Changing Your China Factory? Be Careful.

China WFOE employees

Just read an article, Toy supplier sues maker in reshoring fight about an American toy maker’s lawsuit against its Chinese supplier. The article describes the lawsuit as being based largely on allegations that the Chinese supplier ceased providing the American company credit and delayed deliveries, all in an attempt to make it impossible for the American company to start making its toys in the United States.

Though I have no idea one way or the other whether the allegations in this particular lawsuit are true, I do know that bad things nearly always happen when Chinese manufacturers discover that their American product buyers will soon be ceasing to buy product from it. For this reason, we instruct our client to line up its new suppliers and have them ready to go, before even hinting that it might be ceasing production with its existing suppliers. We give this advice because over the years our China lawyers have repeatedly seen the following:

  • US company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the US 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 that you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds In China and Want Your China-Based Molds? You’re Probably Too Late For That.
  • US company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. US company then learns that someone in China has registered the US company’s brand names as trademarks in China. US company is convinced that its China manufacturer is the one that did these registrations, but has no solid evidence to prove this. US company is now facing not being able to have its product — at least with its own brand name — manufactured in China.
  • US company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. A few weeks later, US company has its products ceased at the China border for violating someone’s trademark. The US company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing that the Chinese manufacturer registered the US company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge. China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. For how to prevent this from happening to you, check out the following:
  • US company tells its China manufacturer that it will cease to use China manufacturer for its production. China manufacturer then says that it will not be shipping any more product because US manufacturer is late on payment and owes X hundreds of thousands of dollars. China manufacturer then reports US manufacturer to Sinosure and Sinosure then ceases to insure product sales to this US company, which can have the effect of convincing Chinese manufacturers not to sell to US company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out Be Sure Regarding China’s Sinosure.

Bottom Line: Plan ahead before you even talk about pulling your production from a China factory.

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