How to Tell if Your China Supplier is Going Bankrupt

Like most lawyers, I am hyper logical. That’s our training and that is who we are. We like order and we like clear explanations for when there is disorder. Clear enough so that we know how to prevent future disorder.

China is not terribly orderly, but at least 95% of the time, the problems foreign companies face in/with 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 would likely have prevented or ameliorated the problem, or at least have given them good recourse once the problem occurred. Note that positioning yourself to have “real recourse” is often the single best way to prevent a problem in the first place. See e.g., You Need an Enforceable China Contract No Matter How Much You are Feeling the Love . Or on the flip side, check out A Lifetime Sentence for Operating in China Without a Lawyer, Well Sorta, where we discuss the case of someone not allowed to leave China and highlight all the things this person did wrong to cause his present situation.

So when someone calls us 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 its factory in China every two weeks to make sure everything was still okay? Get real.

Sadly, with all that has been going on with China these last few years and with all the lockdowns that have been happening these last few months, our lawyers are getting inundated by companies that believe or suspect or really don’t know if their China product suppliers have gone bankrupt, or are just ignoring them because they have no product to sell. In any event, you can only imagine the stress level for these companies — some of which have not gotten any product for months. They are getting pressured for dates from their suppliers and they don’t even know if their China supplier still exists (or in what form) or not.

Our job as lawyers in these cases is to figure out the financial situation of the Chinese supplier and then figure out why the silence and/or the lack of any deliveries. This sort of work that we do is considerably more effective before the product buyer has paid its Chinese supplier, but about half the time, we are called in after money was long ago sent. You need only read about what is happening in China (and what is predicted to happen) to know that this lack of product delivery is becoming a huge deal. Just this week the Wall Street Journal did an article on how China’s Economic Slowdown Is Rippling All Around the World, while The Economist did one on how China’s Export Boom has Ended.

So I was delighted when a fellow lawyer sent me the link to a blog post titled, 10 Red Flags Your China Supplier is Going Bankrupt, as this post succinctly lays out the following warning signs 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, ghosting very well is about to happen. Our China manufacturing lawyers have seen this before.

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

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