How to Tell if Your China Supplier is Going Bankrupt

Like most lawyers, I am hyper logical. That’s our training and that is who we are. We like order and we like clear explanations for when there is . disorder. Clear enough so that we know how to prevent future disorder.

China is not terribly orderly, but well over 95% of the time, the problems foreign companies face in and with China are neither new nor unpreventable. Put another way, when I look at what has gone wrong I usually can find a number of things the foreign company could have and should have done differently to have prevented the problem or to have ameliorated it or at least to have positioned itself to have had real recourse once it occurred. Note that positioning yourself to have “real recourse” is often the single best way to prevent a problem in the first place. See e.g., You Need an Enforceable China Contract No Matter How Much You are Feeling the Love and You Need an Enforceable China Contract No Matter How Much You are Feeling the Love, Part 2. Or on the flip side, check out A Lifetime Sentence for Operating in China Without a Lawyer, Well Sorta, where we discuss the case of someone who is not allowed to leave China and highlight all the things this person did wrong to cause his present situation.

So when someone calls one of my firm’s China lawyers with a China problem for which they are entirely blameless my world gets rocked, at least just a bit. I mean, if that were to happen all the time, there would be no need for people to pay for lawyers, right? The one area where our China attorneys most often see this is when a foreign company has had a great relationship with its China factory for ten or twenty years and then all of a sudden the factory just disappears. What was the foreign company supposed to do? Fly out and visit its factory every two weeks to make sure everything was still okay? Get real.

So I was delighted the when a fellow lawyer sent me the link to a blog post titled, 10 Red Flags Your China Supplier is Going Bankrupt, as this post succinctly lays out the following warning signs for spotting a China manufacturer in trouble:

1. Excess capacity.
2. Poor lead times.
3. Layoffs before the Chinese New Year.
4. Workers aren’t being paid.
5. Turnover has been rising for weeks.
6. New payment terms.
7. Quality is slipping.
8. Phone calls and emails go unanswered
9. Factory abruptly changes location.
10. High customer complaints.

All of these make sense but I particularly like the following for the following reasons:

##3, 4 and 5. Layoffs, turnover and workers not being paid. If the people with whom you regularly work at your China supplier are disappearing or you hear of workers complaining, ghosting very well is about to happen. Our China manufacturing lawyers have seen this before.

#6. New payment terms. Almost always a sign of a factory in rapid decline or a bank switch scam. Either way, beware.

Any additions to the above?

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.