Verifying Chinese companies before going into business with them is very important. It will save you money, steer you away from liabilities, and protect your brand and reputation.
Suppose you decide to do business with Chinese companies. In that case, consider this. The many factors before making a final decision to pursue your new partnership. Suppose you do not conduct due diligence and verify a Chinese company is legitimate. If so, you may be on your way to an agonizing and time-consuming experience. Remember: you may be more susceptible to scams than you think.
Let’s review the recent history.
Many experts will agree on the following important business tip. Before you conduct any domestic or international business, consider this. Ensure you’re about to enter a safe contract. You may have your own set of rules before partnering with a new supplier, for example. But there is an extensive history to consider. Many factors have forced Chinese companies into the spotlight of fraud.
It began before the financial crisis of 2008. Chinese companies entered the US market through reverse mergers. A reverse merger means that a Chinese company would merge with a US company. But they would do so in a way to play along with US investors without certain rules. The difference between a reverse merger and the more traditional way is this. What tends to occur instead is this. Chinese company meets intense regulatory protocols when conducting business. Yet, suppose a Chinese company merges with a US company. This changes things with a reverse merger. It will have access to US public listings, thus avoiding strict regulation. Reverse mergers gained popularity among Chinese and US partnerships in the mid-2000s. About five years later, something became clear. These Chinese companies falsified many aspects of their business.
Early examples of fraudulent schemes hold many components. This includes but is not limited to incorrect addresses and plain made up numbers. Universal Travel announced its physical address for an alleged hotel. Instead, they gave an address for a public restroom. A company named AgFeed Industries lied about its increasing sales.
These incidents are part of deceitful business practices carried out by Chinese companies. There are many benefits to working with business overseas. But you must verify a company’s legitimacy.
Reason 1: Companies fall victim often
Let’s start by exploring how easy it may be to become a victim of fraud. You may think you know all the ins and outs of international business. Still, seasoned corporate experts often fall victim to illegitimate deals.
Things aren’t always what they seem to be, even if they look trustworthy and legitimate. Companies in China must register with the government to prove their legal legitimacy. Be sure to review the Chinese company’s certificates before entering any business relationship. These certificates could be fraudulent despite how real they appear. Many corporations fall for this because the certificate’s validity is difficult to authenticate. As a result, Chinese companies feel encouraged to continue the practice.
If you think you have done the right research before choosing a company, think again to be certain. You could read self-promoted reviews on promising directory sites. You may also review US-listed Chinese companies to ensure credibility. If you rely on US-listed Chinese companies, you still may deal with a bad investment. Association with a country often known for strict regulation may sound convincing enough. Research shows poor oversight led to the dishonest activity of US-listed Chinese companies.
Reason 2: Save money
Saving money is one of the most obvious reasons to verify Chinese companies. You could invest in what turns out to be a misleading opportunity or a complete scam. Beware of red flags. These include requests for added fees and invitations to China. Invitations will advertise luxurious perks. These practices could lead your company in the wrong direction. You might pay for damages, hidden costs, and other unexpected expenditures.
Even if you plan to work for a real Chinese company, you will still save money by conducting due diligence. An example is the comparison of US and global benchmark indexes about the Chinese market. Almost $400 billion of investment poured into Chinese equities only a couple of years ago. Many of these investments came out from shifts in US benchmark indexes in the market. Global bond indexes incorporated state bonds to their benchmarks. Thus, causing another $100 billion into China. Experts suggest this increased investment flow is risky. This is because US investors are too close to a single economy.
Potential financial loss additionally comes through dealing with the aftermath of fraud. Suppose you cannot guarantee a company must provide you a service. In that case, you could suffer a significant financial loss. Not only will you lose money through faulty business dealings. Your effort post-scam could also bleed you dry. It’s often better to cut your losses and learn an important lesson. In other words, you must spend money to conduct thorough vetting to save more money in the long run.
Reason 3: Ensure reliable and quality products, always
One of the worst things that can happen when you partner with a new supplier is this. The discovery they cannot meet your expectations. Verification will ensure you know which type of facilities you are dealing with. It will also deliver quality products at the expected time. Delayed shipments and faulty products will have long term ramifications. A product inspection allows you to confirm a product’s quality meets your expectations. It will also give you room to negotiate over timing, shipment, and other standards further.
You may think that as long as you receive a sample from a facility, you are in the clear to avoid these issues. Think again. Even if the supplier sends you a high-quality sample, it doesn’t mean everything is well. The quality may not remain the same over time. One reason for this is high turnover within management and other staff. High turnover affects production and internal audits. Be sure to do a historical analysis of Chinese companies you plan to work with. It will ensure their products remain the same quality.
It is also important to ensure that inspections of factories are thorough. An investigation found that China’s manufacturing industry conducts fraud, particularly with passing inspections. In reality, many of the companies should have failed. If auditors inspected a factory, it doesn’t mean that it is completely safe and secure.
Reason 4: Avoid legal ramifications and protect your brand’s reputation
There are many legal issues to come your way if you do business with an illegitimate Chinese company. Problems related to pirated products and lack of a paper trail are common. Companies will falsify transactions. Luckin Coffee in April 2020 is a recent example of this. TAL Education Group had an employee work with vendors to forge contracts.
Verification will help you avoid pirated products. Many illegitimate companies are leaders in the Chinese market. These businesses specialize in mischaracterizing their operations’ scope set by the government. Verify Chinese companies to ensure their business scope aligns with your goals. Also, verify to ensure companies represent products.
Additionally, protecting copyrights, trademarks, and intellectual property is essential. Through due diligence, you can avoid legal ramifications. Avoid those that come with intellectual property damages.
It’s necessary to go through the verification process to create a paper trail. Suppose any issues around quality control come to light. It’s critical to have a detailed inspection that meets your country’s requirements. Recorded inspections will help with this. Once your brand associates with muddy legal issues, it takes a long time to earn back your clients’ trust. Choose to verify so you can keep the trust and not worry about gaining it back.
Reason 5: Promote health and safety for all
Nowadays, it’s helpful to a brand’s identity to follow values in the pursuant of a better world. A great way to make sure your company is doing the right thing is this. Invest in a detailed analysis of your Chinese business partners. When business practices are under thorough assessment, this happens. Low safety standards are more likely to emerge. Thus, assessments bring out warnings. Quality products are healthier for customers. Many unsafe products enter the European market, despite the market’s known strict regulations. Economies also suffer as a result of flawed or illegal products. Compliance isn’t only a legal expectation but a social expectation.
Do not make the mistake of assuming you can skip the verification of Chinese companies. Rely on experts to help you invest in your company’s future.