China manufacturing lawyers

Though “Phase One” of a US-China trade deal is set to be signed next week, few believe that will end the ongoing trade and restrictions war between China and the United States. In China’s manufacturing exodus set to continue in 2020, despite prospect of trade war deal, the South China Morning Post (owned by Alibaba), in an article by its Political Economy Editor, Finbarr Bermingham, wrote of how it also will not stem the tide of foreign companies moving their manufacturing from China.

The SCMP article notes that “China’s rising costs, tricky regulations and increasingly unstable geopolitical situation are forcing more manufacturers to move production elsewhere” and we should expect this exodus to gain speed in 2020, “despite the prospect of a minor US-China trade truce.”

The article starts with “veteran manufacturer” Larry Sloven, who after “three decades of building up manufacturing bases in China” helped his company, Capstone International Hong Kong, move its production base from China to Thailand. Sloven does not see the “stream of companies” that have left China ever returning. Per Sloven, “Elvis has left the building.”“

that began at the tail end of the last decade will continue well into this one.” This even though few believe that China’s “just right” mixture of costs, quality, human resources and infrastructure will ever “be matched in India, Indonesia, Malaysia, Mexico, Thailand, Vietnam or anywhere else.”
The article uses the below graph to illustrate how far and how quickly China’s exports to the United States have fallen since the trade war began in July 2018 and notes how China is now only the US’ third largest trading partner, down from number one before the trade war.

China’s trade in goods surplus with the US fell by 7.9 per cent in November alone, per just released US Census Bureau statistics. “US purchases of Chinese goods are now at their lowest point since March 2013.” Since the trade war began, US goods purchases have increased 51.6 percent from Vietnam, 30 percent from Taiwan, 19.7 percent from Thailand 19.7 per cent, 14.6 percent from Indonesia 14.6 per cent, 12.7 percent from Mexico, and 11.3 per cent from Malaysia.

Companies have finally begun to realize that US-China decoupling is real and “they need to rethink things.”  Few believe the Phase One Trade deal will slow down the decoupling and John Evans, “who advises firms on relocating from China, said that even with the announcement of a phase-one deal, he has been getting more calls”: 

“There were still a number of companies sitting on the sidelines, even into the last quarter of last year, thinking there’ll be a grand resolution. But in reality, it’s more of a new normal.”

This so-called new normal has helped drive a long list of big-name companies out of China, with others choosing to keep a presence but scale back operations to continue selling to the domestic market.

But for every Hasbro, Samsung, Sonos, Sharp, GoPro, Sony or Nintendo, there are a host of small suppliers being forced out due to costs, or because they are pressured to follow their major customers

Perhaps most interestingly, the article notes how “a director at a company supplying accessories to Apple– who spoke anonymously because of the sensitivity of the topic – said the US tech giant had told them that they should plan to leave China if they were to be kept on as a supplier, forcing them to scout for new production sites in Southeast Asia.”

It is not just American firms fleeing China, “but companies from all over the world.”  Allar Peetma, CEO of Estonian manufacturer Gerardo’s Toys, says its “plan is to produce in the EU” using automation that will allow it to keep its costs about the same but improve quality. He notes that “other countries have high [import] taxes for China too, like Brazil and Turkey.” Tsutomu Aoi – a manager in the Hong Kong division of Japanese magnetic toymaker Sumaku – says that the tariffs have led his company to set up in Indonesia. CEO Pascal Comte of French scooter manufacturer says that you can’t do anything about tariffs i the short term but “long term for sure, or medium term, the best option is Vietnam. It takes a while to transfer tooling, and to find operations and manpower.”

The article rightly notes that moving manufacturing from China to other countries is rarely fast or easy:

Rarely, however, is the divorce from China a clean one. Sloven at Capstone moved to a new base in Thailand with the help of a Chinese manufacturing partner that still provides many of the components used in their products. It can be a delicate balance, working with a Thai manufacturing partner to ensure that enough of the finished product is made of local content, to qualify for a low-tariff “Made in Thailand” label.

“We’ve worked out a formula that’s good for both of them so they both can stay in business,” he said. “It’s difficult to get out of China without the help of your Chinese partner.”

The company needs to ship a particular form of glue from China that cannot be sourced in Thailand and will also import packaging from there.

“You would be amazed at the things that you find out. It’s cheaper to produce your packaging in China, put it on a boat, ship it to Thailand than to have a factory in Thailand produce that packaging,” Sloven said “My point is you can’t do this overnight. This is a two year process.

For more on what it takes to move your manufacturing from China, check out the following:

See also Would the Last Company Manufacturing in China Please Turn Off the Lights, written way back in October, 2018.

Oh, and for anyone wondering what happened to Elvis, I urge you to read this New Yorker article that explains how he moved to Vicksburg, Michigan, less than 20 miles from the house in which I grew up and in which my mother still lives!

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Photo of Dan Harris Dan Harris

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

Dan is a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

He was named as one of only three Washington State Amazing Lawyers in International Law, is AV rated by Martindale-Hubbell Law Directory (its highest rating), is rated 10.0 by AVVO.com (also its highest rating), and is a recognized SuperLawyer.

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.