A lawyer friend of mine emailed me a link the other day that had been sent to him by one of his clients. The link was to an article written nearly two years ago, China Supplier Vetting, Part 1: Background Checks, and he wanted my opinion on it.
I responded by telling my friend that the international manufacturing lawyers at my firm have many times worked with the person who wrote the article, Renaud Anjoran, and so I just assumed it was good, and it was. In the article, Renaud nicely sets out the seven main ways Chinese suppliers cheat foreign buyers, sorted into two categories:
a. Bad behavior
- Disappearing after a deposit or a fee for samples is wired.
- Price increases after a deposit is transferred.
- Price increases from one order to the next without relation to production cost increases.
- Lack of respect for IP rights (selling the buyer’s design to other customers).
- Lack of transparency (subcontracting outside of an approved facility, changing a component without notice, etc.).
b. Lack of competency/experience
- Lack of reliability: late deliveries, inconsistent communication.
- Inability/unwillingness to reach the desired quality standard.
Renaud then asks “How can you tell if a given supplier will cheat you? Not by asking them….” Fortunately he also provides a slew of very good due diligence tips for ferreting out China factory cheaters [the italics are my comments]:
- Mention that you’ll have their factory audited by a third-party agency. See their reaction. If they want your business and they are a serious factory, they will welcome this suggestion.
- Mention that you’ll have their production inspected by a third-party agency before the final payment. Again, if they are confident in their abilities, they will say OK.
- Open Google and search for “[company name] scam.” I cannot tell you how many times I have done this while on the phone with someone who wants our China litigation lawyers to take their bad or no product case. Around half the time when we get a product buyer who wants to sue its supplier, a 3-minute Google search done before payment was sent would have prevented the problem.
- Check several online directories (Alibaba, Global Sources, Global Market) and see if their profiles on those different directories are consistent. If the information shown is different (phone number, address, etc.), it is not a good sign.
- Look at the information independently verified by the directories. A lot of information can be collected and cross-checked this way.
- Did the supplier participate in a trade show? (They would appear in the exhibitor list which can usually be crawled by search engines.) That’s a positive sign.
- Look in the Chinese Supreme Court’s database (Chinese only). Some companies that were sentenced and haven’t paid the damages show up there.
- Request a sample, and request to pay for it to their company bank account. If this information is provided, it is a good sign. Then, ask them for the address for YOUR courier company to come and pick up the package. Does that address match that of their email signature etc.?
- Check the registration of the company, and check a few other things as well. More and more service companies and lawyers help importers do this. My law firm’s China lawyers do this search early on for pretty much every deal.
As good as the above tips are, the article’s most important point is the following:
Any little fraud (e.g. pretending they are a manufacturer when actually they are a trading company) IS a fraud. If they lie about this, they will lie about other things too.
When I see a “little fraud” I advice my clients to walk away. Those who engage in little frauds almost invariably engage in big frauds, especially when given the chance. And this idea that “everyone in China does this sort of thing” is just not true. There are plenty of good and honest manufacturers in China, and in nearly all instances it is unwise to tolerate bad actors.