Epic Manufacturing Problems In China - Update

This is posted on Epics website.


As many of you may have read, Epic Kayaks has moved its manufacturing facilities in China. We no longer contract out the building of our boats & paddles to Flying Eagle, the composite boat builder we began working with roughly 3 years ago. We have already moved into a brand new 10,000 square meter (100,000 square foot) factory, with a custom set up for our new production. Our new production company is Hangzhou Epic Boat Co., Ltd., a wholly owned subsidiary of Epic Kayaks, Inc. Controlled directly by Epic, our new factory gives us complete oversight of the entire manufacturing process. This will ensure the best possible efficiency and quality control.

Leading the charge is our new Director of Manufacturing, Dave Kruger. With over 30 years experience in the composite boat industry, and direct knowledge of factory layout and operation, Dave has been invaluable in this transition. He has been in China for the past three months, setting up our new facility and preparing our new production line. The factory is now complete with temperature controlled laminating rooms, high capacity vacuum pumps and a large oven for post curing to optimal properties. The first boats from our new factory will start rolling out in January 2009!

The biggest challenge of this move has been getting all of our molds, equipment, materials and finished product out of the old factory, a process being hindered by Flying Eagle. In July, we mutually agreed with Flying Eagle that Epic would be moving production out of their facility. It was agreed that we would be free to take all Epic possessions, including our molds, which we had contracted Flying Eagle to build (per our designs) and purchased.

As our moving date grew closer, Flying Eagle started making more and more demands. Before we could move our boat molds, they said, we’d need to purchase them AGAIN – paying 100% of what we’d already paid. On top of that we would be paying a currency fluctuation in their favor (they invoiced us in US Dollars for the molds, but then wanted the equivalent Chinese Yuan based on when we purchased) plus an additional 17% tax. They are also demanding that we purchase materials from them at an inflated profit margin compared to what we would pay on the open market, with some of these items being a 2-3 year supply.

To make matters worse, they insisted that we sign a lopsided separation agreement. Once the separation was complete, if we hired any former Flying Eagle employees (even those who had quit many years ago) Epic would be liable to a US $200,000 penalty per employee to be paid to Flying Eagle. If we continued to use the same non proprietary high temperature resin system for mold making, we’d have to pay them a $1 million penalty! There were absolutely no restrictions on the Flying Eagle side – they would be free to do whatever they wanted.

It became clear to us that Flying Eagle was trying to take advantage of a foreign company. They wanted to extort as much money out of us as possible, then put completely unreasonable business restrictions on Epic. They said the only way we’d ever get our property out of their factory was to agree to these ludicrous demands. While we have no intention of stealing their employees or copying their resin system, agreeing to huge penalties could leave us vulnerable to false charges that Flying Eagle may try to level against Epic, in hopes they could collect millions of dollars from us in a Chinese court.

In November, as we attempted to move our manufacturing materials to our new location, our moving truck was stopped at the Flying Eagle factory gate by their security guards. We called the police, and when they arrived we stated that we were simply trying to retrieve our possessions (molds, materials, equipment and finished product – all supplied and/or paid for by Epic.) The police went inside to get Flying Eagle’s side and when they returned, we were told that Epic must pay Flying Eagle RMB 8 million (nearly US $1.2 million) that they claim was owed.

With this ransom put on our property, and after four months of agonizing, time consuming and ultimately fruitless negotiations, we had no choice but to take legal action. We have filed a suit against Flying Eagle in the intermediate level court in Hangzhou, China. We’ll see where this leads; we hope the court system is objective enough to clearly see our charges.

In the meantime, work continues in our new factory. We are already working towards rebuilding some of our molds so that we can maintain production and supply our customers. Fortunately, in anticipation of our move, we have built up our stock of inventory at our headquarters in Charleston, SC; as well as some of our distributors worldwide.

It is unfortunate that this positive move for us has been marred by the complicated scenarios of doing business in a foreign country. We thank you for your support and look forward to bringing you the latest and greatest paddling innovations from our new factory in 2009.

Epic Production Problems With Manufacturer

Charleston-based kayak company sues Chinese manufacturer By Andy Owens

aowens@scbiznews.com

Published Dec. 10, 2008

A Charleston-based company that sells kayaks around the world has filed a lawsuit against its Chinese manufacturer after the manufacturer refused to release Epic Kayaks' proprietary kayak molds and threatened to put the company out of business in China.

Greg Barton, a two-time Olympic gold and bronze medalist and co-owner of Epic Kayaks, said several American companies doing business in China find themselves embroiled in similar conflicts when they try to end a business relationship with a
Chinese manufacturer.

Now, he's concerned about getting a fair hearing in a Chinese court. Barton and his partner hired attorneys overseas and hope, by taking a legal route, that Fuyang-based Flying Eagle will be pressured to come to an agreement.

"Can we get a fair trial in a Chinese court - an American company going against a Chinese company? Even if we do, are we going to be allowed to conduct business in the same area?" Barton said. "They've said they can put us out of business or make it impossible for us to do business in that area."

The dispute began over project management and pricing in July, some three years after Epic moved its production to Fuyang, an industrial city south of Shanghai. Flying Eagle manufacturers the rowing shells that many national teams used at the 2008 Beijing Olympics.

The dispute led Epic to try to dissolve its business relationship with Flying Eagle and find a new factory in Fuyang. But four months after agreeing in principle to a separation agreement, Flying Eagle refused to release Epic's molds and equipment unless it received "hugely inflated, ever-changing fees that, if paid, would sink the company," Epic said in a statement.

Barton has spent the past three months in China trying to negotiate a settlement and has spent nearly half this year dealing with production in China. As the demands of Flying Eagle kept escalating, including clauses that could potentially leave Epic vulnerable to penalties up to $1 million, Barton said it became clear Flying Eagle officials thought they had Epic "over a barrel."

Epic filed a lawsuit in the intermediate level court in Hangzhou rather than agree to pay a "ransom" for its proprietary property and equipment.

"It's definitely going to have a significant impact on our cash flow and hurt us quite a bit," Barton said. "It's already hurt us for several months."

Barton said Epic Kayaks has some inventory in the United States and in Europe, so the company is able to fill some orders. Epic produces high-performance paddles and kayaks and was born out of a desire to bring modern, well-designed racing technology to touring kayaks.

"It's definitely costing some money but not nearly the value of what they're holding on to," Barton said. "Unless we're able to secure, very quickly, the release of our molds and things, we're going to be rebuilding some of those."