How To Avoid Paying a Chinese Manufacturer That no Longer Exists
Nearly All China Problems Are Preventable
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.
Therefore, on the rare occasions when someone contacts one of my law firm’s China lawyers with a China-related problem for which the company calling us bears no responsibility, it takes us aback.
This post sets out 10 critical red flags that can signal your China supplier is facing financial trouble or potential bankruptcy. Spotting these warning signs early allows you to mitigate your risks. We explain how to monitor for supplier issues and safeguard your business by responding quickly.
Long-Term China Manufacturing Relationships and Sudden Changes
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? Adopting such a rigorous oversight approach is often just not practical.
The Unresponsive China Manufacturer
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.
Unfortunately, twice in the last few weeks we have talked with companies that paid their China suppliers for product, only to learn that their suppliers no longer exist. This is becoming very common.
Identifying Bankruptcy Signs in Chinese Suppliers
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Ten Key Indicators of a Failing China Manufacturer
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: Excess capacity can signal that the manufacturer is facing reduced orders, which may indicate financial instability. Businesses should verify whether this excess is a result of enhanced efficiency or dwindling demand.
2. Poor lead times: Delays in production or delivery often result from resource or management issues, thereby jeopardizing your supply chain and necessitating an evaluation of alternative suppliers.
3. Layoffs before the Chinese New Year: This could signify financial stress. Verifying the reasons behind layoffs helps assess the company’s stability and foresee potential supply disruptions.
4. Workers aren’t being paid: A direct red flag for financial trouble, and possibly a precursor to strikes or reduced productivity, which likely will impact your product quality and delivery times.
5. Turnover has been rising for weeks: High turnover can suggest internal issues, potentially affecting consistency in product quality and communication, warranting a reassessment of your partnership.
6. New payment terms: A sudden change might reveal cash flow issues or possible fraudulent activity. Ensuring diligence in understanding and negotiating new terms is vital to avoid potential losses.
7. Quality is slipping: A drop in quality may indicate cost-cutting measures or management issues. Continuous quality assessments and having alternative suppliers on standby can mitigate potential disruptions.
8. Phone calls and emails go unanswered: Consistent communication gaps can signal internal chaos or a lack of regard for customer relationships, prompting a need to explore alternative communication channels or suppliers.
9. Factory abruptly changes location: Unanticipated location shifts can mean lease disagreements or financial troubles, which may necessitate re-evaluating logistical arrangements and contract terms.
10. High quantity of customer complaints: A high frequency of customer complaints, especially those persistently revolving around similar issues like product quality, delivery delays, or customer service responses, not only jeopardizes your brand reputation but is also often a harbinger of the supplier’s operational or financial instability.
And here’s one more I am hearing just about every week now: the Chinese supplier seeks to increase the upfront payment for its product and it tells its buyer that it needs the funds otherwise it will not have enough to be able to buy the materials or component parts it needs to make its product. This is a large red flag and you should silently thank your supplier for candidly warning you of its financial problems.
Spotlight on Select Warnings
The following warnings are particularly important, for the following reasons:
Numbers 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.
Number 6. New payment terms. Almost always a sign of a factory in rapid decline or — even worse — a bank switch scam. Either way, beware.
Conclusion
Navigating your relationships with your Chinese suppliers requires vigilance and adaptability, particularly during when (as now) China’s economy is declining. By looking for and responding to red flags—such as excess capacity, deteriorating product quality, and altered payment terms—foreign businesses can position themselves to avoid potential pitfalls and safeguard their interests.
It is imperative to not only be observant of these signs but to actively formulate strategic responses and alternative plans to mitigate potential disruptions. Moving forward, you should seek to establish comprehensive and legally sound agreements, regularly assess supplier stability, and ensure a diversified supplier base, as these will help fortify your business against unexpected adversities.
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.
