For foreign companies doing business in China, or with China, often times calls for some kind of co-operation and mutual dependency with local companies, be it in the form of a JV partner, distributor, manufacturer or other form of supplier. In order to minimize the accompanying risks when engaging in co-operation with a Chinese partner, a foreign investor should consider the following advices when analyzing a Chinese company with which it is, or potentially, will do business.

Approach the company as a potential customer. This will enable you to see how the potential partner is dealing with its own clients and give valuable input to future strategic planning. Enquiring competitors to the potential partner will also give you insights. The approach here should also be as a potential customer shopping around; otherwise competitors can be reluctant to talk openly. Competitors view should always be taken with a grain of salt though.

Company introductions provided by the potential partner should also be carefully analyzed. Ask your own network for advice and information that will help understand the potential partner or the industry in which it is doing business. The same goes for their suppliers and customers.

A thorough analysis of both the potential partner’s papers and operations will help state whether there is coherence between what is put down in paper and the actual production capacity, assets, etc. on the site. It is generally recommended to visit a potential partner more than once, since differences in workflow, inventory, etc. will be detectable through several visits.

Finally, delegating the tasks of the above mentioned to people outside your network can increase the risk of an incomplete investigation. However, there might be cases where documents can only be obtained by licensed Chinese lawyers, such as various files from the State Administration of Tax and the State Administration of Industry and Commerce.

This being done, it is always recommended to establish some form of internal control system after engaging in a partnership. Consequences of not carrying out a thorough due diligence before entering into a partnership or acquiring a Chinese company can result in the new shareholder bearing some unexpected off balance sheet liabilities or in other ways being a victim of fraud.