At least once a month someone will tell one of our China manufacturing lawyers that they don’t need a China-centric contract with their China-based manufacturer because their China-based manufacturer is owned by an American or a European company. To which we always say, “no it isn’t.”
How do we know this? Because no American or European or Australian company (or any other non-Chinese company) can own a Chinese factory directly. It is possible for an American or European or Australian company to own a Chinese company (a WFOE maybe or a China Joint Venture) that in turn owns a Chinese factory, but the odds of this are really slim. I don’t believe any of our China lawyers have ever encountered a foreign company that owns a Chinese company that owns a Chinese factory that does contract manufacturing for third party companies. Something like this is possible, but it is extremely rare.
So what does it mean when a foreign company claims to own the Chinese factory from which it is trying to get you to place your orders? This pretty much can mean one of the following two things:
1. The foreign company that claims to own a Chinese factory is flat out lying. It is amazing how often our China manufacturing attorneys see this and when I say “see this” I mean the foreign company puts in writing “that your products will be made by factories we own in China.” If you see this, you probably should run away. Or maybe you stay and if you ever have a problem you sue the foreign company for misrepresentation. Our international litigators have done that and gotten some pretty large settlements.
2. The foreign company is fudging the truth. A lot. This occurs when the foreign company speaks of having your products made by “our factories” in China. If you push them on what they mean by “our factories,” they will usually state that these are factories with which they have worked for many years and know well and trust.
Why though does any of this matter? As someone whose law firm has been involved in many lawsuits on this one issue, let me tell you that it matters a lot. It matters because companies that believe they are buying their products from an American or European or Australian company are generally going to be willing to pay more for the “safety” that comes from doing business with an American/European/Australian company and they also are likely to be much less careful about the contract they sign and about protecting their IP.
What instead ends up happening is that the foreign company enters into a contract with an American/European/Australian company with no legal connection with the Chinese manufacturer making their products. The buyer has no contract with its Chinese manufacturer mandating that Chinese manufacturer deliver quality products on time and at a certain price and no contract with its Chinese manufacturer prohibiting the Chinese manufacturer from using its IP or from selling your product to your customers.
Almost invariably, if you give this sort of tripartite relationship 6-12 months, you will have problems that are extremely difficult or even impossible to solve.
In China Sourcing: Does Your Sales Contact Really Work At The Factory? Renaud Anjoran wrote of the importance of making sure you know who actually owns the factory in which you will be having your products made. In his post Renaud focuses on another very common type of situation where the foreign buyer ends up not knowing who the owner of its manufacturer actually is and ends up dealing with a non-owner. Per Renaud (and also what our China manufacturing lawyers have so often seen), the following is common:
- The purchaser researches Alibaba and has about an 80% chance of ending up with a trading company.
- The sales contact person keeps saying he/she works “at the factory”, but they don’t.
- The supplier’s company name (which will receive the payment) is that of the trading company. It usually doesn’t include the words “Trading” or “Import & Export”. (They still do NOT look like a manufacturer’s company name, but foreign buyers seldom know that.) Alternatively, that company is in Hong Kong or Taiwan and is presented as “the factory’s sales office, for greater convenience”.
- The purchaser does not research and is misled all along.
- The situation often becomes clear when things have gone wrong… and the whole supply chain needs to be re-built.
In the last year, with so many foreign companies moving their manufacturing from China to places like Taiwan, Thailand, Vietnam, Malaysia, Pakistan, and Mexico, among other places, we are seeing this same sort of deception again, but with a new twist. This time around, about 80 percent of the time it is a Chinese company that is claiming to own the factory in some foreign company and it usually insists that because of that there is no need even for a new contract. But we are finding — so far, without a single exception — that the Chinese company with which our client had a contract for manufacturing in China does not directly own the factory in the country in which it claims to be doing its manufacturing. In other words, the existing contract will be nearly 100% worthless for protecting your company when manufacturing in that third country.
The bottom line is that if you are going to have your products made in Thailand or Vietnam, it will almost always (but not always) make sense for you to have your contract with the company that will be making your products in Thailand or Vietnam and to have that contract written for Thailand or Vietnam pursuant to Thai or Vietnamese law. The same holds true for Taiwan, Malaysia, Indonesia, or wherever. If your contracts is not with the actual owner of the factory in which your products will be made and tailored to the country in which you are manufacturing, you are asking for trouble. See Manufacturing Contracts When Manufacturing in Multiple Countries.
For more on moving your manufacturing from China, check out the following:
1. Articles on deciding whether to move your manufacturing from China and to where.
- Moving Manufacturing from China: Where you Gonna Run?
- Manufacturing Outside China: It’s Thailand’s Time / Manufacturing Outside China: It’s Thailand’s Time, Part 2
- China vs. Thailand for Manufacturing and a 10+ Year Old Showdown
- The US-China Future: Meet Vietnam, Thailand, Mexico, Malaysia, Turkey, and the Philippines
- China, Vietnam, Thailand and Spain: What Would Goldilocks do?
- Nike Likes Manufacturing Outside China and You Should Too
- How to Stop Manufacturing in China: Try Harder
- Moving Your Manufacturing Out of China: The Initial Decisions
- Has Sourcing Product From China Become TOO Risky?
- Complicated Trade Relationships: Dig In or Diversify? Probably Both.
- US-China Tariff Updates: What You Can (and Should NOT) do NOW
- Who Pays the Tariffs on China Imports? President Trump vs. CNN and What YOU Can do NOW to Reduce Your China Prices
- Today’s 25% Tariffs Against China Products: A Roadmap on What YOU Should do Now
- The US-China Cold War Starts Now: What You Must do to Prepare
- The US-China Trade War: Winter is Coming
- Reducing China Exposure by “Making Taiwan Great Again”
- China Manufacturing: Is the Bloom now Off That Rose?
- The China-US Trade War and the Winner is….MEXICO
- Would the Last Company Manufacturing in China Please Turn Off the Lights
- Would the Last Foreign Company in China Please Turn Off the Lights: A Sort of Part 2
- Would the Last Company Manufacturing in China Please Turn Off the Lights, Part 3
- Outsourced Product Manufacturing: Large Company Advantages
- On the Benefits of Country Diversity and Not Just China
- How To Find the Best Asia Factories
- China or Vietnam for Product Sourcing?
- How to Leave China AND Survive
- Doing Business in Burma/Myanmar: An On the Ground Report
- Overseas Product Sourcing: Being There
2. Articles on what you should be doing to protect your company when moving your manufacturing from China:
- Do I Have a Good Lawsuit Against this Company in China, Vietnam, Thailand, India, Malaysia, Cambodia?
- Good Contracts are Key, Corruption be Damned
- Overseas Manufacturing and Clearly Defined Product Specifications
- Manufacturing Contracts When Manufacturing in Multiple Countries
- How YOU Can Avoid Problems when Manufacturing Overseas
- How to Protect Your Molds When Manufacturing Overseas
- International Manufacturing Contracts: Why Templates are a No-Go
- How to Move Your Manufacturing from China AND Protect Your IP
- Manufacturing Outside China: Why Bother with a Contract?
- How NOT to Lose Your Shirt When Having Your Product Made Overseas: Starting Out
- How NOT to Lose Your Shirt When Having Your Product Made Overseas, Part 2: Product Development Agreements
- How NOT to Lose Your Shirt When Having Your Product Made Overseas, Part 3: What Makes Sense for you is What Makes Sense for YOU
- How NOT to Lose Your Shirt When Having Your Product Made Overseas, Part 4: Product Samples Will NOT Protect You
I apologize for just “dumping” so many articles on you, but I have done so because our international manufacturing lawyers are constantly getting asked “what should I be reading on moving our manufacturing out of China” and I just really wanted to get these various articles in one place. I do not suggest you read all of them, but I would appreciate any feedback on them!