How Not To Do Business In China, Part II -- Finding Your Chinese Partner Online
Though labeled part II, I have probably written more than 100 posts on this, but only came up with this title earlier this month. This post builds on a post at the Product Global blog by Ashton Udall, which built on Part I of this series (isn't this how the blogosphere is supposed to work?), in its excellent post, entitled,"Finding Manufacturers in China: Building a Network the Wrong Way." My initial post was on how finding your Chinese partner through a government tour is not usually a good method and Product Global's post added to that by discussing the problems inherent in finding your Chinese partner online through sites like Alibaba.
Product Global's post talks about running into someone at an airport who was heading over to China for the first time:
He was the CEO of a small company here in the US that had a unique product line and niche, and he proudly told me of his plans to show up in Shenzhen and find suppliers to make his product. He had no trip schedule. He had no real idea of how he was going to link up with the right supplier, let alone tour multiple suppliers to begin getting an idea of what the right supplier is. He was just headed there. It was as if I could hear his spurs quietly "clink" on the soft airport carpet as he swaggered by, John Wayne style.
Even though I am a huge fan of the Duke (if you want to spend two hours having a great time really learning about building the rule of law, watch The Man Who Shot Liberty Valance, starring John Wayne AND Jimmy Stewart), I have to concur with Udall that this is no way to find a Chinese supplier.
Udall goes on to talk about American businesspeople he has met seeking to do business in China who "refuse the idea of working through anyone--be it a middleman, trade company, service provider, consultant, to find and partner with manufacturers in China," choosing instead to rely on the contacts they have found "via Alibaba or some other internet trading portal."
Udall goes on to say he views finding a partner through a trading portal on the internet to be even more "sketchy" than finding one through a government tour and I agree. According to Udall, the bottom-line when you have found your partner on the internet is that "you have no idea who you're talking to and they probably have no idea what you're really trying to say." He is absolutely right.
My firm has received countless calls from U.S. based companies who have sent money to China for product and received absolutely nothing. The amounts lost typically range from $10,000 to $200,000 and nine times out of ten the supplier was found online and nine times out of ten the supplier is located in some fairly remote Chinese city, assuming they have any real location at all. I am convinced the amounts are no accident and that the Chinese company keeps the amount low enough so that the cost of hunting it down and seeking to collect is too high in relation to the amount lost. Its remote location (to the extent it exists at all) is also no accident.
I oftentimes ask the victim why they sent so much money to a company in China without making any real effort to validate the Chinese company's first and the initial response is usually a short silence (during which I always imagine they are wondering the same thing) and then usually the same response: "I just assumed they were legitimate or they would not have made it on such and such a site." To which I immediately parry right back by asking, "what made you assume that?" This is usually met with an even longer interlude of silence, and then something along the lines of, "I don't know... I just ... thought ... that.... there was some, ugh... guarantee...." I then start feeling sympathetic and do not point out that they are talking in circles.
The mistake here is not so much finding the Chinese partner online, it is not conducting any investigation to determine if the Chinese partner is legitimate or not. Due diligence is critical before engaging in any transaction in China and relying on some online site to provide it for you is not wise.
Comments (17)
Read through and enter the discussion by using the form at the endLaw Office of Todd L. Platek - May 19, 2007 8:13 PM
Hey, I was disappointed you did not mention Lee Marvin's name!! He WAS Liberty Valance, and gave the Duke and Jimmy Stewart their raison d'etre in that movie!
David Li - May 19, 2007 9:53 PM
Interesting time to see this post. I am typing this sitting on the shore of the West Lake after two days attending an Internet Engineers conference hosted by Alibaba. Alibaba has received $1 billion of investment from Yahoo! last year as well as Yahoo! China. It looks like the integration of the two have gone well despite Jack Ma has recently said the integration has taken longer then he expected.
From the presentations, it looks like Yahoo!/Alibaba teams have been working hard to address the problems mentioned here for payment and credibility. We are told to expect some big announcements later this year. Looks like Alibaba are getting a lot of technologies transfers from Yahoo!
Finding partner online is really no riskier then finding one through consultants or governments. While there are good consultants out there, there are also plenty of bad ones who are really nothing more then glorified tourist guides. Due diligence is critical whether it's the factory or the consultant.
It's easy to pointing out the failures of finding partners online. However, I wonder if that's the results of our profession and human nature. I got more then half of my projects from Internet but quite a few of my clients came to me after they got burn with much cheaper providers. The success stories are rarely publicized because our hunter and gather brains are less likely to share a nice hunting ground with our fellow beings while it's important to warn each other about the dangerous spots.
Laowei - May 20, 2007 1:16 AM
Quoting "My firm has received countless calls from U.S. based companies who have sent money to China for product and received absolutely nothing. The amounts lost typically range from $10,000 to $200,000 and nine times out of ten the supplier was found online and nine times out of ten the supplier is located in some fairly remote Chinese city, assuming they have any real location at all."
I assume here that countless here means zero. The U.S. based business people are really not that stupid... or are they.
Handan - May 20, 2007 1:55 AM
The answers of the cheated companies make me wonder why portals like Alibaba command an automatic sense of guarantee? Is it because their American counterparts actually provide for the validity of members companies in some way? Like rigid entry control and kicking out member companies with a record of frauds in a timely fashion.
Should these things be expected from online portals? Or does it go without saying that easy access to a huge number of companies only comes at the cost of credibility? Thus, should Alibaba come in for any blame?
Alibaba's current marketing pitch is "around-the-clock access to 6 million companies, all at one click." This emphasis on speed and scale is found across China's modernization efforts.
I'm not suggesting Alibaba should be blamed, though. As my questions have made clear, I don't know the boundaries of the duties of online portals like Alibaba.
David Li - May 20, 2007 11:10 AM
Laowai,
As much as we are to believe people's intelligence, Internet is a dangerous place. Even US congressman can fall prey of the Nigerian 419 scam to a total of $10 millions.
http://www.itweek.co.uk/vnunet/news/2170939/experts-warn-continuing-419
audall - May 20, 2007 2:06 PM
I don't think Alibaba can be blamed. Anyone who gets into situations like this can really only blame themselves. Alibaba is really only the "messenger", allowing people across oceans and borders to connect. It does a good job of this. But it is a catalyst only. The difficulty is that most people are not aware of what's involved beyond simply making a connection over the internet. Alibaba provides this, but it's really only the first step in a thousand. I think people are beginning to realize this about many internet sites. Although it was thought they would supplant an entire process, they are really only a catalyst, and are restricted in terms of what they can offer in quality. I might have 500+ connections on LinkedIn, but the 10-20 people I can really vouch for is the same amount whether I have 10-20 connections or 500+ connections. Thus, LinkedIn might provide me with a connection to #445 person, but beyond that, it's up to me. I might be able to contact toy factory #5,436 in China, but that's all I've done--email something or someone on the other end of listing "toy factory #5,436". Would CEO of Company X who sent $300,000 to toy factory #5,436 in China be willing to send that kind of money to LinkedIn Connection #445 just based on faith in the network? My guess is "no". But somehow a lot of people are not drawing that parallel.
Jeremy - May 21, 2007 7:18 AM
I assume here that countless here means zero. The U.S. based business people are really not that stupid... or are they.
Yes. There are plenty of stupid business people in the States.
People who lose money in such a way are usually 'venturing' (ie sitting at home and sending emails) overseas for the first time in their business lives. It might be the first big business decision they make, just starting out with some 'big' idea.
The average person in the States how easy it is to lose money in China. And it is often the 'average person' who is losing out on these relatively small sums (not small to me!) of money.
China Law Blog - May 21, 2007 5:27 PM
Todd Platek --
I am a fan of Lee Marvin (he is also quite famous in legal circles, right?), but please admit that if you are going to name the top two people from this movie, it has to be Wayne and Stewart. I hate to use a baseball analogy, but mentioning Marvin in the same breath as Wayne and Stewart would be like mentioning Canseco with Ruth and Mays
China Law Blog - May 21, 2007 5:33 PM
David Li --
I completely agree that there is nothing inherently wrong with finding your business partner online. What I am trying to get at here is the need to conduct due diligence no matter where you find your partner. I also agree there are many China consultants out there who are basically no better than tourists, but there are definitely some out there who are worth every penny they charge, and then some. Again, due diligence is key.
China Law Blog - May 21, 2007 5:39 PM
Laowei --
I was going to write "nearly every month." That ought to give you some idea of what I mean by countless. There is even a term for it: checking your brains at the gate. The thing is that it is not confined to Americans. Believe me, this is a hazard of international business everywhere.
China Law Blog - May 21, 2007 5:44 PM
Handan --
I do not think Alibaba should be blamed as it makes very clear it does not vouch for those who post on it:
3.2 Some of the Alibaba.com Content displayed on this Site is provided or posted by third parties ("Third Party Content"). Alibaba.com is not the author of third-party content, whether contributed by anonymous users or paid content providers. Neither Alibaba.com nor any of our affiliates, directors, officers or employees has entered into any sales agency relationship with such third party by virtue of our display of the Third Party Content on the Site. Any Third Party Content is the sole responsibility of the party who provided the content. Alibaba.com is not responsible for the accuracy, propriety, lawfulness or truthfulness of any Third Party Content, and shall not be liable to any User in connection with such User's reliance of such Third Party Content. In addition, Alibaba is not responsible for the conduct of any User's activities on the Site, and shall not be liable to any person in connection with any damage suffered by any person as a result of such User's conduct.
I think people make wrong assumptions without reading the fine print.
China Law Blog - May 21, 2007 5:48 PM
David Li --
You are absolutely right. My firm is right now working on a $2.6 million case in China involving an issued Bill of Lading for goods that were never delivered and we recently completed a case where a Chinese company sent a fake wire confirmation showing it had sent a million dollars to charter a Russian vessel, which left port before our client realized no money would be forthcoming. Very smart people who were tricked by very smart people. It does happen. All the time, actually.
China Law Blog - May 21, 2007 5:49 PM
Audall --
Yes. Catalyst is a good word.
China Law Blog - May 21, 2007 5:54 PM
Jeremy --
Absolutely. Actually, when I saw the name Jeremy, I at first thought you were Jeremy Gordon over at China Business Services and I was a little bit pissed to see "him" saying "U.S. business based business people are really" that stupid. I was pissed because Jeremy is based in the UK and many of his clients are from there and I happen to know Jeremy has dealt with similar situations on behalf of his British clients as well. It is not just Americans, it is nationals from virtually all countries that do business in China.
Etienne C - May 25, 2007 8:32 AM
Handan, Jeremy --
Reading your comments, I remembered a paper I read a long time ago when I was in business school. The paper reported on a study on where people find their information. It concluded that the vast majority of people go for the easy and convenient sources of information even when they know that the quality or exhaustiveness of the source is not good. Only a few people (the paper referred to them as information gatekeepers) go the extra mile and really go for the real source of reliable and complete information.
Online sites like alibaba offer a very convenient tool, and provides lots of information and photos. It is therefore tempting to believe that it offers all of the information and that, as a new Western business person, I can get a piece of the China action without the uncertainty of changing my assumptions.
And as China is still a very rough market, it is clear that the unsavvy and naive Western business people who do not realize or deny that they operate in a new environment will be the ones that suffer the most.
China Law Blog - May 28, 2007 2:36 PM
Etienne C
Everything you say makes complete sense.
Tout que vous dites a le sens.
Law Office of Todd L. Platek - June 3, 2007 8:33 PM
Dan, I'm not making any admissions, but nice try. Lee Marvin was #1 baddie in that and other movies and is sorely missed. Yes, he made palimony law as well, and is probably not missed by the other party in that lawsuit.