Our international litigators have lately been getting more than the usual number of emails/phone calls from companies (mostly American and European) wanting to pursue litigation against their Chinese manufacturers for bad product. In these “bad product” cases — especially if it is with a formerly “good” manufacturer — the product problem frequently stems from a sloppy subcontractor used by the Chinese manufacturer with whom the Western company has been working. The Chinese manufacturer admits it used a subcontractor and it blames the bad quality on the subcontractor. In most instances, the Western company did not even know anyone other than its Chinese manufacturer was working on its product.
Most internationally savvy China manufacturers are busy these days and loath to turn down good clients, even if taking on more clients will require they subcontract. Sometimes the subcontracting is for one portion of a product, oftentimes a portion they themselves are not even capable of making. Other times, they will subcontract out all the manufacturing.
We have handled many cases for foreign companies that received bad product from their previously reliable suppliers and in well over half of these cases, the product quality problems stemmed from their Chinese supplier having subcontracted out all or a portion of the manufacturing. The Chinese supplier usually admits to having subcontracted the work and sometimes even remarks that the problems otherwise would never have occurred. The supplier admits legal responsibility for the quality control problem, but then usually proposes remedying it by giving a small discount on future orders until the damages from the bad product have been covered. The foreign company is usually in no mood to continue doing business with the offending supplier and wants only a monetary remedy. However, because the profit margins at most Chinese manufacturers are so low, they often cannot pay the damages caused by the bad product and a standstill results that can only be resolved through litigation.
The best solution for this subcontracting problem is to prevent it from happening in the first place and the way to do that is with a good manufacturing contract. When our China lawyers draft manufacturing contracts we usually include a provision precluding the Chinese manufacturer from subcontracting out production without written permission from our client.
Virtually without exception, the Chinese manufacturers agree to this provision and then abide by it. The reason for this is simple: the manufacturer may have 20+ companies for whom it produces goods, but very few (if any) contractually forbid subcontracting. When the Chinese manufacturer is so busy as to require subcontracting, it makes sense for it to subcontract manufacturing for those foreign companies for whom it is NOT prohibited by contract from doing so. I analogize this to bike locks. Even the best bike lock cannot prevent all thefts, but its efficacy comes from bike thieves preferring to steal a bike with a poor quality lock or none at all than one that is difficult to break. Your well-crafted China manufacturing agreement will become your equivalent of a high quality bike lock.
For more on China manufacturing contracts, check out the following: