How to Leave China Safely

1. Western Companies Want to Leave China and Are Leaving China 

The Wall Street Journal ran a front page article last week on American companies seeking to reduce their exposure to China. This article, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, reinforces what we have been saying for months about how American and European companies view the Trump tariffs and other government restrictions on China trade as a wake-up call and they are acting accordingly. We keep writing about how so many of our clients have moved out of China, are seeking to move out of China, or very much want to move out of China. But due to the attorney-client privilege, we are not allowed to name names, but the Wall Street Journal can and it does.

The article starts out by talking about how no matter what sort of new trade deal the United States reaches with China and no matter what sorts of promises China makes about what it will do in the future, the past is past and business with China will never be the same again.

Rattled businesses on both sides of the Pacific are skittish about rushing back in to revive the once-booming investment activity between the two countries.

“There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.

It then notes that the “US-China trade dispute isn’t the only factor driving a decline in investment flows between China and the U.S., which plunged to just over $19 billion last year, from a 2016 peak of $60 billion.” China has clamped down on capital outflows and “the U.S. Committee on Foreign Investment has moved to block or unwind Chinese investment in companies that could give it a strategic advantage” and there is no reason to believe any trade agreement will change either of these things.

The article gives the following examples of companies permanently reducing their China footprint:

1. Camera maker GoPro has decided to move its camera production from China to Guadalajara, Mexico to improve supply-chain efficiency.

2. Bicycle maker Kent International Inc., is investing in Cambodian factories to avoid the Chinese tariffs.

3. Synplus Inc., a supplier of leather, fur and suede has “switched from western China pig leather to Pakistani lamb leather. Synplus has also begun considering investing in a Vietnamese supply chain to remain competitive and to avoid future tariffs.

2.  Chinese Companies are Not Investing in the United States

It also gives the following examples of Chinese companies pivoting away from investing in the United States:

1. China’s Guangzhou Automotive Group, citing trade tensions, said it delayed plans to export its cars to the U.S.

2. Shandong Ruyi Technology Group put “on hold” its plans to buy an abandoned Arkansas TV factory and turn it into a cotton-yarn mill.

3. Sun Paper Industry Group “postponed” a $1 billion paper mill project in Arkansas.

3. Staying in China is the “Wrong Answer”

The article then concludes by quoting the president of the American Apparel and Footwear Association, Rick Helfenbein, who “says that when apparel companies talk to analysts and investors, they are grilled on their exposure to Chinese uncertainties [and]…. “the wrong answer is ‘90% of everything I do is China,’ and a good answer is, ‘We’re working hard to reduce our exposure to China.’”

4. How to Reduce Your Risks When Leaving China

If you too are working hard to reduce your exposure to China, kudos. BUT, you must be careful because hell hath no fury like a Chinese company scorned and our China lawyers have of been hearing frequently from foreign companies that did not realize that saying goodbye to China can have major ramifications. In this post, we will talk about the risks of terminating your China supplier and how to reduce those risks.

It is common for Chinese manufacturers to retaliate against foreign product buyers that cease buying product from them or greatly reduce their purchasing. For this reason, you should line up your new suppliers and have them ready to go before you even hint you might cease or reduce production with your existing China suppliers. Many Chinese manufacturers are suffering right now and they tend not to take kindly to foreign companies further imperiling their economic survival. This means you need to be careful in how you decouple from your China supplier.

We give this advice because over the years our China lawyers have repeatedly seen the following:

1. Foreign company tells its China manufacturer it will cease using China manufacturer. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling you will be moving on.

2. Foreign company tells its China manufacturer it will cease using China manufacturer. Foreign company then learns someone in China registered the foreign company’s brand names and logos as trademarks in China. The foreign company is convinced its China manufacturer did these registrations, but it has no solid evidence to prove this. The foreign company is now facing not being able to have its product — at least with its own brand name — manufactured in China. The way to prevent this is to fortify your trademark registrations in China and around the world before you even hint to your China manufacturer that you may be switching suppliers.

3. Foreign company tells its China manufacturer it will cease using China manufacturer. A few weeks later, foreign company has its products seized at the China border for violating someone’s trademark or design patent. Foreign company is (rightly) convinced its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered its brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge (or just registered the design patent). China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. For how to prevent this from happening to you, check out the following:

4. Foreign company tells its China manufacturer it will cease using China manufacturer. China manufacturer then says it will not be shipping any more product because foreign company is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports foreign company to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which convinces other Chinese manufacturers not to sell to foreign company without getting 100% payment upfront. See Be Sure Regarding China’s Sinosure. Our international litigators have been seeing a ton of cases where Chinese manufacturers have been claiming to be owed large sums of money when nothing  is really owed. This seems to have become the new “best” strategy for desperate Chinese manufacturers against foreign companies moving their manufacturing out of China.

Bottom Line: Plan ahead for pulling your production from your Chinese manufacturer and do it right.