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Path: Sourcing News & Advice
>> Import from
China Advice >> Changing your China factory? Be
careful

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Changing your China factory? Be careful

Posted: September 24, 2014

by Dan Harris

Just read an article, Toy supplier sues maker in
reshoring fight about an American toy maker’s lawsuit against its Chinese
supplier. The article describes the lawsuit as being based largely on
allegations that the Chinese supplier ceased providing the American company
credit and delayed deliveries, all in an attempt to make it impossible for the
American company to start making its toys in the United States.

Though I have no idea one way or the other whether the allegations in this
particular lawsuit are true, I do know that bad things nearly always happen when
Chinese manufacturers discover that their American product buyers will soon be
ceasing to buy product from it. For this reason, we instruct our client to line
up its new suppliers and have them ready to go, before even hinting that it
might be ceasing production with its existing suppliers. We give this advice
because over the years our China lawyers have repeatedly seen the following:

US company tells its China manufacturer that it will be ceasing to use
China manufacturer for its production. China manufacturer then keeps all of
the US 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.

US company tells its China manufacturer that it will be ceasing to use
China manufacturer for its production. US company then learns that someone in
China has registered the US company’s brand names as trademarks in China. US
company is convinced that its China manufacturer is the one that did these
registrations, but has no solid evidence to prove this. US company is now
facing not being able to have its product — at least with its own brand name —
manufactured in China.

US company tells its China manufacturer that it will be ceasing to use
China manufacturer for its production. A few weeks later, US company has its
products ceased at the China border for violating someone’s trademark. The US
company is (rightly) convinced that its China manufacturer is the one behind
the product seizure, believing that the Chinese manufacturer registered the US
company’s brand names as trademarks in China long ago and is just now using
that trademark to seize product as revenge. 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:

Register
Your China Trademark Or Go Home

Register
Your China Trademark Or Go Home, Part II.

China
Trademarks. Register Them In China Not Madrid.

China:
Do Just One Thing. Trademarks.

US company tells its China manufacturer that it will no ceasing to use
China manufacturer for its production. China manufacturer then says that it
will not be shipping any more product because US manufacturer is late on
payment and owes X hundreds of thousands of dollars. China manufacturer then
reports US manufacturer to Sinosure and Sinosure then ceases to insure product
sales to this US company, which can have the effect of convincing Chinese
manufacturers not to sell to US company without getting 100% payment upfront.
For more on Sinosure’s role regarding China exports, check out Be
Sure Regarding China’s Sinosure.

US company tells its China manufacturer that it will no ceasing to use
China manufacturer for its production. China manufacturer then either
threatens to or actually does hold people from the US company hostage for
alleged debt. For more on the problems that can arise from allegations of not
having paid a debt to a Chinese company, check out China
Hostage Situation. Now IS A Good Time To Pay Your Debts and How
Not To Get Kidnapped In China, Part 3. Resolve Your Debt Problems Before You
Go.

Bottom Line: Plan ahead before you even
talk about pulling your production from a China factory.

Dan
Harris is founder of the Harris & Moure law firm,
a boutique international law firm focusing on small and medium sized businesses
that operate internationally. China is the fastest growing area for the firm.
Dan writes ChinaLawBlog.com as a
source of China legal and business information.

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