A customer came to us because they have had a BIG disagreement with a Chinese supplier and want to remove their tooling to go to a new manufacturer…what could go wrong?
This isn’t the first instance of suppliers making life difficult for their customers who want to remove their tooling in our disputes series, as when this request comes in, they know the writing is on the wall. The problem for the customer is that the supplier has the physical tooling in their possession, so prying it away can be tough.
The supplier is ‘shocked’ at the request to remove tooling
The customer wanted to remove their tooling from their Chinese supplier of several years and insisted in late July that they wanted the supplier to release the tooling for collection after a few days in early August. There was one outstanding order that they wanted the Chinese supplier to finish making as a part had been missed by the supplier (just one reason why they wanted to stop working with them) and then they would pay for it as normal.
The supplier replied with a shocked response and gave several rather baffling reasons to delay the transfer, suggesting that it could take a month or more. They had to send an application to remove the tooling to their ‘tooling management’ team first, who would:
- Check on who owns the tooling – they stated that their business may share a ‘small part’ of a customer’s ODM tooling cost as they ‘invested in it’ as a favor to the customer to help them. This was news to the customer who believed they had paid in full for the tooling when it was fabricated.
- Check the tooling wear – in this case, it should last for 200,000 shots (and the customer knew that it was still within its usable lifespan based on the previous orders placed).
- Find out where the tooling was located – they claimed that they would split up tooling between different suppliers to ‘protect it.’
- Work out how long it would take to collect – they claimed that tooling used infrequently might be stored in a ‘quiet place’ and could take longer to find.
The sales manager also stated how shocked they were that their customer of several years would suddenly request to pull out the tooling and reminded them that they had made a lot of effort to accommodate their demands during COVID and that the sudden request had ‘hurt their partnership.’
Something odd is going on…
The customer’s MD had made it clear in previous emails that they wanted to end the relationship, so the shock coming from the Chinese side was surprising.
They were also confused by the items the supplier wanted to check regarding the tooling and its ownership and location. The customer made the following statements:
- They were invoiced and paid for their branded tooling and assumed full ownership of it. The tooling should be of no value to anyone but their business.
- The tooling had not been used 200,000 times so there should be no need to check its usage (unless, of course, it had been used in unauthorized productions and there seems to have been a suggestion that they suspected the supplier might have used it in this way to sell to others).
- They refuted the claim that the supplier would need to check where it is located, and that an asset register of the tooling kept for customers must be easily available.
- They disagreed that sub-suppliers might not be able to find the tolling easily if it is not regularly used and that they should have a duty of care to know where the tolling is kept.
They asked for the supplier to have the tooling ready for collection within a week so they could wrap up the relationship amicably.
Things get nasty
The sales manager of the supplier bit back, claiming that the request for removal of the tooling was a ‘trick to delay payment’ for the outstanding order that needed to be finished. They claimed that the tight deadline given made it impossible for them to finish the order and that the missing parts from the order had not been mentioned earlier. The supplier claimed that they had an ulterior motive regarding payment and that it was more than just about removing tooling.
Furthermore, they gave the customer 48hrs to pay $50k+ for the outstanding order or they would report them to Chinese authorities and have them added to a credit blacklist in China that could affect their future orders.
Worse still, the supplier added that they had paid for HALF of the tooling costs and that the customer would need to pay this back before they would allow it to be removed.
Of course, this is quite an escalation for their initial request to give them time to ‘check’ and it clearly looked like retaliation for losing the business.
The problem is that the customer did not have a manufacturing contract that they could fall back on to remind the supplier of their responsibilities and of who owned what, or even to sue them, leaving them at a disadvantage, despite working together in good faith having worked well up to now.
What can we learn from this?
There’s no sugar-coating this situation, once the relationship has broken down like this it’s unlikely that you will get an amicable resolution with a Chinese manufacturing supplier. To be fair to the customer here, the supplier went from 0 to 100 in one email even though the customer was never impolite. They didn’t like what they were hearing, panicked about losing an established customer, and lashed out.
In this case, the customer may have to cut their losses and let the tooling go, move on and fabricate new tooling. This time, without involving the new supplier, to avoid nasty surprises like the well-used claim that they have also invested into the tooling and so own part of it.
It might have been better to attempt to remove the tooling ‘to check and maintain it’ before pulling the trigger on the relationship – in some cases, this could work.
This is a classic example of a Chinese supplier losing face. They feel that they have done favors for you in the past, perhaps giving you good credit terms, rushing orders to meet your deadlines, and more, over the years, and their pride is hurt when you ‘suddenly’ want to leave. They perhaps feel that you ‘owe’ them better.
Clearly, most Western businesses won’t operate like this, but it shows why it’s important to protect yourself with a clear and enforceable China manufacturing contract that outlines responsibilities and ownership of IP and assets like tooling. Also, how developing a capable backup supplier in the background to switch to if need be can be a lifesaver in situations like this where you need to make a fast move.
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