Due Diligence and Visiting a Factory Overseas
The trading portals out there, Alibaba and others, have led to a vast surge in small businesses and individuals contacting overseas suppliers to procure goods. Go ahead and search "injection molding China" on Alibaba and you get 800+ results. It's remarkable how the world shrinks through websites like this. But unfortunately, they also have a tendency to give the false impression that the rest of the product sourcing process is as simple as contacting someone online. How easy?! I email someone that says they have a factory that can make what I want. I tell them what I want. They ask for money. I send my money over. And...
ChinaLawBlog, which routinely posts useful cautionary tales about why his clients have to come his firm for help, recently wrote a post on the importance of due diligence. One of his clients lost a year and a large sum of money to an overseas trader that posed as a manufacturer, did not even have an export license, and had little inventory.
In product sourcing, due diligence goes beyond a credit and reference check. If you're going to depend on an overseas vendor to create your product, a product that is to represent your company and drive sales, you've got to know they can do the job right. Visiting the factory or having someone you trust on the ground there to visit the factory is necessary. Not only can you assure yourself that the deal isn't a scam, you can perform key inspections to verify that the factory has the capabilities in place to serve you as well as meet the owner and managers face to face to establish the relationship. It's an investment in time and money that pales in comparison to trying to seek legal recourse, if you even have the opportunity. This goes for most countries, not just those from which you hear the most warnings about. If you are going to be placing production orders in a size that will be significant to your company, visiting your partner's factory shouldn't be left out of the due diligence process. It's also a chance to travel, see another way of life, and try some incredible food (if you're adventurous). Whatever your impetus, someone needs to perform this step for your business.
Amen, brother. I wrote on this particular one because there was enough at stake to warrant legal pursuit. You would not believe how many contacts we get from companies who have purchased much smaller dollar amounts of goods and never received a thing. With these companies, there is usually little to nothing we can do that would make economic sense, beyond telling them to try to retain a Chinese lawyer in the usually small, out of the way city the "manufacturer" purported to be located.
Posted by: China Law Blog | February 14, 2007 at 06:25 AM
ChinaLawBlog,
In your blog, credit and reference checks were mentioned as a good strategy for weeding out bad partners. In sourcing situations, we advocate factory visits. Are they any other steps, from a legal perspective, you would recommend to those out there looking to operate with a business partner in China?
Posted by: Audall | February 18, 2007 at 06:22 PM
Scams happen in many countries. I am a Chinese. I agree that visiting the factory is one good way to ensure the credit and quality of the potential partner in China. The Alibaba website's Chinese version provide CREDIT CERTIFICATE for suppliers in China. Buyers will be much safter to do business with those suppliers with that certificate. One recommendation, when you want to do business from online partnters, find a Chinese translator to help you finish the business on Alibaba Chinese version.
Posted by: pengcheng qu | February 23, 2007 at 06:09 AM
Pengcheng,
Alibaba is making an effort to make the process safer. A few months back, I saw an online survey on the site, completed by it's members, which indicated that the number one issue between buyers and sellers on the site was trust. Quality was second. The credit certificate will help, but they still have a ways to go.
Posted by: Audall | February 25, 2007 at 07:17 PM