Abroad Manufacturing Due Diligence: A Information for Avoiding Pricey Errors


A toy importer, thrilled about getting its toys from Vietnam at an important worth paid $2 million upfront to a supposed “toy maker”. The dream changed into a nightmare after they realized there was no such Vietnamese toy maker, and no toys would ever materialize.

This importer isn’t alone. Many international corporations have confronted related pitfalls attributable to insufficient counterparty due diligence when contracting with an abroad producer. This publish delves into these pitfalls and offers clear suggestions on how one can sidestep them.

Know Your Counterparty: The Blueprint for Protected Abroad Contracting

Coming into right into a contract with an abroad producer requires you conduct meticulous due diligence in your putative enterprise accomplice. This contains confirming that you’re contracting instantly with the manufacturing entity itself, reasonably than with an offshore mother or father firm with no actual belongings. Vetting and absolutely understanding the corporate you’re coping with is among the most essential steps for avoiding pitfalls down the street. This may increasingly appear apparent however overlooking due diligence ideas and/or contracting with the incorrect firm has sunk many international corporations which have their merchandise made abroad.

Many corporations erroneously belief third-party sourcing companies, fully disconnected from the precise manufacturing unit producing the products. Ought to points come up, similar to product defects or missed deliveries, these corporations discover themselves cornered legally, capable of problem solely the sourcing firm they contracted with, not the core producer.

Equally, some companies contract with mother or father or holding corporations primarily based in areas like Hong Kong, Taiwan, or Singapore. These entities usually possess minimal belongings, including layers of issues when looking for authorized recourse.

Earlier than contracting with anybody, you must do your due diligence and ensure the occasion you’re paying just isn’t a shell entity or a sourcing firm with little or no belongings. As corporations migrate out of China for manufacturing, my legislation agency’s dispute decision attorneys have seen a spike in such third-party issues with rising producers globally. This third-party drawback is a matter world wide.

Why Counterparty Due Diligence Issues

Many international corporations mistakenly consider that partnering with offshore holding corporations offers added safety. Nevertheless, issues come up when these corporations can solely search recourse in opposition to intermediaries, or when these offshore entities lack belongings within the nation wherein the merchandise are being made. With out in-depth analysis you threat being left with no authorized recourse in instances of non-performance, high quality points, and even fraudulent actions.

How you can Discover the Proper Manufacturing Counterparty

A direct partnership with the manufacturing entity is commonly the most secure route. Offshore mother or father entities, typically devoid of serious belongings, can depart you stranded with out authorized choices. Understanding the real company construction is pivotal. Correct due diligence uncovers the true company construction.

To solidify your abroad relationships, you must think about doing the next:

1. Authorized Identification Verification

Get hold of the enterprise identify of the occasion you propose to contract with. In most of Asia, you must by no means rely solely on English names, which can differ from the corporate’s precise authorized identify.

2. Due Diligence Procedures

Conduct thorough due diligence on that precise entity, together with:

– Checking company registration paperwork to verify authorized possession and construction
– Reviewing monetary statements to evaluate stability and sources
– Verifying certifications like enterprise licenses are up-to-date
– Confirming the entity instantly owns the related manufacturing unit/belongings
– Trying to find litigation historical past or disputes involving the corporate
– Verifying the identify characters and English identify are constant throughout all paperwork.
– Overview historic modifications in possession, administration construction, or firm identify. Main shifts might point out instability or threat.
– For producers, request copies of their manufacturing unit certifications and audit reviews to validate capabilities, however be sure to have an knowledgeable evaluation these as a result of these are sometimes faked.
– For large cash offers, think about an on-the-ground audit of amenities and company documentation.

3. Working with Third-Social gathering Brokers

If contracting with a third-party agent, validate it has a strong monitor report and actual ties to the provider. Require ensures for efficiency. For extra on sourcing brokers, take a look at Sourcing Brokers When Manufacturing Abroad: The Lengthy Model.

4. Contract Negotiations

Negotiate protecting contract phrases like safety deposits, retention funds, and private ensures.

The Pricey Pitfalls of Counterparty Negligence

Efficient due diligence is paramount when navigating worldwide enterprise. Now let’s have a look at actual examples that illustrate the significance of counterparty due diligence. The next are simply a number of the real-world examples of corporations that received in bother by utilizing third-party sourcing brokers with out contracts to guard them or by not conducting ample due diligence earlier than shifting ahead.

1. The Bricks for Fish Supply

An organization, lured by the aggressive pricing of a Chinese language firm, eagerly bought a major amount of fish for his or her enterprise. Because the cargo docked in Seattle and staff started offloading, anticipation shortly turned to horror. The preliminary layers of the container consisted of outdated, unusable fish, however as they dug deeper, a surprising discovery was made. The majority of the container was stuffed with damaged bricks, strategically positioned to fulfill the load specs of the cargo.

This misleading tactic was a smokescreen. The delay in discovery, attributable to the combined cargo of bricks and fish, allowed the fraudulent Chinese language firm to dissolve its operations and vanish, however not earlier than duping a number of different unsuspecting patrons. This unlucky episode price the shopper each in financial phrases and popularity harm. It was a traditional bait-and-switch tactic with a pricey aftermath. If the shopper had undertaken an preliminary, deeper due diligence on the seller, this unlucky occasion would have been averted.

Ethical: By no means pay anybody abroad except and till you recognize who they are surely.

2. The No Fish At All Case

A South Carolina firm, trying to capitalize on the worldwide demand for fish, made a major order from what they believed was a good Qingdao firm. The whole transaction was made extra advanced as that they had already pre-sold this fish to a British firm, making the well timed arrival of the cargo essential. Nevertheless, because the supply date neared, inconsistencies started to emerge. The Qingdao firm that was anticipated to ship the fish by no means existed within the first place; your complete deal was a facade.

This duplicitous transaction had a domino impact. The British firm, having not obtained their anticipated cargo, resorted to authorized measures, and sued the South Carolina firm. Upon reviewing the transaction paperwork, attorneys from my agency shortly recognized a number of pink flags that ought to have been trigger for concern from the outset. This oversight not solely resulted in important monetary loss for the South Carolina firm but additionally entangled them in worldwide litigation.

Ethical: Scrutiny of all particulars is a defend in opposition to fraud and cascading repercussions.

3. The Non-Existent Toy Firm

American firm pays Vietnamese firm a pair million {dollars} to make a toy for it. Vietnamese firm by no means makes a single toy. American firm hires my legislation agency to discover choices for pursuing the Vietnamese toy producer. Our worldwide dispute decision attorneys have a look at the manufacturing contract and spot that the signing occasion is a totally completely different entity than the Vietnamese toy producer with which our shopper thought it had the contract. It seems our shopper’s contract was with a “sourcing guide” who operated out of a $600 a month single workplace in Hong Kong. Skeptical of ever with the ability to acquire from this firm, our shopper (properly) chooses to not pursue litigation

Ethical: At all times confirm the authenticity and authorized standing of your online business companions earlier than parting with any cash.

4. The Delayed Christmas Lights

A few years in the past, an American firm referred to as us after simply having realized that its two-million-dollar order of Christmas tree lights wouldn’t be delivered to america till December. We referred to as the Chinese language manufacturing unit, and so they informed us that they had no concept who our shopper even was. It turned out that our shopper had unknowingly been utilizing a sourcing agent (we figured it out by taking a look at some Chinese language language paperwork) and it had no contractual relationship with the precise manufacturing unit. To make issues worse, the Chinese language manufacturing unit was deliberately not producing our shopper’s order as a result of our shopper’s sourcing agent owed cash to the Chinese language manufacturing unit. Our shopper ended up having to pay hundreds of thousands extra to the Chinese language manufacturing unit to get it to ship the lights on time.

Ethical: Direct contracts with producers forestall middlemen points and assist guarantee manufacturing precedence.

5. The No Treatment Manufacturing Contract

European firm will get dangerous product from its Chinese language shoe producer and so refuses to pay the remaining $800,000 or so for the cargo. European firm then will get sued in China and retains my legislation agency to help. Seems that the lawsuit in China has been introduced by a Chinese language sourcing agent whose contract with our shopper makes clear that it will get paid for brokering every transaction, whether or not the transaction goes effectively or not. In different phrases, there would have been a very good probability this sourcing agent would have prevailed in its lawsuit in opposition to our shopper as a result of it had fulfilled all necessities of its cope with our shopper, and the producer offering dangerous product was irrelevant. These kinds of contracts are disturbingly widespread. Our shopper ended up settling.

Ethical: Contracts instantly with producers needs to be used to supply clear high quality management necessities.

6. The Producer with no Manufacturing facility

American firm hires out the alleged finest United States producer for a selected kind of sporting items product. This U.S. producer informed American firm that it might make the sporting items product for the American firm in China. American firm agreed and inside a couple of 12 months it realized that the American firm didn’t have any factories in China; it was outsourcing the manufacturing to an unrelated Chinese language firm. American firm realized this after the Chinese language producer began promoting the American firm’s sporting items product as its personal. American firm additionally realized that the Chinese language producer had secured a patent on the sporting good. This ultimately led to extremely costly litigation involving six lawsuits, one in China, and 4 in three completely different states in america.

Ethical: Guarantee readability about your producers and all the time defend your mental property rights throughout borders.

7. The Falsified Certification

A U.S. complement firm was lured by an Indian firm claiming to have Good Manufacturing Apply (GMP) certification. Submit-production, the importer came upon the manufacturing unit’s GMP certificates was a faux, and the manufacturing unit was ill-equipped for his or her manufacturing wants, inflicting them appreciable monetary losses.

Ethical: Double-check all certifications and keep away from basing choices primarily based on the idea that your producer is appearing in good religion.

How you can Safeguard Your Pursuits When Partaking in Worldwide Manufacturing

1. Conduct On-site Verification

There’s no substitute for first-hand statement. Visiting and inspecting a facility or workplace offers you an unfiltered view of an organization’s operations. Footage might be deceptive, and paperwork might be falsified. Standing on the manufacturing flooring and assembly with on-site administration offers insights that can’t be gained remotely. In the event you or a consultant out of your firm can’t make the journey, think about hiring a trusted particular person within the manufacturing nation to evaluate the state of affairs in your behalf.

2. Verify the Precise Authorized Identification

This ensures you’re partnering with a respectable entity. Mistaking an organization’s identification can result in contracting with fraudulent or unqualified companions. Guaranteeing you’re coping with the right entity from the beginning can save numerous complications later.

3. Conduct Rigorous Background Checks

By extensively vetting your potential accomplice, you scale back the possibilities of partnering with entities which have a historical past of fraud or misconduct. It’s higher to find potential pink flags earlier than coming into right into a binding settlement.

4. Confirm Direct Connections to Manufacturing or Operational Property

This affirmation ensures that your accomplice has the required infrastructure to satisfy their contractual obligations. It prevents potential disruptions attributable to lack of sources on the accomplice’s finish.

5. Set Clear Contract Phrases

Clearly outlining expectations and cures for non-compliance protects your pursuits. In case of disagreements or breaches, a well-drafted contract can present authorized readability and safety.

6. Take into account Third-party Verification

In the event you can’t conduct on-site checks personally, it could be smart to interact a neighborhood knowledgeable or company to take action in your behalf. Their native information and unbiased perspective can unearth potential points that may stay hidden to an outsider.

By diligently following the above steps for each potential accomplice, you’ll be making certain that you simply’re coping with respected, steady entities. The intricacies of worldwide contracts could be intimidating, however the fitting stage of due diligence drastically reduces dangers.


The distinction between a profitable worldwide enterprise and a pricey misstep usually lies within the stage of due diligence performed earlier than pen meets paper. Investing time and sources within the applicable stage of due diligence will assist safeguard your monetary pursuits and defend your  firm’s popularity from potential hurt. Your upfront due diligence will prevent heartache down the street.