China lawyers

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

One of the most common questions our lawyers have been getting lately is “what should I do.” Mores specifically, we are getting this classic question from our clients that are making their products in China, either in their own facilities in China (that they own via their own China WFOE) or via third party contract manufacturers. They want to do what to do in light of the tariffs the United States is imposing on incoming China goods. More particularly, they want to know what more about non-China options.

I today read one of the best articles on what is happening out there with respect to US companies leaving China to manufacture elsewhere. The article is by CNN and its titled The trade war is pushing business out of China, but not into America and I like it so much because it 100% correlates with exactly what my law firm’s international lawyers are seeing and hearing, mostly from our own clients.

The article starts with the following:

US tariffs are prompting companies to move some production out of China, but it’s not going where President Donald Trump would prefer.

The trade war has made more than $250 billion of Chinese exports more expensive for Americans — from leather belts to refrigerators to motorcycles. The disruption to the world’s biggest trading relationship has electronics manufacturers, industrial machinery makers and fashion brands working on shifting some of their assembly lines.

“We are flooded by inquiries,” said William Ma, group managing director of Kerry Logistics, a Hong Kong-based firm that helps companies around the world manage their supply chains. “It all happens after the trade war.”

Many firms are keeping much of their operations in China, which offers a giant domestic market and advantages that businesses struggle to find elsewhere. But those that are moving aren’t flocking to the United States. Instead, they’re looking to transfer work to other Asian countries.

This is exactly what we are seeing. Many of our clients are moving their manufacturing elsewhere in Asia, many of our clients are “stuck” in China, and none of them have resourced their manufacturing to the United States, at least not yet.

The article then notes how “the tariffs have accelerated the shift of manufacturing from China to countries in Southeast Asia, where labor is cheaper.” and it uses the Steve Madden Company as an example of this:

Steve Madden (SHOO), whose handbags have been hit by a 10% tariff, says it’s moving a significant chunk of its production to Cambodia and other countries. The company currently makes about 85% of its handbags in China, a figure that could drop to 50% or 60% next year.

“The shift is almost entirely due to the US-China trade conflict,” Steve Madden CEO Ed Rosenfeld told CNN’s Alison Kosik. “We have to prepare as though tariffs will be the new normal, but we are hopeful that cooler heads will prevail.”

Again, this is exactly the sort of thing we are seeing from our clients whose products can relatively easily be made outside China; they are having some of their products made outside China. Only some because it just isn’t that easy or even possible to move all your production at once.

The article essentially says consumer tech brands are desperate to manufacture outside China and we are seeing the same thing:

Consumer tech brands are also looking to Southeast Asia. Hugh Lo, vice president of the consumer division at Taiwan’s New Kinpo Group, which makes electronics for clients such as Toshiba (TOSBF) and Samsung (SSNLF), says he has been inundated with inquiries from companies keen to transfer manufacturing out of China.

A year ago, his team got about one inquiry a week, he said. Now, it’s “maybe 30 times more.”
Lo said that TV and gaming device makers have been particularly interested in relocating. He declined to name individual companies.
Here’s the thing though; there just isn’t sufficient capacity for this outside China. Yet.
To what countries are manufacturers moving? The article nails this as well:
Nathan Resnick, whose San Diego-based startup Sourcify helps thousands of businesses place orders with manufacturers across Asia, has also noticed a clear shift away from China this year.
In January, Chinese factories supplied as much as 90% of the orders his company helped place in industries like textiles and household appliances. Now, he estimates that figure has plummeted to about 50%, with the focus moving to countries like Thailand, Vietnam and the Philippines.
“It’s really just been recently,” Resnick told CNN. “I didn’t go to any of those countries last year.”
Again, this is exactly what our international lawyers have been seeing as well. I estimate that among my law firm’s clients well over 50% of the production that is moving outside China is going to Vietnam and Thailand and the Philipines comes in third. Our clients looking to outsource their manufacturing are mostly favoring Vietnam and our clients looking to build their own manufacturing facilities are mostly favoring Thailand and the Philipines. We will see…
The article also rightly notes that leaving China is not easy and many cannot:
A lot of companies are unwilling to leave China, which has a range of advantages for manufacturing industries that are spread across Asia.
Many of the products US firms export from China have to fit exact requirements, necessitating specialized equipment and highly trained workers, according to Harley Seyedin, president of the American Chamber of Commerce in South China.
“Their supply chains cannot be adjusted in short order,” Seyedin told CNN.
China also boasts better roads, ports and power grids than most Southeast Asian countries. “China just has such a great infrastructure,” Resnick said. “You go to some of these areas in the Philippines or Vietnam, and the ground surrounding the factory is not developed whatsoever.”
Starting from scratch in another country is a major step.
Executives estimate it could take up to two years to build a new factory. Then there are the challenges of navigating the local bureaucracy and training new staff to meet the company’s standards.
One more big problem: many (most?) factories in countries like Vietnam and Thailand are bursting at the seams:  “Businesses that want to move their orders outside China face another problem: finding factories in the region that can accept them.” Our firm works extremely closely with well-qualified people in both these countries and so we know this problem is very real.
What are you seeing out there?