The Wall Street Journal ran a front page article last week on how American companies are working to reduce their exposure to China. The article is titled, Trade Deal Alone Won’t Fix Strained U.S.-China Business Relations, and it reinforces what we have been saying here for months about how American and European companies are viewing the Trump tariffs and other government restrictions on China trade as a wake-up call and they are acting accordingly. It states exactly what our international lawyers have been saying for months and it reinforces that with concrete and specific examples. We keep writing about how so many of our clients have moved out of China, are seeking to move out of China, or simply very much want to move out of China. But due to the attorney-client privilege, we are not allowed to name names, but the Wall Street Journal can and it does.
The article starts out by talking about how no matter what sort of new trade deal the United States reaches with China and no matter what sorts of promises China makes about acting right in the future, the past is past and business with China will never be the same again.
[R]attled businesses on both sides of the Pacific are skittish about rushing back in to revive the once-booming investment activity between the two countries.
“There is no way any deal between China and the U.S. will cause everyone on both sides to say, ‘We were just kidding,’” said Dan Harris, managing partner at Harris Bricken, a law firm that specializes in investment with China. “The tariffs and the arrests and the threats and the heightened risk have impacted companies and that will not go away.
It then notes that the “US-China trade dispute isn’t the only factor driving a decline in investment flows between China and the U.S., which plunged to just over $19 billion last year, from a 2016 peak of $60 billion.” China has clamped down on capital outflows and “the U.S. Committee on Foreign Investment has moved to block or unwind Chinese investment in companies that could give it a strategic advantage, including social-media companies” and there is no reason to believe any trade agreement will change either of these things.
The article gives the following examples of foreign companies permanently reducing their China footprint:
- “The camera maker GoPro has decided to move its camera production for the U.S. market from China to Guadalajara, Mexico. The company was contemplating such a move anyway, but the tariffs served as the ‘catalyst to improve supply-chain efficiency.'”
- Bicycle maker Kent International Inc., based in New Jersey, “said it was investing in Cambodian factories to avoid the Chinese tariffs.”
- Synplus Inc., a supplier of leather, fur and suede that sources its materials from China has “switched from western China pig leather to Pakistani lamb leather. Companies are ‘forced to create a new manufacturing channel’ and ‘if it’s successful, they won’t choose to come back,’ ” said Ms. Cynthia Gardenhire, the company’s Vice President. Synplus has also begun considering investing in a Vietnamese supply chain to remain competitive and avoid future tariffs.
It also gives the following examples of Chinese companies pivoting away from investing in the United States:
- China’s Guangzhou Automotive Group, citing trade tensions, said it delayed plans to export its cars to the U.S.
- Shandong Ruyi Technology Group put “on hold” its plans to buy an abandoned Arkansas TV factory and turn it into a cotton-yarn mill.
- Sun Paper Industry Group “postponed” a $1 billion paper mill project in Arkansas.
The article then concludes by quoting the president of the American Apparel and Footwear Association, Rick Helfenbein, who “says that when apparel companies talk to analysts and investors, they are grilled on their exposure to Chinese uncertainties [and]…. “the wrong answer is ‘90% of everything I do is China,’ and a good answer is, ‘We’re working hard to reduce our exposure to China.’”
If you too are working hard to reduce your exposure to China, kudos to you BUT be careful because hell hath no fury like a Chinese company scorned and our China lawyers have of late been hearing frequently from foreign companies that did not realize that saying goodbye to China can have major ramifications. In this post, we will talk about the risks of terminating your China supplier and how to reduce those risks. In a subsequent post we will talk about how to shut down your China WFOE, Rep Office or Joint Venture or China factory.
- The 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.
- The foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. The foreign company then learns that someone in China has registered the foreign company’s brand names and logos as trademarks in China. The foreign company is convinced its China manufacturer is the one that did these registrations, but it has no solid evidence to prove this. The foreign company is now facing not being able to have its product — at least with its own brand name — manufactured in China. The way to prevent this is to fortify your trademark registrations in China and elsewhere around the world before you even hint to your China manufacturer that you will be switching suppliers.
- The foreign company tells its China manufacturer that it will be ceasing to use China manufacturer for its production. A few weeks later, the 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 its 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:
- The 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 the foreign company is late on payment and owes it hundreds of thousands of dollars. China manufacturer then reports the foreign company 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 the foreign company without getting 100% payment upfront. For more on Sinosure’s role regarding China exports, check out Be Sure Regarding China’s Sinosure. In the last few months our international litigators have been seeing a ton of cases where Chinese manufacturers have been claiming to be owed large sums of money when in reality nothing whatsoever is owed. This has been happening so frequently this seems to be the new “best” strategy for desperate Chinese manufacturers.
Bottom Line: Plan ahead for pulling your production from your Chinese manufacturer and do it right.