For many overseas buyers, the point of greatest risk comes before the supplier has manufactured anything.

The buyer has selected a supplier, negotiated pricing, approved a sample, and received an invoice requesting a substantial deposit. The supplier may require 30%, 50%, or even full payment before production begins.

Once the deposit is paid, the buyer’s leverage usually decreases. Before transferring funds, the buyer should complete at least the following ten checks.

1. Verify the Supplier’s Legal Identity

Obtain the supplier’s complete Chinese legal name, business license, Unified Social Credit Code, registered address, legal representative, and current registration status.

Do notrely solely on an English name. The company named in the contract should be the same company whose registration has been verified.

2. Confirm the Bank Account

The bank-account holder should generally match the contracting party.

Pay particular attention when the supplier asks for payment to:

• A personal bank account
• A Hong Kong company
• An unrelated mainland Chinese company
• A trading company that is not named in the contract
• A bank account that changed immediately before payment
• An account in a country unrelated to the transaction
• Alternative payment structures may be legitimate, but the relationship between the entities
  should be verified and reflected in the contract.

Bank account changes should always be independently confirmed using a known telephone number or separate communication channel. Email accounts can be compromised, and fraudulent payment instructions may closely resemble genuine supplier communications.

3. Determine Whether the Supplier Is a Manufacturer or Trading Company

Ask whether the company owns the factory, leases the facility, or purchases products from third-party manufacturers.

A trading company is not automatically a bad supplier. It may provide valuable sourcing, quality-control, logistics, and communication services. The problem arises when the buyer believes it has contracted with a manufacturer but is actually dealing with an intermediary that has limited control over production.

4. Verify the Factory and Production Capacity

A site visit or operational investigation should confirm:

• The factory’s address
• The entity operating the factory
• The machinery and production lines
• Current production activity
• Approximate staffing
• Quality-control systems
• Storage conditions
• Capacity to complete the proposed order
• Whether key processes are performed in-house or outsourced

A staged factory tour or a video call conducted by the supplier is not equivalent to an independent inspection.

5. Review Ownership and Management

Identify the supplier’s shareholders, legal representative, key managers, and related companies.

Frequent changes in shareholders, management, legal representative, or registered address may justify additional investigation. Related companies may also reveal prior disputes, regulatory penalties, failed businesses, or assets held outside the contracting entity.

6. Search for Litigation and Enforcement Risk

A supplier involved in numerous lawsuits may be experiencing financial or operational pressure.

Relevant matters may include:

• Unpaid supplier claims
• Employment disputes
• Bank-loan defaults
• Lease disputes
• Product-quality claims
• Intellectual-property disputes
• Enforcement proceedings
• Restrictions imposed on individuals connected with unsatisfied judgments

Not everylawsuit is significant. The pattern, timing, amounts, and subject matter are more important than the raw number of cases.

7. Check Administrative and Customs Records

Government records may disclose regulatory penalties, abnormal-operation listings, license problems, customs issues, or other compliance concerns.

China Customs maintains an enterprise credit and compliance system and publishes certain information concerning customs registration, credit status, administrative licenses, penalties, abnormal-credit listings, and related measures.

For an export supplier, customs registration and export activity can help test whether the company has the international trading experience it claims.

8. Verify Certifications and Test Reports

Do not assume that a certificate displaying the supplier’s name is authentic or applicable to the product being purchased.

Confirm:

• Who issued the certificate
• Whether the issuing body is legitimate
• Whether the certificate is current
• Which factory and legal entity it covers
• Which models or product categories it applies to
• Whether the certificate number can be independently verified
• Whether the tested product is the same as the production product

Certificates are sometimes altered, borrowed from related companies, or presented for products different from those being sold.

9. Investigate Intellectual Property and Subcontracting Risks

Determine who owns the tooling, molds, product designs, software, specifications, and
other materials used in production.

The buyer should also understand whether the supplier will subcontract any part of the work. Unauthorized subcontracting can create quality problems, confidentiality risks, labor and compliance exposure, and uncertainty about who has access to the buyer’s technology.

Where intellectual property is important, the buyer should consider contractual protections specifically designed for use in China rather than relying only on a standard Western-form nondisclosure agreement.

10. Use an Enforceable Written Contract

Purchase orders and email exchanges may not adequately address the risks of an international manufacturing relationship.

• A supplier agreement should clearly identify the Chinese contracting entity and cover matters such as:
  
• Product specifications
• Quality standards
• Inspection and rejection rights
• Delivery deadlines
• Payment milestones
• Tooling ownership
• Intellectual-property ownership
• Confidentiality
• Subcontracting
• Warranties
• Remedies
• Dispute resolution
• Governing language
• Proper execution and use of the company chop

The contract should be completed before the deposit is paid, not after production problems begin.

Due Diligence Should Match the Risk

A small test order may not justify the same investigation as a long-term manufacturing relationship involving custom tooling and millions of dollars in annual purchases.

The appropriate scope depends on factors such as:

• The amount of the deposit
• The total anticipated spend
• Product-safety risk
• Regulatory exposure
• Dependence on the supplier
• Difficulty replacing the supplier
• Importance of the buyer’s intellectual property
• Length of the relationship

The central principle is that due diligence should occur while the buyer still has leverage. The best time to discover a supplier’s identity, ownership, financial pressure, manufacturing limitations, or payment irregularities is before the buyer’s money leaves its account.