Day 1278: A startling discovery
TL;DR: Due to serious financial misconduct at the factory that makes the Model 01, keycap sets that we believed were in the mail to you have yet to be shipped. We’re working to resolve the problem, but it may take us a while. The past few weeks have been stressful but Keyboardio is in good shape. Curious about what happened? Read on.
In happier news, the Model 01 is back in stock for immediate shipment at https://shop.keyboard.io
Words we never wanted to hear
"I'm not saying anything else without a lawyer present."
There's basically no situation in which these words indicate that things haven't gone badly, badly wrong.
These are the words someone says after they get caught.
These are the words that our account manager from the factory that makes the Model 01 said at about 6PM on Tuesday, November 27, after we'd finally figured out how much she’d stolen.
A backer update we never expected to write
A month ago, we were pretty sure that this backer update was going to be the last update about the Model 01. We thought we were going to be able to report that all the keycaps you've ordered had been shipped, and that most had already been received. We had thought that we were going to be able to report that our initial contract with our factory had been (mostly) successfully completed with the delivery of the MP7 shipment of keyboards, and that we were in discussions about whether to move production to a new supplier or to continue production with them now that we'd solved most of the manufacturing issues.
This is not that backer update. And we're pretty sure it won't be the last substantial backer update.
This is not a backer update that makes us look good.
This is not a backer update that makes the factory look good.
This is not a backer update that makes our account manager look good.
This is a backer update that has been hard to write.
This is a backer update that includes details we're hesitant to share.
This is a backer update that doesn't include all the details we'd like to share.
The situation we're writing about is not yet resolved. It is unlikely that it will be resolved to the satisfaction of all parties involved. Before writing about this situation, we had to check with our lawyers. There is a chance that writing about this situation may influence the outcome, but we’ve decided that we’re willing to take that risk. From the start, we’ve tried to be as up-front with you as we can about the trials and tribulations about low-volume manufacturing in China. We’re not about to stop now.
Whatever the outcome of this situation, we still expect to honor all of our commitments to you.
Back to the beginning
One of the reasons we chose the factory we ended up using for the Model 01 was that the account manager seemed a little bit more engaged and collaborative than her peers at many of the other factories we met with. (In previous updates, we’ve sometimes referred to her as our “salesperson”, as that was the department she was in, although her role encompassed a lot more than that.) Her English was good. It seemed like she fought hard for what her customers wanted and that she was committed to managing the full production process. She told us that because the factory’s regular project management team didn’t speak English, she’d be our point-person throughout the manufacturing process. She seemed like a little bit of a control freak. It was nice that she was the "Director of Overseas Sales" and seemed to have significant pull inside the organization. In contrast, our sales contact at our second choice factory was so new and had so little internal influence that she couldn't get us even a single customer reference.
What we didn't know at the time was that our account manager had been with the company for only a few months, and that we were her first project with them.
We paid the initial deposit for the tooling and the keyboards directly to the factory and got started.
Right from the beginning, there were problems. The factory started making injection molding tooling before we'd approved the final design. That caused months of delays. The factory outsourced the injection molding to partners without telling us (despite assurances to the contrary in the contract). Small communications issues caused outsized delays. Throughout this process, our account manager kept in constant contact with us, to the point of nightly calls on both weekdays and weekends. We genuinely believed she was working hard on our behalf.
There were occasional "weird" things that felt like they might be lies, but every time we independently verified one of them, it checked out. As time went on, we talked to a lot of folks who’ve been manufacturing hardware in China. It became clear that small companies doing business in China just run into weird problems. However, if you've read our backer updates over the past few years, you will be well aware that we've run into more than our share of weird problems. In the words of one industry veteran we talked to, "every problem you guys have run into is something that happens. But nobody has all the problems."
It was only much later that we would realize how prescient this comment had been.
A new bank account
When it came time to pay for the first mass production run, our account manager sent us an invoice that included bank details that differed from those on the initial invoice. When we asked her about this, she said that the new account belonged to one of the factory's partners.
This is not entirely unheard of, but immediately set off alarm bells. We asked the account manager to confirm in writing that this change was 100% correct and above-board. When she did, Kaia forwarded this confirmation onward by email to the factory owner. The factory owner didn't get back to us and we were already desperately late to get these keyboards shipped. The total amount of the invoice was relatively small compared to the deposit we'd already paid the factory. And Jesse was physically present in China while this was happening. So we paid.
The keyboards shipped out.
We didn't think too much more about that alternate bank account because, well, all the right things appeared to happen.
Controlling the relationship
Unbeknownst to us, our account manager had gotten the factory to ship out our order of keyboards, even though they hadn't received any payment from us. Much later, we learned that she'd lied to the factory owner, telling him that we were broke and needed to sell that batch of keyboards before we could afford to pay for them. She held onto our money for a while and then paid it out to the factory.
This was how she started to poison the factory against us.
At around the same time, she started telling us about how poorly managed the factory was, but that she was running interference, solving problems on our behalf. At one point she told us about how gullible the factory owner was and that he got taken advantage of by his workers all the time.
If this were a novel, the foreshadowing would have been a little heavy-handed.
Over time, she told us lies about serious moral failings on the part of everybody at the factory we might approach to talk about the problems we were having. At the time, the things she said sounded believable. Much later, we'd realize that they were part of a plan to ensure that she was the trusted gatekeeper for all interactions between us and the factory.
When it came time to ship the second mass-production run of keyboards, Jesse had a meeting with our account manager and the factory owner in the factory's conference room. The first part of the meeting was in Chinese and then the factory owner had another commitment. After he left, the account manager told us that the project had been dragging out and the factory was out of pocket for raw materials, many of which had increased in price since we signed the contract. She said that the factory owner demanded we pay a little more up front and that this would reduce the amount we needed to pay for the remainder of the shipment. We're nice people who wanted to have a good relationship with our factory. And the money was going to the factory eventually. We knew that the bit about raw materials getting more expensive was true—China’s been on a major anti-pollution kick, which has caused a lot of prices to spike. All in all, it felt a little bit funny, but we agreed.
You can probably guess most of what happened next. The account manager held onto all of our money for as long as she possibly could. When we started to get frantic about shipping, she paid the factory owner just enough money to convince him to release the shipment. When we met a couple weeks ago, the factory owner said that she paid this money in Chinese RMB. When he expressed concern about this, since we'd agreed to pay in US Dollars, she told him that, again, we were broke. She said that she was loaning us the money for this shipment, so we could try to recover our business.
Similar situations played out for subsequent shipments of keyboards. To us, the factory seemed moderately incompetent and disorganized. To the factory, we seemed like a small-time deadbeat client who might never make good on their promises to pay.
Over the course of 2017, Jesse made several extended trips to Shenzhen to work with the factory to solve a variety of design, manufacturing, and supply chain issues. When he was on the ground at the factory, issues got solved far faster, but that itself wasn’t a huge red flag. Our relationship with the account manager seemed pretty good.Before one of the trips, she asked if Jesse could bring American prenatal vitamins, as she and her husband were trying to have a baby. She even commissioned a portrait of our son from an artist at the famous Dafen Artist Village in Shenzhen. (Perhaps unsurprisingly, while she sent us photos of the portrait, she never sent the actual portrait.)
Sometime in 2018, the account manager started telling us that she was planning to quit working for the factory once our project was over. She said that she'd actually started a factory with some partners and that they were already making mice and planned to expand to keyboards in the near future. She even tried to get us interested in investing in her new factory.
Pushing things too far
Keyboard shipments in 2018 happened. They weren't on time. They were not without issues. But they happened. Well, up until we got to the MP6 shipment, which was supposed to happen at the end of August. The account manager told us that due to scheduling issues, they wouldn't start assembly until early September. And then things kept dragging out by days and weeks. Finally in the middle of October, the account manager told us that we would need to prepay for MP6 and MP7 or the factory would refuse to complete the assembly.
Jesse actually came close to getting on a plane at this point, but we had some unmoveable family commitments and already had a trip to Shenzhen on the books in December to talk to factories about our next product.
We figured that this was part of a ploy on the part of the factory to get us to break the contract, so they could quit. Jesse told the account manager this. She swore that she would not quit her job at the factory until this project was successfully delivered.
We were upset. This was a straight up violation of the contract and of normal standards of business. The account manager told us that the factory was having cashflow issues and that if we didn't prepay, there was no way we were getting our keyboards. Since we had over 100 customers who'd bought these keyboards when we'd been promising that they'd ship in August or September, we bit the bullet and agreed to pay for MP6 before delivery. MP7 would complete our order with the factory. We said we couldn't possibly pay in full, as we'd have zero leverage if the factory failed to deliver. The account manager took a day to "negotiate" with the factory and said she'd gotten them to agree to accept half of the remaining amount due as a gesture of good faith. She wrote into the payment agreement that the factory would return the payments if they did not hit the committed delivery dates.
When we paid this money, we knew the MP6 keyboards existed—we'd already had our third-party quality control agent check both the assembly line and the assembled keyboards. On October 26th or so, our account manager committed to get the keyboards shipped out ASAP. That should mean that keyboards arrive in Hong Kong the same day they were shipped. More typically, that means that keyboards will arrive at our warehouse in Hong Kong within 48-72 hours. Three days later, they still weren't there.
Our account manager said that she was in Malaysia and would dig into it when she was back in town in a couple days. She told us that she'd visited the trucking company and that they'd agreed to expedite our shipment. Two days later, the keyboards still hadn't arrived.
We were flipping out. We had daily calls with our account manager explaining just how bad it would be if these keyboards didn't arrive at our warehouse before Black Friday. She told us that she understood entirely and that she promised that the factory would compensate us USD1000 per day for every day they were late, going all the way back to October.
Over the course of 3 weeks, excuses included:
- The factory has not paid their bill with the shipping agent, so all of the goods shipped by the factory have been impounded
- Two of the factory’s biggest customers didn’t pay their bills, so the factory hasn’t met their contractual minimums and the shipping agent won’t do anything until this is resolved
- The shipping agent has agreed to ship your keyboards, but they're fully booked up today
- Your keyboards are on a truck! The truck is in Hong Kong. But it will arrive after the warehouse closes. (In this case, our account manager called the warehouse and got their staff to wait around for a couple hours after work.)
- The factory has taken the keyboards back from the trucking agent because they're incompetent. They need to redo the customs paperwork and then send them to a new trucking company.
- The new trucking company hadn't finalized their contract with the factory so refused to send the goods to Hong Kong
- The new trucking company has handed the goods off to their Hong Kong partner. They will be delivered tomorrow morning.
A conversation with the factory owner
"Tomorrow morning" was, by now, the day before Thanksgiving. This was beyond the pale. We were absolutely livid. It was clear that something was very wrong, though we couldn’t begin to guess at the magnitude of the problem. We sent our on-the-ground manufacturing consultant to the factory to meet with the factory owner, without our account manager present. The factory owner was angry, too. The conversation went something like this:
"Why the heck haven't Keyboardio's keyboards been delivered?"
“I've told the account manager over and over: Those keyboards will never leave our warehouse before Keyboardio pays for them.”
"But Keyboardio has paid for them. Here are the wire transfer confirmations."
“Well, we haven't received any of the last four payments.”
“What about the 5000 sets of keycaps Keyboardio ordered?”
‘You mean the 2700 sets they ordered? They’re ready, as soon as they pay for them…”
"It sounds like there's a big problem."
“Yes, it sounds like there's a big problem. We've not received at least USD30,000 that Keyboardio think they've paid.”
Our manufacturing consultant reported all of this to us while we were in the middle of hosting Thanksgiving dinner.
He also shared an additional anecdote with us: The account manager had apparently been notorious for borrowing money (up to around USD1000 at a time) from coworkers and had been spotty about paying them back on time. The problem had become so bad that the factory owner had forbidden his staff from loaning her money. (To this day, she still owes at least one of them.)
36 hours later, Jesse was on the way to the airport, en route to Shenzhen.
Unravelling the scam
Monday morning, Jesse and our manufacturing consultant were due to meet with the factory owner, but he wasn't answering his phone. The account manager told us that she was unavailable until the afternoon, as she had to go visit the factory working making replacements for the keycaps that “got lost in the mail” again. (More on that later.)
After lunch, Jesse and the manufacturing consultant showed up at the factory to find the factory owner in the middle of a heated conversation. The manufacturing consultant told Jesse that they were discussing commission. The account manager was asserting that they'd had an oral agreement about her commission (as a percentage of factory profit.)
That's when we learned that she was no longer an employee of the factory. Remember how we said she’d promised not to quit until this project was finished? That was a lie. It turns out she'd quit 18 months prior. The factory had allowed her to keep our project as an independent "sales agent." This, at least, is not uncommon when doing business in China. What did surprise us was that the account manager had kept such tight control of our account that other people at the factory were afraid of angering her by speaking to us directly. The last time Jesse had been in Shenzhen, the factory owner had tried (unbeknownst to us) to take Jesse to lunch. Our account manager had refused to allow it. Folks at the factory said that they were worried that any direct contact with us would be seen as trying to steal her client.
During the first day of meetings, the account manager agreed to pay the remainder due to ship the MP6 keyboards on Tuesday morning, and that Jesse could come to the factory on Wednesday morning to watch them depart for Hong Kong on a truck.
Throughout the first day of meetings, all of the discussion of fraud and embezzlement was in Chinese. Eventually, the account manager left, supposedly to go arrange payment.
When Jesse discussed this with the factory team with the account manager out of the room, they told him that they were trying to allow her to save face, as they thought this was the most likely way to recover the stolen money.
Lies all the way down
On Tuesday morning, Jesse and our manufacturing consultant sat down with the factory's management team to discuss what had really happened and what needed to happen going forward. The first thing they did was to compare, in detail, what we'd paid and what the factory had received. The discrepancy wasn't USD30,000. It was over USD100,000.
We started looking at how the number could have gotten so big.
Part of it was the amounts the account manager had told us we needed to prepay, which she pocketed.
Part of it was the order for 5000 sets of keycaps we'd placed in January (along with shipping costs for 2700 sets that the factory was supposed to send directly to you.) As it turned out, she'd doctored the invoices she sent to us and to the factory. She'd dramatically inflated the unit cost of the keycaps and associated packaging on the invoice presented to us. At the same time, she'd halved the size of the order she sent to the factory. And those keycaps that the factory shipped out in August and October? They simply never existed. Total fabrication. At this point, Jesse took a break to walk into the factory's warehouse, where he found pallets of thousands of QWERTY, Unpainted, and Black keycap sets literally gathering dust. They'd been sitting there for months. The factory said they needed to get paid before they'd release the keycaps.
And, it turns out, part of the discrepancy was due to the fact that the account manager had negotiated aggressive discounts and price breaks on "our" behalf and not passed them on to us.
When we asked if our account manager had done this to any of her other clients, the factory owner told us that we were the only customer she’d brought in before she’d quit.
Having come to understand the scale of the fraud, we told the factory that we were worried that she might try to disappear. We asked if someone at the factory could call her husband to see if he could tell us what was going on. That resulted in some pretty confused looks from the factory team.
“She’s single. She’s never been married.”
It turns out she’d lied about that, too.
At this point, we were pretty sure that nobody was ever going to see our account manager again. Boy were we surprised when the account manager agreed to show up at the factory to continue our discussions that afternoon.
You're probably asking yourself "why didn't they call the police?" Jesse was asking himself the same thing. When he asked the factory team the same question, their response was both understandable and somewhat unsatisfying: "It's not enough money to destroy her life over. We think we can solve this without the police."
It all got pretty weird. The factory owner posted guards at the factory's front gate to make sure that she didn't simply walk out and disappear. At one point, Jesse found himself standing in a dark stairwell to make sure she didn't sneak out the back when she said she had to go to the toilet.
Tuesday afternoon's discussions were...somewhat more frank. Jesse was very clear with the account manager that he knew she had been lying about everything from the beginning and that he did not believe she still had the money. He asked her to prove it by showing bank balances to him or the team at the factory. She claimed that her Hong Kong account had been "blocked" due to an issue with the bank. Astonishingly, most of the people in the room seemed to take both this explanation and the claim that she was withholding the money as a bargaining tactic about her commission at face value.
A couple times during the afternoon, while arguing with the factory owner, the account manager called a friend or compatriot of some kind to get "advice" about the negotiation.
(In the end, MP6 did ship: she paid about half of the required amount on Wednesday, half on Thursday, the truck shipped out on Thursday afternoon, and the keyboards got to the warehouse on Friday afternoon. As of this writing, they’re currently in stock at https://shop.keyboard.io/)
Wednesday morning, Jesse met with our new lawyer to discuss our options. He told her that we'd like to resolve the situation by making sure that the theft was an internal matter between the factory and their former employee and that we'd like to maintain good relations with the factory. The lawyer explained that we could pursue both civil and criminal options, but that the civil option was more likely to lead to a positive resolution, wherein the money was recovered and our relationship with the factory was preserved. She said that the criminal penalty for what our account manager had done ranged from ten years to life in prison. She said that as soon as we called the police, the account manager would be unable to travel internationally or to buy plane or train tickets. More importantly, she said that once the police were involved, they'd have full control of the investigation and that there'd be very little we could do to get an outcome we wanted. She did agree that it was our ultimate fallback and that it was important that the account manager be aware of how severe the penalties for her actions are.
Wednesday afternoon, Jesse contacted our wood supplier to make sure that he didn’t engage with our account manager. When Jesse told him a bit about what was going on, he revealed that a couple months back, our account manager had called him up to say that she was travelling internationally, had lost her wallet and needed him to loan her some money so that she could get a flight home. When Jesse asked if he’d paid, the wood supplier said that he told her that it was wildly inappropriate to be asking a suppliers for personal loans, and that she ought to ask a close friend or family member instead. He may be the only person in this whole story who didn’t get conned by our account manager.
Thursday, Jesse, our lawyer, the factory owner, and the account manager sat down at the factory to hash out a new legal agreement between all the parties. Everyone agreed that we had paid everything we thought we had. The account manager confirmed in writing that she had received all the money we sent and agreed to repay it to the factory. Everyone agreed about the products (and quantities) we've ordered. We agreed to new delivery dates for everything that hasn't yet shipped. The factory agreed in writing that we own all the tooling we've paid for and that they will make it available for us to move to another factory if we want to.
The meeting didn't come to quite the resolution we'd hoped it would, but it turned out dramatically better than it might have.
Our lawyer has advised us not to go into more detail about the rest of the agreement or the shipping and delivery schedule we agreed to. At this point, we need to let things play out a bit more. We expect to have an update on keycaps and MP7 by mid-January at latest.
A new beginning
Saturday, Jesse and our manufacturing consultant sat down with the factory team. We knew our account manager had tightly controlled all information about the Model 01, so we wanted to make sure they had all the details they'd need to finish the work they've agreed to.
What we found...probably shouldn't have shocked us. In August, we'd sent 20 defective circuit boards back to our account manager at the factory, so she could give them to the engineering team to study and improve future production runs. In September, she'd confirmed receipt and said that the engineering team had been studying the failures. Nobody at the factory had heard anything about this. Jesse went strolling through the warehouse to find where everything from the account manager's office had been shelved. There was our box of defective circuit boards. Unopened. Jesse physically handed them to the manager of the R&D department.
We talked about the kinds of problems we'd seen in the field with the Model 01. Jesse was trying to reassure the factory when he told them that we weren't going to hold them responsible for the 100 defective wooden enclosures from the first mass production run, and that we understood that the problems for that, at least, mostly rested with the original supplier. This all had the opposite effect of what Jesse had intended. It turns out that the account manager had never bothered to tell the factory management about the defective enclosures, either.
It became clear that just about every conversation she’d reported having with the factory on our behalf over the past 18 months had been a total fabrication.
Finally we got to the point of talking about the future. Jesse explained that a few weeks before, Keyboardio had been dead-set on moving production to a new factory as soon as the keyboards we'd paid for were shipped. Now that we had a better understanding of what's going on, he said, we're happy to treat this as an opportunity to reboot the relationship. So long as the new agreement is honored and things ship on schedule, we effectively have changed factories.
Our account manager was a poor project manager and a poor salesperson, but she was a pretty skilled con-artist. It's not 100% clear if it would have protected us in this instance, but we've now learned (the hard way) that one should never pay an invoice from a Chinese company unless it's been stamped with the company's official "chop" or seal.
Going forward, our new account manager at the factory has asked that all correspondence be CC’ed to the factory owner, the factory's CFO, her, the junior sales assistant, Jesse, Kaia, and our manufacturing consultant. Similarly, when discussing things on WeChat, we should use a group chat where everybody sees everything. Most importantly (to everybody), future payments, if any, should only ever be to the factory's primary bank account. And that we never again pay an un-stamped invoice.
Where we are today
So, that's most of what's new with us.
Is this catastrophically bad news? Yes and no.
On the one hand, there's a lot of money missing. We think there's a decent chance that money has vanished never to be seen again. Products that we said we sent you...simply never existed. We're genuinely sorry about that.
And of course it never feels good to realize that you got scammed.
On the other hand, Kaia pointed out to Jesse the other night that this actually makes her more confident about our ability to manufacture products in China in the future. When that industry veteran told us that all of these problems never happen to the same company, it turns out that they were right. All those uncontrollably crazy problems and delays we had? While many of them had a grain of truth, the vast majority of the issues we thought we had.. simply didn't exist. And, indeed, when we’ve worked directly with other suppliers for replacement wooden enclosures, travel cases for the Model 01, and on other bits and pieces, everything has gone a good deal more smoothly.
We're hopeful that we have a stronger, better relationship with the factory than we've had in the past. If worst happens and the new agreement with the factory falls apart, we're still potentially out a lot of money, but it's not enough money to kill the company. The part of the agreement that says we own all the tooling for the Model 01 has the force of law. (And yes, it's stamped with the corporate seal.) We are, of course, hoping that everything works out with our current factory, but if we need to, we can to move the tooling to a new factory, and to produce and ship your keycaps and more Model 01s.
A bit of good news
Oh. We do have a little bit of good news. The company that's making the Model 01 travel cases finished the second production run of cases a couple weeks early. We reported to them that one case from the first production run had a stitching error, so they threw in 10 extra cases, just in case any other issues get discovered. This second production run of travel cases arrived at our Hong Kong warehouse on Tuesday. On Thursday, we asked the warehouse to ship out cases to every Kickstarter backer who’s filled out the backer survey. We expect most of them to arrive on your doorsteps before the end of 2018. In the coming weeks, we'll make cases available for sale on https://shop.keyboard.io.
We also have several hundred Model 01s in stock at our warehouse in Hong Kong. Orders should ship out within 2 business days.
Before commenting on this update
As we wrote at the start of this update, it contains some sensitive information and we're a little hesitant about posting it. In order to be able to post this publicly, we've got to set a few ground rules.
It's perfectly ok to post comments telling us that we were naive and too trusting. We're well aware.
Please do NOT post any comments or speculation about the identity of our account manager or factory or their motivations. Doing so may limit our ability to share details with you in the future. And we really want to be able to share details with you in the future.
<3 Jesse + Kaia