Manufacturing in China: It’s All Good

China MOU LOI

The nature of this blog means a large percentage of our posts stem from negative incidents in China. This post stems from a somewhat shockingly positive phone call I received the other day from a Mexican company that wanted my law firm’s assistance in getting its molds back from its Chinese supplier and in drafting an OEM agreement with a new supplier.

This Mexican company had used a Chinese factory to manufacture its product and then, due to dissatisfaction, had decided it would switch to a new factory. The “old” factory was holding on to the molds, claiming they owned them.

After learning the Mexican company had no written contract with the old factory and that the molds were worth “less than $20,000,” I suggested they should simply seek to buy the molds from their old supplier for as little as possible. I explained how the lack of a contract specifying who owned the molds meant it would be very difficult to prove the molds belonged to the Mexican company, and the Chinese company no doubt knew this.

We then talked a bit about the Mexican company’s business, which involves making an item in fairly large quantities that has all of a sudden become very popular. I learned of how demand for their product was soaring and of how they could not afford to have much of an interruption in manufacturing, but that they had enough inventory on hand to switch manufacturers now. I then asked why they were switching to a new Chinese factory and they told me the following story:

We found this company [the company holding on to the molds] on Alibaba and about 30% of the product we got from them on the first shipment was defective. They refunded some of that money, but not quite all of it. Our second shipment had a 3% defect rate.

I asked them to repeat the above, thinking I must have misheard things, and they did. I then told them they were maybe the luckiest company alive (can a company be alive?) and that switching manufacturers would be a huge mistake. I told them that picking this Chinese factory off the internet and getting one that is clearly honest and cares about its product and is now producing with only a 3% defect rate was incredible. I told them the odds of their next factory hitting anything close to a 3% defect rate by its second shipment were about zero. I said if I were them, I would not buy back the molds and I would not switch manufacturers. I would instead call up the old factory and thank them for working so hard on quality and let them know that you view them as your partner and you hope that the relationship continues to work so well for everyone.

The Mexican company agreed.

For more on what it takes to have a good relationship with your Chinese suppliers (beyond not getting rid of a great find), check out Treat Your China Suppliers Well…..

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