"Doing Due Diligence on your Chinese Partner” ACSME Roundtable - July 2018

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Guest Speaker: Bruce McLaughlin, the CEO of Sinogie Consulting

  • 2 decades of experience in working with Chinese corporations and government organisations

  • Expertise in looking into Chinese companies to find out what's going on under the surface

  • Sinogie, with offices in Hong Kong, Shanghai and Sydney, provides a range of services to foreign companies planning to do business in China and elsewhere in East Asia. Their core services include media monitoring, corporate investigation, market research, industry research, partner searches and government policy analysis.

“Doing Due Diligence on your Chinese Partner” event

  • Bruce presented his business in China and shared some "horror" anecdotes when foreign companies don't do due diligence in China which sparked a lively discussion

  • Bruce and his local team in China have helped SMEs in Australia, America, Europe, etc. do their China due diligence for many years, there were many amusing stories

Bruce Presentation...      

Before going into business with any Chinese partner, customer, investor or supplier you must do your due diligence. You'll be amazed at what you find out if you do it properly! 

Due diligence is very important to build relationships with a partner based in China. Dealing with a completely foreign environment loosens your guard because you assume that if something is weird, then it is just that culture, you don’t question things as much. A third of “companies” in China are not even real! 

  • Does the company exist?
  • Are they who they say they are? 
  • Are they credible?
  • Are they just making wild claims? “It’s always the ‘son of the general’”

These questions are not as transparent as you may think.

Sinogie Consulting provides a range of China-focused corporate intelligence services, including company investigation, partner searches, market research and government policy analysis.

Sinogie's key focus:

  • corporate investigation

  • government policy analysis mainly in China

Bulk of the clients are non-Australian because many Australians falsely believe that you can’t do due diligence in China

It's worth underscoring that due diligence for large multinationals is different than for SMEs, SMEs have fewer resources and more to lose. And some fake companies will go above and beyond for your money. Let’s just say, you can easily rent military tanks or rent a fake office in the centre of Beijing.

All this being said, we don’t want to shoot China down, we want to make China a more transparent place to do business. Although we have shot down some large deals, e.g. we stopped 7.5 million dollars from going into China on the basis of Sinogie's investigation… it prevents further problems in the future. In fact, the Chinese government sometimes comes to Sinogie to investigate companies outside of China.

Myth – You can’t do due diligence in China.

Biggest challenge – Don’t accept everything at face value. Corporate frauds often have roots in being unfamiliar to a very foreign environment. There's a phenomenon of switching business owners’ brains off when abroad. There are even some “horror” case studies of NOT doing due diligence.

Fact – There are a million reasons to do business in China with heaps of opportunities. Do not get put off by these horror stories in China, just recognize the need for an investigation.

  1. Is the company what it claims to be?

For example, many people think they are dealing with a manufacturer when they are actually dealing with a trading company. There is nothing inherently wrong with being a trading company but if something goes wrong, you will not be able to claim all the money you put in it and it adds an extra layer of communication you have to deal with. You need to know if it is a trading company or not.

Bruce once pretended to be an Australian SME looking to buy compatible cartridges for computers. He found several suppliers, had meetings with these companies and they all promised to take him to their personal manufacturing company. All the businesses took him to the same manufacturing company that was supposed to be special for their business. The pictures on the website were photoshopped and they were dishonest from the beginning.

2. Can the company be trusted?

Understanding who these people are, going to the factory, and talking to other companies are all essential. It is so easy for these companies to look good even if they are not.

If something seems weird, don’t just say "Oh, it is because it is China." It probably seems weird because something is weird. However, there are so many things that can go right to an extraordinary degree. Just don’t be stupid!

Don’t just wire the money – it can easily disappear and it’s hard to trace it back.

3. Has the company ripped-off their clients in the past?

Lots of investigation into historical background of the company by approaching the suppliers. Postponing the visit to the factory (which turned out to be the same factory for many suppliers that actually manufactured counterfeit goods). Some criminal records are never reported to keep the face of the specific province. You need to cooperate with the local government. Check whether the firm is registered – that information is often available online but sometimes it’s just on paper ( name, address, legal representative, director, shareholders, registered capital)

Nonetheless, “So much that can go right…” Chinese efficiency can be truly astonishing “there is a reward in the end”.

Q&A Session:

Q: What does it cost to do this kind of stuff?

Bruce: Basic cost: no more than $300

A full credit check and more: can be done for under $1000

Most expensive project - $150,000 for 3 months involves connecting with the local government.

Q: Is Alibaba the best platform for trading goods in China?

Bruce: 9/10 businesses start entering China using Alibaba.However, since there are millions of people that do business through Alibaba, there's possibility for encountering fake goods or just shop fronts. Good news is that Alibaba does eliminate businesses once they find out that they are not legit but there is no way they can find everybody up front due to the sheer volume of the sellers on that platform so be careful when using Alibaba.

Q: Are trade shows more efficient market entry than Alibaba?

Bruce: To a degree, trade shows are similar to Alibaba but just a higher entry cost. The people running the expos do not do due diligence, they just want to make money. Trade shows are just a source of information and do not guarantee that the company is real. Trade shows allow you to meet people at all levels of the supply chain. Yet, they give foreign companies a false sense of security – not necessarily a deliberate fraud but just making promises they can’t deliver.

Q: At what point in time during the business process do you suggest we use your business and do due diligence?

Bruce: Once you find the product you want, get samples, and are happy with the people you met. That is when you come to Synergy.

Q: Can companies come to you and ask what is a good China based company that they can use?

Bruce: Yes, we ask them multiple questions and get involved with the government, etc.

Q: I’ve heard that many companies in China are now outsourcing to Bangladesh, Vietnam, Cambodia, etc. Mainly shoes and clothes. Is this true?

Bruce: Yes, that is another reason why you have to do due diligence.

Comment: When you speak about the Australian and Chinese relationship, you speak with expertise and business and love and enthusiasm. This is often missing in higher communication.

Q: Are there any issues with procurement in China?

Bruce: For example, everyone in Sinogie Consulting has 10 years experience in China but they all started without any experience, they were straight from the university so they could be moulded to follow Australian business ethics. But the office is connected to an extensive network in local governments.

Q: Are there any barriers when moving across different provinces in China?

Bruce: There are internal trade barriers – they are not necessarily tariffs but regulatory standards/ regulation barriers that vary across the provinces. A new way to increase manufacturing standards via twinning different provinces (i.e. between poor and rich provinces).

The next ACSME Roundtable topic will be "Working with Millennials and Startups in China"

and will be held on Tuesday 28th August 2018. Register now via the link below.

You can also sign up for ACSME Membership to receive priority tickets for future monthly Roundtables.

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