The samples came from Factory A. Mass production was happening at Factory B
Unauthorized subcontracting risk in Chinese factories - why factories secretly outsource, what it does to quality, molds, certification and lead times, the warning signs and how to verify, sample no-subcontracting contract clauses, and what to do once you find out

Hello, this is GreenFrog Seoul.

This is the story of a company that imports bathroom accessories. The samples were flawless and the first two orders arrived without a problem. Then, ahead of peak season, the third order tripled in volume and came in with widespread plating defects. Something else was off too. The QC pass stickers inside the cartons carried the name of a company nobody had heard of.

When asked, the factory first called it "our affiliate", then changed its story to "our lines were full, so we borrowed a hand from the plant next door". The importer had never approved that plant or even heard of it. The mold had been moved there as well.

This happens more often than people think. Chinese manufacturing is divided into specialist plants for almost every process, and factories pass work to each other every day. That by itself is not a problem. The problem is when finished-goods production or a key process moves to another factory without the buyer knowing. This post walks through why factories secretly outsource, what breaks when they do, and how to spot and prevent it.

In the unauthorized subcontracting cases we handle, factories that set out to deceive are the minority. Far more often it starts as "just this once" when volume overflows or margins get tight. Volume that leaves the factory rarely comes back.

1. Why factories secretly subcontract

There is almost always a reason behind unauthorized subcontracting. Once you know the reasons, you can see which deals carry more risk.

How to tell a factory from a trading company is covered in Episode 50. Working with a trading company is not wrong in itself. But if it is a trading company, the buyer should know which factory actually makes the goods.

2. Acceptable subcontracting vs risky subcontracting

You can't block all subcontracting, and you don't need to. Few finished-goods factories make their own screws, springs and cartons. Plating and surface treatment usually go to specialist plants because of environmental permits. The line to draw is whether the buyer knows and has approved it, and whether it is a process that determines quality.

3. What unauthorized subcontracting breaks

The damage rarely stops at a quality defect. Every condition the buyer checked when choosing the factory can collapse at once.

Certification deserves extra care. For regulated products such as electrical goods and children's products, the product has to come from the certified plant. If market surveillance uncovers unauthorized subcontracting, it can lead to certificate cancellation, a sales stop or a recall. Certification in general is covered in Episode 10, mold ownership in Episode 109, and social compliance audits in Episode 104.

4. Warning signs

Unauthorized subcontracting usually leaves small traces. One sign alone proves nothing, but when two or three overlap it is time to check.

Frequent changes of contact person or slow answers to technical questions can also be a sign. If the people actually making the product are not at that factory, every answer has to pass through one more step.

5. How to verify - before the order, during production, at shipment

Before the order: match capacity first

Most unauthorized subcontracting can be prevented by giving the factory only what it can handle. Check its number of machines, daily output and existing orders, then set your quantity and lead time against them. If the numbers don't add up and the factory still says "no problem", ask where that volume will come from. How to assess capacity is covered in Episode 98.

During production: look without warning

If you announce the date of a during-production inspection (DUPRO), the factory can run a portion on its own line just for that day. Where possible, give only a date range, not the exact day. If an on-site inspection is hard to arrange, ask for a live video call showing the production line. Unlike a recorded video, a live feed is hard to stage. Production tracking is covered in Episode 102 and third-party inspection in Episode 47.

At shipment: leave a trail

Require a factory ID code or lot number on the product or inner packaging so you can trace which plant made it later. Engrave buyer ownership and a serial number on molds, and check where the mold is kept during the pre-shipment inspection.

6. Sample subcontracting clauses for your contract

If subcontracting is not in the contract, it is hard to hold the factory to anything. It can simply say "nobody told us not to". Write down the restriction, the approval process, audit rights and the consequences of a breach together. The overall structure of an OEM contract is covered in Episode 12 and quality agreements in Episode 103.

Sample wording (subcontracting restriction and prior approval)
The Supplier shall manufacture the Products under this Agreement at its own plant listed in the Annex. Before entrusting all or part of the production of the Products, or any key process, to a third party not on the approved subcontractor list in the Annex, the Supplier shall obtain the Buyer's prior written approval, and the approval request shall state the subcontractor's name, address, assigned process and quantity.

Sample wording (audit and molds)
The Buyer, or a third party designated by the Buyer, may visit the production facilities of the Supplier and of approved subcontractors without prior notice to verify production status. Molds and drawings owned by the Buyer shall not be moved outside the location stated in the Annex without the Buyer's written approval.

Sample wording (breach)
If the Supplier breaches this clause, the Buyer may cancel the relevant order or refuse to accept the Products. The Supplier shall compensate the Buyer for resulting losses, including re-inspection, certification-related and recall costs, and shall additionally pay a penalty of 20% of the relevant order value.

The 20% penalty is only an example; set it to fit the size of the deal and the relationship. Once the clause is in, also make sure the factory has actually read and understood it. Prepare a Chinese version of the contract and repeat a "no production outside approved plants" line on every purchase order, so "we didn't know" is hard to say later.

7. If you have already found unauthorized subcontracting

The first instinct is to cut the factory off immediately, but order matters. The factory is still holding your goods and your mold, so an emotional reaction can make the loss bigger.

If the subcontractor's quality is actually fine and the original factory was effectively just brokering, dealing with the subcontractor directly is an option. First check whether your contract with the original factory has a non-circumvention clause. Switching factories is covered in Episode 99 and negotiating defect claims in Episode 36.

8. Three real cases

These are anonymized versions of patterns we see often. Amounts and ratios are examples.

Case 1 — Peak-season volume sent to the plant next door

This is the bathroom accessories importer from the opening. The factory passed half of the tripled order to a small nearby plant, which cut the plating thickness to hit the price. The importer had to deal with about KRW 30 million of defective goods through rework and discounted sales. Afterwards it split orders to fit the factory's capacity and began placing peak-season orders two months earlier.

Case 2 — Made somewhere other than the certified plant

This importer brought in electric toys for children. Certification was based on Factory A, but Factory A handed part of a reorder to a partner plant. The product looked the same, but the screws on the battery cover were a different spec, and market surveillance caught the difference. The importer had to recall the lot and work things out with the certification body. Its contract now bans production outside the certified plant, and it checks the factory code on every shipment.

Case 3 — Stopped early by an unannounced inspection

This company had small leather goods made under OEM. An unannounced during-production inspection found only another brand's products running on the factory's lines. Pressed on it, the factory admitted it had sent the sewing to a home workshop nearby. The company had the factory pay for 100% pre-shipment inspection, and from the next order it formally audited the sewing subcontractor and added it to the approved list. Instead of banning subcontracting, it made it visible.

9. Common mistakes

• Believing one factory visit means the factory will keep producing in-house
• Not checking whether the sample plant and the mass-production plant are the same
• Suddenly raising order volume in peak season without looking at capacity
• Having no subcontracting clause in the contract at all
• Banning all subcontracting, which pushes the factory to hide its subcontractors
• Announcing the date of every in-line inspection in advance
• Seeing another company's name on a carton or label and letting it go
• Never checking where the mold is
• Not revisiting certification when the production plant of a regulated product changes

10. Unauthorized subcontracting prevention checklist

Before you start

• I confirmed whether the supplier is a real factory or a trading company
• I got the equipment list, monthly output and existing orders and checked them against my volume
• I received and approved a list of subcontractors and addresses by process
• The contract covers prior approval for subcontracting, unannounced audits, no moving of molds and consequences of a breach

During production and at shipment

• I ran in-line inspections unannounced or checked the line by live video
• I checked company names on cartons, labels and test reports
• I confirmed a factory code and lot number on the product or inner packaging
• I confirmed the mold's location and condition with photos

Ongoing

• I split peak-season volume in advance to fit the factory's capacity
• For regulated products, I check on every shipment that the certified plant is the actual production plant
• I get notice before a subcontractor changes and audit it if needed

Closing - quality control starts with knowing who makes your product

Companies hit by unauthorized subcontracting usually say, "We trusted the factory." That trust wasn't wrong. But even when a factory outsources with no intention to deceive, simply squeezed by volume or price, the quality, certification and mold control the buyer checked all start to wobble at once.

There's no need to treat subcontracting as the enemy. Chinese manufacturing has always been built on many plants sharing the work. What a buyer has to keep hold of is knowing which factory, and which processes, each product actually goes through.

The first step is simple. Ask your main factories for a list of subcontractors by process. Factories that hand it over readily are usually well managed. If a factory dodges the question or just says "we do everything ourselves", make your next in-line inspection unannounced.

GreenFrog Seoul helps with factory capacity assessments, subcontractor verification, unannounced in-line inspections and contracts with proper subcontracting clauses. If you have already found unauthorized subcontracting, we start with quarantining the goods and recovering the mold. If you are starting with a new factory, we start with checking its capacity.