I had an interesting conversation with a Chinese friend who works for local district’s government (in Shenzhen city). He explained to me how “the Chinese legal system does too little for society”.
No recourse against factories closing suddenly
One of his examples was about factory owners who disappear with the cash, and leave millions of RMB of unpaid invoices and wages behind them. Some factory bosses are actually not the legal representative of their company—one of their employees is—so they run no risk when stopping all operations at once. They can do it when lots of cash is in their hands (pressing customers to pay early and doing the reverse to suppliers and staff).
Hundreds or thousands of employees suddenly have no dormitory, no food, and no salary. It causes huge disruptions. Sometimes the local government actually has to give them some money (local officials need to ensure that demonstrators don’t get too loud). Many similar cases were reported in China, particularly last year.
The factory owners often start another business nearby, and nobody can do anything about it. There is no legal recourse. That’s what my friend was complaining about. And, of course, he was envying the legal systems of the US and Europe, where this type of things would never happen.
Is it better in more developed economies?
Actually I think it is even more widespread there! In France, I know that many small entrepreneurs organize their bankruptcy by first giving their assets to their spouse and then changing the marriage contract. Thousands of farmers have done it, to avoid years of unpaid taxes. In the US, according to the book Microtrends, close to 1% of the population of an American state (Massachusetts, if my memory is good) is legally bankrupt. As the author wrote, bankruptcy is “a way of life” there.
Does it also happen to large companies in the US and Europe? Probably not in the same proportions. Many of the Chinese factories that closed actually did not bother filing for bankruptcy: the owner disappeared and nobody could find him. That type of behavior might be particular to China (and other developing countries? I don’t know).
Takeaway for buyers of Chinese products
Don’t build your whole business on one supplier. Even if they make a margin on your orders, you cannot count on the boss to maintain a stable business. Want to know more? Read this post about the short-term view of Chinese suppliers.
If your interests depends in large part on one or two factories, get credit checks–you will see if they have are in good financial standing. If they have lots of debt and a small profit, you know that they might not be there for the long haul.