This post is by online business expert Matt Thomas.
A profitable online business that’s growing in popularity is importing custom manufactured products from China and selling them through the Fulfillment by Amazon (FBA) program.
One big advantage of sourcing your own product from China is the ability to be unique. While the competition is selling the same products as everyone else, importing a product from China and making it your own by private labeling means you’re the only supplier. If that product is in high demand, being the sole supplier can be a very profitable position.
The gurus hawking FBA as the ultimate risk-free path to riches make it sound easy to turn all your ideas into successful products. One post I read advised to take your idea and head straight to Alibaba.com, a site where Chinese manufacturers and middlemen advertise the products they’re capable of producing. The post encouraged you to custom manufacture 1,000 units of the product and ship them direct to Amazon’s warehouse and, from there, sell them on Amazon at fantastic margins. The perfect online business, they say!
Until one of your products burns someone’s house down – as happened in the recent spate of hoverboard fires – or a child gets hurt.
The Buck Stops With You
Like building any real business, you’re not exempt from using common sense when importing from China for Amazon FBA. Importing private label goods from China comes with its own pitfalls. Products imported from China account for more than 60% of product safety recalls. If your product injures someone, you’re responsible.
While an attorney representing someone injured by your product may attempt to go after Amazon’s deep pockets as the retailer, your role as the manufacturer won’t go unnoticed. Plus, there are a myriad of product safety regulations and labeling requirements that you must comply with. Even if a lawsuit against you is completely without merit, you’re still going to have to hire an attorney to answer the civil complaint — we’re talking at least a couple thousand dollars and that’s if they can get the case dismissed (or settled) quickly.
While a Chinese manufacturer may produce (or be willing to create) a product that meets your exact specifications, there’s no guarantee that the product meets regulatory requirements. To make matters worse, unless you have official documentation, the presence of official-looking regulatory symbols and certifications on the product indicating compliance are worth about as much as the ink used to print them.
A retailer reselling products has responsibility for the products it sells, but often retailers will attempt to pass much of the liability onto the shoulders of the manufacturer. This is made more difficult when dealing with a foreign manufacturer. Unfortunately, the courts have very little reach in terms of assigning liability to Chinese companies without a domestic presence.
An Alphabet Soup of Product Regulations
When selecting a Chinese manufacturer, it is essential to choose one that will produce your product so that it meets regulatory requirements. In the US, government agencies that regulate products include the Food and Drug Administration (FDA), Federal Communications Commission (FCC), and the Consumer Product Safety Commission (CPSC). Depending on your industry, however, one or more of a dozen federal agencies could require you to meet certain standards. A recent Web Retailer post by Fredrik Gronkvist covered EU regulations.
A huge mistake sellers make when importing products from China is to assume that the manufacturer knows the regulations you have to comply with. They are experts in manufacturing, not necessarily in regulatory compliance. It’s always your responsibility as the importer, wholesaler and retailer to make sure your products are in compliance.
Consumer product safety is regulated by the Consumer Product Safety Commission (CPSC) in the United States. You should know that the CPSC considers importers of goods from China to be manufacturers under their rules. This means that these rules apply to you, the Amazon FBA business owner, when you are reselling imported Chinese goods in the US.
For example, if you’re producing a cookware product that comes in contact with food, the FDA requires that you use coatings that conform with their regulations. You must meet certain criteria in order to have your product be “FDA-compliant.” As an importer and reseller, you’re responsible for your products meeting all applicable requirements.
If the product you import is intended for children 12 years of age or younger, there are even more extensive requirements. If your product is classified as a “children’s product,” you are required to submit it for third-party testing and certification from a CPSC-accepted laboratory. Your product is also required to have a tracking label and you may be required to attach a postage-paid customer registration card to track sales in case of a product recall.
Some other examples of labeling requirements include country of origin labeling (for example, “Made in China”), labels indicating regulatory compliance or certification (FCC ID, CE, or UL-listed), and warning labels such as age restrictions (“Not recommended for children under 3”) or warnings about choking hazards and loose parts. Again, the appearance of a regulatory symbol on a product means only that the manufacturer knows how to print a logo on a product – always verify that products are actually certified.
How to Protect Yourself
Obviously it’s not all doom and gloom. There are steps you can take to reduce your risks.
The first step in protecting your FBA business is to make sure you’re working with your attorney to structure your business in a way that protects your personal assets, both from general liability and products liability claims. That means doing more than using an online legal service to set up an LLC. Even a corporate entity such as an LLC or S-Corp, for example, won’t always prevent someone from suing you and taking your house (see piercing the corporate veil). Having an attorney look specifically at your situation is vital.
You also need to have insurance for your Amazon FBA business. Even though Amazon only requires insurance for sellers reaching certain sales thresholds, you should consult your insurance agent early in the process. At the time of this writing, Amazon requires sellers reaching certain sales volumes to obtain commercial general liability (CGL) insurance of up to $1,000,000 per occurrence. Amazon also requires that you use specific wording on your policy listing them as additional insureds under your policy.
Ted Devine, CEO of online small business insurance company Insureon, says that the biggest liability for those importing products or having them manufactured is product liability:
Even if the products being made are not under the retailer’s own label or are not being actually manufactured by the retailer, that business will still be the liable party in the event of a customer lawsuit.
The cost of a commercial liability policy will also vary with the products you’re selling. Devine says a liability policy for a business manufacturing and importing clothing (starting at $425/year) would be less than for a business importing exercise equipment (starting at $6,000/year), for example, due to the increased risk of injury.
In some cases, product liability coverage may not be available at all or might be prohibitively expensive. For example, e-cigarette manufacturers and retailers might find it difficult to get insurance. Devine explains:
E-cigarette businesses often have to turn to specialty carriers, which tend to be more expensive. Depending on the contractual obligations an e-cigarette retailer has (e.g., to Amazon or eBay), it may cost in the ballpark of $6,000 to $10,000 per year to get a general liability policy that includes product liability coverage.
Devine says that hefty premiums aren’t limited to just one industry. He says harder to insure businesses include those that manufacture or import medical devices, children’s wear, and personal care items (perfume, makeup, lotion), to name a few. For these businesses, he says, you could easily see policy prices in the same range as e-cigarettes.
Other types of insurance coverage that may be included in some policies (or available separately) for small businesses importing from China, include business interruption insurance, product recall coverage, manufacturing errors and omissions, and coverage for loss of ocean cargo. When they review your business activities, your insurance agent will be able to advise you exactly which type you’ll need.
In addition to protecting yourself by having a corporate business entity and liability insurance, here are some ways to avoid importing dangerous or defective products from the start:
- Consult an engineer familiar with the type of product you’re creating. Mechanical and electrical engineers offer their services online and are often able to evaluate products for safety issues in the design phase at a reasonable cost. Identifying a problem before production begins will save you enormous costs.
- Consult a professional familiar with regulatory compliance in your product field. In addition, the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) requires that regulatory agencies publish free compliance guides to assist small businesses.
- Be sure that the manufacturer knows your expectations. Ask them to send proof of test results and certificates. This lets them know you’re paying attention and you expect the product to be produced to the applicable standards.
- Make sure to be clear when specifying materials. If you don’t specify the paint on a toy, for example, a manufacturer might use lead paint (it’s happened!). Keep in mind that Chinese manufacturers may use cheaper materials to save money if you don’t specify. It’s important to be specific not only the type of material, but the grade and other sub-types of each material.
- Send samples of your product to an independent testing lab in the United States to verify compliance – even if not required by product safety regulations.
- Have a recall plan in place in case you discover safety issues, or are ordered by a regulatory agency to recall your products.
- Use an on-site quality inspector – a representative you hire to inspect the manufacturing process to ensure the terms of the agreement are being followed. It’s entirely possible that the factory you contract with will further sub-contract the order to another factory – making it even harder to control the quality of the process.
- Pay special attention to high-risk items, especially those that could represent a shock or fire hazard. Inexpensive power adapters are sometimes missing important safety components designed to prevent injury, for example.
- Have your products shipped directly to you first, at least for your first shipment, and then ship them to Amazon. While it’s cheaper to ship directly from China and through your freight forwarder to Amazon’s warehouses, resist the temptation to save a few bucks. You need to know firsthand if there are quality control issues. You don’t want to find out through returns, negative reviews, and complaints to Amazon. Only when you’re completely comfortable with the supplier’s ability to deliver quality in bulk (not just a quality sample!), should you even consider shipping directly to Amazon.
While the Internet has made it easy to import your own product from China and sell it on Amazon, it’s important to step back and evaluate both the risks and rewards. Don’t fall for all the hype. Importing products from China is a complicated business and while some people make it look easy, failing to plan can cause you enormous headaches and financial loss.
By the same token, Amazon FBA can be enormously profitable. Following the steps I’ve outlined above will add additional expenses to your startup costs, but taking the time and effort to perform product due diligence and structure your business correctly will help ensure a sustainable, long-term FBA business with less potential headaches down the road.
This post was by online business expert Matt Thomas. Since 1999, Matt has had many online business ventures of his own, alongside client consulting and project management projects.
This post was originally published on Insider Secrets as Amazon FBA Seller Liability: The Dangers of Importing and Reselling Products from China. This isn’t legal advice – Matt is not a lawyer!