China Manufacturing Risks are Sky-High Right Now. Act Accordingly.

China manufacturing risks are sky high right now.

For the last couple months, a team of our lawyers (a/k/a the PPE team) have been working nearly nonstop on helping companies, charities, and even countries navigate the purchasing of Personal Protective Equipment from China. As we have written extensively, this is a risky business.

For some of what we have written on sourcing PPE from China, we encourage you to check out the following:

And for more on what we have to say about the risks of buying PPE, please check out the following news articles as well:

Most recently, in Face masks, ventilators with fake certificates pushed by scammers as demand for Chinese medical supplies booms, AsiaOne interviewed one of our PPE lawyers, Steve Dickinson, on the risks of buying from Chinese suppliers:

While some do sell viable – if overpriced – products, others sell junk. “They’re not concerned about whether the products perform or not … and they can disappear overnight,” Dickinson added.

Dickinson said claims of special ties with manufacturers were common. So were convincing certificates that turned out to be fake, invalid, or issued to a different company.

Offers to quickly ship high-volume orders in return for cash upfront were frequent, too.

Scam sellers typically dissuade buyers from contacting the manufacturer or conducting other forms of due diligence, such as visiting warehouses where products are stored, he said.

Of nine medical goods suppliers with whom significant product inquiries were made for this story, all but one – a face mask producer in the eastern province of Anhui – provided documentation made out to different companies.

They all claimed business ties with manufacturers allowing them to sell their goods to foreign buyers, but only one produced a contract showing the manufacturer had given them permission to do so.

But this post is NOT going to focus on PPE. I merely led off with PPE because that industry has so clearly and unquestionably become rife with blatant rip offs. But here’s the thing; huge swaths of other manufacturing industries in China have become rife with blatant rip offs as well. Having your product made in China — whatever the product — has never been riskier.

Ordering and paying for something from China and then getting nothing in return or something not at all like what you ordered is happening left and right these days and yet many companies are oblivious to this.These fraudsters are smart and there are good reasons why they spend the money to send you something instead of nothing at all and why they at first claim they will remedy the problems and why they so often continue to make that claim. The reasons are usually two-fold. One, sending even really bad product is less likely to lead to criminal charges than sending no product at all. If the police come by the Chinese fraudster can say, “I sent them the product they ordered. It’s not my fault those Americans/Europeans/Australians are so picky.” Two, by stalling they can keep their scam alive for much longer. They’ve paid for advertising and for a website and they’ve even bought the really bad product (be it spoiled fish, baking powder or bottom of the line window awnings) and they want to maximize these expenditures.

Whenever China manufacturing sees  a big decline in their demand — as is happening right now — YOUR risks of getting nothing or getting junk instead of what you ordered goes way up. China’s manufacturing industry is hurting worse than I’ve ever seen it in my twenty or so years of dealing with China. First it got hit with the trade tariffs, which led to foreign companies looking to move their manufacturing elsewhere. Then it got hit with the coronavirus in China, which caused many factories to generate little to no revenue for many months. Then it got hit with the coronavirus outside China, which has caused worldwide demand for Chinese products to plunge and has caused even more foreign companies to want to move their manufacturing out of China. To sum up, times are pretty miserable for most Chinese factories these days and they know this and they are grabbing for what they can as fast as they can.

The below email (modified slightly so as not to reveal anyone) is pretty typical of what our China manufacturing lawyers have been seeing in greater numbers these days (modified to hide any possible identifiers):

My regular Chinese supplier of widgets never re-opened after the coronavirus. So I then placed an order for 50,000 pieces and they are of the wrong material and they are warped and the sections that are supposed to open freely do not operate correctly because of the wrong material. I spent hundreds of thousands on developing this product and and they will not give that back to me even though they told me they were going to rework the products because they knew there was an issue. Now I have all this product that is useless that I cannot sell and I am paying storage it because I expected I would be able to return it.I’m out so much money and yet still trying to get a new product to market but that is proving really difficult because I have been hurt so badly financially. And then last week I learned that they are selling the product we worked on developing together and that product does not have any of the problems with the ones they sent me. Is there anything you can do to help me?

My response to these sort of emails is always to ask to see a copy of their product development contract so I can determine who actually has the right to sell the product and a copy of their manufacturing contract to see whether the foreign company has any recourse for the (deliberately) poorly made product. Most of the time the company has neither, which usually (but not always) makes doing anything at all to help them just too difficult and expensive to warrant undertaking.

Much of the time, the big frauds are committed by a non-existent company or by a company that is in dire financial straits. Let’s face it, thriving Chinese companies don’t need to steal people’s money and they almost never do. So at the very minimum, you should make sure that the company to which you will be sending the money is actually registered as a company in China and licensed to make and sell the products you plan to buy from it.

The following will help you reduce your risks:

1. Be careful when establishing business relationships with a new company. Do as much due diligence as you can. Send people you trust to do a site investigation of the manufacturing site.  Do a site inspection on goods before payment. Make sure the company exists and is legally able to conduct the business for which you will be paying it. Make sure that it is doing at least okay financially. We do this sort of due diligence work all the time for our clients and in the last few months, nearly 40 percent of the time we have recommended they seek out another supplier.

2. Use a contract that actually works for China and that sets forth clearly what you are buying and what happens if your China supplier fails to comply.

3. Know the market price of whatever it is you are seeking to purchase before you purchase it. Do not trust a company that gives you an unreasonably low price quote. That company likely will either steal your IP or never send you what you ordered or both. See China Contracts: Make Them Enforceable Or Don’t Bother and China Contracts that Work.

4. Consider a small trial order to reduce your risk. The problem with this though is that many scammers will provide you with a good trial and then scam you when you order the full amount. But if you combine this with a contract that works for China and proof that the company actually exists and is operating legally, you will be lowering your risks.

All this begs the big question. Has Sourcing Product From China Become TOO Risky? I will be addressing this issue in detail at a June 10 webinar put on by The International Trade Association of Greater Chicago and the Hong Kong Business Association of the Midwest. Go here for more information on that webinar and to register.