China’s Economic Slowdown: Do You REALLY Know Your China Counterparty?

Are you sourcing product from China factories? If so, read these three articles now and start acting accordingly:

• China’s Industrial Profits Drop Most in Two Years Amid Slowdown (Bloomberg)
• China zombie factories kept open to give illusion of prosperity (Financial Times)
• China’s Slowdown and American Business (Wall Street Journal)

What constitutes acting accordingly? I discussed a bit of this in a recent article I wrote for Forbes, entitled How American Businesses Should Deal With China’s Slowdown:

American companies need to understand what is happening within their own industries within China. This might mean visiting your Chinese co-party’s factory, warehouse or office to look for warning signs of a company in distress. Or it might mean taking out insurance to cover your China business or transaction. A number of Chinese manufacturers are owned by Taiwanese, Singaporean or Hong Kong companies, and sometimes it is possible to secure guarantees from the foreign parent.

The key is to be proactive. If you find yourself in a bad situation with a Chinese company going under, there usually is no remedy after the fact. Bankruptcy in China generally consists of a company shutting down in the middle of the night and its owner fleeing to another town. The key to weathering China’s slowdown will be for American companies to go back to basics. Think afresh about what your company contributes to China’s economy and how that is likely to shape policy makers’ opinions. Focus on scrupulous regulatory compliance and renew your focus on due diligence at a company-to-company level. Above all, no American company doing business in China should blithely assume that a slowdown won’t affect it.

The other day, I spoke with a client that has had a very successful seven year relationship with its China product supplier, and yet is looking for a new one. The client is looking for a new supplier to diversify and/or to replace. It is looking again for a product supplier because its existing supplier lately lost a lot of business to Vietnam and to larger Chinese manufacturers. This client is rightly worried about maintaining its supply chain. Our China lawyers are hearing a lot of this lately, along with increased requests for due diligence assistance.

What exactly should you do? That depends. It depends on your industry and it depends on the nature of your China business. But at minimum, you should consider conducting or re-conducting due diligence on your key China counterparties. Your China counterparty of last year may very well be different from this year’s version.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.