The EU SME Centre, the EU-China Business Association and the Flanders-China Chamber of Commerce organized a webinar entitled “Remote due diligence: Get to know your partner in China” on December 1.
Ms. Gwenn Sonck, Executive Director, EU-China Business Association / Flanders-China Chamber of Commerce, welcomed the participants to the webinar. Mr. Alessio Petino, Business Advisor of the EU SME Centre and living in Beijing, will give his guidance on identifying potential partners, conducting due diligence, and choosing the right partner in China and how to best prepare yourself. For many of our companies the travel restrictions to China and the sudden lockdowns are one of the biggest difficulties. Other major challenges for European businesses in China are also the slower growth of the Chinese economy, the global economic slowdown and rising geopolitical tensions. But despite these difficulties, we need to persist. China remains an important market for our businesses and cannot be ignored. China's market offers long-term business opportunities. There is an enormous unmet potential for growth, also taking into account China's growing middle class. European companies also remain committed to China and continue to invest. They also believe there is more to gain than to loose from being in China. European companies have more localization strategies, building local supply chains and partnerships.
European investment in China increased slightly in 2021 to €8.6 billion euro compared to €8.5 billion in 2020. Most were greenfield investments. Investments already increased by 15% in the first half of this year, mainly coming from a few large European companies.
Mr. Davide Orlandi, EU Partnerships Coordinator, EU SME Centre, introduced the Centre, which is funded under the Single market Program managed by the European Commission and was set up in 2010. It is supporting European small and medium-sized companies, entrepreneurs, and start-ups entering or expanding their activities in or with China. The project is implemented by six partners and associated partners in Europe and in China. The Centre mainly offers: a self-diagnosis tool that measures readiness toward the Chinese market; comprehensive market reports, guidelines and case studies; practical and confidential advice; online training programs; and advocacy for EU SMEs.
Mr. Alessio Petino, Business Advisor, EU SME Centre, introduced the topic of the webinar “Getting to know your partners in China: tips on background checks and due diligence”. Every week the EU SME Centre receives emails from SMEs that encounter issues when dealing with Chinese partners. They can be divided into three categories:
• When buying from China, the goods are of lower quality or defective.
• In a less common scenario the buyer doesn't receive the goods at all.
• When selling to Chinese companies, a frequent issue is late payments.
Many issues can be avoided by conducting basic checks and due diligence to identify common red flags of potential risks.
Examples of issues include:
• Defect products: a European SME purchased steel and metals from a Xiamen-based manufacturer and paid an advance payment of around €70,000. After receiving the goods it was found that the thickness of the plates was not the same as stipulated in the contract. A testing report by a European laboratory was not recognized by the Chinese seller. The European company requested a refund or a new batch of products but this request was ignored.
• Goods missing: purchase of three containers of steel and metals with advance payment of the full amount. Around seven tons of steel were missing from each container, corresponding to a difference of €25,000. The Chinese supplier offered to ship the missing steel if the EU company made a second order for new containers.
• Genuine issue but no contract: textile printing machines ordered from a known Chinese partner with advance payment of around 100%. The seller changed shipping company and the machines were never received and the shipping company did not provide a tracking number. The European company couldn't do anything because there was no contract.
• Goods never shipped: purchase of alloy steel with advance payment of €30,000. The Wuxi manufacturer kept using Covid restrictions for not shipping the goods. After two months, the Chinese supplier stopped responding to emails.
• Scam on notary and RMB exchange fees when selling to China. According to the purchase order, the seller had to pay 50% of notary and currency exchange fees to the buyer. After the fees were paid by the seller, the buyer disappeared.
What do these cases have in common? There are six red flags of potential scams, but no absolute rule.
• The seller does not have a website, or no Chinese version, or no ICP filing. If there is no company name in Chinese, you don't have any legal information. It could be anybody. In order to be legal in China, all websites need to have an ICP content filing.
• The stamps or chops used in the contracts do not have legal value in China. Legal Chinese chops are standardized in size, are round and have a big red star in the middle.
• T/T payment in advance to Chinese seller. A scammer wants to be paid before shipping the goods. Use other options, such as letters of credit. If you go ahead with an advance payment, limit the percentage. If something goes wrong the possibility of getting the money back is small.
• Suspicious bank account provided by the Chinese seller, such as that of an individual or another company.
• The registered capital of the company of the Chinese seller is not paid yet. This means the company probably has no assets. It is easy to check the registered capital of companies.
• The seller is asking to cover notary or other additional fees.
One or more of these red flags does not automatically mean that a company is not safe, but tells you to be cautious.
How to do background checks and do due diligence? Seven preventive actions:
• Ask the Chinese seller a copy of its business license, which includes all the legal information.
• Check if the information on the business license is correct by for example consulting the website of the National Enterprise Credit Information Publicity System or other government or credit platforms. You could also check if a company had any legal issues.
• Verify that the contact person is authorized to negotiate on behalf of the company, including his business card with full Chinese name. Make sure the contract has the proper Chinese chop affixed to it.
• Contact the EU SME Centre and your representations in China.
• Establish a solid contract in the original version, including clauses on payments, deliveries and quality inspection.
• Hire an auditor for on-the-ground inspection of the goods in China. If the Chinese company refuses, you should be very cautious.
• Hire a Chinese lawyer for in-depth due diligence in case of bigger transactions.
Mr. Petino mentioned that the above is not legal advice as the EU SME Centre's advisors are not lawyers.
Useful resources:
• Guidelines on how to minimize risks of scams when buying in China
• Guidelines on how to draft sales contracts when exporting to China
• Webinar recording: the ABC of commercial dispute resolution
A Q&A session concluded the webinar. What to do if the company chop is invalid? Mr. Petino: The risk is that Chinese courts might not recognize the contract. You might provide additional evidence such as email exchanges that proves the involvement of the company. Contracts need to be on paper, as electronic contracts are not recognized by the courts.
What to do about companies with the same name? Mr. Petino: There can only be one Chinese name and that is the only legal name. You cannot register a company under a name that is already registered. English names have no legal value.
