Sometimes, if things have really gotten bad, you’ll need to leave your current Chinese supplier and transfer manufacturing to a new one.
Side note: to see some reasons why you might need to leave an existing Chinese supplier for a new one, read our many posts about disputes with Chinese suppliers and how to handle them over on Sofeast’s blog.
In this post, I’ll explain how to transfer manufacturing from the current factory to the next, and when it is prudent to give your incumbent manufacturer the bad news, as going too early with this might leave you with even more problems to deal with.
There are two scenarios where you, the buyer, want to leave a current Chinese supplier and move to a new one, both with quite different processes and, perhaps, outcomes.
1. You have a product development/manufacturing agreement in place with the supplier
If you do have a signed manufacturing agreement in place with your Chinese supplier that is enforceable in China then making a move will be a lot easier than if you do not. However, consider these points:
Be sure that your ownership of the product IP is beyond dispute
If you came up with your product’s design and funded its development then you probably own the product IP. On the other hand, if you selected a sample product off-the-shelf from a trade fair, branded it, and then re-sold it in your country, it is definitely the supplier’s product and you are just a ‘distributor.’
However, when working with a Chinese manufacturer, even if you did design the product unless your supplier has signed a development agreement that says otherwise, there is a very real possibility that the supplier has a claim over ownership of part/all of the IP rights.
If your supplier claims ownership it might give you these headaches:
- If you are ‘distributing’ a product whose IP you don’t own, should you even be asking another factory to make it? I know this has been done many, many times in China. But is it the right thing to do? Also, might you be exposing yourself to a lawsuit?
- Can you forbid your current supplier from selling the same product to other companies? If they believe it is their product, they won’t think your position is fair, and they will probably NOT want to lose business opportunities.
- If you request the product design files (CAD drawings in STEP format, schematics and GERBER files for the electronics, and so on) but you didn’t pay for them, the supplier is not likely to send anything to you for free meaning that you’re ‘locked into’ working with them whether you like it or not.
Check that your manufacturing agreement has these clauses
The following clauses will make your life easier if you are trying to transfer manufacturing from one supplier to another.
- Tooling list, ownership, and right to pull at short notice — very common if you (the buyer) have paid for the tooling.
- Termination under breach of the agreement — the criteria to fulfil should be clearly laid out, the buyer (you) should be able to terminate the agreement in case they are not fulfilled, and the modalities of who does what should be defined.
- Termination without breach of the agreement — in case the buyer decides to terminate the agreement, again, the modalities should be clear.
- Manufacturer’s obligation to provide certain information with a certain amount of detail — in addition to the design files I mentioned in the previous point, try to get the bill of materials (including the suppliers’ contact information).
- Manufacturer’s obligation to provide training, or technical support, to their replacement for a reasonable fee — this is not very common, but you might be able to negotiate it if your business is very attractive.
To be safe, it’s wise to discuss your needs with a lawyer specializing in China business law before you start sharing your product’s details and working with a new supplier, especially if they’re helping to develop and manufacture a new product idea that you have come up with.
2. You do NOT have a manufacturing agreement that can be enforced on your supplier
This is quite a common situation for a lot of buyers who are manufacturing in China. It’s also risky for several reasons. Here are some tips:
Follow a fair process with your current supplier so they know your level of expectations and your lack of satisfaction
If your manufacturer doesn’t know your expectations and then you complain that they have fallen short, who is really to blame? In a case where you were unclear, it’s no surprise that some Chinese suppliers can be adversarial and fight back if you then try to pull your business.
To avoid this situation:
- Document and explain your quality standard (be prepared to repeat things).
- Make sure managers are aware of the few things that are most important to you.
- Be as specific as possible.
If your relationship with a supplier has already broken down it’s probably too late to implement these tips, but they are best practices for your future relationships with new suppliers.
Source and onboard a new manufacturer before you start the process of transferring manufacturing
Your current supplier is likely to offer you zero assistance in taking your business elsewhere and may be quite obstructive. If you are manufacturing a complicated product it takes quite a long time and a lot of work to get a new supplier up to speed, so it’s best to start the process as soon as possible. Certainly, don’t wait until you tell the current supplier that you’re going to move on and transfer manufacturing elsewhere.
Sourcing good new suppliers can be hard work. These resources can help you:
- Understand the differences between ODMs, OEMs, and CMs
- I drew up a list of contract manufacturers you might find helpful
- I wrote a few questions to ask potential suppliers
Onboarding a new Chinese manufacturer will be easier if you have the following documents in hand:
- Description of your requirements, and documentation of a quality standard
- The design files, hopefully in their latest versions
- A detailed bill of materials
If possible, allocate some small orders to them whilst still working with your current supplier* as this helps them prepare production, iron out any kinks, and build up their understanding of what it takes to manufacture your product. Then, when you’re ready to pull the trigger, you can ramp up their orders while winding down the orders from your original supplier.
*This may not be possible if you need to transfer your tooling.
Transfer tooling carefully
Plastic injection mold tooling is a large investment and could cost into the hundreds of thousands of dollars, so with a change in manufacturer comes the need to pull out your tooling and move it to the new factory.
However, ask the incumbent supplier to pull the tooling and they will know you’re leaving them and could dig in, refusing to allow its removal for different reasons.
Without a written acknowledgement from the manufacturer that you own the tooling they may claim that it is their own tooling and refuse to release it, or try to charge you a fee that covers their development costs (if they invested time and resources into helping you develop and fabricate the molds) or, maybe, even a fee just to remove them from their facility. You may not even know where the molds are… they could be at an undisclosed sub-supplier, so you can’t even locate them without the supplier’s aid, therefore having this acknowledgement as a part of an enforceable contract will be even more sensible.
When it comes to the process to transfer manufacturing itself, you may want to follow the 10 steps I outlined here and read this post about tooling management in China.
Plan to transfer your business to your new manufacturer carefully
This is a delicate situation as you can no doubt see at this point, so planning carefully is key. Start by reading this 45-point checklist in How To Plan for Transferring Production To a New Factory.
Your new supplier has probably been in this situation before where they’ve received business from a new customer that was already being manufactured by someone else in China, so they may have valuable experience and suggestions for you that will help smooth the transition.
If the relationship between you and your old supplier has become negative the new supplier may not want to become known by them in case of reprisals, so in situations like you can use a third party to handle the transition, logistics, and act as a go-between.
Finally, inform your current supplier that the business relationship is ending and that you’re going to transfer manufacturing elsewhere
You need to find the right time to tell your current supplier that you’re going to transfer manufacturing to another supplier and stop working with them. When to do so varies depending on each situation and relationship, but here are a couple of tips:
- A small minority of buyers set rules and follow them. They might say, for example, “We have a backup supplier. We give you 6 months to build an effective quality system, and we will not accept any price increase. We can help you with guidance and engineering if you need it. Anyway, after 6 months, if we see no marked improvements, we will cut the order quantity by 20 % each month.”
- Most buyers are not in a position to challenge their suppliers this way. They make it clear that they are not satisfied, but they don’t say anything that can be understood as a threat, for fear of being threatened in turn. Then, they cut ties when they feel the timing is right.
Would your supplier expect to be notified long in advance?
In China, many manufacturers will drop their own suppliers at a moment’s notice, so doing the same probably won’t be surprising behavior. Therefore, you’re probably not required to give them advanced warning unless there’s something in your agreement with them that obligates you to give them notice or vice versa. Too much warning might work against you, remember, as this gives them time to work out a strategy to obtain money from you in order for their cooperation if the relationship has soured.
Terminating the relationship if you owe money and then visiting is risky for foreign businesspeople as they may hold you hostage in China until you pay them in full!
Start taking positive action now
If your Chinese manufacturer is giving you poor quality, late deliveries, unexpected price rises, or other problems (explored in the eBook), it may be time to find a better option.
This book, drawing on our decades of dealing with Chinese suppliers and manufacturing in China ourselves for various customers, will help introduce why you will benefit from switching and how to make the transition in an orderly and secure manner.
Disclaimer
We are not lawyers. What we wrote above is based only on our understanding of legal requirements. Agilian Technology does not present this information as a basis for you to make decisions, and we do not accept any liability if you do so.
Editor’s note: This post is based on a Qualityinspection.org blog post: 7 Tips to Manage the Transfer of Production To Another Chinese Factory written in 2021 and has been adjusted and republished here for Agilian readers.
