No idea why but we have lately been seeing an increase in clients interested in getting their products from China anonymously. These companies want to have their products made in China without anybody knowing who in China is making their products for them, and sometimes that they are being made in China at all. There are many reasons why companies seek a low profile when having their products made in China, including the following:
1. They do not want their buyers to know the products they are buying are made in China. But what about place of origin requirements? What about them? If you are selling an item that says “hand burnished in the United States” most of your buyers will believe your product is made in the United States even if all you do to hand burnish them is to have some U.S. employee spend five seconds running a cloth over your product before it goes on retailer shelfs. There are plenty of items people buy all the time without realizing they come from another country. For example, about 90 percent of seafood sold in the United States is imported, yet in my experience pretty much nobody realizes it is even more than half. Whenever someone tells me they refuse to eat anything made in China I tell them that if they eat garlic or anything with garlic, they almost certainly eat something from China. About 80 percent of garlic in the US comes from China and that number is almost certainly considerably higher when it comes to processed and frozen foods. The point is that many (most?) companies would prefer their buyers not know their products come from China.
2. They do not want their competitors to know their products are made in China and they especially do not want their competitors to know exactly where in China their products are made. If you are making better widgets than any of your competitors and selling them at a better price, you can bet your competitors want to know how you are pulling this off. And if you are accomplishing this by using a high quality and efficient Chinese manufacturer, you can also be sure your competitor(s) would seriously consider using your same Chinese manufacturer if they could find out who it actually is. I cannot tell you how many times one of our China lawyers has asked a client how it chose XYZ Chinese manufacturer and gotten the following sort of response: “Well, company X is the leader in our industry and so I tracked down who company X uses in China to make their widgets and I went to them to have them make our widgets too.”
3. They do not want their Chinese manufacturers to know where their products are made in China. I’m being somewhat facetious here, but not really. In fact, it is this reason that has been driving the increase in clients seeking China manufacturing anonymity. They want to have portions of their product(s) made by three to six different Chinese manufacturers, without any of the manufacturers knowing about the others and without any of the manufacturers knowing to what use its portion will be put.
But all of the above is easier said than done, and I would estimate that most SMEs do not achieve the secrecy they seek, either because they mess up somewhere along the way or because doing so is too expensive.
The below are the pressure points where we see companies frequently fall off the secrecy track:
- The initial email to a potential Chinese manufacturer. Yes, the initial email. If your name is Luis Twederluski (I made that name up so please don’t even bother to look it up) and you send emails to ten companies in China from your LuisTwederluski333@gmail.com account, you have probably already revealed more than you wanted. From just your email address, there is a good chance someone can figure out your full name and then from that figure out your company name and from that what you are intending to have made in China.
- The parts in your product. Take the company that does not want anyone (especially its China constituent part suppliers) to know what it is making. This company has company A in Suzhou make part 1, Company B in Xi’an make part 2, Company C in Dongguan make part 3, and company D in Shenzhen make part 4, and then it calls it a day. Wrong. What if one of these companies somewhere stamp their name on the parts that are going into the product? What if even without any stamping of names their parts are identifiable by those in the industry? The more typical problem with having 3-6 companies operating completely independently of each other is cost. If you are a large company with personnel who can coordinate logistics, timing and interoperability of parts between your various suppliers, then you should be covered. But if you are a small company and you think you can coordinate all these things while sitting at home in Pittsburgh, well that just isn’t terribly likely. Most importantly, where are you going to put the 3-6 parts together into your product and then have it packaged? If you were thinking of doing these things in the United States for anything near to as low a price as you would pay in China, well that is not likely going to happen.
- Importing the product into the United States. It never ceases to amaze me how few people realize how easy it is to review import records on the web. Just by way of an example, Google search “Lululemon (which is NOT a client of our firm) import records” and the first item will take you to www.importgenius.com which for free shows you a “sample shipment record” showing Lululemon imported “hustle pants” from Mactan Apparel out of Taiwan, but the pants actually came from Cebu, Philippines. If I actually cared from where Lululemon gets its products, my next step would be to sign up and pay for Import Genius (there are other search services as well) and then start going through Lululemon’s import records. Your competitors might be doing that with your import records even as I write this. We have had client companies tell us of the amazing lengths they have gone to keep their name off U.S. import records. A few years ago it was the rage to form a company in Hong Kong and have that HK company buy your products from the PRC manufacturer and then have the PRC manufacturer actually ship your products to your Hong Kong entity and then that way the US import records would not reveal the name of the PRC manufacturer because your own HK company would be the exporter. There was (and still is) usually a far easier way, especially if you are in a large industry. Let’s say your company is called World’s Best and Finest Toys and you sell toy dolls that you have made in China and you do not want your competitors (or anyone else for that matter) to know from which toy factories you are getting your dolls. You can set up an import management company and call it World’s Most Mediocre Hamburgers and Kielbasas and use that company to import your dolls. This is a cheap way to make it more difficult for anyone to know what you import.
A word of warning is definitely in order though: some of these methods may not work, some might even be illegal for your particular industry or your particular country, and some might increase your taxes or just otherwise make your life miserable. In other words, don’t anyone write me an email months from now saying (and I do get these!) I did what you told me to do in this [link] blog post and now I am wondering if. . . .” The above are examples; I am not telling you to do anything. In fact, I am telling you that you will be making a huge mistake to do any of these things without first consulting with an international trade law attorney and with your tax professional first.
The goal of this post is not to solve your product secrecy problems but to get you thinking about the issues and not to blow your cover with your first email to a potential manufacturer.
What do you do to maintain your product secrecy?