Like clockwork, the downturn in China’s economy is leading to a big uptick in American companies contacting our international litigators for help in fending off Sinosure threats. For the full import of what I mean by Sinosure threats, I urge you to check out Owe Money to China? Meet Sinosure, Leviton Law Firm, and Brown & Joseph and China Sinosure: What You NEED to Know. To summarize, Sinosure is China’s Export and Credit Insurance Corporation and what that means in real life is that it insures most of China’s exports. It insures those exports by paying its policyholders when a foreign company fails to pay for product it has received from its Chinese supplier.
So how does an increase in Sinosure cases against American companies reflect the downturn in China’s economy? Well over half of the many Sinosure cases our lawyers have seen over the years arise from bad product delivered by the Chinese manufacturer. The typical Sinosure case involves a Chinese company sending over (let’s say) $500,000 in bad product. The American company cannot sell that product for its usual $950,000, but instead is forced to unload it for $350,000. The American company tells all this to the Chinese company and seeks to resolve its alleged $500,000 debt to its Chinese supplier with a one time $250,000 payment. The Chinese company goes silent and a few weeks later, the American company receives an aggressively threatening letter from one of Sinosure’s U.S. lawyers. So again, how does this link to China’s recent economic troubles?
With every China economic downturn, Chinese companies (logically enough) change their behaviors. I first wrote about this phenomenon for the Wall Street Journal way back in 2012, China’s Slowdown and You: The effects for foreign companies extend beyond merely slack sales. This latest economic slowdown greatly worries Chinese manufacturers and these worries have caused many of them to try to get what they can, NOW. See China Trademark Theft. It’s Baaaaaack in a Big Way and On SMEs Trusting China Manufacturers. Don’t. Just Don’t. In 2011, in China. Smells Like 2008, Gloom And Doom Edition, I wrote the following on what our China lawyers were seeing from Chinese manufacturers during that downturn:
We are getting those 2008 and 2011 calls (and emails) again now. Pretty much every single day now we get an email from a foreign company (usually U.S. or European) asking for our help in recovering anywhere from $20,000 to $2 million paid to a Chinese manufacturer that shipped clearly bad product or no product at all. Unfortunately, in most cases, we have to tell the sender that without a really good China manufacturing contract the odds of their getting their money back are not so good. See China Manufacturing: Bad Contracts and Bad Times Lead to Bad Products. To make matters worse, some of these companies that want their initial payment back from a Chinese manufacturer that has provided bad product end up getting dunned by Sinosure for failing to pay the remainder allegedly due.
So what should you do when Sinosure comes knocking on your door threatening you and your company with all kinds of harm? One thing for certain: Do not go to China to try to resolve the matter with your Chinese manufacturer. Please, please, please do not do this. For why not, see Maybe Owe Money To China? Don’t Go There. Second, do not believe for even one second that Sinosure’s lawyers or collection agencies care about anything but getting money from you. In particular, do not believe that they care at all that the Chinese manufacturer sent you unusable product. And why should they? If you don’t have a China-centric contract with your Chinese manufacturer that clearly specifies the quality of product you are to receive, Chinese law is almost certainly on the side of your Chinese manufacturer in any event.
Truth is there is no one good way to deal with a rampaging Sinosure. The best way for you to deal with Sinosure will depend on your specific contracts, situation, and goals. When our lawyers are retained to represent a Sinosure victim, we typically begin by asking them the following questions:
- How much is being claimed against you? There is no point in hiring a lawyer if the amount at stake is too low to warrant it.
- Why have you not paid? This greatly influences our initial strategies.
- To whom do you owe the money? We usually follow up by asking how important the creditor is to the debtor’s business.
- Do you have other suppliers in China in addition to the one (or more) that claim you owe them money? We are trying to figure out how important it is that the Sinosure problem be solved quickly?
- Is it important that you be able to continue doing business in China? Exactly what sort of business? These are important questions for determining strategy.
- Is it important that you or anyone else in your company be able to go to China? This is an important question for determining strategy.
- Do you have any brand names or logos or other IP that you use on any products or packaging made in China? If so, have you registered those brand names or logos in China? It is very common for Chinese companies to register their debtor’s brand names and logos as China trademarks so as to gain leverage. Often, the first thing we do is shore up the IP registrations of a company involved in any sort of business dispute in China. You do not want to go into battle without first patching up a gaping wound.
But what about Sinosure wanting your first born? Is that a real thing? Of course it’s not; that was just for effect. Well, sort of. I say “sort of” because we have been hearing of late that Sinosure is threatening to go after American business owners personally. Can Sinosure do that? Probably not, but maybe. That Sinosure has apparently now added this threat to its arsenal is troubling nonetheless. Sinosure is tough and relentless and a big problem and that problem is growing.