Monday, May 9, 2011

Outsourcing from China – Avoiding this Horror Story

A recent article in Manufacturing News described the outsourcing horror story that has engulfed Fellowes Inc.  The large paper shredder manufacturer has suffered a significant loss in China.

A Chinese joint venture partner stole Fellowes Inc.'s proprietary assets and forced the operation into bankruptcy. The estimated cost is valued at a $100 million. Now the former Chinese partner is planning on entering the shredder business independently, in direct competition using Fellowes' seized assets.

While I am sympathetic with the impossible position encountered by Fellowes, this is largely the result of not employing a quality China based law firm to prepare and execute the initial contract. China is a country of rules, not laws.  Success depends on highly skilled, tough attorneys completely knowledgeable of China; Chinese culture, mores, dangers. One cannot be naive, for any investment in foreign environments requires extreme caution, due diligence, and a fundamental acceptance of the risk involved.

There are other examples of similar problems of doing business in China.  Often, the main source of the problem usually has occurred because a USA manufacturer has relied on a USA based law firm to develop legal agreements. Also, some difficulties have been encountered employing a China based expatriate law firm staffed with British or American lawyers. Again, it is essential to retain a law firm staffed and managed by China born and raised attorneys.

Unfortunately, once a Chinese company takes hostile action, similar to the one detrimental to Fellowes Inc., it is almost impossible to reverse the outcome because of the challenging Chinese legal system.  

To avoid such devastating potential pitfalls, do not enter into a joint venture to manufacture products in China. It is best, to construct a 100% owned and operated manufacturing plant in China. Ironically, it is nearly as easy to build an operating plant in China as it is to build one in the USA.  But the end product is far more secure, providing complete control of the operation, particularly the essential proprietary and confidential factors.

See the original Manufacturing News’ article  by Mr. McCormack here:

A Cautionary Tale Of Outsourcing To China: There Is No Recourse, You Could Lose Everything                        
by Richard McCormack                     April 15, 2011
Thousands of American companies that have moved production to China to take advantage of cheap labor might want to consider a case study that is unfolding for a U.S. manufacturing company. Fellowes Inc., one of the world's largest makers of office and personal paper shredders, is witnessing the destruction of its business, as its large Chinese manufacturing plant has been shut down by its joint venture manufacturing partner.