Over the past few years, many companies have been rethinking China, and looking to reduce their reliance on China manufacturing. Some are shifting production to Southeast Asia, others to Mexico, and some are re-shoring to the United States
Most businesses understand that setting up manufacturing in a new country comes with its own challenges. What fewer realize is that reducing your footprint in China—or leaving entirely—can create a whole new set of risks, often more immediate, personal, and costly than those in your new market.
This post explains the key risks of leaving China, how to prepare a safe China manufacturing exit strategy, and what steps you should take to protect your company, your assets, and your IP in your new manufacturing country.
Why Leaving China Can Put You in the Crosshairs
If you're planning to move manufacturing out of China, your exit's success will depend heavily on your approach, your history with suppliers, and your operational footprint.
Once word spreads about a departure, even previously cooperative partners may turn hostile—often seeking to extract money, assets, or leverage.
Hostage-Taking
Yes, this still happens in China. In 2021, I co-wrote Commercial hostages in international business disputes, which explains how Chinese companies detain foreign executives to collect alleged debts, protest layoffs, or fight facility closures.
If you are closing a facility or laying off workers in China, do not assume you are safe on the ground in China.
At a minimum, you should Avoid traveling to China during the transition. If you or your executives are already there, leave promptly. If travel is unavoidable, hire professional security and control the location and circumstances of your meetings. For instance, do not meet in the factory of your supplier who claims that you owe it $800,000. See How to Reduce Your Chances of Getting Kidnapped in China.
Fake or "Resurrected" Debts
Once you signal—intentionally or not—that you're reducing your China footprint, you may face a wave of sudden claims:
- Tax authorities demanding unpaid or reassessed taxes.
- Landlords claiming additional rent or inflated repair costs.
- Suppliers invoicing for undelivered goods or long-settled disputes.
- Employees seeking exaggerated severance, back pay, or unused vacation payouts.
It's common for multiple claims to arrive at the same time, forcing you to either spend heavily to defend yourself or settle to move forward.
Some companies avoid this by shutting down operations abruptly and disappearing, but that approach only works if you are certain your business will never operate in or with China again—and that no executives will find themselves in China, Hong Kong, or Macao even by accident.
Common Supplier Retaliation Tactics
When a foreign company announces its plan to move production elsewhere, certain Chinese manufacturers may retaliate by engaging in the following tactics:
- Tooling and Mold Seizure – Claiming ownership and refusing to release them.
- IP Hijacking – Registering your trademarks or logos in China through third parties.
- Customs Seizures – Blocking your goods for alleged IP infringement.
- Product Ransom – Refusing to ship goods you've already paid for until you pay "debts," then reporting you to Sinosure.
Risk Factors for Retaliation
Your chances of facing retaliation rise significantly if you have:
- 50 or more local employees.
- Substantial outstanding supply or service contracts.
- Suppliers heavily dependent on your business.
- Public announcements about your relocation.
- A history of strained relationships with suppliers or officials.
Companies with smaller footprints, diversified supplier bases, and a quiet departure plan generally face fewer problems.
How to Mitigate Your China Exit Risks
A safe China manufacturing exit strategy requires advance planning, discretion, and legal preparation.
Essential steps:
- Secure all molds, tooling, and paid-for products before hinting at your departure.
- Register all relevant IP in China—even if you are leaving—to prevent others from doing so first. See China Trademarks: Register Yours BEFORE You Do ANYTHING Else.
- Obtain clear financial statements confirming zero outstanding debts, taxes, or salaries.
- Use airtight contracts with suppliers, landlords, and employees confirming asset ownership and payment status. If your contracts do not protect your IP from China, consider entering into new contracts before you leave China.
- Remove foreign personnel from China well before the announcement that you will be leaving.
Keep your departure plans strictly confidential until all critical protections are in place.
Protecting Your Business in Your New Manufacturing Country
Relocating production offers the chance to start fresh—but only if you protect yourself from day one.
1. Conduct Due Diligence
Investigate your new manufacturer's finances, reputation, and litigation history. Work with a local law firm to ensure accuracy and depth. See Foreign Company Due Diligence Reports.
2. Use Protective Contracts
The right country-specific contracts are your first line of defense. Before you even think about sharing sensitive information or sending a deposit, you should have these essential agreements in place:
- NNN Agreement – For discussions with potential suppliers before you share sensitive information.
- Manufacturing Agreement – Clearly defines product specs, quality control, delivery schedules, payment terms, and IP protections before you send any money.
3. Register IP in the New Jurisdiction and Target Markets
Secure trademarks, patents, and copyrights in your manufacturing country and your sales destinations. Registering with customs authorities can help prevent counterfeit shipments.
Conclusion
Leaving China manufacturing is not a simple supply chain decision—it's a legal, operational, and reputational challenge. Poorly planned exits can cost companies millions in seized assets, lost IP, and damaged business relationships.
Plan early, act quietly, and secure every legal and operational safeguard before you make a single public move. Done right, a China manufacturing exit can position your business for a safer, more stable future in its new location.
China Manufacturing Exit Strategy — FAQ
This is intended as a comprehensive guide to planning and executing a safe, cost-effective China manufacturing exit. It explains how to protect your IP, manage supplier risks, and choose a new production location.
Pre-Exit Planning: Laying the Groundwork
Essential due diligence steps and risk assessments before relocating manufacturing from China.
Q: What is a China manufacturing exit
strategy?
A: It's a structured plan for relocating manufacturing out of
China while protecting your tooling, intellectual property (IP),
and supply continuity—while minimizing supplier retaliation,
fraudulent debt claims, and IP theft. An effective strategy covers
legal, operational, and personal safety risks.
Q: What due diligence should I do before planning my
China exit?
A: Conduct a full China supply chain risk assessment. This includes
supplier audits, contract compliance checks, confirming tooling
ownership, verifying all IP registrations in China, and reviewing
tax, labor, and regulatory compliance. Skipping this step can lead
to costly disputes and delays.
Q: Why is leaving China manufacturing
risky?
A: China factory shutdowns and manufacturing relocations can
trigger aggressive supplier and government responses—tooling
seizures, fraudulent debt claims, hijacked IP registrations,
customs blockages, and in extreme cases, threats of personal
detention for foreign executives.
Q: What are the major drivers pushing companies to move
manufacturing out of China?
A: Key reasons include rising labor costs, IP theft concerns, U.S.
and EU trade barriers, geopolitical tensions, and a strategic push
for supply chain resilience. Many companies are searching for
"China Plus One" manufacturing options to reduce
risk.
Q: What are the typical costs of exiting China
manufacturing?
A: Expect legal fees, tooling relocation expenses, inventory
write-offs, severance payments, and potential settlements. Budget
for at least 3–6 months of dual production during the
transition, and anticipate 30–50% higher total costs than
initial estimates.
Q: How much time should I plan for a safe
exit?
A: Small operations may manage in 3–6 months, but complex
supply chains often require a year or more of discreet planning to
protect assets and IP before word spreads.
Q: What documentation should I secure before announcing
departure?
A: Gather contracts, IP registrations, financial statements,
employee files, supplier agreements, and government permits. Store
copies securely outside China and ensure remote access is not tied
to Chinese servers.
Q: How do I prevent IP hijacking in
China?
A: File and maintain Chinese trademark, patent, and design
registrations before any sign of your exit surfaces. This is your
strongest defense against hijacked filings.
Q: How do I safeguard tooling and molds
pre-exit?
A: Confirm tooling ownership in your contracts, retrieve assets
quietly before announcing departure, and move them to a secure,
neutral location.
Exit Execution: Managing Risk in Real Time
Best practices for supplier notification, contract management, workforce handling, and avoiding tax and regulatory pitfalls during a China manufacturing relocation.
Q: When should I notify suppliers, and what retaliation
should I expect?
A: Notify suppliers only after securing your tooling, paid-for
inventory, clearing debts, and registering your IP. Early notice
often triggers retaliation—tooling seizures, trademark
hijacking, blocked shipments, bogus invoices, sudden "quality
deposits," or claims of exclusive design rights. Some
suppliers also leverage Sinosure or local authorities to pressure
foreign buyers.
Q: How do I handle existing contracts and commitments
during exit?
A: Review all agreements for termination clauses, notice periods,
and penalties. Complete open purchase orders when possible, but
avoid signing new long-term commitments once exit planning
starts.
Q: How do I manage my local workforce during
transition?
A: Prepare severance and retention bonus plans in advance for key
staff. Ensure full compliance with Chinese labor laws to avoid
disputes, complaints, or government action.
Q: How do I avoid government fines or back-tax claims
during exit?
A: Conduct a pre-exit tax compliance check. Resolve VAT filings,
settle local tax obligations, and meet social insurance
requirements before departure to prevent asset freezes or blocked
export clearances.
Q: How should I communicate my exit to customers,
investors, and other stakeholders?
A: Keep messaging tightly controlled. Avoid public announcements
until all critical assets are secured. Directly update key
customers and partners to prevent misinformation and reputational
harm.
Q: What's the risk after exit news
leaks?
A: Landlords, tax authorities, suppliers, and employees may surface
with inflated claims, attempt to seize assets, or demand
settlements before releasing goods or equipment.
Q: Should foreign executives and personnel leave before
announcement?
A: Yes—reducing foreign on-the-ground presence before news
breaks minimizes detention or coercion risks.
Q: Who is most at risk when leaving
China?
A: Companies with large local workforces, high supplier dependence,
public exit announcements, or strained supplier relationships face
the most danger. Smaller companies with minimal presence and clean
supplier relations face fewer—but still real—risks.
Post-Exit Positioning: Securing Your Future Supply Chain
Choosing your next manufacturing base, protecting IP abroad, and exploring alternatives to a full China exit.
Q: What should I look for when choosing a new production
country?
A: Compare labor costs, infrastructure, political stability, trade
agreements, IP protection laws, and supply chain resilience. Many
companies adopt a "China Plus One" approach to balance
risk and flexibility.
Q: What key legal protections are needed in a new
manufacturing location?
A: Use NNN Agreements during supplier vetting. Once you select a
manufacturer, sign a detailed Manufacturing Agreement defining
product standards, quality controls, IP ownership, and delivery
terms before sending any payments.
Q: Should I register IP in the new manufacturing country
and sales markets?
A: Yes—register immediately in both your new production
country and your major sales markets. Also record IP with customs
to stop counterfeit or unauthorized imports.
Q: Are there strategic alternatives to a full
exit—like nearshoring?
A: Yes—many companies diversify production with a "China
Plus One" model, retaining some China operations while adding
capacity in other countries for cost or market access
advantages.
Leaving China Manufacturing: The Hidden Risks And How To Protect Your Business
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
