The Hidden Risk of Chinese Suppliers

The economic news coming from China isn’t good. While the U.S. economy is expanding, the Chinese economic growth rate has declined from double digits just a few years ago to 3% in 2022. According to China’s General Administration of Customs, China’s exports have fallen for four of the six months so far in 2023. Shipments to the U.S. dropped almost 24%, the 11th straight month of declines and the worst result since the huge drop in exports at the beginning of the pandemic.

China has struggled to recover from factory and city closures during the pandemic. Now that the danger of COVID-19 is mostly behind us, many U.S. companies are rethinking their sourcing and manufacturing strategy in China. That means many companies are shutting down their factories or pairing back their operations in China and moving production to other low-cost countries such as Vietnam, India, and Mexico. Some companies are making the decision to reshore manufacturing to the U.S. This trend leaves Chinese suppliers in a bind – losing so much business that they are forced to either shut down factories or go bankrupt.

When Chinese suppliers go bankrupt

When your Chinese supplier goes bankrupt, they stop production, sometimes in the middle of producing your order. Once this happens, there is usually no remedy after the fact. You may have made a down payment on production, supplied raw materials, and spent time teaching the supplier how to produce your goods. But once a Chinese company declares bankruptcy, you probably won’t be able to recover your investment. Chinese bankruptcy typically consists of a company shutting down in the middle of the night and its owner fleeing to another town or another country.

While some companies decide to leave China, others are determined to stay. Your company should consider if China is a long-term growth market and if manufacturing there to service the local market is the best strategy. Other companies stay because suppliers are sole sources, and certain manufacturing processing is done nowhere else but China. Others stay because their entire supply chain is in China. Whether a company stays or goes, being alert for signs of supplier bankruptcy is essential for supply chain managers.

What to watch for

If you suspect a Chinese supplier may be having financial difficulties, they probably are. If your supplier is asking for a larger downpayment than usual, or if they are continuing to ask for money to buy raw materials, they may be having financial difficulties. Another warning sign is production delays. The Chinese company may be redirecting your down payment funds to keep their production line up and running, instead of purchasing raw materials for your products. If the supplier has given you previous customer references, reach out again to those reference contacts to discover what they are experiencing. The only way to know for sure is to visit the factory to verify raw materials and confirm that your products are in process. Meanwhile, you should also prepare contingency plans and alternate sources should the Chinese supplier declare bankruptcy.

There is no substitute for monitoring and knowing your global supply chains. Site visits, now that factories have reopened, are essential to verify that what you think is happening, is actually happening. Making contingency plans to move production to an alternate site, or source from another supplier will help to mitigate the effects of supplier bankruptcy.

About the author

Rosemary Coates is the executive director of the Reshoring Institute and the president of Blue Silk Consulting, a global supply chain consulting firm. She is a best-selling author of 42 Rules for Sourcing and Manufacturing in China and Legal Blacksmith - How to Avoid and Defend Supply Chain Disputes  Ms. Coates lives in Silicon Valley and has worked with over 80 clients worldwide. She is also an Expert Witness for legal cases involving global supply chain matters. She is passionate about Reshoring.

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