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How To Cooperate With Your Chinese Supplier, Part 1: Be Prepared for Many Chinese Factory Closures This Coming CNY

It is coming again. Chinese New Year (CNY for short). All Chinese manufacturers will close sometime in early February and re-open slowly toward the end of the month. The more they rely on migrant labor, the longer the break (on average).

If you are a seasoned importer, you know how to manage the disruption. This is not what I am writing about today.

This year comes with an extra risk: closure of the business because of environmental non-compliance.

Many factories have been completely shut down, and many others had to close temporarily. (By the way, at CMC we prepared a white paper that explains this in detail.)

And yet, many manufacturing facilities are still operating in non-compliance and have managed to dodge the bullet. The owner knows he is at risk and he could lose his business overnight. He has been hiding somehow — for example, pretending the factory is closed when government inspectors are rumoured to be in the area, and operating at night.

Are these companies going to invest in new equipment in order to reduce their air/water/ground emissions? Not likely if they have the typical old-style Chinese attitude of “get the cash today and worry about the company’s future later”.

Are these owners going to try and survive another year? Some will, and some won’t. Those who won’t try will simply collect cash from customers, will avoid paying suppliers, employees, and taxes, will order nothing for production after CNY, and will quietly get out of sight.

If some of your critical suppliers use your tooling, and if you don’t have a backup supplier that can take over your productions quickly, you should really look into your suppliers’ processes. Do they do die casting, paint, surface treatments, or anything else that is potentially polluting? High risk.

How to reduce your risk? Avoid paying a deposit before CNY, if possible (maybe pay by letter of credit). Get your valuable tooling out of the factory and store it somewhere else. Cultivate a backup.

I have no idea what proportion of factories is in this situation. I can only guess that the number of “close and run” cases will go up this year. Let’s hope you are not one of the victims.