ChinaCompany Due Diligence

China’s factories are hurting. First they were closed because of the coronavirus in China and now their orders are way down because of the coronavirus everywhere else and because of politics and because of tariffs. As we have been saying on this blog pretty much ever since we started it: a bad economy means increased risks. See China Manufacturing Risks are Sky-High Right Now. Act Accordingly.

What this means is that our international manufacturing lawyers get emails almost every day from someone who sent money to an entity they thought was or would be their Chinese manufacturer but never sent them a thing in return.

Our international dispute resolution attorneys recently looked into taking on such a case but then chose not to do so after some brief research. I mention this case right now because it should be of great relevance to any company that buys product from China or is doing business in China, or really any company that buys product or does business just about anywhere in the world.

Here are the facts of this case amalgamated with probably a dozen other cases our law firm has handled. The foreign company — in this instance a North American company went to China and met with a Chinese company there for manufacturing its product. The two parties sign an agreement and the North American company sends the Chinese company a large sum of money to build the tooling. The Chinese company then says another large sum is needed to be ready to go as soon as the tooling is complete.  Months pass. Nothing. More months pass. Still nothing. It has now been nearly a year and still nothing.

The North American company contacts our law firm about pursuing litigation against this Chinese manufacturer to recover the money paid. We review the documents and determine the North American company has a strong case (this in itself is rare, but this company had actually used good international lawyers for drafting its manufacturing contract), and so we as a next step investigate the Chinese company to determine whether it has sufficient assets to pursue. We conduct a fast and cheap investigation on this Chinese company and from this we learn the following:

  • The Chinese company is not a manufacturer. It is a broker, with a tiny, rented office.
  • The Chinese company does not even have an export license. In other words, it gets its products from manufacturers and then it has to bring on another company to ship those. It is just a middle-person. It is a broker.
  • The Chinese company’s only asset appears to be a small amount of inventory, which it may or may not own.

The North American company retains us to compile comprehensive due diligence reports on ALL the Chinese companies with which it presently conducts business. All the rest were actually manufacturers, but a number of them appeared to be in difficult financial straits, which made them high risk.

China company due diligence. Not optional.

Not these days anyway.

What are you seeing out there?

Print:
EmailTweetLikeLinkedIn
Photo of Dan Harris Dan Harris

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

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network. 

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

He primarily represents companies doing business in emerging market countries, having spent years building and maintaining a global, professional network.  His 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.

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

Dan is a frequent writer and public speaker on doing business in Asia and constantly travels between the United States and Asia. He most commonly speaks on China law issues and is the lead writer of the award winning China Law Blog. 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 Dan regarding various aspects of his international law practice.

Dan is licensed in Washington, Illinois, and Alaska.

In tandem with the international law team at his firm, Dan focuses 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.