Due Diligence = Sound Sleep

Related entries: Business Issues, General, Risk & Law, Services

Big companies generally measure the potential worth of the China market in millions or billions. Even smaller companies can manage impressive figures in terms of sales or savings. But it is surprising how some businesspeople approach the market and the issue of risk. Some recent conversations bring this into sharp focus:

    • A foreign-managed agency in China was asked to help find distributors for some equipment. They sent off samples in the hope of getting a deal, but had not checked on the product’s IP status. They (and their horrified client) were therefore surprised when they heard that the recipient of the equipment has themselves applied for a patent for the product in China, and were offering the original “owner” a license for the technology! It is wise to register IP early, to check out potential partners, and to ensure that any samples or technical disclosures are given under clear contract terms.

    • A businessman called up to ask about sourcing telecoms and IT components from China. “Where should I go, and who should I see? I am leaving in a few days”. No research. Nothing. He was just planning to turn up and start buying. With a “flexible” approach like that, anything could happen. Much of it not good. I suggested he wait, do some research (whether online at Alibaba and the like, or using a professional), plan to attend a trade show, and take it a step at a time. I wish him luck. He will need it.

    • Another company had been happily buying construction supplies from a supposed manufacturer in China. Everything was fine until the supplier had a relationship breakdown with the actual manufacturer and, unbeknown to the end user, switched to a new source. Unfortunately the new product had quality problems (with safety implications), and the end user was tens of thousands of pounds out of pocket – and in need of re-supply. Basic due diligence at the outset would have made it clear whether the supplier was indeed the manufacturer, while pre-shipment inspections would have caught the inferior product before it became a problem.

    • It is not just small companies. A major international trading company fell into the relationship trap, believing that their smooth business in the past would continue in the future. However, after a change in management, the supplier decided to hang on to several million dollars in advance payment without delivering the contracted goods. Recovery is now under way. Regular evaluation of suppliers and partners, is a good idea. Full pre-payment is generally not. Nor is reliance on one key contact who may disappear.

As Andrew Hupert at Diligence China puts is in a recent article:

    “… a lot of the westerners I talk with in China have horror stories about being ripped off, losing money and/or dealing with partners who have inexplicably become uncooperative. These unhappy endings invariably started with the western partner bending over backwards to find partners that wouldn’t pass due-diligence muster in international business centers…You would be wise to pay a little more to find a partner or consultant who understands international best practices when you are entering the China market.”

In a clear (if not subtle!) message, he suggests: “Don’t check your brains at the China border!”. Quite!

In conclusion, there are a range of low-cost services that, combined with a sensible approach and a bit of good advice, can save businesses a lot of time, pain and money. Here are just a few of them:

    • Company analysis: From a few hundred dollars these reports can confirm registration, licenses, legal representatives, registered (and actual) locations, financial details, credit and legal checks, and other details that may be required. They can also provide useful information for use in negotiations. One client recently benefited from finding out the target supplier had high inventories that it needed to move. They were able to negotiate better terms as a result. Another one, planning some M&A, found that the target company had basically been locked out of its main joint venture. A useful thing to know!

    • Inspections: A few hundred dollars spent on in-process or pre-shipment inspections can save time and money later on. Inspections also put suppliers on notice that they are being monitored. In combination with sensible payment terms they provide an excellent, low-cost risk management tool.

    • Personal Due diligence: People do not always tell the truth. No, really! Hiring staff into a fast-moving business is not easy, but neither is dealing with fraud and other messy problems. Better to spend a few hundred dollars to check the new “asset” is who he says he is, and really has the qualifications and experience he claims than to count the cost later.

Help is at hand. For those that want to sleep well…

5 Responses to “Due Diligence = Sound Sleep”

  1. ron efron Says:

    Do you have recomendation of companies that can provide Personal Due diligence serices for basic level staff? I know this is available for top management positions, but it is very expensive and not worth spending so much money for entry level staff.
    Thanks. ron.

  2. Jeremy Gordon Says:

    Ron, Thanks for that. We can provide this service at all levels of staff. Basic services would include the following, and can be done quickly and a low cost:

    – ID Number Verification: Verifies ID No., DOB, Sex, and the Names of Relatives.

    – Criminal Records Search: Provides Criminal Punishment Records, Security Administrative Punishment Records, and Re-education through Labor Records.

    – Education Verification: Verifies DOB, Attendance, Majors, Degrees earned and dates.

    – Employment Verification: Verifies Date of Employment, Job Title, Salary, Reason for Leaving, Eligibility for Rehire, Overall Job Performance.

    – Professional Reference Check: Reviews information regarding applicant’s capacity to perform in the proposed position.

    – Transcript: Provides original record transcript.

  3. Archive » The Poisonous Supply Chain| China Business Blog Says:

    […] ill anyone who has a long chain of unknown and untested suppliers. As I have said before, Due Diligence = Sound Sleep. See new sources: Shake-up for China’s food industry By Mure Di […]

  4. Archive » Made In China (With Risk)| China Business Blog Says:

    […] fety standards , companies sourcing from China can take steps of their own to manage risk. Due diligence, testing, inspections – and regular reviews – should be part of any sourcing pla […]

  5. Archive » Briefly…Top Ten Tweets (From Obamao, Experts & Oxymorons To Emerged Economies, Consumer Wealth & A Blushing Barbie)| China Business Blog Says:

    […] Comment: Confidence can become more and more fragile as a deal gets closer. Often we are asked to do due diligence at the last minute. While some checks can be done quickly, this is not the best approach. Early due diligence can not only limit risk, it can also provide crucial business intelligence to support negotiations. Do it early, and sleep well! See more here. […]

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