Large American companies are moving manufacturing outside of China, often abruptly. Many manufacturers were hit in 2020 by very soft demand and cancelled orders. Their government is becoming more serious in getting taxes paid and regulations complied with. And so forth.
The logical conclusion? Many factory owners who have accumulated debt and don’t see the light at the end of the tunnel are tempted to go out of business.
Are there ways for you to monitor the situation and assess whether there is high risk so that you start relying on a backup instead and building up more inventory?
The good news is, yes, there are often signs you can probably pick up.
Here are my tips for assessing your Chinese supplier’s financial health:
Making use of public records
Certain elements of risk may be available as public records. They can point to a degrading financial situation if they appeared recently. Here is a non-exhaustive list:
- Dishonored checks
- Civil litigation
- Performance defaults
- Charges & mortgages
- Adverse local media coverage
Other information of public record can also give an idea of the situation. If the supplier has added a shareholder recently, that may be part of a refinancing effort?
Sending someone on site
You are probably unable to visit your key suppliers these days. Maybe you should still have someone (typically, an auditor, or a project manager) pay them a visit.
Counting the number of operators who are busy, and comparing that to the number last year at the same period, would bring good insights.
Are they shrinking? Maybe they have gathered all their operations on one floor when they used to occupy 4 floors? They certainly lost considerable business. If they weren’t paid on the last shipments to those lost customers, it might be a matter of weeks before they are officially bankrupt.
Is the owner in a good mood, and is happy to take you to a nice dinner? Or does it seem to be hiding and avoid public places (which might indicate he contracted ‘shark loans’ and has trouble repaying them)?
You might also pick up some good signs. Do they still spend time on tasks and projects that bring dividends in the mid- to long-term? For instance, preventive maintenance, office renovations, keeping up quality systems, sending staff to training, etc. It can be hard to assess these points from a distance.
Better yet, have they invested in new equipment, or are they planning to?
Any other signs that they might be in a rough financial situation?
Have they asked for advance payments from your side? That usually means they are in a very tight cash situation.
Have they started to be much more rigid? For example, refusing to rework some issues? That’s a sign of a company that is scraping by, day by day.
If you present them with a contract to sign, do they just refuse to even read it, or do they sign it without any comments? That’s also not the sign of a company projecting itself 10 years from now.
Are they putting an order on hold? Maybe that’s because they don’t have the cash to give a deposit to a key supplier?
Have they had repeated issues due to their own suppliers? It might be due to the fact that they owe a lot of money to those suppliers, who are not happy and not making efforts.
Is there any equipment they had to dispose of? (Maybe in order to get a fresh infusion of cash?)
Visiting them, counting the number of operators who are busy, and comparing that to the number last year at the same period, would bring good insights.
How do Sofeast help you to assess whether a supplier is at risk of going bankrupt?
There are several ways in which we can help assess suppliers on the ground here in China for you.
Perform a credit check on them
A credit check might detect some elements of risk.
In it we’ll be checking points like:
- Official business details and registered capital
- Adverse data (dishonoured checks, debt, defaults, civil litigation, etc)
- Credit history
- Public records (Bankruptcies, etc)
We send you an easy-to-read English report that includes a risk evaluation.
The credit check price is 199 USD for 1 company – contact us to request this.
Check their legal records
Maybe they lost in a court of justice because they didn’t pay certain things? Maybe they have added a shareholder recently, as part of a refinancing effort? We could check those things in a Legal Records Check (99 USD for 1 company).
Audit the factory
Especially this year (2020), clients are unable to visit China due to the closed borders thanks to the coronavirus pandemic. So, in order to observe the supplier and examine for some of the telltale signs as mentioned in the section before this above, you can consider sending in an auditor.
Aside from examining your supplier’s production capability and reliability (always good to keep tabs on this eve with existing suppliers), your auditor will also be able to check the state of the manufacturer, see if there are any red flags, and ask probing questions that can shed light on how the business is doing (we discussed these kinds of on-site supplier evaluations in this podcast episode).
Factory audits start from 279 USD per man-day in major areas of China.
If you have never had the experience of a factory closing its doors forever, I can assure you it’s not fun. Several of our clients have been in that case. I hope the little checklist I put together in this article will be useful. Do you have any experiences or points to add? Let me know in the comments, please.
If uncovering and dealing with supply chain risk (such as losing a key supplier) is important for your business (it should be!), take a look at my series of blog posts on Supply Chain Risk Management over on QualityInspection.org.
Editor’s note: This blog post first appeared on QualtyInspection.org here and is edited and republished for Sofeast readers.
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