Outsourcing to China: a cautionary tale
We’ve discussed the downsides of U.S. companies outsourcing to China before—the harm it causes the American workforce and economy, the pollution that Chinese factories produce, and the production of poor quality and often downright dangerous goods. But the story of what happened to U.S. manufacturer Fellowes Inc. when it decided to move production of its line of personal paper shredders from Illinois to southern China may be the most poignant case study on the dangers of outsourcing we've seen yet.
In a recent article from Manufacturing and Technology News, author Richard McCormick discusses the nightmare that unfolded for Fellows Inc. shortly after the company shifted production overseas. Though initially lucrative, the joint venture that James Fellowes, a third-generation chairman and CEO of Fellowes Inc., set up with a Chinese company called Shinri began to deteriorate rapidly:
“In 2009 everything changed when the leadership of the Chinese company shifted to another Zhou brother. Over the next year, the Chinese company ‘gradually attempted to usurp control [of our operations] in direct violation of the joint venture agreement,’ Fellowes told a recent hearing of the House Foreign Affairs subcommittee on Asia and the Pacific. ’Shinri methodically imposed unreasonable requirements on Fellowes in an effort to extort more profit and ultimately control the global shredder business in direct violation of our contract.’"
But it didn’t stop there. When Fellowes refused to meet Shinri’s illegal demands, including requests for 100% ownership of their technologies and a 40% price increase on their product, the company proceeded to completely sabotage Fellowes’ Chinese operations:
“Starting on August 7, 2010, Shinri started to obstruct shipments of shredders from the factory, forcing the joint venture to stop production. ‘It placed security guards and trucks at the gates to prevent the entrance of our people, the shipment of our goods and the transfer of our wholly owned assets,’ says Fellowes. ‘They expelled Fellowes’ appointed management personnel at the facility and they illegally detained Fellowes’ injection molded tools. This ultimately led to the bankruptcy of the joint venture.”
Though clearly Shinri’s actions were illegal, Fellowes’ soon found that there was little that China could—or was willing to do to help:
“They sympathized with our plight but they were either unable or unwilling to force our Chinese partners to open our factory or facilitate a purchase of the joint venture by Fellowes. The cumulative impact of these actions is an economic loss totaling over $100 million to Fellowes.”
Back in the U.S., James Fellowes testified before the House Foreign Affairs subcommittee on Asia and the Pacific, and though there wasn't much the U.S. could do to aid the damaged company, Fellowes’ plight did capture the attention of several lawmakers, including Don Manzullo, (R-Ill.):
“I see China going backwards. I have never in my life in any Congress seen so many complaints over outrageous stealing of intellectual property and making a folly over the rule of law. They are going in the opposite direction based upon the complaints coming in.”
Let the story of Fellowes Inc. serve as a cautionary tale to those U.S. companies that are considering outsourcing manufacturing to China. Foreign corruption can harm U.S. companies and should be addressed strongly.
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