How to terminate your China supplier: Very carefully

by Dan Harris

In The Single Best Way To Avoid Being Taken Hostage In China, we wrote of how Chinese companies often take hostages in an effort to collect on alleged debts or to protest employee layoffs or closing of a China facility:

As the article states, “it is not rare in China for managers to be held by workers demanding back pay or other benefits, often from their Chinese owners, though occasionally also involving foreign bosses.”

My law firm’s advice every single time to our clients who are laying off workers in China or closing a facility in China or allegedly owing money in China is to stay in the United States for all negotiations. One only needs to be a regular reader of our blog to know that we took this position long ago and have never waffled:

• If you are in a debt dispute with a Chinese company, the best thing to do is not go to China at all.

• If you must go to China, think about using a bodyguard or two and think very carefully about where you stay and where you go. Most importantly, be very careful with whom you meet.

• Consider preemptively suing the alleged creditor somewhere so that you can very plausibly claim that you have been seized not because you owe a debt, but out of retaliation for having sued someone. If you are going to sue, carry proof of your lawsuit with you at all times while you are in China.

In a similar vein, we have also written extensively on why you must prepare well in advance for terminating your China supplier. And by plan in advance, we mean make sure that you have secured your molds and all paid-for product before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere.

A good friend of mine (and a veteran China sourcing specialist) just sent me an article regarding a US toy company in extremisbecause its Chinese supplier is refusing to ship goods needed by this Christmas after learning that the US company will be manufacturing next year’s products in the United States. The article is entitled, Jilted Chinese supplier tells would-be U.S. reshorer -”Not so fast” and it talks about how the American toy maker has brought a lawsuit in the United States against its Chinese supplier. The article describes the lawsuit as being based largely on allegations that the Chinese supplier ceased providing the American company credit and delayed deliveries, all in an attempt to make it impossible for the American company to start making its toys in the United States.

Though I have no idea whether the allegations in this lawsuit are true, I do know that it is fairly common for Chinese manufacturefs to seek retaliation against their American product buyers if they cease buying product from them. For this reason, we instruct our clients to line up new suppliers and have them ready to go before they even hint that they might cease production with their existing China suppliers.We give this advice because over the years our China lawyers have repeatedly seen the following:

• US company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the US company’s tooling and molds, claiming to own them. The way to prevent this is to get an agreement from your Chinese manufacturer that you own the tooling and molds before your Chinese manufacturer has any inkling that you will be moving on. For more on the importance of mold agreements, check out How Not To Lose Your Molds In China and Want Your China-Based Molds? You’re Probably Too Late For That.

• US company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. US company then learns that someone in China has registered the US company’s brand names as trademarks in China. US company is convinced that its China manufacturer is the one that did these registrations, but has no solid evidence to prove this. US company is now facing not being able to have its product — at least with its own brand name — manufactured in China.

• US company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. A few weeks later, US company has its products ceased at the China border for violating someone’s trademark. The US company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing that the Chinese manufacturer registered the US company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge. China has laws forbidding its manufacturers from registering the trademarks of those for whom it manufactures, but because it is usually not possible to prove that your manufacturer in Shenzhen had a cousin in Xi’an do the registering, this sort of thing goes on unchecked. For how to prevent this from happening to you, check out the following:
  • Register Your China Trademark Or Go Home
  • Register Your China Trademark Or Go Home, Part II.
  • China Trademarks. Register Them In China Not Madrid.
  • China: Do Just One Thing. Trademarks.

• US company tells its China manufacturer that it will no ceasing to use China manufacturer for its production. China manufacturer then says that it will not be shipping any more product because US manufacturer is late on payment and owes X hundreds of thousands of dollars. China manufacturer then reports US manufacturer to Sinosure and Sinosure then ceases to insure product sales to this US company, which can have the effect of convincing Chinese manufacturers not to sell to US company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out Be Sure Regarding China’s Sinosure.

• US company tells its China manufacturer that it will no ceasing to use China manufacturer for its production. China manufacturer then either threatens to or actually does hold people from the US company hostage for alleged debt. For more on the problems that can arise from allegations of not having paid a debt to a Chinese company, check out China Hostage Situation. Now IS A Good Time To Pay Your Debts and How Not To Get Kidnapped In China, Part 3. Resolve Your Debt Problems Before You Go.

You should always plan ahead for pulling your production from your Chinese manufacturer.

Dan Harris is founder of the Harris & Moure law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.