How to Stop Manufacturing in China: Try Harder

The title above is only half facetious.

Truth is there are a ton of companies that claim to want to move their manufacturing out of China but — to their own detriment — have not done so and are not doing enough to do so. How do I know this? I know this because our international manufacturing lawyers constantly speak with companies in this situation.

The below is a typical email; the sort of email our law firm gets at least one of every single day.

I found your services online while searching for a law firm that can draft an NNN Agreement for my company. We need a China-centric NNN Agreement like what you describe here.

Our company is just starting to manufacture a new product in China, and I am interested in getting an NNN before we reveal the specifics of that new product to anyone. Our product is unique and so we will also be looking to secure a design patent pending for the EU and in the United States and trademarks in both places as well. We are based in Norway and about half of our sales are in the EU 40% in the United States and the rest spread all over the world. But I am concerned with knockoffs from China.

Does it matter that we are based in Europe? If you can please let me know if you think a NNN can help, and any information about what the process is like that would be appreciated.

Thank you,

One of our international manufacturing lawyers will usually look over the sender’s website and respond with something like the following:

Thank you for writing. Your being based in Europe is irrelevant. Many of our clients are European, especially when it comes to manufacturing in Asia. You probably did not notice, but we have offices in Europe and lawyers licensed in Germany and in Spain. So even if you ever need to communicate with someone in your own time zone (or close) that is possible.

We typically do the following for our clients looking to manufacture in China.

China NNN Agreement. We do these in Chinese (the official version) and in English (for you) and they typically take us 4-5 business days to complete. You can learn more about our NNN Agreements here. We draft our China NNN Agreements to protect confidentiality and to prevent your Chinese counter-party from competing with you or circumventing you. They make sense before you reveal any confidences. If you choose to have us draft an NNN Agreement, we first send you (via DocuSign) a one page Flat Fee Agreement setting out the flat fee structure. We next send you a questionnaire and when we have your answers to that we draft the NNN in English (and in Chinese) for your approval. Once you approve the agreement we send you  instructions on how you should send it to your Chinese counter-party and how to secure a propert signature from them. See China Company Chops: The Basics. 

China Manufacturing Agreements. Once you have chosen your manufacturer, you will need a Contract Manufacturing Agreement (a/k/a OEM Agreement or Product Supply Agreement). You can find out more about our Manufacturing Agreements here. Our drafting process for these agreements is similar to our drafting process for our NNN Agreements. If you are already certain who you will be using as your Chinese manufacturer you can skip the NNN Agreement and go straight to the Manufacturing Agreement because our Manufacturing Agreements contain all the substantive provisions of our NNN Agreements.

China Trademarks. If you plan to put your company name or your brand name or your product name or your logo on your products or on their packaging, you should register those as trademarks in China. As we discuss here, this is true even if you will not be selling your products in China. For China, we do a trademark analysis (to figure out generally what you should be doing to protect your IP from China and, more specifically, the trademark class or subclass in which you should file), a two-tier trademark search (usually) and the actual trademark filing. It also generally makes sense for you to have a trademark in those countries in which you have or expect to have substantial sales and we can help you with that also.

Design Patents. Much of the time when our clients believe a design patent will make sense for them, they don’t, either because securing the design patent will not be possible or because it will provide little to no protection. I would urge you to speak with one of our international IP lawyers to determine whether a design patent will make sense for your company.

Our goal is to provide our clients with customized solutions to fit their manufacturing needs. Towards that end, if you have any additional questions, please do not hesitate.

I looked at your website and it appears your products will be subject to U.S. tariffs against Chinese goods. Is that in fact the case and if it is, have you considered having them made in a country other than China?

More than half the time the response to the question regarding manufacturing in a country other than China will be something like the following:

Our products are subject to the U.S. tariffs and they are not treated favorably by the EU either. We would like to have them manufactured outside China but we are worried about quality and delivery times. A few years ago we looked at having them made in Vietnam or in Thailand but nothing ever came of that. China is what we know and we are not very comfortable with these other countries. Do you think we should be looking elsewhere for this new product?

Our response is then often something like the following:

Yes, I do think you should be looking somewhere other than China for manufacturing your new product and I think that if you succeed with that, you should start looking to move the rest of your manufacturing out of China as well. I can tell you that a number of our clients with products very similar to yours are having their products made in Vietnam, Thailand, Malaysia, Myanmar, Cambodia, Mexico, Egypt, Turkey, Bangladesh and/or Pakistan and pretty much without exception they are saving quite a lot of money or hassle by doing so. I asked about your moving your manufacturing out of China because I know that doing so is doable for your products. I also know that doing this is not easy and we would be happy to help. I suggest we have a phone call to discuss and then if it makes sense, I can turn you over to one of our international manufacturing advisors to discuss more of the specifics with you.

This probably sounds harsh, but their are a lot of companies out there that would benefit from moving their manufacturing out of China that have not yet done so for reasons more related to inertia than to economics or anything else. I realize change is hard but if you are in a situation where you are essentially paying 25% more than your competitors and at huge risk of your products being slapped with retroactive duties ranging from 20% to 250%, inertia is not a good excuse.

And if your company is thinking that there will be a solution to the US-China trade war and that solution will obviate any need to move your manufacturing from China, you are very likely engaging in wishful thinking. The US-China trade war has been going on for more than a year now and, if anything, we are farther away from resolution than when it started. Today’s New York Times headline nicely sums up the trade talk status: U.S.-China Trade Talks End With No Deal in Sight.

In the run up to this just completed round of US-China trade talks one of our international trade lawyers, Fred Rocafort, nicely summarized the history of our positions regarding the US-China trade disputes and how companies should be making their manufacturing decisions at least somewhat independently of that:

Since the beginning of US-China trade negotiations, this blog has been relentlessly negative about relations between the two countries, which we usually describe as being in a “straight line decline.” In our October 2018 piece, China, the United States and the New Normal, we started calling the bad relations between China and the United States the “new normal.” That same month, we titled a post Would the Last Company Manufacturing in China Please Turn Off the Lights, in which we mentioned “it does sometimes feel as though within three years nobody will be making widgets in China anymore.”

In April of this year, the Wall Street Journal quoted China Law Blog’s Dan Harris in their cover story, Trade Deal Alone Won’t Fix Strained US-China Business Relations, saying the following:

“There is no way any deal between China and the US 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.”

Then on May 4, 2019 (one day before President Trump’s May 5 tariff tweet that changed everything), we wrote The US-China Trade War: Winter is Coming, on how no matter what happens in the US-China trade war, things will NOT revert back to the way they had been for foreign companies:

The above is but an introduction to what we see as China’s diminished future for foreign companies. Since pretty much the inception of the US-China trade war we have been saying that we do not see its end because we have always seen it as more than a trade war. At first, we saw the US tariffs as an effort by the United States to get China to “open up” and “act right” on things like the internet and IP. But because we did not see China changing on these things, we did not see the trade war ending. Vice-President Pence’s speech on China earlier this week has only reinforced for me that the trade war between China and the US will not be ending any time soon, if ever. The New York Times has called that speech the Portent of a New Cold War between the United States and China and China’s own Global Times wrote an article entitled, Pence speech shows Washington’s tougher policy on China. Don’t blame us. We are just the messengers. Things are getting very tough between China and the United States right now and the trade war is just a symptom of that, not the disease.

The United States is aggressively and unabashedly doing what it can to isolate China and to remove it from the world of international trade. The new free trade agreement between the United States and Canada is further proof of this as it essentially blocks Canada and Mexico from engaging in free trade with China. See What Trump’s new trade pact signals about China. Word is that shutting out China is going to become a regular thing in all new US trade agreements. See US Commerce’s Ross eyes anti-China ‘poison pill’ for new trade deals. Will the EU and Japan and Latin America play ball on this? I predict that most if not all of them will.

So yes, the above is why we will continue to write about what North American and Latin American and European and Australian businesses should be doing to deal with the new normal regarding China. We are writing these things because we value our credibility and because we presume our readers value our no-holds barred advice— threatening emails or not.

On the flip side,  we fully realize all sorts of products literally must be made in China, at least in the short term and at least for most companies. Quartz . Magazine wrote on this just yesterday, in The US will have a hard time not getting these products from China:

Then there are the products the US almost exclusively gets from China. Raising tariffs on these goods will likely cost American consumers, and leave importers in a bind to find substitutes in the short-term—in the long-run, manufacturers may look to produce these goods outside China. We identified 11 product categories that China supplied 95% of US imports worth at least $100 million in 2018 by analyzing data from the US Census Bureau. All 11 product categories were on the list of goods for which the US has threatened to raise tariff rates by 25%. The US has since agreed to delay these hikes as part of negotiations.

Relations between the United States and China are bad and deteriorating and we expect EU-China relations are also likely to deteriorate. See New EU chief vows to uphold the rules-based order the European way. US and European companies are moving their manufacturing from China in droves. See Europe Joins U.S. Companies Moving Out Of China. China is no longer a safe bet for companies that sell their products to the United States and it has become increasingly risky for companies that sell their products to the EU as well. See Has Sourcing Product From China Become TOO Risky?

What are you seeing out there and what are you doing about it?

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.