At least once a month someone will tell us they don’t need a China-centric contract with their China-based manufacturer because their China-based manufacturer is owned by an American or a European company. To which I always say, “no it isn’t.”
Here’s the deal. No American or European or Australian company (or any other non-Chinese company) can own a Chinese factory directly. It is possible the American or European or Australian company that claims to own a Chinese factory owns a Chinese company (a WFOE or a China Joint Venture) that in turns owns a Chinese factory, but the odds of this are incredibly slim. None of my law firm’s international manufacturing lawyers have ever encountered a foreign company that owns a Chinese company that owns a Chinese factory that does contract manufacturing for third party companies. Something like this is possible, but it is exceedingly rare.
So what does it mean when a foreign company claims to own the Chinese factory from which it is trying to get you to place your orders? This pretty much can mean one of the following two things:
1. The foreign company that claims to own a Chinese factory is flat out lying. It is amazing how often we see this and when I say “see this” I mean the foreign company puts in writing “that your products will be made by factories we own in China.” If you see this, you probably should run away.
2. The foreign company is fudging the truth. A lot. This occurs when the foreign company speaks of having your products made by “our factories” in China. If you push them on what they mean by “our factories,” they will usually state that the factories in China to which they are referring are the factories they have worked with for many years and know well and trust.
Why though does any of this matter? As someone whose law firm has been involved in many lawsuits on this issue, let me tell you it matters a lot. It matters because companies that believe they are buying their widgets from an American or European or Australian company (hereafter referred to as the “AEA Company”) are (1) generally willing to pay more for the “safety” that comes from doing business with an AEA company, (2) generally willing to be relaxed about the contract they sign with the AEA company, and (3) relaxed about protecting their IP from China because they believe they are inherently protected because AEA law applies.
Unfortunately, the widget buyer could not be more wrong. The widget buyer now has a contract with an AEA company that has no legal connection with the Chinese manufacturer. The widget buyer has no contract with its Chinese manufacturer mandating the Chinese manufacturer deliver quality widgets on time and at a certain price and no contract with its Chinese manufacturer that prohibits the Chinese manufacturer from engaging in IP theft and no contract with the Chinese manufacturer that prohibits the Chinese manufacturer from selling your product to your customers. The AEA company also probably has no such contact with the Chinese manufacturer.
If you enter into this sort of tripartite relationship you will almost invariably have problems that are difficult or impossible to solve. I will in my next post talk about the sorts of problems we frequently see in these situations.