October 28, 2020

How To Perform In-Depth Due Diligence On Your Supplier | Vetting Chinese Suppliers (Part 9)

In This Episode...

You're listening to part 9 of our mini-series guiding you through effective vetting of Chinese suppliers that will help you to find the best possible manufacturer for your products (you can catch up on the entire mini-series on vetting Chinese suppliers here 😉)

This episode (recorded in late October 2020) is particularly timely as many importers aren't able to travel to China to check on their new or current suppliers' progress, so getting an understanding of how their business is doing and if they're engaging in any practices which could cause risks for your supply chain (such as if they were to be shut down by the government for flouting certain regulations). Therefore, understanding how and why to perform in-depth due diligence is an important step to assuring supply chain stability and quality for those of us in who can't visit China yet and as a standard part of your vetting process to stamp out risks.

Show Notes

00:00 - Why is performing due diligence on suppliers in China so important at the moment? China hasn't been unaffected by the pandemic. Can you be sure that your supplier is going to stay in business, for example? This would be a big issue if a key supplier were to suddenly close down. Also, explaining why some manufacturers won't disclose if they are having some difficulty.

06:00 - Why the lack of travel to China causes trouble for buyers who lack visibility into their supply chains. Being unable to visit suppliers' factories blocks many buyers from making their own subjective evaluations based on what they see (👂 listen to this episode about On-site, Subjective Factory Evaluations), so a lot of buyers have no idea if their suppliers are in good shape or not and feel worried that they could be at risk.

07:54 - How even local buying offices with foreign staff in China may have limited visibility into the suppliers due to local COVID restrictions. 

10:03 - When performing due diligence, what are the points to focus on (modelled on what we do for clients here at Sofeast)? 

  • Checking on how are the real company owners
  • Looking into the financials of the company
  • Assessing levels of debts and who creditors are
  • Ownership changes
  • Has capital been transferred for new companies
  • Checking that in-house processes adhere to specific regulations

All of the above are best accompanied by an on-site visit where the operations are examined in detail in order to find out about company health. An example is given where the inspector sees that the company is now leasing out a part of their facility to a different organization where they used to occupy all of it. Is this a cause for concern that the company isn't doing so well?

15:38 - Checking that in-house processes don't fall foul of local regulations. How this can cause a factory to be very quickly shut down in China for this, losing you a supplier overnight! Checking relevant licenses for polluting processes etc is necessary.

17:38 - The differences between 'Old China' and 'New China' in terms of suppliers. With 'Old China' thinking factory owners are more likely to skirt certain rules and play fast and loose with the law (examples provided), and 'New China' where owners behave in a more sustainable way and follow the rules. The latter are far more risky suppliers to work with these days as government scrutiny and enforcement increases.

21:10 - Common strategies of 'Old China' manufacturers to be aware of. Is an owner sinking all of their money into real estate, or perhaps has moved their operations out of a major city into a more undeveloped area or province in order to reduce scrutiny? Buyers need to be aware of tricks like this which are possible red flags.

25:21 - How the culture is changing, leading to less risk for buyers. 

27:37 - Is there more transparent business information out there for buyers who are examining suppliers? The forthcoming corporate social credit system could be a game-changer here as it will show importers very transparent information about companies' health and affairs.

29:44 - Why financial information, such as accounts, don't give a picture of the present time + recap of the 'Big 2' due diligence points: Financials and respect for regulations. How all of this is industry and product-specific, so checking certifications and test reports is also needed.

32:15 - The serious risks you need to investigate when examining a potential supplier. Don't trust anything without confirming it. Focus on the key points of importance, such as:

  • Their long-term stability
  • Relatively healthy financials
  • Ownership and management
  • Stability of their suppliers (your sub-suppliers)
  • Processes and efficiency for cost-control
  • Experience in your product niche
  • Familiarity with standards for your country/market

36:25 - Should a backup supplier be planned for in order to switch if there are issues with current suppliers? Explaining how to organize this in order to guard against the discontinuity of supply.

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