The New Reality of Manufacturing in China
Twelve months ago, a U.S. company wired $800,000 to a trusted Chinese supplier it had worked with for years. The factory never shipped a single product. Instead, it shut its doors, the owner disappeared, leaving the American company with a total loss of capital and zero legal recourse.
The failure wasn’t bad luck. It was a lack of due diligence and a weak, non-China-specific contract that made recovery impossible.
This isn’t an outlier anymore. It’s the new normal.
If your business still relies on Chinese manufacturing, the game has fundamentally changed. The landscape in 2025 looks nothing like it did just five years ago. Risks haven’t just risen. They’ve evolved into existential threats for the unprotected.
Many foreign companies, especially small and midsized enterprises (SMEs), are being blindsided by new legal and commercial dangers that are multiplying across the board.
Why China Still Matters
At the same time, for many industries, China remains the best — and sometimes the only — viable option for production. Its supply chains, scale, and speed-to-market are still unmatched. The reality is not that companies should automatically leave China, but that they must engage with their eyes wide open, securing their assets against a new set of threats.
The Critical Factors Driving Today’s Reality
1. Economic Headwinds and Increased Factory Insolvency
China’s economy is struggling with weakening domestic demand and a severe real estate downturn. This instability is triggering a wave of factory collapses, sweeping through the manufacturing base with little warning.
The Vanishing Supplier: Our lawyers have seen a sharp surge in cases where manufacturers take large advance payments and then vanish, leaving foreign buyers with no goods, no cash, and no recourse.
The Fallout: I personally know of half a dozen U.S. and EU companies that have gone bankrupt after being defrauded or stranded by insolvent Chinese suppliers.
For a deeper dive, read China’s Economic Slowdown and YOUR Business: The Times They Are a Changin’.
2. IP Misappropriation as a Survival Strategy
Facing financial stress and a flight of foreign buyers to tariff-free jurisdictions, Chinese manufacturers are scrambling to survive. One of the most cynical survival strategies we’re seeing is factories weaponizing their customers’ Intellectual Property (IP) against them.
Your Toughest Competitor: Factories are now more likely than ever to misappropriate customer IP and materials to compete against the foreign buyer directly. (Related: Your China Factory is Your Toughest Competitor.)
3. The Weaponization of Trademarks (Quick-Fire Hijacking)
The classic IP risk of trademark theft is back, but it’s more sophisticated and weaponized for profit.
The New Tactic: Factories rarely register the stolen marks under their own names anymore. Instead, they use relatives or shell companies in different provinces to make enforcement attempts nearly impossible for a foreign company to track.
The Ransom: By registering a foreign buyer’s mark, the factory can block legitimate exports or resell under the same brand. In many cases, they demand massive ransom payments just to release the mark.
Our trademark team has seen these cases spike in the last 18 months. For context, see China Trademark Theft. It’s Baaaaaack in a Big Way and Your China Factory is Your Toughest Competitor.
4. Aggressive Sinosure Claims and Escalating Tariff Risk
The U.S. tariff regime continues to profoundly reshape supply chains, forcing companies to tread carefully and often consult customs lawyers before placing a new order. Compounding this, the state-owned export credit agency Sinosure is getting more aggressive.
Sinosure as a Hammer: As Chinese factories face collapse, they’re increasingly leaning on Sinosure to recover alleged debts from foreign buyers — even in cases of disputed quality or fraud. This transforms an ordinary commercial dispute into a high-stakes, quasi-governmental claim — and it wreaks havoc on foreign importers. For more on the dangers of Sinosure, see Fighting Back Against Fake (and Real) Sinosure Claims: A Primer.Don’t let a commercial dispute become a crisis.
If Sinosure has contacted you, contact our law firm immediately. We have handled around 100 Sinosure matters, which, as far as I can tell, is 99 more than any other American law firm.
Big vs. Small Companies: The Dangerous Gap in Protection
The most significant difference in today’s China manufacturing landscape is the unequal risk exposure between multinational corporations and SMEs.
Large Multinationals are meticulous. They lock down their legal risks before they even start production, prioritizing comprehensive, China-specific protective legal documents and IP registrations that give them immediate leverage and legal standing in Chinese courts.
Small Companies, by contrast, often skip these foundational steps, either due to misplaced trust in a supplier or a lack of understanding about Chinese law. Because SMEs don’t have the financial cushion of multinationals, when any of these new risks materialize, the result is often complete business failure. This gap in legal protection has become a near-existential risk.
None of this means China has lost its dominance as a manufacturing hub. For many companies — especially in sectors like electronics, consumer goods, and advanced manufacturing — no other country can yet match China’s combination of infrastructure, expertise, and output. The point is not to avoid China altogether, but to approach it with realistic expectations and protections.
New Scams and the End of Quality Control
The climate of desperation and instability is driving an explosion of new financial and quality risks. We’re seeing a rise in advance-payment frauds where no goods are delivered. At the same time, sophisticated bank-switch scams are proliferating — often with the manufacturers themselves complicit. Meanwhile, quality downgrades are spreading as factories cut corners and use cheaper materials.
Together, these risks represent a systemic breakdown in quality control. For examples, see How to Protect Against China’s Four Most Common Business Scams
The Travel and Exit Ban Dimension
The crackdown is not just economic. The U.S. State Department has raised travel advisories due to arbitrary detentions and exit bans. Foreign executives have been trapped in China for years under exit bans — often used to coerce settlements of private commercial disputes.
Before setting foot in China, a clear-eyed risk assessment is essential. For help with this, check out How to Assess Your Personal China Risks
China Manufacturing Risks FAQ 2025: What Importers and SMEs Need to Know
Is China still the best place to manufacture despite these risks?
Yes, but the terms of engagement have changed. For many sectors (especially high-tech, electronics, and goods requiring deep component supply chains), China remains unmatched in speed and capacity. The goal is not to leave, but to engage only after securing comprehensive legal protection.
Why are so many Chinese factories suddenly failing or defaulting?
China’s slowing economy, overcapacity, and the severe real estate downturn are pushing many manufacturers into financial desperation. This instability triggers a wave of “vanishing supplier” fraud, where factories take large advance payments and shut down without delivering product.
How quickly can these manufacturing risks materialize?
Almost overnight. We’ve seen suppliers vanish within weeks of receiving a large payment, and trademark hijacking can happen literally the same day a brand name is disclosed.
What’s different about China risks in 2025 vs. previous years?
The risks have evolved from simple quality control issues to sophisticated, desperate survival tactics. We are now seeing coordinated fraud, the weaponization of IP theft, and aggressive, state-backed collection efforts. The stakes are higher and the tactics far more hostile.
I’ve worked with my Chinese supplier for years. Am I still at risk?
Yes, absolutely. Economic pressure is now forcing even historically reliable suppliers into desperate measures. While long relationships provide a degree of confidence, they are no guarantee against corporate insolvency, outright fraud, or IP theft driven by survival pressures.
Do I face a risk of being detained or barred from leaving China?
Yes. The U.S. State Department warns of arbitrary enforcement of local laws, including exit bans used to coerce settlements of commercial disputes. Before traveling, a clear-eyed risk assessment with a qualified attorney is essential.
Can I sue my Chinese manufacturer in a U.S. court?
You can sue, but U.S. court judgments are traditionally worthless in China. The new 2024 CPL rules open the door to enforcement under reciprocity, but the process is highly specialized and requires a separate application. Your most reliable protection will still in most cases come from Chinese-language contracts enforceable in Chinese courts.
What does “China-specific” legal protection actually mean?
It means legal documents (e.g., contracts, NNN agreements) that are written in Chinese, governed by Chinese law, and enforceable in a Chinese court. For example, a contract valid in California but untranslated and unstamped in China will likely be thrown out.
How do I protect my trademarks in China?
The first, non-negotiable step is to register your trademarks in China immediately. If you don’t, your factory (or a related third party) can register the mark first, legally blocking you from exporting your own products until you pay a massive ransom.
What is Sinosure and why should I care?
Sinosure is a state-owned export credit insurance agency. Financially struggling Chinese factories are increasingly using Sinosure to press aggressive, quasi-governmental claims against foreign buyers, even for disputed quality or fraud. Mishandling this transforms a commercial spat into a severe business crisis.
What is the most critical step small businesses must take to mitigate risk?
Do conduct comprehensive due diligence and use airtight, China-specific contracts. Don’t rely on trust or generic Western contracts — they will not protect you in China.
Key Takeaways
Factory insolvency and fraud are now routine risks in China.
IP misappropriation and trademark hijacking have become survival tactics.
SMEs face disproportionate danger due to weak legal protections.
Tariffs, Sinosure, and scams are compounding financial risk.
Even setting foot in China now carries serious legal and personal risks.
Despite these risks, China is still the best option for many companies — which makes protecting yourself there all the more essential.
The Bottom Line
The China manufacturing landscape has fundamentally changed from a low-cost opportunity to a high-risk operational environment. For large companies, this is a challenge to be managed. For SMEs, it is something else entirely: a crisis that can end businesses outright.
In my next post, I’ll explain the precise legal and operational measures small and midsized companies must take to reduce these risks by setting out practical steps that can make the difference between survival and bankruptcy.
In the meantime, if you have any specific questions contact our international manufacturing lawyers for a China risk assessment or contract review before your next order.
