgo orders to stay compliant with the company’s ethical code.

In general, foreign enterprises in China should address the issue of compliance very carefully and thus SMEs in China often share the sprawling maxim: Trust is good, control is better.

	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
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