Mitigating Your China Supply Chain Risks

Mitigating China Supply Chain Risks

Navigating supply chains with Chinese manufacturers presents challenges like withheld goods, surprise fees, unresolved disputes, and late deliveries. Over the years, representing companies that source products from foreign countries has provided me with a deep understanding of how these disruptions impact businesses and the various ways they can be mitigated. This post will delve into the root causes of these issues, illustrate real-world examples, and provide actionable strategies based on my experience helping companies protect their supply chains.

Real-Life Situation: Withheld Goods from a Chinese Factory

Recently, I received a call from an American company that had paid around $250,000 for several orders of their primary product—Product A. Despite full payment, the Chinese factory refused to release the Producxt A goods, citing an unrelated $4,018 balance on a different product (Widget X). To complicate matters, the  Chinese factory was demanding an additional $24,000 in “product storage fees,” which had never been previously discussed or agreed upon.

The buyer was understandably frustrated and unsure how to proceed. We suggested thte first thing we should do is to determine the financial viability of the manufacturer, to try to determine how next to procced. We did that and learned that its Chinese manufacturer had actually filed for bankruptcy and was in the process of liquidating. Our client is in the process of deciding whether to file a claim in the Chinese bankruptcy or not.

This scenario is increasingly common and highlights two troubling trends. First, Chinese manufacturers are withholding goods to gain leverage in unrelated disputes, often using outstanding balances or minor issues as excuses. Second, many Chinese factories are in severe financial distress, taking payments for products they have no intention or ability to produce. In some cases, factory owners pocket these final payments and never declare them during bankruptcy proceedings, leaving foreign buyers with little recourse for recovering their funds or goods.

From my conversations with the American company, it became clear that it had made several common yet avoidable mistakes—errors that not only worsened its losses but that I’ve seen repeatedly in similar cases.

Chinese Manufacturing Problems Are Increasing

Several factors are driving these supply chain disruptions, and understanding the underlying reasons is essential for businesses to mitigate risks effectively.

1. Financial Instability Among Chinese Factories

Many Chinese factories are facing severe financial strain due to tighter credit markets, declining government subsidies, rising labor costs, and increased global competition. Financial instability often leads factories to “juggle” payments from one client to fulfill orders for another, more profitable client. In some cases, factories take payments without any intention of delivering goods, simply trying to stay afloat a little longer.

2. Distrust of Foreign Companies

Chinese manufacturers are becoming increasingly cautious when dealing with foreign buyers, particularly American companies. Many Chinese suppliers believe that Western businesses are shifting their supply chains to countries like Vietnam, Mexico, or India to avoid rising Chinese labor costs, tariffs, and geopolitical risks. Many U.S. companies are actively exploring alternative supply chains to bypass tariffs and mitigate tensions between the U.S. and China.

Sensing this shift, Chinese manufacturers frequently seek to secure as much revenue as possible before the relationship dissolves.This distrust prompts Chinese suppliers to act opportunistically, sometimes withholding goods or imposing surprise fees to extract as

3. Geopolitical Factors Impacting Supply Chains

Geopolitical tensions between China and other countries, particularly the United States, have significantly disrupted global supply chains. Trade wars, tariffs, and sanctions are some of the most common factors influencing supply chain vulnerabilities.

Strategies to Mitigate Supply Chain Risks

Over the years, representing companies that source products from foreign countries has provided me with valuable insights into effective risk mitigation strategies. Based on my experience, here are key strategies that can help businesses avoid costly supply chain disruptions:

1. Conduct Thorough Due Diligence

Before entering into any agreement, ensure your supplier is financially stable and operationally capable. This includes site visits, financial audits, and a thorough review of the supplier’s business history. A comprehensive due diligence process can help you avoid engaging with factories facing financial trouble.

  • Small Businesses: Use third-party services that specialize in overseas factory audits to conduct background checks without the need for in-house resources.
  • Larger Companies: Establish a regular audit schedule and use in-house teams to continuously monitor supplier financial health and compliance.

2. Negotiate Strong Contracts

Contracts must be enforceable under Chinese law and written in both Chinese and English. Key clauses should include payment schedules, quality control requirements, delivery timelines, and dispute resolution mechanisms. A solid contract is your first line of defense in ensuring the supplier meets their obligations.

3. Stagger Payments

Instead of paying the full amount upfront, structure payments around key milestones like production completion, quality checks, and delivery. This gives you leverage at every stage of the supply chain, ensuring your supplier meets agreed-upon standards before receiving full payment. Be cautious of any company asking for more than 70% upfront. The ideal upfront payment varies depending on the product, industry, and sometimes the financial stability of your Chinese supplier.

4. Diversify Suppliers

Over-reliance on a single supplier can be risky. Diversify your supply chain by working with multiple suppliers across different regions, such as Southeast Asia or Mexico. This mitigates the risk of disruption if one supplier fails to deliver or engages in unethical practices.

5. Alternative Sourcing

Consider nearshoring or reshoring options to reduce reliance on China. Nearshoring involves moving production to countries closer to your home market, while reshoring brings production back to your home country entirely. Both options can help reduce shipping times, lower transportation costs, and improve supply chain control.

  • Nearshoring: Reduces logistical complexities and delivery times, making your supply chain more agile and responsive.
  • Reshoring: Improves quality control and reduces exposure to geopolitical risks, while supporting local economies.

6. Involve Legal Counsel Early

Legal professionals with expertise in Chinese law and international trade should be involved from the start. Early legal counsel ensures that contracts are correctly drafted, risk assessments are thorough, and any potential issues are addressed before they escalate.

7. Monitor Supplier Performance

Regular audits of supplier performance are crucial. Conduct routine quality checks, financial reviews, and site visits to ensure that the factory is meeting agreed-upon standards. Identifying problems early can save significant time and money.

8. Explore Insurance Options

Supply chain insurance provides protection against disruptions, including non-delivery, supplier bankruptcy, or other unforeseen issues. This added layer of security can help mitigate the financial impact of any disruptions.

9. Build Strong Relationships

Chinese business culture places high value on relationships, or “guanxi.” Developing trust and mutual respect with your suppliers can go a long way toward preventing disputes and ensuring smoother transactions. Building strong relationships creates goodwill that can help resolve potential issues faster and more amicably. Maintaining regular communication, visiting suppliers, and ensuring mutual understanding can also help protect your interests.

Proactive Prevention is Key

Working with Chinese suppliers is increasingly fraught with risks,  \the right strategies can reduce these risks. Conducting thorough due diligence, negotiating airtight contracts, and involving legal counsel early on will help you mitigate the potential pitfalls that can lead to costly supply chain disruptions.

Proactively monitoring supplier performance, diversifying your supply base, and exploring alternative sourcing options, such as nearshoring or reshoring, further reduce reliance on any single source and help build a more resilient supply chain. Additionally, fostering strong relationships with suppliers and considering supply chain insurance can further safeguard your business.

Businesses that take these proactive steps are considerably better positioned to navigate the complexities of working with Chinese manufacturers and protect themselves from the financial and operational impacts of supply chain issues.