China Trends (Part 1): How to verify the supplier is stable? Prudent planning; good relationships at risk of going bad.

How to verify the supplier is stable? Good relationships at risk of going bad.
How to verify the supplier is stable? Good relationships at risk of going bad. Corporate Assessment: When to conduct due diligence on a Chinese company?

China Trends (Part 1): Increased chance your “good supplier” will turn bad in the next 12 months. How to verify if the supplier is stable or not?

Why now?
Why the need to verify the supplier is stable!

Background:

Beijing continues to aggressively pivot away from an economy based on manufacturing-for-export.

How will China’s move towards a consumer-oriented economy
impact its exports?

In simple terms, for consumerism to work in China, it needs a middle class with disposable income in their pockets.  Beijing feels the best way to get there is to continue to raise the minimum wage, year after year.  It’s working … consumption is on the rise and if the US-China trade war ever cools down, US exporters will benefit from a rising Chinese middle-class.

But if you are in the China sourcing game, the sad fact is that China is no longer a low-cost manufacturing base for a growing list of production categories.  Faced with increasing costs of manufacturing, Chinese factories essentially have 4 options:

  • Find ways be more efficient
  • Pass the increased costs on down the supply chain
  • Move out of China
  • Close up shop

The Trump tariffs exacerbate the situation.  Increasing efficiency on the production line or passing costs to somebody else are easier said than done.  As a result, I am seeing a substantial increase in the number of long-term suppliers who suddenly decide to move or close.   

Ask yourself what would happen if your supplier decides to close up shop.

Do you think they would give you advanced notice so as not to impact your supply chain? Or would they would keep it a secret and try to extract as much money out of your pocket as possible before they close the doors?

Sadly, after 20 years in China, it’s my opinion the vast majority of suppliers fall into the second group.  Worse is the fact that buyers are getting screwed in the process because they failed to put some simple/affordable protective measures in place.

Corporate Assessment: When to conduct due diligence on a Chinese company?

As suppliers (especially small trading companies) can disappear on short notice, it may be wise to conduct a corporate assessment for all new suppliers and do a re-evaluation each year for each active supplier.  Luckily it does not cost a lot to hire a professional auditor.  And if you are on a tight budget, this article will even show you how to conduct a simple corporate assessment on your own.  But first let’s review the paid option.

Here are some highlights from https://www.asiabridgelaw.com/corporate-assessment-ca-stability-assets-reputation-chinese-company/

The Corporate Assessment (CA) is the idea tool for clients who want viability into the stability, assets & reputation of a target company. The subject company will not know the assessment is taking place.

What does the Corporate Assessment include?

A typical Corporate Assessment (CA) may offer insight into the following financial and administrative details of the target company:

  • Total Assets
  • Total Liabilities
  • Total Owner’s Interest
  • Income
  • Profit
  • Taxes Paid
  • Registered Capital
  • Corporate Status
  • Number & Type of Employees
  • Management (Names & Positions)
  • Name of Legal Representative
  • Shareholders & Shares
  • Related Companies
  • Sales & Purchasing Data
  • Litigation Records
  • Media Coverage & Reputation
  • Official Name of Company
  • Date of Establishment
    ....& Registration Number
  • Registered Address
  • Administrative Address
  • Ownership of Physical
    ....Infrastructure
  • Type of Entity
  • Duration of Operations
  • Business Scope
  • History of changes to registration
    ....& business scope
  • Registered Trademarks & Patents
  • Key Financial Ratios such as
      • Return on net assets (%)
      • Return on total assets (%)
      • Net profit margin (%)

Download a sample Due Diligence report: CA SAR Sample (PDF)

How much does due diligence cost?

Much less than the cost of a trip to China! Visit the rate sheet for latest pricing. Flat fee, all inclusive, payable in any currency at the day’s exchange rate.

If you are unable to hire professional due diligence, here is an article that will show a step-by-step method to conduct a simple corporate assessment on your own:

How to Do Due Diligence on Chinese Suppliers?

Coming up next:

Learn how to conduct a Red Flag Assessment by reading our next blog post:

China Trends (Part 2): Increase chance your “good supplier” will turn bad in the next 12 months.  Learn how to spot the red flags before it is too late.

Additional Resources

  1. More whitepapers & video tutorials on related subjects can be found https://www.asiabridgelaw.com/resources/
  2. 10 short videos covering 10 Common Mistakes when conducting business in China.
INSIDERS REPORT & RATE SHEET
China Sourcing: 10 Common Mistakes

 

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About the Author: Michael J. Bellamy

About the Author: 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.

Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/

Mike is the author of “The Essential Reference Guide to China Sourcing
(available on Amazon).

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