Like clockwork, the downturn in China’s economy is leading to a big uptick in companies and lawyers contacting our international litigators for help in fending off Sinosure threats. For the full import of what I mean by Sinosure threats, I urge you to check out Owe Money to China? Meet Sinosure, Leviton Law Firm, and Brown & Joseph and China Sinosure: What You NEED to Know. To summarize, Sinosure is China’s Export and Credit Insurance Corporation and it insures most of China’s exports and it then pays its manufacturer policyholders when a foreign company fails to pay for product received from those manufacturers.
Most of the Sinosure cases our lawyers have seen over the years arise from bad product delivered by the Chinese manufacturer. The typical Sinosure case involves a Chinese company sending over (let’s say) $500,000 in bad product. The American company cannot sell that product for its usual $950,000, but instead is forced to unload it for $350,000. The American company tells all this to the Chinese company and seeks to resolve its alleged $500,000 debt with a one time $250,000 payment. The Chinese company goes silent and a few weeks later, the American company receives an aggressively threatening letter from one of Sinosure’s U.S. lawyers.
With every China economic downturn, Chinese companies (logically enough) change their behaviors. I first wrote about this phenomenon for the Wall Street Journal way back in 2012, China’s Slowdown and You: The effects for foreign companies extend beyond merely slack sales. This latest economic slowdown greatly worries Chinese manufacturers and these worries have caused many of them to try to get what they can, NOW. See China Trademark Theft. It’s Baaaaaack in a Big Way and On Trusting China Manufacturers.
In 2011, in China. Smells Like 2008, Gloom And Doom Edition, I wrote the following on what our China lawyers were seeing from Chinese manufacturers during that downturn:
Chinese companies that are going out of business or believe they are going out of business have an annoying tendency to ship bad or fake or no product at all. In 2008, pretty much every week we were getting calls from companies saying that the product they had ordered just was not coming. We handled one case where a company had bought about a million dollars of fish and received containers of cheap bricks surrounded by fish. That fake shipment was the dying gasp of a company that ceased to exist. We have started to get those same sort of calls in large numbers again.
We are getting those 2008 and 2011 calls (and emails) again now. Pretty much every single day we get an email from a U.S. or European company seeking help in recovering anywhere from $20,000 to $2 million paid to a Chinese manufacturer that shipped clearly bad product or no product at all. To make matters worse, some of these companies that want their initial payment back from a Chinese manufacturer that has provided bad product end up getting dunned by Sinosure for failing to pay the remainder allegedly due.
So what should you do when Sinosure comes knocking on your door threatening you and your company with all kinds of harm? One thing for certain: Do not go to China to try to resolve the matter with your Chinese manufacturer. For why not, see Maybe Owe Money To China? Don’t Go There. Second, do not for even one second believe that Sinosure’s lawyers or collection agencies care about anything but getting money from you. In particular, do not believe they care at all that your Chinese manufacturer sent you unusable product. And why should they? If you don’t have a China-centric contract with your Chinese manufacturer that clearly specifies the quality of product you are to receive, Chinese law is almost certainly on the side of your Chinese manufacturer in any event.
There is no one good way to deal with a rampaging Sinosure and the best way for you will depend on your specific contracts, your specific situation, and your specific goals. When our lawyers are retained to represent Sinosure victims, we begin by asking them the following questions:
- How much is being claimed against you? There is no point in hiring a lawyer if the amount at stake is too low to warrant it.
- Why have you not paid? This greatly influences our initial strategies.
- To whom do you owe the money? We usually follow up by asking how important the creditor is to the debtor’s business.
- Do you have other suppliers in China in addition to the one (or more) that claim you owe them money? We are trying to figure out how important it is to solve the Sinosure problem quickly?
- Is it important you be able to continue doing business in China? Exactly what sort of business? These are important questions for determining strategy.
- Is it important that you or anyone else in your company be able to go to China? This is an important question for determining strategy.
- Do you use any of your company’s brand names or logos or other IP on any products or packaging made in China? If so, have you registered those brand names or logos in China? Chinese companies frequently register their debtor’s brand names and logos as China trademarks so as to gain leverage. Often, the first thing we do is shore up the IP registrations of a company involved in any sort of business dispute in China. You do not want to go into battle without first patching up a gaping wound.
But what about Sinosure wanting your first born? Is that a real thing? Of course not; that was just for effect. Well, sort of. I say “sort of” because Sinosure does often go after American business owners personally. Can Sinosure do that? Probably not, but maybe. That Sinosure has apparently now added this threat to its arsenal is troubling nonetheless. Sinosure is tough and relentless and a big problem and that problem is growing.