China Manufacturing and the Bike Lock Theory on Preventing Bad Products

China Manufacturing Subcontracting Risks

Our international litigators have lately been getting more than the usual number of emails/phone calls from companies (mostly American and European) wanting to pursue litigation against their Chinese manufacturers for bad product. In these “bad product” cases — especially if it is with a formerly “good” manufacturer — the product problem frequently stems from a sloppy subcontractor used by the Chinese manufacturer with whom the Western company has been working. The Chinese manufacturer admits it used a subcontractor and it blames the bad quality on the subcontractor. In most instances, the Western company did not even know anyone other than its Chinese manufacturer was working on its product.

This blog post delves into the roots of these issues and offers strategic solutions to safeguard your interests

The China Subcontracting Quandry

Most China manufacturers are loath to turn down good clients, even if taking on more clients will require they subcontract. Sometimes the subcontracting is for one portion of a product, oftentimes a portion they themselves are not even capable of making. Other times, they will subcontract out all the manufacturing. I think the increase in subcontracting problems stems from employee issues caused by COVID.

We have handled many cases for foreign companies that received bad product from their previously reliable suppliers and in well over half of these cases, the product quality problems stemmed from their Chinese supplier having subcontracted out all or a portion of the manufacturing. The Chinese supplier usually admits to having subcontracted the work and sometimes even remarks that the problems otherwise would never have occurred. The supplier usually admits legal responsibility for the quality control problem, but then usually proposes remedying it by giving a small discount on future orders until the damages from the bad product have been covered.

The foreign company is usually in no mood to continue doing business with the offending supplier and wants only a monetary remedy. However, because the profit margins at most Chinese manufacturers are so low, they often cannot pay the damages caused by the bad product and a standstill results that can only be resolved through litigation.

The Power of a Good Manufacturing Contract

The best solution for this subcontracting problem is to prevent it from happening in the first place and the way to do that is with a good manufacturing contract. When our China lawyers draft manufacturing contracts we usually include a provision prohibiting the Chinese manufacturer from subcontracting out production without first obtaining written permission from our client.

Virtually without exception, the Chinese manufacturers agree to this provision and then abide by it. The reason for this is simple: the typical Chinese manufacturer has dozens of companies for which it produces goods, but very few (if any) contractually forbid subcontracting. When the Chinese manufacturer is so busy/overwhelmed as to require subcontracting, it makes sense for it to subcontract manufacturing for those foreign companies it is NOT contractually prohibited from subcontracting. I analogize this to bike locks. Even the best bike lock cannot prevent all thefts, but its efficacy comes from bike thieves preferring to steal a bike with a poor-quality lock than one that is difficult to break. Your well-crafted China manufacturing agreement will become your equivalent of a high-quality bike lock.

Just as a robust bike lock deters thieves by presenting a more formidable challenge, a strong manufacturing contract deters subcontracting (and other) practices by making it clear that they are not an option without explicit consent. This approach not only protects the quality of your products but also preserves the integrity of your brand in the competitive international market. Strengthen your defenses by revisiting your contracts today, and ensure that your manufacturing agreements are as resilient and reliable as the products you strive to create.

I suggest you try it.