If you are about to select one Chinese supplier, and you know you will be tied to them for the foreseeable future, it is in your interest to spend some time and money to vet them.
Here are a couple of examples:
- A company is about to work with a manufacturer on a complex, custom-developed, product. If things go well, production will start in 4-6 months. Finding out many issues later will mean very serious delays.
- An end customer has to approve the facility or it has to be certified to a certain standard that is difficult to achieve. Approving a new factory later on is expensive and time-consuming.
(Obviously, if you can keep a backup factory on the side, it helps a lot. But it is not always realistic when heavy development work is necessary.)
Let’s go through the main points you will want to check before choosing your manufacturing partner.
1. Financial health, capital, debt, partners
Here you want to go deeper than in part 1 (background check).
Who is the owner? Are there several partners? Does the “boss” you were introduced to have as much power as he seems?
Is the company I am in contact with a manufacturer, or a trading company?
Have they been losing money for a long time? Maybe the boss will run away soon?
Is there a chance they accumulated debt with their suppliers over time (even if that doesn’t show up on the books)? In that case, how will they put pressure on their suppliers to improve quality and on-time delivery?
If it’s a recent company, was all their declared capital transferred? Or is there a risk that they close the company because they can’t contribute all the capital?
These are the types of questions you might have before partnering with a Chinese company.
Getting a Chinese business’ financials has gotten much harder in recent years. Specialized firms can still get their hands on this information without the target company being aware of it, but only in certain cities.
2. Respect of regulations
Do they have any potentially polluting process such as paint, plating, anodizing, e-coating, etc.? Do they consume a high amount of power (e.g. die casting)? Do they have the right licences (if applicable), and is there a risk they get shut down soon by the government?
Have they paid the staff social insurance? Have they declared a profit, or done a good part of their business ‘under the table’?
Again, not easy to check without the manufacturer being aware of it. But you can ask for the tax return and the licence documents (if applicable). If they don’t show it to you, are they really going to be your partner?
3. Other important indicators
The supplier gave you a lot of information in part 2 (questions before the first visit). Go on site and check it!
Is there something that isn’t regularly misrepresented in China? I am not sure:
- A piece of land that is supposed to be owned by the supplier might be reserved for residential use, or might be owned by another company, or both.
- The working hours records are very often manipulated.
- A government inspector who shows the thumbs up might be an actor hired for the day.
Anything can be misrepresented!!
Something physical is harder to fake:
- If you come three times and you see that the packing department handles many more pieces than final assembly, you can conclude there is a lot of subcontracting. Will your productions be subcontracted too?
- If the star engineer whom you really like doesn’t seem to have a physical desk in the office, and if he doesn’t know the name of the assistants in his department, he is probably not a regular employee. Will he be around when they have to work on your project?
Fortunately, not everything you will find is negative. I am giving examples about frequent situations that you really want to notice early on.
As you an see, the Chinese business environment is not transparent. Some people have been arrested simply for doing investigations of companies/businesses in China. So there are limits to what information can be gathered and verified. But that’s not a reason for skipping the due diligence phase entirely!