I spoke at a seminar last week in Chicago on what companies that source their products from China need to be doing to avoid litigation. Number one on my list was to “choose a good Chinese partner.”  I went on to say that the odds of having problems with a legitimate Chinese company are a lot lower when you deal with a “legitimate” Chinese company. I then talked of how legitimate Chinese companies do not like getting sued and will usually work to avoid that.

Needless to say, an attorney button-holed me to ask the next logical question: “how do you distinguish between a Chinese company that is legitimate and one that is not?”

My answer was along the following lines:

  • The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.
  • You then need to have someone fluent in Chinese and with knowledge about Chinese business licenses examine the one that you have been sent. Our China attorneys typically look at these for the following:
    • To determine whether it is real or fake. We do this by comparing the information on the business license provided to us with the corresponding information on the relevant Chinese government website — typically the local SAIC — State Administration for Industry and Commerce). If the business license you have been provided is fake, you walk away.
    • To see when the company was formed. We like to compare what the real business license says against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different years given in different places, we get suspicious and we ask more questions.
    • To see where the company is located. We like to compare this too against both what we were told (by email or whatever) and also what the Chinese company says on both its English language and its Chinese language website. If there are different addresses given in different places, we get suspicious and we ask more questions.
    • To see what the scope of the Chinese business is, as listed on its registration. If the scope is “consulting” and our client thinks it will be ordering ten million dollars worth of widgets from a factory, we get really suspicious. Looking at the scope is a good (though not always fool-proof) way to determine whether you are dealing with a manufacturer or a broker.
    • To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company.

Doing the above is not nearly enough due diligenc for big deals, but it is a fast, relatively cheap way to get a much better sense about a Chinese company. Just the above is not going to be enough to guarantee a good long-term relationship, but it oftentimes is enough to let you know that you do not even want to attempt a short-term one.

For more on China due diligence, check out the following:

Dan Harris

I am a founder of Harris Bricken, an international law firm with lawyers in Los Angeles, Portland, San Francisco, Seattle, China and Spain.

I mostly represent companies doing business in emerging market countries. It has taken me many years to build my network and it takes constant communication and travel to maintain it. My work has been as varied as securing the release of two improperly held helicopters in Papua New Guinea, setting up a legal framework to move slag from Canada to Poland’s interior, overseeing hundreds of litigation and arbitration matters in Korea, helping someone avoid terrorism charges in Japan, and seizing fish product in China to collect on a debt.

I was named as one of only three Washington State Amazing Lawyers in International Law, I am AV rated by Martindale-Hubbell Law Directory (its highest rating), I am rated 10.0 by AVVO.com (its highest rating), and I am a SuperLawyer.

I am a frequent writer and public speaker on doing business in Asia and I constantly travel between the United States and Asia. I most commonly speak on China law issues and I am the lead writer of the award winning China Law Blog (www.chinalawblog.com). Forbes Magazine, Fortune Magazine, the Wall Street Journal, Investors Business Daily, Business Week, The National Law Journal, The Washington Post, The ABA Journal, The Economist, Newsweek, NPR, The New York Times and Inside Counsel have all interviewed me regarding various aspects of my international law practice.

I am licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at my firm, I focus on setting up/registering companies overseas (via WFOEs, Rep Offices or Joint Ventures), drafting international contracts (NDAs, OEM Agreements, licensing, distribution, etc.), protecting IP (trademarks, trade secrets, copyrights and patents), and overseeing M&A transactions.

  • “To see the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company.”

    This is generally very easy for Chinese companies to fake. There are companies who will loan the desired amount of capital for a set fee and make all the arrangements, and once the documents are acquired the client company simply returns the capital to the loan company.

    Also, note that restrictions on registered capital have now been lifted — any amount of capital may now be listed on the application for a business licence.

  • Michiel

    You can strike the last point (check registered capital) off your list, at least where it concerns Chinese (not WFOE) companies. I’m a bit surprised that you’re not on top of this, unless this is another case of “different local implementation”.
    Since the recent changes to the company laws, the actual situation (in Suzhou at least) is that the registered capital amount has become completely irrelevant and even more fictional than it already was. This is definitely the case for newly registered companies (verified), and as far as I know (not verified) also for existing companies.
    Whereas previously, you (read: Chinese company) had to actually show “evidence” that you had the entire amount of capital in your bank account, and pay some tax relative to this amount (0.3% that was), you can now just write down whatever you fancy, and you don’t pay tax anymore either, only pay the same few hundred RMB fees that everybody pays, irrespective of the amount of registered capital.
    Like I said, this is (at least in Suzhou) fact. Whereas in the past, to both register a 100K company and to later bump it up to 1000K, you needed an actual -official/certified- bank statement showing the amount (100K and 1000K respectively — no matter that it only needed to be in the bank account for just long enough to print out the bank statement, a few hours tops) and pay tax on that (300 and 3000), now none of those things are needed.
    In the past, you could assume that a large-registered-capital company did have (at some point in time, for at least a few hours) said cash, and thought it worth the 0.3% tax to appear to be a “larger and therefore more trustworthy” company. Now any self respecting swindler can get a gazillion RMB piece of paper at no extra cost. At least, 10 million RMB (that used to be pretty good) has been verified; no idea at how much the grumpy gov’t boy/girl will say “that’s too much”….
    You’d almost put more “trust” in a company that didn’t go to obtain a 800 million piece of paper, although that might also mean that they didn’t want to (couldn’t) spend the few hundred RMB in fees to get the paperwork changed.
    Oh, and the company address check is now also subject to inflation. One does still need to bring in a piece of paper stating that the owner of the property is the owner of that property (and thus agrees with having your company there), but that’s about the only requirement. Before, you could only have one company at one address, and not any type anywhere, but all that has gone out of the window.
    So, a company being registered at XYZ address means zip. However, them being unable to reproduce the XYZ address in more than one place without several typos may mean that they’re a less sophisticated swindler. Or that their web-guy is an idiot.
    The one check that is still somewhat valid, is to walk over to XYZ address and see what kind of place it is (a big factory in an industrial park, with the company logo all over it, rather than a ten square foot cubbyhole in a xiaoqu). Or farm this walk out to somebody who can be trusted (a bit of catch 22 there, but hey).
    Also an option is a search for the number of times that one address is registered to different companies, assuming only the most legitimate of companies won’t want to make some quick cash by “sharing” their address with others. That won’t work for some addresses though, unless you are able to include the room/unit number of multi-unit buildings.
    And yes, anyone unwilling or unable to send you real or fake pieces of paper may be suspect, although, on the flip side, that may also be them not trusting you, the prospective customer/partner, not to use their pieces of paper and in a scam of your own. Yes, people/companies are used to handing over information/paperwork to legitimate parties, but all but the dumbest folk are also hesitant to get scammed themselves. You really have to first meet in person, have a meal, that sort of thing, raise the bar, build some trust, weed out the obvious…
    Again, this is the current situation in (my part of) Suzhou (where “real” evidence still costs a few hundred RMB and fake ones now go for as little as 40 RMB). It’d be interesting to see whether it is different in other localities.

  • Michiel

    Rob; nobody said anything about lousy food and getting drunk — I manage to avoid that quite easily — but IMHO there just is more value in meeting in person as opposed to interacting through email or phone or skype or some taobao thingymajig. And that actually goes both ways.
    See who and/or what you are dealing with. Is this person (for) real? Does he/she appear to be what they say they are? I don’t know, grok some body language?
    It might be as simple as checking your opponent’s shoes before you sign the check.
    The obvious is usually quite obvious if you are in a position to see it for yourself. Or get somebody else to do it. Just don’t rely on pieces of paper, and/or people’s (un-)willingness to hand these over, because that doesn’t mean much…