I spent much of last weekend on an airplane going through stacks of documents I had been meaning to read for month. While doing so, I came across a big US government Commercial Services print-out I had picked up at a doing business in China seminar many moons ago. Darned but there was some good stuff in there and I was planning to post on it in due course.

Due course became today after I read how Diddy, a well-known entertainment mogul, record producer, and actor, (f/k/a and a/k/a Sean John Combs, Puff Daddy, and P.Diddy), is paying a big price for having violated the first rule on the list of what the US Commercial Services sees as the “Major Causes of Business Problems in China” [link no longer exists]:

  • Inadequate vetting and due diligence of Chinese partners, distributors and suppliers.
  • Giving away too much in joint ventures.
  • Absence of contract clauses guaranteeing licensing compliance spot checks.
  • Lack of appreciation of what differentiates a commission from a kickback in the Chinese context.
  • Failing to register your IP (patents, trademarks and copyrights) “in a timely fashion.”
  • Failing to keep a detailed eye on the always changing legal and regulatory environment in China.
  • Failing to retain a qualified China lawyer to help navigate the ins and outs of China law

Interesting how many of these (really all of them) relate to the law.

I like this list and I think it appropriate to list a failure to conduct due diligence at the top.  This failure is particularly common among SMEs (Small and Medium Enterprises).  Far too often I see companies entering into transactions worth hundreds of thousands to millions of dollars, knowing shockingly little of the Chinese companies with whom they are dealing.  Is it not worth the $2,500 to $10,000 to know with whom you are dealing?

Diddy’s China problems are instructive.  Diddy heads up clothing company, Sean John, which is now facing a public relations nightmare after it was discovered that the “faux” fur on its coats from China is actually real fur.  This discovery has precipitated a recall of the coats and will no doubt lead to a considerable loss of money and prestige for the company.

These problems almost certainly would never have occurred if the company had conducted sufficient due diligence on the company from whom it was purchasing its coats and/or conducted quality control monitoring of the product.

If you are doing business in China, read the list so as to avoid your own “faux pas.