One only need read the news to understand how many Chinese factories have yet to resume operations and most that have resumed operations are not at full capacity. China factory production levels have “only reached about 30-50 per cent of capacity” and this means many foreign companies that have their products manufactured in China will not be getting the products they ordered. See The coronavirus means tense times for small business owners who import products from China.
Most of our law firm’s clients that have products made in China OR elsewhere with Chinese component parts are not at all confident of getting the products they ordered on time or even ever. They are telling us things like, “we have enough inventory to last two months but after that, it will be a disaster” or “time will tell as to when we get our products” or “we are taking a wait and see attitude.” One client told me “we will know that we will be getting our products when the products arrive at our door, not before.” But now is not the time to just sit back and wait for your products to arrive. If ever there is a time to be proactive regarding your factory production, now is that time.
If your Chinese factory is back online but at less than full capacity this likely will mean that some of your factory’s product buyers will get product while some will not. Your job right now is to increase the odds that your company will be one of the companies that does get its product. If your factory is at 40 percent capacity, you need to do what you can to make sure your company is in the 40 percent (or so) that gets its product.
There are lots of things you can do to increase your odds, but usually the best thing is to offer to pay more. If you are paying 100 dollars per widget you might want to test whether paying 120 dollars will get you to the front of the line, because it very well might. Our manufacturing lawyers have engaged in this sort of negotiation many times pre-coronavirus when shipments were delayed for other reasons. Convincing your Chinese manufacturer that you will be with it for the long-haul is another way, but that will likely require you sign a long-term contract evidencing that.
If you are going to pay 20 percent more for your widgets you need to you want to be doubly sure you will actually get the widgets. A good China-centric manufacturing contract is of critical importance for this and that includes being sure that contract does not have a force majeure provision that will let your manufacturer off the hook for non-performance. See Do Not Let Force Majeure be a Major Force In Your China Contract and China Force Majeure Provisions are not Your Father’s Force Majeure Provision so BEWARE. See also, this recent Financial Times article, Chinese copper traders declare force majeure over coronavirus, on Chinese companies invoking force majeure because of the coronavirus.
Even with a good contract, it will make sense for you to do what you can to determine your Chinese factory’s ability to actually produce and deliver your widgets. Pre-coronavirus, this would have meant sending someone to the factory to conduct due diligence, but that is obviously far more difficult now. About the best I can tell you on this score is that our China manufacturing lawyers and our China business specialists have been actively assisting our clients with this in various different ways. What we do is very much case dependent because what makes sense for a jewelry company that has its product made in Qingdao will usually be very different from what makes sense for a technology company that has its products made in Shenzhen.
What are you seeing out there?
