With companies falling all over themselves to move their manufacturing out of China to reduce their risks (and their tariffs), my law firm’s international manufacturing lawyers are not only hearing from many companies wanting to leave China, but from many companies in big trouble for not having properly engineered their leaving China.
In The Single Best Way To Avoid Being Taken Hostage In China, we wrote of how Chinese companies and individuals often take hostages in an effort to collect on alleged debts or to protest employee layoffs or the closing of a China facility:
My law firm’s advice to our clients that are laying off workers in China or closing a facility in China or allegedly owe money to someone in China is to stay outside China. Regular readers of our blog know we took this position long ago and have never waffled:
- If you are in a debt dispute with a Chinese company, the best thing to do is not go to China at all.
- If you must go to China, think about using a bodyguard or two or three and think carefully about where you stay and where you go. Most importantly, be careful with whom you meet.
- Consider preemptively suing your alleged creditor somewhere so you can plausibly claim to have been seized not because you owe a debt, but in retaliation for having sue. If you are going to sue, carry proof of your lawsuit with you while you are in China.
Though China may seem safe, one should absolutely not write off the possibility of violence in one’s business dealings in China. My law firm has helped about a dozen foreign companies navigate their way out of situations where violence was threatened or occurred. We tell our clients that if they owe money to a Chinese company or are involved in any sort of dispute with anyone in China (partner, employee, etc.), they should avoid meeting to discuss the dispute/problem anywhere other than in a neutral, very public place in the day time and they should — if at all possible — not go to China or remain in China so long as that dispute might be pending.
In a similar vein, we have also written extensively on why you must prepare well in advance for terminating your China supplier. And by plan in advance, we mean make sure you have secured your molds and all paid-for product before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere.
Not surprisingly, there has been little media coverage about people being held hostage for changing suppliers, but there was this story about a US toy company whose already paid for product was held hostage by a Chinese supplier after learning the US company would be re-shoring its manufacturing to the United States. The article is entitled, Jilted Chinese supplier tells would-be U.S. reshorer -“Not so fast,” and it talks about how the Chinese supplier delayed deliveries in an attempt to make it impossible for the American company to start making its toys in the United States.
It is incredibly common for Chinese manufacturers to retaliate against foreign product buyers that cease buying product from them. For this reason, we instruct our clients to line up new suppliers and have them ready to go before they even hint about ceasing production with their existing China suppliers.
We give this advice because our China lawyers have seen the following:
1. Foreign company tells its China manufacturer it will be ceasing to use it for its production. China manufacturer then keeps all of the foreign company’s tooling and molds, claiming to own them. This is incredibly common. The way to prevent this is to get an agreement from your Chinese manufacturer making clear you own the tooling and molds before your Chinese manufacturer has any inkling you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds/Tooling In China. Get this contract signed well before you leave
2. U.S. company tells its China manufacturer it will be moving its manufacturing from China to Mexico and Thailand then it learns someone in China registered its brand names and logos as trademarks in Mexico and Thailand! U.S. company is now facing not being able to have its product — at least with its own brand name and logo — manufactured in these countries. The easy way to prevent this is to register your brand names and logos in the country to which you will be moving your manufacturing before anyone knows this might be happening. You might even want to consider doing these registrations under a company name that will not tip anyone off to your plans to leave China.
3. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its widget production. A few weeks later, foreign company has its widgets seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the foreign company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge. China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is virtually impossible to prove your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing happens all the time. You can prevent this by timely registering your China IP and by making sure your China IP is up to date before anyone knows you may be leaving.
4. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then says it will not be shipping any more product because foreign manufacturer is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports foreign manufacturer to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which can cause the foreign company financial problems that makes it difficult for it to leave China. This too is incredibly common and our law firm has handled at least three times as many Sinosure related matters in 2020 as in any prior year.
5. Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then either threatens to or actually does hold people from the foreign company hostage for alleged debt. This is China’s dirty little secret, but this too is incredibly common and in every single instance where this has happened to one of our clients, the local police have either stayed completely out of it or helped the hostage takers.
Bottom Line: Manufacturing in China has become much riskier, but leaving China has become much riskier as well. Protection comes by planning ahead.