How to Tell if Your China Manufacturer is Going Bankrupt

Nearly all problems foreign companies face involving China are neither new nor unpreventable. Put another way, when a foreign company comes to one of our China lawyers with a China legal problem, we almost invariably can find a number of things the foreign company could and should have done differently that likely would have prevented and/or ameliorated their problem.

So when someone calls with a China problem for which they are entirely blameless my world gets rocked, at least just a bit. I mean, if that were to happen all the time, there would be no need for people to pay for lawyers, right? The one area where our China attorneys most often see this is when a foreign company has had a great relationship with its China factory for ten or twenty years and then all of a sudden that factory just disappears. Was the foreign company supposed to conduct due diligence on its China factory every two weeks to make sure everything was still okay? Get real.

With all that has been going on with China these last few years, our lawyers are getting inundated by companies that want to know why their China product suppliers are ignoring their emails and phone calls. You can imagine the stress level for these companies, some of which have not gotten product for months. They are getting pressured for dates from their own buyers and they don’t even know if their China supplier still exists.

Our job as lawyers  is to figure out why the silence and/or lack of deliveries. We much prefer to do this sort of work before our client has paid its Chinese supplier, but about half the time, we are called in only after money has already been sent.

What exactly can a company do to avoid paying money to a supplier on the verge of going bankrupt? 10 Red Flags Your China Supplier is Going Bankrupt does a great job laying out the following “tells” for spotting a China manufacturer in trouble:

1. Excess capacity.

2. Poor lead times.

3. Layoffs before the Chinese New Year.

4. Workers aren’t being paid.

5. Turnover has been rising for weeks.

6. New payment terms.

7. Quality is slipping.

8. Phone calls and emails go unanswered

9. Factory abruptly changes location.

10. High customer complaints.

All these make sense, but I particularly like the following for the following reasons:

##3, 4 and 5. Layoffs, turnover and workers not being paid. If the people with whom you regularly work at your China supplier are disappearing or you hear of workers complaining, there is a good chance ghosting is about to happen.

#6. New payment terms. Almost always a sign of a factory in rapid decline or — even worse — a bank switch scam. Either way, beware.

For additional actionable information on how to deal with Chinese companies during China’s economic slowdown I urge you to read China’s Slowing Economy and YOUR Business.