China’s factories are hurting. First they were closed because of the coronavirus in China and now their orders are way down because of the coronavirus everywhere else and because of politics and because of tariffs. As we have been saying on this blog pretty much ever since we started it: a bad economy means increased risks. See China Manufacturing Risks are Sky-High Right Now. Act Accordingly.
What this means is that our international manufacturing lawyers get emails almost every day from someone who sent money to an entity they thought was or would be their Chinese manufacturer but never sent them a thing in return.
Our international dispute resolution attorneys recently looked into taking on such a case but then chose not to do so after some brief research. I mention this case right now because it should be of great relevance to any company that buys product from China or is doing business in China, or really any company that buys product or does business just about anywhere in the world.
Here are the facts of this case amalgamated with probably a dozen other cases our law firm has handled. The foreign company — in this instance a North American company went to China and met with a Chinese company there for manufacturing its product. The two parties sign an agreement and the North American company sends the Chinese company a large sum of money to build the tooling. The Chinese company then says another large sum is needed to be ready to go as soon as the tooling is complete. Months pass. Nothing. More months pass. Still nothing. It has now been nearly a year and still nothing.
The North American company contacts our law firm about pursuing litigation against this Chinese manufacturer to recover the money paid. We review the documents and determine the North American company has a strong case (this in itself is rare, but this company had actually used good international lawyers for drafting its manufacturing contract), and so we as a next step investigate the Chinese company to determine whether it has sufficient assets to pursue. We conduct a fast and cheap investigation on this Chinese company and from this we learn the following:
- The Chinese company is not a manufacturer. It is a broker, with a tiny, rented office.
- The Chinese company does not even have an export license. In other words, it gets its products from manufacturers and then it has to bring on another company to ship those. It is just a middle-person. It is a broker.
- The Chinese company’s only asset appears to be a small amount of inventory, which it may or may not own.
The North American company retains us to compile comprehensive due diligence reports on ALL the Chinese companies with which it presently conducts business. All the rest were actually manufacturers, but a number of them appeared to be in difficult financial straits, which made them high risk.
China company due diligence. Not optional.
Not these days anyway.
What are you seeing out there?