Not surprisingly, our China lawyers are seeing a massive increase in foreign (mostly American) companies seeking to reduce or eliminate their China ties. Many are seeking to terminate their relationship with their Chinese suppliers and moving production elsewhere (so far, it’s been mostly Vietnam, Taiwan, Thailand, India and Malaysia). The other day I spoke with a company that has 50% of its manufacturing in China, 25% in Vietnam and 25% in Thailand and it wants to get out of China “as quickly as possible” but rightly afraid of just pulling up stakes and moving out.
Why is this company right to be so afraid and what are the risks for a foreign company seeking to leave China? Equally importantly, what can you do to mitigate those risks?
Way back in 2013, in The Single Best Way To Avoid Being Taken Hostage In China, we wrote of how Chinese companies and individuals often take hostages in an effort to collect on alleged debts or to protest employee layoffs or the 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 outside China 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.
By this point many of you are probably wondering why I am writing about debt when the issue is leaving China. My answer is very simple: once the news goes out that you will be leaving China, alleged creditors will come out of the woodwork. The tax authorities will come up with taxes that you owe. Your landlord will explain why you owe it way more than you thought you did. Your suppliers will send you bills for items they never actually gave you. Your employees will demand all sorts of severance. I am not saying these sorts of things always happen, but I am saying that they often do and you need to be prepared for it.
What about just shutting down in the middle of the night and walking away, never to return? That is always possible, but that itself comes with all sorts of risks and it virtually never makes even economic sense unless you are 100% certain that neither your company nor anyone who can be relatively easily identified with it will be doing business with China ever again and will never find itself in China ever again. As someone who has twice in his life been in an airplane that had to land somewhere other than its intended destination –(I once spent four unplanned January days in Magadan, Russia, when the city had essentially no fuel for heat) you should also be 100% sure you will never involuntary find yourself in the PRC. See also A China WFOE Shutdown, Baltimore Colts Style.
In a similar vein, we have also written previously on why you must prepare well in advance for terminating your China supplier. And by plan in advance, I mean you need to secure your molds and all of the product for which you have already paid before you do anything that might tip off your China supplier regarding your plan to start manufacturing elsewhere.
In How To Terminate Your China Supplier: Very Carefully, I discussed an article about a US toy company entitled, Jilted Chinese supplier tells would-be U.S. reshorer -“Not so fast,” that talks about how an American toy maker that brought a lawsuit in the United States against its Chinese supplier alleging its Chinese supplier had delayed deliveries to try to make it impossible for the American company to start making its toys in the United States. In my post, I noted that I had no idea whether the American company’s allegations were true, but “I do know it is common for Chinese manufacturers to seek retaliation against their foreign product buyers that cease buying product from them. For this reason, we instruct our clients to line up new suppliers [be they within China or in some other country) and have them ready to go before they even hint that they might cease production with their existing China suppliers.
- Foreign company tells its China manufacturer it will be ceasing to use China manufacturer for its production. China manufacturer then keeps all of the foreign 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.
- Foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. Foreign company then learns that someone in China has registered the foreign company’s brand names and logos as trademarks in China. Foreign company is convinced its China manufacturer is the one that did these registrations, but it has no solid evidence to prove this. Foreign company is now facing not being able to have its product — at least with its own brand name — manufactured in China. Foreign company is also now faced with having to deal with a low cost Chinese competitor that can legally make products in China with the foreign company’s brand name and logo and sell those products anywhere in the world where the foreign company does not itself possess the trademark rights in its brand name and logo. The way to prevent this is to make sure your IP registrations in China are current before you reveal to anyone that you will be leaving there, or even just reducing your footprint there. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.
- Foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. A few weeks later, foreign company has its products seized at the China border for violating someone’s trademark or design patent. The foreign company is (rightly) convinced that its China manufacturer is the one behind the product seizure, believing the Chinese manufacturer registered the foreign company’s brand names as trademarks in China long ago and is just now using that trademark to seize product as revenge (or just registered the design patent). 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:
- Foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. China manufacturer then says that it will not be shipping any more product because foreign company is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports foreign manufacturer to Sinosure and Sinosure then ceases to insure product sales to this foreign company, which can have the effect of convincing other Chinese manufacturers not to sell to foreign company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out Be Sure Regarding China’s Sinosure. Note that if you are planning to move your business to a country other than China Sinosure’s power over you will be greatly diminished
- Foreign company tells its China manufacturer that it will be 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.
To increase your chances of surviving a move out of China, analyze your weak points and do what you can to minimize those. Above all else, plan ahead and act with all deliberate speed.