Deliberately Bringing China Down, Factory by Factory

Pretty much since we started this blog we have said that if we hear about something three times and we find it interesting we will write about it.

Well last week I heard about something for the second time and it is so incredibly interesting that I am writing. Let me begin by saying that nobody should assume that my writing about this means I condone this; it merely means I find it fascinating and incredibly newsworthy.

The “this” to which I am referring is an underground (I say underground because I have never read about it or even heard about it other than from the two people who over the last six months or so reached out to me to brag about a system they have set up for ordering product from Chinese factories with no intention of ever paying in full for it, leaving the Chinese government holding the bag. I do not have any reason to believe that these two people are operating in tandem, mostly because I failed to ask either of them whether they knew or were working with others doing this same thing.

Let me explain as best I can, after hearing about this two times over the last year or so.

Supposedly there is a small but increasing group of people who for various different reasons want to harm China. The two people with whom I talked (one was strictly by email) said that they were doing this to seek revenge against Chinese factories “which are always cheating people” and because their actions will harm China and its relations with other countries. I say other countries because one of those who reached out to me is an American and the other is a Norwegian. Neither ever explained how this would hurt China’s country-to-country relations and I’m not seeing that as terribly real.

What both of these people are doing — and they claim they are not the only ones — is buying product from Chinese factories on credit and then getting the product without paying for it. What is so interesting (and so believable) is that both of these people said that they started out ordering and not paying for products from the very same Chinese factories they claim previously stole from them, but using different companies and email addresses, etc.

Their playbooks are basically the same. They set up limited liability companies in U.S. states that allow for their ownership to remain secret and then they use these LLCs to order products from China. One of the callers told me he has about a dozen of these U.S. LLCs. They then pay as little in upfront costs as they can negotiate. They all said that their goal was 30 percent upfront, but they often were settling for 50 percent upfront, but no more.

In a bit of a twist, one of the callers — a former sourcing agent — said that he likes to spend weeks even months negotiating with Chinese factories to make and send expensive samples and then he ghosts them, never ordering anything from them and then just moving on to a new factory. He also uses the same, apparently more regular tactics of the other two. He says he gets particular satisfaction from this because he was on two occasions duped by Chinese factories that essentially did the same in reverse to him so as to stall him while stealing his IP. For this common Chinese factory trick, see How to Give Away your IP in China Without Realizing it.

The most recent of these product buyers (for lack of a better term) to contact me says that he reaches out to Chinese companies in a way that makes it appear as though he is with a really big (but ever-changing) foreign company and then lures them in to spend money helping to develop a product and then orders it with as small an upfront payment as possible — usually 30 percent. Then when the product arrives in the United States, he convinces the supplier to free it up, with the remaining 70 percent payment to follow a month or so later.

A month or so later, nothing happens and the Chinese company will start complaining and/or going to Sinosure (China’s State owned export insurance company) to try to get paid. When I asked this person whether he was worried about being sued personally, he said no, because he is using a company in a foreign jurisdiction with “high level secrecy laws” and it would be nearly impossible to trace his name to that company. In turn, that company sets up LLCs “like popcorn” in Wyoming, which also has pretty good secrecy laws. He says he does not believe anyone (“especially the morons at Sinosure”) would ever be able to figure out how to find him and even if they did, he does not believe they would ever sue him for fraud in the United States because it would be too expensive, and the fact that he spends most of his time in Mexico makes it even less likely. He said that his typical order is for $100,000 to 200,o00 so that he can “spread the pain around” and so that the cost of pursuing him will virtually always be considerably more than he might owe. He also said that buying such low amounts of product also means that he has never once had to fill out any sort of credit application with Sinosure.

He said that in the end, even his $200,000 orders involve a loss of “only” $140,000 to the Chinese company because he is paying $60,000 upfront and he believes Sinosure covers the factory for all of its loses, so the “pain goes straight to the CCP.” He then sells all that he gets online and he uses the money he gets from that to multiply the number of his purchases. He said that when you pay 30 to 50% of “China wholesale” it is pretty easy to make good money selling the products (mostly clothing, consumer goods and electronics) at a good profit.

He said that he has been doing this for going on for four years and he has done this about one hundred times and he has lost money on some of these orders (about a half dozen times because the Chinese factory cheated him by taking his money and never sending any product), but done “pretty well” overall. He said his biggest complaint is how it his work is getting tougher because Chinese companies “really do not like Americans these days” and so he is finding more of them that either have no interest in working with him or only want to work with him if they can rip him off. He also said that shipping costs and delivery delays are hurting him the same way they are hurting everyone else.

He said that he views what he is doing as a “service to the world” and he contributes half of his profits to charities that fight against China, and lately to charities that help Ukraine. But no matter how much he (and I) can and do rail against China factory theft and the perniciousness of Sinosure, what both he and the first person with whom I talked are doing is stealing money, and I am not aware of any country that has a “but that country allows stealing from us” defense.

I would love to hear from people about the sorts of tactics these two people are employing. Are they morally reprehensible/outright theft or are they more akin to a new sort of non-violent high tech guerrilla force seeking to take down/harm the CCP or some combination of the above? Do you think they are telling the truth (I’m definitely not certain that they are) or did they just scam me in the hopes I would write about it to convince others to do this and essentially do their work and take the risks for them? Do you see flaws in their system such that it cannot really work?

I think what they were telling me is real because they certainly seem to know what they are doing and they appear to have covered all of the bases. I definitely have come across many bad actors on both sides of international product buy/sell transactions that are cheating the other side, but have never claimed to be doing so to serve some higher purpose. The last person expressly said that he wants to fan anger not just against China and the CCP, “but against everyone in China.” I told him that what he was saying sounded a lot like those who seek to create a race war in the United States and his response to me was “that’s your view not mine.” Both said that they had contacted me because of my obvious dislike for Sinosure (see this and this) and because they thought I’d write about it.

I have, but more because I want to get thing off my chest than because I feel good about it, because as much as I resent the way China treats the rest of the world, I still do not like these plans and I told the last person that I would be saying this.

Please weigh in.