Can anyone tell me what due diligence means?
I recently presented at the Import & Export Show in Sydney on the topic of trade with China . A common question during this session was; “I found a supplier online, how do I know they are legitimate?”
Here’s my advice; you don’t know unless you have done due diligence on them.
Due diligence is NOT;
1. Meeting someone who ‘says’ they are a manufacturer and thinking they are a nice person;
2. The fact that the person representing themselves as a supplier has a web site and can be found on Alibaba.com;
3. Seeing products at a trade fair and assuming the person at the booth is the original manufacturer;
4. Visiting your ‘suppliers’ factory, that appears to be theirs, but that you can’t verify because you can’t read or speak Chinese and rely on them for all communications;
5. Because you paid for a sample and got one.
By the way I didn’t make up these statements, they are common answers I hear when I ask new importers, have you done your due diligence.
So what is due diligence?
Due diligence is the checking and verifying of a business or person that you are about to engage in trade with. Its very necessary in international trade, as knowing that you are dealing with a legitimate company could protect you against huge potential loss through fraud or other belligerent acts. If the supplier is not a legitimate business entity; all contracts are rendered useless, raising a legal case against them is pointless and they may just pick up and disappear after you send the money – leaving you left with nothing. Furthermore there is no government agency or bureau that can really help you with this, or who is prepared to, if you haven’t even done basic due diligence in the first instance.
What can you do to help yourself?
I suggest as a minimum you need at least 5 key indicators or verification points as a basic part of your greater due diligence plan.
My top 5 include;
1. An original scan of the suppliers manufacturing license. Check it is up to date and verify its legitimacy with the local Chinese authorities. Note this is a Chinese language document, if you don’t read Chinese, you will have no idea what it says. If you don’t speak Chinese you wont be able to check with the government authorities either.
2 & 3. At least 2 other documents with the registered manufacturers name on them, such as Export License, Tax Certificate or Testing Certificates for example. These also need to verified with the issuing body.
4. Proof of supply to other recognised clients.
5. A conversation with the production manager, ensuring he understands the complexities of your project. You will know quickly whether he has done this before and whether he really works for the factory. By the ways it is likely he will only speak Chinese, its usually only the sales staff that speak English in Chinese factories.
Whilst most of you have romantic notions of being an international importer/designer/entrepreneur, the majority will not be equipped to know who you are dealing with when it comes to China. It’s not your fault, the language and cultural barriers makes it difficult for event the smartest. It is worthwhile paying someone who can provide you with this reassurance and due diligence. It could mean the difference from whether or not you get to live your your dream!