Worthless Product from China Factories and the Reasons for That

Christmas morning and I find myself responding to companies that recently got worthless product from China, in what is typical pretty much at the end of every year. I think these things increase at the end of the year because the Chinese company that sends the worthless product has decided to shut down at the end of the year and the taking money from a foreigner and then sending the foreigner bad product is its last gasp effort to make good money.

The below email is an amalgamation of the emails we’ve gotten:

We purchased a piece of equipment from china costing US $348,500.00. The supplier cut it up into small pieces before shipping it to us, completely ruining the equipment. We purchased this under the Trade Assurance Program and we submitted a request for refund. They have continually found reasons not to accept a return or refund and it has now stopped responding at all to us. I would like to see if it is worth it to go after them or do we just walk away from it. Maybe a simple demand letter will get things moving. Or do we need to sue them?

The below is an amalgamation of my typical response:

Thanks for writing.

You refer to “Trade Assurance” so I am guessing you are referring to Alibaba, whose trade assurance so often turns out to be a bad joke for foreign companies that mistakenly relied on it. I have never known them to pay anything real and if you read your Alibaba contract closely you can probably see why.

Truth is that unless you have a really good contract (preferably in Chinese) with your manufacturer your chances of getting money back are probably not good and you should therefore think long and hard before pursuing litigation or arbitration.

Believe it or not, there is even a reason why this company sent you product parts rather than just not sending you anything at all. By sending you something, your case becomes one of quality and not non-delivery, and unless your contract and your POs are clear about quality requirements and your manufacturer failed to satisfy those specific quality requirements, it may have done nothing wrong under Chinese law. But if your contract and your POs are clear about the required contractual quality, than we very likely can help you on this.

But because you are coming to us now for the first time, I am going to assume you did not use an experienced China attorney to draft your contract and therefore I am skeptical about your chances. Do you have a contract with your manufacturer? Is it in Chinese? Does it set forth product quality requirements? Does it have a provision laying out damages for bad quality? Does it call for disputes to be resolved in a Chinese court? Does it state that you get your attorneys’ fees if you prevail? If you have a contract, please send it to me and I will review it and give you my initial thoughts.

My advice is that you not to do any more overseas manufacturing with China or with any other country (and this includes through Alibaba) without having a real manufacturing agreement in place. Otherwise, what happened to you here will just keep happening to you. Chinese manufacturing companies see Western companies abandoning China for manufacturing and so they no longer care about quality.

An agreement with your Chinese manufacturer can help as can having your products made in a country other than China, but that too requires really good agreement for the particular country. See THE Rules When Manufacturing Overseas, which we wrote earlier this week.

Sorry I cannot be more optimistic regarding your situation, but the last thing we want to do is take money from you and then tell you there is nothing we can do. But like I said, send us a copy of your contract — if you have one — and that will enable us to give you a more accurate assessment of your situation and to be clear about whether we think we can help you and how. Also, and maybe most importantly, if you want help moving out of China and/or preventing future problems, please let us know.

We have been seeing a massive increase in letters like the above and we fully expect this high level of problems will continue in 2020, as Chinese factories continue to hurt and to close down. China has become very risky for small companies looking to manufacture and this blog post touches on this.

Just yesterday, the South China Morning Post had two articles highlighting China’s manufacturing problems. In Trade war helps push China’s private manufacturers to the brink, as investment hits all-time low, the SCMP had this to say about a Chinese bicycle manufacturer:

Ge is planning to open a factory in Cambodia that will see him not only capitalise on cheap labour and avoid US tariffs on Chinese products, but also offer him the chance of entering the European market. Currently, bicycles made in China are subject to punitive anti-dumping duties of 48.5 per cent when exported to the European Union.

The article then analyzed China’s overall manufacturing slowdown:

[M]anufacturers are losing confidence in the future success of their businesses. In the first 11 months of this year, fixed asset investment growth in China’s manufacturing sector dropped to 2.5 per cent, the slowest rate since 2004 when records began according to the National Bureau of Statistics.

Combined industrial profits tumbled 4.9 per cent in the first 10 months of this year from the same period in 2018, government data showed. Among more than 2,300 manufacturers listed in Shenzhen and Shanghai that released their third-quarter financial reports, almost half of them had declining net profits.

The profit slumps were bad, but arguably overshadowed by plunging product prices, which have fallen for five straight months since July.

China’s manufacturers are bearing the brunt of US President Donald Trump’s trade war, which comes on top of rising production costs in the world’s second-largest economy.

As a result, traditional exporting sectors such as textiles, paper making, metal production, electrical mechanics and equipment manufacturing suffered the biggest profit drops.

As confidence in their own future business prospects sapped, many manufacturers preferred to put their cash into financial products. Financial portal Wind tracked the biggest listed corporate spenders on wealth management products in China this year. The top 13 spent at least 10 billion yuan (US$1.4 billion) each, and nine of them were manufacturers.

For instance, Hisense Electric, a Qingdao-based television maker, reported a 1.87 per cent return on equity in the third quarter, an important gauge of profitability, compared to the average interest rate of 4.1 per cent it made on the wealth management products on which it spent more than 11 billion yuan this year.

Similarly, in China’s fastener firms, ‘the rice of industry’, grapple with the nuts and bolts of a slowing economy, the SCMP noted that “Chinese manufacturing activity has been depressed for most of this year, with industrial production growth falling in October to its second lowest level in more than 17 years” and “profits at Chinese manufacturers dropped by 4.9 per cent between January and October from a year earlier.” “Increasingly brutal competition . . . has left some businesses hesitant to invest in developing new products” and driven prices to “close to rock bottom.”

In other words, Chinese factories are spending their money on moving their manufacturing outside China to avoid tariffs or on financial instruments to get better returns than investing into their existing factories in China. None of this bodes well for the long term stability or even viability of Chinese factories and none of this is good for foreign companies that get their products from Chinese factories.

More concretely, this means it is more important than ever for foreign companies to do sufficient due diligence on their Chinese manufacturers (both new and existing) and to protect themselves with good contracts and IP registrations. See How to Conduct Business with Chinese Companies That See a Dark Future.

What are you seeing out there?