Very few importers make an effort to know the exact financial standing of their Chinese suppliers. China is viewed as a fundamentally opaque country, where “nobody knows who the real boss is anyway”. For example, meeting a representative of a given company, and then sending P/Os and payments in the name of a different company, is quite frequent.
I am not saying it is a mistake. It is perfectly fine for small purchases, especially if quality is confirmed before payment. But it is NOT advised when the purchaser is betting a lot (i.e. a lot of his money, or his own image with his customers) on a supplier’s reliability.
I just found a post entitled Let me tell you about China due diligence, written on the China Law Blog 2 years ago. It relates an example that perfectly drives the point home:
US company goes to China and meets with company there for manufacturing product. The two parties sign an agreement and US company sends over a large sum of money to build the tooling. Chinese company then says another large sum is needed to be ready to go as soon as the tooling is complete. Months pass. Nothing. More months pass. Nothing. It has now been a year and still nothing.
US Company contacts my firm and wants to know about pursuing litigation against this Chinese manufacturer to recover the money paid. We determine US company has a very strong case, but suggest we first investigate the Chinese company to determine whether it has sufficient assets to pursue. We conduct a fast and cheap investigation and get a comprehensive report on the Chinese company. From this report we learn the following:
- Company is not a manufacturer. It is a trader, with a tiny, rented office.
- Company does not even have an export license. In other words, it gets its products from manufacturers and then has to bring on another company to ship them. It is just a middle-person.
- Its only asset is a small amount of inventory, which it may or may not own.
In this case, the importer has lost everything. Ordering a simple background check before wiring the cash would have been enough to surface these issues.
It would have been obvious that the owner of a small Chinese company (with no asset) that receives a large sum of money will seriously consider keeping the cash for himself. What is the risk if he does so and the buyer sues him? Fold his operations and start something else. It happens!