Not surprisingly, our China lawyers are seeing a massive increase in foreign companies seeking to reduce or eliminate their China ties. Many are seeking to terminate their relationship with their Chinese suppliers and move production elsewhere (so far, it’s been mostly to Vietnam, Taiwan, Poland, Thailand, Mexico, Brazil, India and Malaysia). The other day I spoke with a company that has 50% of its manufacturing in China, 25% in Vietnam and 25% in Thailand and it wants to get out of China “as quickly as possible”, but is rightly afraid of just pulling up stakes and moving out.
What are the risks for a foreign company seeking to leave China? Equally importantly, what can you do to mitigate those risks?
Way back in 2013, I wrote an article [link no longer exists] on how Chinese companies and individuals often take hostages in an effort to collect on alleged debts or to protest employee layoffs or the closing of a China facility:
As the article states, “it is not rare in China for managers to be held by workers demanding back pay or other benefits, often from their Chinese owners, though occasionally also involving foreign bosses.”
My law firm’s advice to our clients that are laying off workers in China or closing a facility in China or allegedly owe money to someone in China is to stay outside China. Regular readers of our blog know we took this position long ago and have never waffled:
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- If you are in a debt dispute with a Chinese company, the best thing to do is not go to China at all.
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- If you must go to China, think about using a bodyguard or two or three and think carefully about where you stay and where you go. Most importantly, be careful with whom you meet.
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- Consider preemptively suing your alleged creditor somewhere so you can plausibly claim to have been seized not because you owe a debt, but in retaliation for having sue. If you are going to sue, carry proof of your lawsuit with you while you are in China.
By this point many of you are probably wondering why I am writing about debt when the issue is leaving China. My answer is simple: once the news gets out that you will be leaving China, alleged creditors will come out of the woodwork. Chinese tax authorities will come up with taxes you allegedly owe. Your Chinese landlord will explain why you owe it way more than you thought you did. Your Chinese suppliers will send you bills for items they never actually gave you. Your China employees will demand all sorts of severance and vacation time. These sorts of things almost invariably happen and you need to be prepared.
What about just shutting down in the middle of the night and walking away, never to return? That is possible, but that comes with its own risks and it rarely makes sense unless you are 100% certain that neither your company nor anyone who can be relatively easily identified with your company will be doing business in or with China ever again or find itself in China ever again. As someone who has twice in his life been in an airplane that had to land somewhere other than its intended destination –I once spent four unplanned January days in Magadan, Russia, when the city had essentially no fuel for heat — you should also be 100% sure you will never involuntary find yourself in the PRC. See also How to Do Business in China Without Going to Prison.
In a similar vein, you shouldn prepare well in advance for terminating your China supplier. And by plan in advance, I mean you need to secure your molds and all product for which you have already paid before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere.
Chinese manufacturers often seek to retaliate against their foreign product buyers that cease buying product from them. For this reason, we instruct our clients to line up new suppliers [be they within China or in some other country) and have them ready to go before they even hint to anyone in China that they might cease production with their existing China suppliers.
1. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling you will be moving on.
2. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. Foreign company then learns someone in China has registered the foreign company’s brand names and logos as trademarks in China. Foreign company is convinced its China manufacturer did these registrations, but it has no solid evidence to prove this. Foreign company is now facing not being able to have its product — at least with its own brand name — manufactured in China. Foreign company is also now faced with having to deal with a low cost Chinese competitor that can legally make products in China with the foreign company’s brand name and logo and sell those products anywhere in the world where the foreign company does not itself possess the trademark rights in its brand name and logo. The way to prevent this is to get your IP registrations in China current before you reveal to anyone that you will be leaving China, or even just reducing your footprint there. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.
3. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. A few weeks later, foreign company has its products seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the foreign company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge (or just registered the design patent). China has laws forbidding its manufacturers from registering the trademarks/patents/copyrights of those for whom it manufactures, but because it is usually not possible to prove your manufacturer in Shenzhen had a cousin in Xi’an do the IP registering, this sort of thing goes on unchecked.
4. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then says it will not ship any more product to foreign company because foreign company is late on payment and owes China manufacturer hundreds of thousands of dollars. China manufacturer then reports foreign manufacturer to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which can have the effect of convincing other Chinese manufacturers not to sell to foreign company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out Be Sure Regarding China’s Sinosure.
5. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then either threatens to or actually does hold people from the US company hostage for alleged debt. For more on the problems that arise from allegations of debt to a Chinese company, check out How to Reduce Your Chances of Getting Kidnapped in China.
To increase your chances of surviving a move out of China, analyze your weak points and do what you can to minimize those. Above all else, plan ahead and keep quiet until you are ready to jump.
