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Beware of Yuan

During the eleven-year history of Katy Spring, we have bid on many contracts that have high dollar volume, but rarely do we get the business.  The main reason we seldom do is that there is usually someone out there willing to do the work for a very slim margin to get these large volume accounts.  We are competitive, but we know where we need to be to make a profit, and our philosophy has and will always be; to offer fair pricing that builds long-term relationships with our customers.  Under bidding or bidding for very slim margins does not fit within our business philosophy.  It just doesn’t make good business sense for us, our clients or prospective clients.

So when a bid came in from a Chinese Import/Export company that had a total U.S dollar value exceeding a million dollars, at first I didn’t give it much thought.  Sure it’s great in volume, but someone’s going to outbid us, especially since the company is in China, where labor rates are much lower, assuming they would select a Chinese spring manufacturer.  We do, however, have clients in China.   I’ve been told by our Chinese clients the reason they buy from us is that they can’t get the quality they need from their local spring manufacturers.  I know there are good spring manufacturers in China; this is simply what we’ve been told by our Chinese customers.  Naturally, we were skeptical and cautiously optimistic when this import/export company said they accepted our price and would like to enter into an agreement with our company.

I told our Chinese prospect that we typically work with purchase orders.  They said they don’t use purchase orders but work with “contracts” instead.  I told them fine, to send a draft of the contract for our review.  The draft they sent was a simple, two-page document that covered standard contract items for example; part number, price, delivery, packaging, etc. but left certain items blank for us to fill in, such as “terms.”  With all of our overseas customers that do not have a U.S.-based office, we require cash-in-advance wire transfers.  For this company we also asked for ten percent down.  They didn’t bat an eye at anything we asked for in the contract.

Shortly after we returned the draft of the contract, the prospective client asked for a face to face meeting at their office.  I didn’t mind going to China, it wasn’t a vacation hot spot for me, but for a million bucks in new business, I’d go.  Prior to committing to traveling half-way around the world, we asked for a video conference.  They agreed to it, and we downloaded some free video conference software and sent them the link to do the same.  The night we tested the software, the instant messaging worked fine, but there was no video image.  They said they didn’t have a video camera…odd. Why didn’t they mention that when I originally requested a video conference?

My partners, James West, Mark West, and I talked about our Chinese prospect over the course of several days on how to proceed with them.  James suggested making samples and submitting them for approval first.  I thought it was a good idea too; however the Chinese told us they had a deadline with their client the following week which would have made it impossible to submit samples in time.  At this point, I was starting to get excited about the possibilities that this business deal could bring to our company and pushed for following through for a face to face meeting as they requested.  That day’s decision; I wish I could have changed.

We started to shop for plane tickets to Hainan, China and because of the expense, decided it made more sense for only one of us to go.  I would go, James and Mark would stay in Katy and be available 24/7 should I need them…and I would.

We only had a week to prepare for the trip.  What had taken place so far with the Chinese was over a period of about two months, now it was time to make sure we had our ducks in a row one last time.  We reviewed our bid again, checking and rechecking every detail.  We found a travel agency that got us a fair price, considering we booked this trip a week in advance.  We researched everything on this Chinese Import/Export Company we could find on the internet, reviewing their web pages several times.  They wouldn’t tell us much via e-mail saying they preferred to share more information when we meet.  I assumed the secret nature was part of their Chinese business culture. 

James, Mark and I had many conversations before my departure, and all of us had a sense things were going too smooth.  Our company just doesn’t land accounts this large, this easily.  But we couldn’t find any red flags, so we kept moving forward as planned.  I remember saying at one point, “If I were spending a million bucks, I think I would want to visit the company that’s making my product, instead of the other way around.”  There were many more questions to be asked.  On October 31st 2010, at 6 a.m. CDT, I left for Hainan China.

I flew economy since the price for business class was an additional seven grand and by nature, we’re frugal.  I flew from Houston to Newark and expected to fly over Europe for the international leg of the flight, but instead we flew west, over Canada and the North Pole.  The North Pole was a spectacular sight from thirty seven thousand feet.  There were huge cracks in the ice and sheets of ice as far as one could see, and I remember saying to myself; “why would anyone want to go there?”

Thirteen hours after leaving Newark, we landed in Beijing.  I was in China.  I found a guy at the airport who spoke broken English and offered to help me get to my domestic flight to Hainan.  He wanted twenty bucks for his services.  I happily paid him.  A few minutes later we were on a shuttle to Terminal One.  This baggage handler took me right to the ticket counter and spoke to the Hainan Airline Agent for me until my bags were checked, and for the first time in years, I was actually holding a plane ticket that wasn’t an “e-ticket.”  They even stapled the baggage claim tickets to the plane ticket like they once did in the U.S.  I experienced, for the first time, the excellent service I would receive for the most part in China. 

After a four hour lay over in Beijing, I was on my way to Hainan.  Beijing would be the last time I’d see an American for five days.  It would also be the last time I’d have an English conversation at normal speed.  The aircraft for the three-and-a-half hour flight to Haikou City, Hainan was a Boeing 737, normally staffed by three or four attendants in my domestic flying experiences; had seven flight attendants.   The service on the flight was excellent.  As I boarded the plane, people were staring at me, whispering back and forth to one another.  I eventually got used to it as this became the norm throughout the week.  I took my seat by the window and a lady’s toddler sitting next to me had a long bewildered look at me.  I smiled back at the kid and a few minutes later, the lady said something to the flight attendant in Chinese of course, and the next thing I know she traded her seat with someone else.  I’m not sure what happened.  Maybe it was my breath.

I landed at Haikou City Airport at about nine in the evening, local time.  I had been on a plane for a total of twenty hours and traveling for about twenty eight, counting the two layovers in Beijing and Newark. 

I’m not sure why my host had a sign with my name on it when I arrived, I was pretty easy to spot, but there they were, happy to see me; Yuan, the prospective client, and his assistant Ruby.  Ruby spoke English moderately well, although I had to ask her several times to repeat her name.  She told me she was an English major and had been studying the language for about twelve years.  Yuan and Ruby were very nice and did a good job of putting my mind at ease, at least when I met them.

From their website, the five-star hotel I was staying seamed nice, and it made a good first impression on me.  Even though I’m cheap I chose a five star, because I wanted everything a Haikou hotel had to offer, and with the exchange rate, this place was only costing us seventy bucks a night USD. 

After I checked in and got to my room, I got a second wind and decided to visit the “New York-Style Disco,” the hotel advertised that was located on the third floor.  The hotel Manager personally took me to the hostess at the disco and the hostess asked me if I wanted a “room.”  I said “no thanks” and I’d just go back to my room.  The hotel Manager spoke a little English and she could tell I had the wrong idea about their “disco rooms.”   After several attempts, she explained to me that a “room” meant a karaoke room.  Well that I had to check out, so they put me in a room with a microphone, a fifty inch flat screen, and a killer sound system.  Two young men and women joined me later with a plate of fruit and a pitcher of beer.  I didn’t ask for any of the food or drinks, so the hotel Manager told me what the price was for the refreshments and this unusual form of entertainment.  It was about fifty bucks total USD so I agreed to pay and hang out for awhile.  These kids wanted me to sing, so I humored them by singing a couple of songs.  They all sang too and sounded pretty good for not being able to speak much English.  After about an hour of broken-English karaoke, I had enough and went to my room.

In my room, I couldn’t get the lights to work.  I called the hotel Manager again, and she personally came up to show me that I had to stick the room key in a key slot by the light switches to activate the electricity in the room.  Ingenious I thought.  I bet the hotels that use this system save a ton on their electric bill.  Finally it was time for bed.  I’d been told the beds were firm in China, but I didn’t expect this.  The best way I can describe their unusually firm mattresses is “camping;” which for me is a sleeping bag on the ground, no air mattress  It’s fine for a couple of nights, but then I’m ready for my bed  As tired as I was though, I slept pretty good that first night. 

Fortunately the first meeting was scheduled late in the day, about four p.m. local time.  Ruby called late morning to tell me about the meeting and to see how I was doing.  I told her I was fine and thanked her for letting me rest.  I was hungry, so I headed downstairs to one of the five restaurants the hotel had to offer.  I chose the “Western-Style” restaurant, as they called it, thinking I could get a late morning omelet or something.  They were serving lunch, as it was eleven in the morning.  Omelets were not on the lunch menu, so I ordered a cheeseburger.  The cheeseburger was thick and came with a fried egg in the center.  It tasted o.k., but it was a little bland compared to home, probably had less salt and pepper.  By the way, the local drink of choice is coconut juice; it’s as popular as sodas in America.

After my meal I decided to take a stroll outside the hotel.  It was a sunny, windy day in Haikou, and the humidity reminded me of the Texas gulf coast.  The hotel was located on the main boulevard.  There was a lot of street noise and the honking sounded like Manhattan.  There were cabs, bicycle cabs, and lots of people on bikes.  Frankly, the Haikou streets seemed dangerous to me.  I remembered the night I arrived, driving to the hotel seeing bikes, scooters and motorcycles constantly darting out in front of our car, many with no lights.  We narrowly missed some of them with our bumper.  It was more of the same during the day, even observing from the sidewalk in front of the hotel. 

I walked about a hundred yards down from the hotel to a side street that was crowded with people.  There were at least a dozen mangy, stray dogs walking around in this area and people just sitting on the sidewalk.  One lady was holding her baby up to a tree while the toddler urinated on the tree.  I went into a couple of small stores which the store fronts were open to the street. The tenants of the stores looked pretty rough, dirty faced, one with most of his teeth missing and none of them seemed to care about helping me find anything.  I walked a few feet back to the busy boulevard, and the transition was amazing in just those few feet.  I was back on the boulevard with cleaner people who walked with a purpose.  I was amazed how these two, totally different worlds seemed to coexist so closely together.

Ruby, Yuan and their driver picked me up at four.  We took a twenty five minute drive to their office where we got down to business after I was briefly introduced to their General Manager, Louis.  The office was located on the seventh floor in Haikou City center in a modest-style building.  I noticed in Beijing as well as Haikou that many buildings are built with the same design, brick, color, etc. and look very similar.  Their office was clean and very plain with the primary colors being black and white.  The office staff, which consisted of about ten people, worked in an open area.  They seemed young, about mid to late twenties and had friendly expressions on their faces when I arrived. 

The details we discussed in the contract were basic details; confirming pricing, quantities and the ability of our company to deliver.  They asked questions about packaging, more questions than we usually get.  I guessed, at the time, they were concerned about the long transit time and wanted quality packaging to make sure the product would not be damaged. 

After answering their questions it was my turn.  I wanted to know the industry our products were supporting.  I wanted to know why they were sourcing from a U.S. company when labor was so much cheaper in China.  I wanted to know how long they’d been in business and how long the relationship was with their customer they were exporting these parts to; I was told the following:

The story they gave me was that the end user was a German company that produced medical products.  They were buying parts from my prospect’s broker who was actually in Los Angeles.  A spring company from Taiwan was making the parts, but they were having quality problems, since the parts were actually shipping to L.A., they wanted to source in the U.S.  They told me they quoted three companies; two U.S. and a spring company in Mexico.  They told me we had the lowest price of the three companies.  They also added; our company had “the lowest price by far.”  Against a Mexican spring company?  That didn’t make sense.  Additionally, we asked for ten percent down to initiate the contract thinking that we’d never get it but it didn’t hurt to ask.  They offered to put down twenty five percent!  Their explanation was that they didn’t want to pay the additional wire transfer fees.  They were offering to give a quarter-million dollars to a company they knew virtually nothing about…again, seemed strange to say the least.   I couldn’t wait for James and Mark to hear this one.

I got back to my room around five thirty and waited to call James around eight p.m. local time.  The time difference was thirteen hours, China being thirteen hours ahead of U.S. CDT.  The lobby of the hotel was active in the late afternoon/early evening.  The bar opened at two p.m., and the drink of choice by the locals was tea.  I noticed business men would sit for hours at a table, surrounding a pot of tea in the middle of the table.  We would do the same for our second meeting, although our second meeting lasted only about thirty minutes the following day. 

James was surprised as I was that they wanted to put down twenty five percent.  And like me, even though we became a little more skeptical at this point, James and Mark could see no valid reason to walk away from this deal.  So we agreed to proceed.

The second meeting was scheduled for one thirty the following day, Wednesday.  Once again I slept in but I didn’t sleep well.  The hard mattress was not working for me.  I ate breakfast at the Western-Style restaurant again.  This time I made it in time for breakfast.  They offered rice, noodles, soups and even salad…for breakfast, along with other stuff I could not identify.  They did have French toast, ham, sausage, and hard-boiled eggs.  This would be my breakfast for the remainder of the week.  It wasn’t very good but it would do.  I did eventually try some of the stuff that I had no idea what it was, and still don’t know what I ate.  The coffee was actually good for a tea-drinking society.  One note about what they labeled, “Thousand Island Dressing.”   It looked different every day.  One day it was yellow, one day it was white, and one day it had that familiar pink color.  Not surprisingly, I did not indulge in the “Thousand Island” dressing.

After breakfast I headed to the gym.  A bellhop personally took me there and stayed with me the whole time.  He changed weights for me and set up the machines.  He even apologized for the outdated work-out equipment they had.  For a five star hotel, the work out room was in bad shape.  Many of the light fixtures were broken, the room needed paint and carpet, and the equipment looked like it should have been in an eighties time capsule.  Even though this place needed a complete make over, the bellhop spent his time making the old equipment look its best by dusting it while he wasn’t helping me.  He spoke pretty good English too, and would later be a big help to me.

For our second meeting, it was more of the same.  They had questions that I consider standard; how long would it take to get samples?  What size boxes do we have?  What will be the maximum weight of every box?  We were used to working with purchase orders, even from our other overseas customers, so this “contract” stuff seemed a little different.  The only part in the contract that mattered to us; they agreed to, and actually exceeded our expectations in that we required a wire transfer deposit before proceeding with manufacturing.  The fact that they agreed to prepayment and even wanted to put down twenty five percent; did make us suspicious, but again after the second meeting, we kept moving forward with them.

The following day there was no face to face meeting.  Ruby phoned to tell me they would e-mail the final contract, adding some minor changes that we already agreed to, and after reviewing, they would schedule a formal signing for Friday.  James and I reviewed the final contract and the only change we asked for was to specifically add; “FOB our plant,” which we do for all of our international customers.  I phoned Ruby about the change and in less than thirty minutes, they e-mailed the updated contract.  It was a go.

Finally, I had a day with nothing scheduled, and as luck would have it, it rained…and it rained all day.  The weather had gotten much cooler, in the sixties, so I decided to stay close to the hotel and take a stroll down to a store that was on the main boulevard. I didn’t want to have anything else to do with the side streets again. 

Before going to the store I exchanged another hundred dollar bill.  Apparently there’s a big counterfeit problem in China they were telling me about at the front desk, because they would not accept the somewhat faded hundred dollar bill I had.  They asked for a cleaner, crisper bill, which I gave them.  Ironic I thought, because if there was any money that looked counterfeit to me, it is the Chinese Yuan.  Like a lot of foreign currency, the Yuan has color, but to me the paper feels like a commercial grade of paper…not that I’m an expert, just my opinion.  Interestingly, when I returned home and tried to exchange what Yuan I still had, my bank could not find it in their foreign currency exchange book.  After looking for awhile, they told me the currency I had left was discontinued back in the eighties, and I was out of luck exchanging it.  Fortunately, it only totaled the equivalent of a dollar fifty-two USD. 

At the store, I bought a bunch of candy and snacks to take back to the states.  I thought about buying my wife something, but there wasn’t a mall or shop that had anything she would want.  I figured everyone back home would like food, and I could share this stuff with the family and the office.  This particular store was open to the streets.  There were people loitering outside and I could tell a family was running the place, because there were small kids running all around the store and the lady that cashed me out was trying to control them.  These store tenants were cleaner than the tenants on the side street but still showed no desire to help me.  To their credit, I didn’t know how to ask for help in Chinese either.   I couldn’t read anything on the food packages so I had to go by the pictures.  I got some candy, fruit snacks and cookies from what I could tell.  I knew it wasn’t much to bring back, but there wasn’t much to shop for at this place.

Back at the hotel, I went to the bar and had a Chevis.  I was really missing conversation and found myself having imaginary conversations.  I didn’t want people to think I was crazy, so I kept my voice down.  A waiter and waitress tried to talk to me, but it was a lot of work for both of us.  I did appreciate them trying.  By the way, even with the excellent service I received in China, there is no tipping.  That is a custom I agree with…no offense service industry. 

Texting and calling home was expensive, so I kept it to a minimum.  For some reason, I could not call out anyway so when I needed to talk to someone, I had to text them to call me.  For dinner I had the buffet at one of the restaurants upstairs where among some standard Chinese food items like noodles and fried rice, I also had shark fin, ox tail and fried frog leg pieces.  Again, it was o.k., but far from great.  Personally, I preferred the “fake” Chinese food from home.  A couple of other notes about Thursday evening; I was bitten by several mosquitoes in the restaurant during dinner, and after dinner, in the lobby, a bellhop shouted “mouse!”  The “mouse” was actually a rat the size of a Chihuahua.  That Thursday evening I was thinking to myself that I was very ready to get back home.

After the previous evening, it shouldn’t have surprised me that I woke up nauseated and with a headache.  One Chevis could not be the cause.  Fortunately, I had the foresight to bring a variety of stomach medicines, and I took them all; nausea medicine, aspirin, and…well, one gets the idea.  I also started drinking soda.  I had zero desire to eat.  I just wanted to get through the signing of this contract which was scheduled at noon and get back to bed.  I wanted my strength for traveling as I was scheduled to leave at eight the following morning. 

As we drove to the office, I asked Ruby if there was a nearby pharmacy.  I was running low on aspirin.  Naturally she asked if I was o.k., and I told her I had a headache was all.  She offered to take me to the pharmacy, but I told her we could go after the meeting. 

Before the meeting, I was offered green tea, which I accepted.  The Chinese serve and sell green tea in loose-leaf form, meaning no tea bags.  So I drank the tea and picked the leaves out of my teeth.  We went over the contract one last time, and then they brought the General Manager, Louis in for the signing.  Louis sat down and we exchanged pleasantries with Ruby’s assistance.  Louis said things like, “We wish to have a long-term relationship with your company; “and “we hope to source more parts with your company in the future.”  Yuan and Ruby were binding five formal contracts, stamping pages with what looked to be a formal red stamp of some kind, and getting them ready for signatures.  Then came what our instincts were telling us the whole time.

What seems too good to be true probably is, and for this “contract,” the kicker was a small sentence in the contract that contained the words “notarization fee.”  Specifically it said, “Each party will pay half the notarization fee.”  To get something notarized in the U.S. is relatively inexpensive, so we didn’t think much of it when we first saw the blurb about a notarization fee in the contract.  According to Luis, the fee would be one and two tenths percent of the total contract value or about thirty seven hundred dollars USD for our half.  Louis asked me if I was o.k. with the fee.  I said that it would not be a problem; “we’ll just deduct it from your invoice.”  Louis said that was unacceptable as the total dollar amount could not change and the Chinese notarization department was very strict that every detail had to be in order. He added they needed the fee prior to notarizing the contract.  He also said it takes up to two weeks to process the contract for notarization, and could I come back to sign?  “Hell No!” I said to myself and asked them what the options are, that coming back in two weeks was not practical.  They said I could sign an authorization letter to accept my signature.  Knowing that these contracts were garbage (again, the only formal contract with a foreign company to us is cash in advance), all I wanted to do was leave.  I signed the five worthless contracts.  After signing, Louis slapped his hand on the table and stood up with his hand extended for a handshake, which is what I suppose, another Chinese custom.  We shook hands and the entire office applauded.  I played along, took a few photos, and a few minutes later, I was waiving good bye.  Incidentally, Louis refused to be in the photos citing it was due to a Buddhist belief, and he could not be in any photos until January 1st, 2012.  Yea right Louis.

I got back to the hotel and contacted James and Mark to tell them about this new development.  “Certainly they would not fly us half-way around the world, spend two months negotiating, and go through all of this for approximately thirty seven hundred bucks?” I told James.  James agreed and didn’t have a problem with paying the fee either, especially over a million dollar contract; still we were skeptical more now than ever. 

After hanging up with James, I was really feeling bad.  I tried to sleep but could not.  We needed to do some more internet searches, and I knew just the person to ask.  I text Mark and asked him to search the internet for “Chinese Notarization Scams.”  About an hour later I got a call from James.  Mark found several pages of companies that had been through what we were going through, and one stamping company in New Jersey’s story in particular was almost identical, even mentioning Yuan by name.  In the stories we read, some of these companies paid the notarization fee, some paid more than once when they were told that additional money was required.  None of these U.S. companies heard from Yuan again after they paid the notarization fees.  Now we were ready to walk away from this deal…and fast. 

Ruby called later that afternoon to ask how I was feeling.  I told her, “not well.”  She then asked if we could wire the notarization fee money today to a personal bank account, saying the personal account was necessary so that they could avoid paying high Chinese taxes.  Ruby claimed that in China, they charge higher taxes to business accounts then personal bank accounts.  When I told her we could not, she then asked if they could pick me up to take me to an ATM.  I told Ruby I don’t carry an ATM card when I travel and only had about a hundred dollars to get me home.  This second push made me a little nervous for the first time, knowing that these people were taking me to the airport in a few hours.  I wasn’t comfortable being with them or at their mercy.         

I convinced myself that they wouldn’t do anything stupid; still, I decided to leave before they were to arrive at six a.m. to pick me up for the forty minute ride to Haikou City Airport.  I only slept about two hours that night and ate nothing, partly due to being restless and partly due to what would be later diagnosed as food poisoning.  At four thirty a.m. I went down to the front desk and checked out of the hotel.  I was glad to see my favorite bellhop was there, the one that assisted me at the gym, and he tried to get a cab for me.  He apologized that the soonest he could get a cab was thirty minutes and for one hundred Yuan, he offered to take me to the airport in his own car.  A hundred Yuan was less than twenty bucks USD and I quickly accepted his offer.  I would have given him a hundred USD if he would have asked. 

With the exception of our state’s driver’s license office, I can’t remember being so happy to leave a place.  Once I got through airport security, I text Yuan to tell him I was not feeling well and was already at the airport.  He text back asking me to wait, I told him I was getting ready to board the plane.  That was the last I heard from them. 

At the airport, a young Chinese man approached me, acting very shy.  He asked very politely if he could speak to me.  I said “yes,” and invited him to sit. 

Camera flashes started to go off and I noticed the people he was with were taking pictures of us. I asked, “Why are they taking pictures?” he said that it was the first time he had ever seen a foreigner. 

It turned out to be the boy’s mother and his fellow classmates taking the pictures.  The boy was seventeen.  I completely forgot about how bad I felt while talking to this young man.  He was very courteous and humble.  After our company was almost scammed, receiving worthless Chinese currency, and seeing people urinate and spitting on public floors (I forgot to mention the spitting which I spotted several times during the week); this young man was the bright spot of my trip that reminded me that all of China was not bad.  In fact, the majority of the people I met in China were friendly, polite, humble, and appreciative.  This young man at the airport was the epitome of all the good memories of the Chinese people.

It was a miserable flight home, but upon my return I received a lot of text messages from my family, James, Mark, their parents Claude and Mildred, and friends that made me feel much better and appreciate that I was home.

What this Chinese prospect tried to accomplish with their scam was selfish for several reasons.  The one that comes to mind mostly for me is how their actions hurt honest Chinese companies that are trying to conduct legitimate business with other U.S. companies.  Scams are everywhere, but being snake bit by a foreign scam can create prejudices about doing business with an entire country.

Why would a Chinese “Import/Export” company go through all the trouble for thirty seven hundred U.S dollars?  In China, the exchange rate is about six to one.  Remember my five star hotel room cost about seventy USD which, I’m guessing this same hotel could have easily been two fifty to four hundred dollars a night in the U.S.  Thirty seven hundred dollars, if they can scam about four or five companies a month, pays fairly well in China.  But I’m speculating.   

“Nothing venture, nothing gained;” James said later…it’s true.  We took a calculated risk that didn’t pan out and could have cost more than just the travel expense; however it didn’t do much to change the way I felt about not shutting down the false hope this situation created for our company, sooner.  We are still a young, motivated company, just a little wiser now.    

In addition to reporting this scam to all five American Embassy’s in China, we felt it is our obligation to get the word out about our experience to help other companies from falling into the same trap.  Mark found the information about the New Jersey Stamping company and others that experienced what we did, and it saved us from additional expense and frustration.  We greatly appreciate those companies taking time to make their stories public and warn other companies, like ours, to beware of Yuan.

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