How to Do Due Diligence on Chinese Suppliers?
Often I'm asked about how to do due diligence on Chinese Suppliers and how to be sure it's safe to do business in China.
Some of the short questions I'm asked are things like:
- How do I know if it is it safe to do business with this supplier?
- Are there ways to tell if this seller is legit?
- Is it a good factory to do business with?
How to Do Due Diligence on Chinese Suppliers
In today’s blog post I want to offer simple, effective and affordable ways to conduct due diligence.
When we talk about verifying the legitimacy of a factory we are really taking a look at 3 distinct levels of security which fall under the general category of Due Diligence.
Scam Assessment: Is the company real?
If yes, move to level 2:
Corporate Assessment: Who owns the company? Does the seller have a good reputation? Are they financially stable?
If the research findings are positive, we move to level 3:
Quality Assessment: Does the supplier have the ability to product the products I want to buy?
Who Conducts Due Diligence and How Much Does It Cost?
While Scams Assessments, Quality Audits and Corporate Research all fall under the general category of due diligence during the supplier verification phase, they each require radically different skill sets to conduct and are generally offered by different service providers. At each level, there are tasks which you can do on your own, so let’s look at both the “Free do-it-yourself (DIY) options” first.
Free/DIY options for Scam Assessments
Have you heard about SupplierBlackList.com?
www.SupplierBlacklist.com is where buyers are helping each other in their due diligence on Chinese suppliers (and other countries) by basically exposing suppliers that did them wrong.
It’s no secret that most of the online supplier directories like Alibaba and Global Sources make their money from the sellers that list on their directories.
I would argue that Global Sources does a much better vetting process than the other major platforms, but at the end of the day, the suppliers are paying to be listed, so there is a built in conflict of interest.
According to the Supplier Blacklist website:
Online supplier directories receive listing fees and sometimes commissions from the suppliers. As a result, there is little incentive to delist poorly performing suppliers even when buyers are abused.
The legitimacy of so-called “verified supplier” directories is highly debatable. To complicate matters, there is no functional Better Business Bureau or government entity willing to crack down on scams and unethical practices overseas. SupplierBlacklist.com is a free, user-generated platform designed to fill this void in the marketplace assisting you in performing due diligence on Chinese suppliers.
If you have developed a good supplier, keep that secret to yourself. But if your vendor has done you wrong, tell the world about it!
SupplierBlacklist.com tracks suppliers (factories, brokers, trading companies and other forms of sellers and service providers) around the globe who have under-performed in the following areas:
- Poor Quality
- Missed Lead Times
- Compromised Intellectual Property
- Lack of Labor & Environmental Compliance
- Contract Violations
- Scams & Other Unethical Activities
Since SupplierBlacklist.com is free, it is a good place to start your anti-scam research when performing due diligence on Chinese suppliers.
Affordable options for Scam Assessments
A Red Flag Assessment (RFA) is the ideal tool for clients who are buying from Chinese suppliers. The RFA will help you source safe, avoid scams and confirm that the terms of the deal are fair. Visit here to see a sample RFA and learn more about the service/fee structure.
Free/DIY Options For Corporate Assessments
There are some free and do-it-yourself options for corporate assessments. Below are 2 of those options:
- Ask for References
- Visit the Factory
Ask For References!
Most buyers skip this important step. But it doesn’t cost anything to ask for references and follow up with an email or phone call. Suppliers are unlikely to hand out their entire customer list, but if they can’t give you one or two happy clients…run away and find a new supplier!
Visit the Factory
This may be the single most important step in finding the right supplier when doing your due diligence on Chinese suppliers.
Sales people in China are very good at telling you what you want to hear. So visiting the factory can be a real eye opener and while you are there pick up a copy of the business license and verify that the name on the license is the same name as on the purchase contracts and matches the name on the bank account.
If you have a contract with the same company you are paying, it will protect you should something go wrong later.
Get a friend that speaks Chinese and have them plug in the name of the factory into the business registry of their given city in China. In most parts of China you can find out of the business license is still active and who is the legal owner/representative of the business.
Affordable Options For Corporate Assessments
AsiaBridge Law’s Corporate Assessment (CA) service is the ideal tool for clients who want viability into the stability, assets & reputation of a target company.
This report is particularly of value if you are:
- Thinking about entering into a business arrangement with a Chinese company to buy or sell goods.
- Exploring a JV or investment partnership with a Chinese entity.
- Considering litigation against a Chinese company. If a company doesn’t have assets, it’s not worth the effort to fight and win only to remain uncompensated!
It is recommended to conduct the CA on new business partners and have follow up reports done periodically (at least once per year) to expose any changes in the stability, assets and reputation of the target company. Discounts are available for multiple reports if booked in advance.
Visit here to see a sample CA report and learn more about the service/fee structure.
Free/DIY Options For Assessing the Factory’s Quality Systems
Without visiting the production site in person while doing your due diligence on Chinese suppliers, it’s hard to assess if the seller has the means to product the given product you want to buy. Do not just make it one time, but make it over and over again at the quality level, lead time and pricing point you need.
But if you visit the seller in person and get a look at the manufacturing, here are two video tutorials that will teach you what to look for:
Comprehensive 1 hour 7 part video tutorial on how to spot a good factory and avoid the bad ones.
Affordable Options For Assessing the Factory’s Quality Systems
Most simple factory audits (SFA) cover the following:
- Quality System: on-site visit to confirm if there is a QC system in place. If yes, what is the auditor’s general impression of the system?
- Employees and Workforce: An overview of HR policies, management style and workers situation.
Quality Systems Auditing is outside the scope of services at AsiaBridgeLaw.com, but contact our friends at www.SourcingServiceCenter.com and they can make some introductions. For your reference, most SFA’s can be conducted in 1 day and cost around 500 USD if you hire a professional firm.
If the auditor charges a very low fee it probably means they make their money by receiving kickbacks from the factory. So select your auditing firm very carefully.
Related Blog Posts on Quality Auditing
Managing Expectations about Due Diligence in China
Things change fast in China. If key managers leave or the product line is changed, good suppliers can go bad overnight.
So if you are paying for due diligence, ask how “fresh” it is!
In my opinion, substantial due diligence at all three levels is essential when sourcing from China.
Perhaps I am jaded after living here in China for a long time. Maybe sometimes I assume the worst unless proven otherwise.
Remember, do the following...
- Scam Assessment (Level 1): Is the company real?
- Corporate Assessment (Level 2): Who owns the company? Does the seller have a good reputation? Are they financially stable?
- Quality Assessment (Level 3): Does the supplier have the ability to product the products I want to buy?
ABL Blog: Sr. Editor and Primary Content Creator: Michael J. Bellamy
Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses. Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.
A featured presenter on China issues at seminars, trade shows and corporate events across the globe.
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