The Importance of Due Diligence in China

Описание: 0:05 Is every Chinese business necessarily legitimate? What is the importance of conducting due diligence before entering the Chinese market?
5:05 What is the scope of a due diligence and what does it cover?

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Is every Chinese business necessarily legitimate? What is the importance of conducting due diligence before entering the Chinese market?
Well, I’ll maybe answer the question with rhetoric, is every Canadian company registered with the local authorities? Are they really all legitimate businesses? I think everybody can take a moment to think about it, and the short answer in both countries would be a very much NO. It really comes down to: This company may exist, legally speaking, but it doesn’t mean that it would be the right partner for you, it doesn’t mean that it would have the right qualification or history or recourses to support what you want them to do. So the devil is in the details, for Canadian companies entering into the China market, in particularly, there will be cultural differences, language obstacles, differences in legal framework, so it is really thus necessary to get to the bottom of things.
I think ultimately, looking at business partner relationships, on what to look for, this differs a lot in different countries, but there are also a lot of commonalities. So being a Chinese myself, I’m not here to badge, to say all Chinese companies are bad, and I think also really to emphasize, due diligence isn’t to give a black or white picture to say if a partner is bad or good, because a lot of times we say that beauty is in the eye of the beholders, right? So we’re really helping you to get sufficient information, facts and color on the counter part that you are going to deal with.
So you form a sound business decision, one of the challenges today, is in the internet world. Everything is instantaneous, everybody wants to see everything and there are a lot of things at fingertips. There is a misconception when companies are conducting due diligence. They focus too much on account numbers, so they would be calling a credit report on other companies, they would try to look at the P&L (profit and loss), or balance sheet of the company to see if they are financially viral, which I think is a small element, an unnecessary element of due diligence, but I would really caution those companies that are not really operating on shore, to take a huge grain of salt with financial numbers. One thing is that, there are a lot of differences in terms of financial reporting; we repeat this story that a lot of companies have three or four different sets of books: one for government, one for internal use, one for the stock exchange, and perhaps one for the wife and one for the mistress. So you really don’t know which set of books you’re looking at, but more importantly is that even if the company is in good financial standing i.e., it has a lot of assets, it has a lot of capital, it doesn’t mean that it’s going to honor its contractual obligation, so from a due diligent perspective, my sort of guidance to clients is sometimes, focus less on the immediate level that would be the corporate entity you are dealing with, and focus less on the numbers i.e., the financial statement you are being presented, but focus more on the people behind the company, who are running the company, because regard whether it is a state owned enterprise, it’s a public listed company, it’s a private company, it’s a family business, ultimately they are all run by people, so to really try to get a sense or a forecast on your future relationship, and how is it going to be going with this counter party, it is critical to really understand where do these people come from. What is their historical track record in dealing with their past business partners, have they honored their obligations; especially I think people are now talking about “slowdown in China”, which is a reality happening.
In any country, businesses go through cycles, ups and downs, it is always better when it is a bullish market, everybody is making money, perhaps things don’t transpire as a desperate crisis as it is as a down market. In a down market, it’s more of a chance to test the integrity, the honor of your business partner, so to really understand how the business partner in the past, have dealt with a down market, how he has dealt with, in particular, foreign business partners, would be really important, because that would almost demonstrate almost a sign of how likely they will behave in the future.
What is the scope of a due diligence and what does it cover? ....