Would the Last Company Manufacturing in China Please Turn Off the Lights, Part 2

Also in October, 2018, in response to questions our international lawyers were getting I wrote the following:

I see a lot of foreign companies leaving China now and I see that exodus as continuing. It would hardly be an exaggeration to say that on at least one level, nearly all of our clients would — at least in theory — like to cease having their products made in China. Part of this is due to the hassles and the hard times they have gone through in China and part of this is due to the grass always being greener on the other side. But to a large extent, these (hurt) feelings are mostly irrelevant. What’s relevant is whether these companies can do their manufacturing in a country other than China and whether their company would be better off doing so. I think that in large part the answer to the second question will more often be yes than no but the answer to the first and more important part will more often be no than yes. Put simply, most of the companies currently having their products made in China have no choice. No country right now comes close to matching China for its combination of manufacturing sophistication and low cost and until this changes, the overwhelming bulk of companies having their products made in China will continue to do so.

Further proof of this trend comes from China’s most export numbers, which — as this blog has predicted would be the case — continue to rapidly decline. See China’s exports fall more than 20% in February (CNBC) and China February exports tumble the most in three years, spur fears of ‘trade recession. 

I see three big things keeping somewhat of a lid on a manufacturing exodus from China. One, capacity. Countries like Thailand and Vietnam are literally getting overrun by American and European companies seeking to move their manufacturing there and it has gotten to the point where if you do not use a sourcing agent with really good factory contacts in these countries you will likely find it difficult to impossible to find a factory willing to take on your product manufacturing. Two, capability. Countries like Thailand and Vietnam have for years been great at manufacturing certain things and not others. They are both rapidly improving in their capabilities, but they are not at China levels, at least not yet. Three, knowledge and soft infrastructure. Many foreign companies already know China and know how to get a widget made there. Far fewer know Thailand or Vietnam or Indonesia, etc. And even if you don’t know China, it can be amazingly easy to navigate on your own and there are countless people out there who are super knowledgeable (and many who most emphatically are not) to help you. See China Manufacturing: To Sourcing Agent or not to Sourcing Agent, That is the Question. Our clients were having so many problems finding good people to help them with Vietnam and Thailand that we brought in house our two most trusted Thailand and Vietnam people.

If you are going to up and leave China for another country, you will need the very same protections in whatever country you go as you need for China, but specifically tailored for whichever country to which you are going. This may include the following:

1. An NNN Agreements before you reveal your product specifications or design or customers or any other trade secret.
2. A Mold/Tooling Ownership Agreement if you will be bringing your molds or tooling from China to the new country or if you will be paying (either directly or indirectly) for new molds or tooling in the new country.
3. Product Development Agreements if you will be working with your new manufacturer to modify an existing product or create a new one.
4. Manufacturing Agreements with whomever new who will be making your product. Go here, here, here, and here for what that entails
5. You will need to register your trademark to protect your brand name and your company name and your logo in whatever new country you will be going. This will likely be the most important thing you do.
6. A design patent or a utility patent
7. A copyright. Usually not needed, but when it is, it’s very important.

And for a good overall read on what your company should be doing NOW in light of China’s plunging economy, check out China’s Economic Slowdown and YOUR Business: The Times they are a Changin’ — which we wrote back in September when many (most?) were denying there was any slowdown at all.

What are you seeing out there?

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.