Foreign companies doing business in China can establish stable supply chains by finding local partners who are legally compliant, reputable, and capable. To achieve these goals when doing business in China, due diligence investigations are standard as a means for a company to determine that potential business partners can meet your operational requirements or compliance standards.
Two different types of professionals provide due diligence services; the first are lawyers, who may also direct private investigators to obtain even more information. Technical experts provide onsite factory audits, product inspections, and testing services before a product ships, to ensure that you receive the product you agreed to buy.
In this article, we will explain how to get China due diligence right, and avoid common problems others have experienced when trying to identify appropriate suppliers.
How Much Legal Due Diligence is Needed?
The depth of your China supplier due diligence investigation depends on your goals, for example general legal compliance with a focus on the FCPA will involve a search for past regulatory penalties or litigation implicating its executives, shareholders, or beneficial owner. In addition to this, anti-bribery compliance investigation will look for relationships or conflicts of interest between the supplier’s executives or directors and the client itself. Some investigation approaches look at legal issues that may impact business performance, with a recent focus on avoiding problems with export control restrictions and supply chain ESG requirements. This is achieved by inspecting raw material origins and supplier compliance with the law. A well-rounded approach, looking at both legal compliance and legal risk, ensures your company can avoid unreliable supply chains.
Common due diligence techniques for China include both using direct requests for information and stealth due diligence. The stealth approach uses open source intelligence methodology to supplement information from supplier questionnaires and interviews.
Investigators cross-check information with site visits and third-party interviews with affiliates and beneficial owners, and limited inquiry into the supplier’s business partners. Unless cutting corners, a due diligence investigation in China with good supplier cooperation takes two to four weeks, but a purely stealth investigations can be much faster.
Where to Find Public Information on China Companies
Business Status: The China Business Credit Lookup System provides governance information, regulatory penalty, and litigation records.
Personal Property: The Personal Property Finance Lookup System shows security interests filed on personal property such as equipment and raw materials, but does not cover any kind of vehicles or financial instruments.
Court Judgments: China Judgments Online, Credit China, China Enforcement Lookups, and the China Court Notices websites show judgments, but some are unavailable due to confidentiality requirements or delays in posting information, which raises a risk the information is outdated.
Company Reputation: Searches can be run in Google and WeChat to understand how the market and news media in China sees them. Public information can provide insights into what the supplier is doing in markets and about the scale of their operations. However, private company documents including financial records, resolutions, and business transactions are protected trade secrets unless voluntarily provided. China public company information is easier to find in public sources.
If you know where supplier real property is situated in China, you should have property title and mortgage filings reviewed. There is an important caveat that merely having the supplier’s legal name is not enough to identify all of their real property, nor will having a list of property addresses.
A full view of a supplier’s assets and liabilities generally cannot be found using public sources. Nonetheless, these challenges can be overcome to an extent by having an attorney request business registrar filings on your behalf, such as corporate change history, board resolutions, and filings. Accessing private supplier information by engaging due diligence firms can sometimes be effective, and many companies have used them or private investigators. But caution is warranted in this case because you could be vicariously liable if they violate privacy or trade secret law on your behalf.
Merely purchasing and receiving information unlawfully, even if from a private investigation firm, is illegal in China. A well-known business case study is how investigator Peter Humphrey was incarcerated in China for buying investigatory information in violation of law of on a job for a major corporation, GlaxoSmithKline. Executive Mark Reilly was arrested on more comprehensive charges (New York Times).
With appropriate attorney oversight, a China due diligence best practice is to investigate the supplier’s affiliates and beneficial owners because there is substantial relevant information outside of the supplier entity in itself. For example, the supplier you are negotiating a deal with is usually a part of a network of affiliates controlled by the beneficial owner but have different shareholders, assets, and staff.
Moreover, the parent company and beneficial owner has substantial influence over a Chinese supplier’s reputation, debts, and business model. Therefore, due diligence investigations should take a close look at the supplier’s affiliates and beneficial owners. In typical cases, significant issues include supplier relationships with client management, regulatory violation liability, failure to maintain required licenses, and material litigation.
Early identification of issues can help you avoid making the wrong deals, or obtaining additional protective assurance such as getting additional performance guarantees. Foreign companies doing business in China in also face unique challenges such as language and cultural barriers, difficulty obtaining and verifying important information, and risk uncertainty. Experienced outside advisors can help a lot with these kinds of issues.
Technical Due Diligence
Once you have done basic legal due diligence on your supplier, the next step is to begin negotiations and insist that full technical due diligence in the form of audits, inspections, and testing is embedded in the contract. If the supplier refuses to sign a contract that includes these procedures, that’s a sign they do not intend to meet your customers’ quality expectations. Therefore, your supplier’s willingness to accept an audit, inspection, and testing process is necessary to ensure their success.
These processes in themselves are not a silver bullet; they need to be tightly integrated with the work of specialized attorneys, otherwise there are endless legal loopholes that dishonest suppliers can exploit against you. If this sounds like a headache, CBL integrates legal services from its network of attorneys expert in local jurisdictions, with supply chain consulting experts and translation support services, providing a turnkey solution so you can focus on your core business.
Factory Audits
Before signing the contract, make sure that your supplier agrees to allow you to audit the actual factory being used in production, and provide those reports to your lawyer to ensure they become enforceable representations.
The inspector will observe the production area and judge whether the factory is capable of producing the product adequately and is capable of complex workmanship. To make sure the factory isn’t cutting corners, the auditor will follow a quality verification checklist (ISO9000 based) to verify the factory’s work is reliable. Skilled auditors can eliminate risks that the factory is not even producing your goods, instead subcontracting it to a third party. Walmart learned this lesson the hard way when the media reported that their products were actually made in the Tazreen factory in Bangladesh that burned in 2012.
In a separate audit, typically ISO 26000 but also following local Chinese regulations, the auditor investigates pay records, worker interviews, and relationships to ensure social compliance. Chinese law has more recently cracked down on use of third-party temporary agencies, the use of which is tightly regulated as we describe in detail here. In a 2025 China Labor Watch report, the Apple iPhone was a center of widely reported allegations that suppliers making the iPhone egregiously and exploitatively broke these compliance rules.
What if the factory refuses to let you audit their facility? In most cases, this is a sign that the factory is doing something dishonest in order to cut costs while offering the same price. While it eliminates the most risks for the least cost, factory audits do not cover every risk, because what looks like a reliable factory can still do shoddy, rushed work.
Product Inspections
You’re may have heard that Chinese suppliers can often get extremely upset when inspectors turn up. In the famous Fonterra Foods poisoned baby formula scandal, executives allegedly decided against rigorously inspecting product, because those local partners manipulated them into worrying that locals could get upset and “lose face.” Nonetheless, allowing factories to ship without allowing pre-shipment inspection is usually an unacceptable risk.
In today’s China, contracts have become more widely relied on than in the past, so having your lawyer insist on effective, highly specific quality inspection provisions in your written agreement provides a strong foundation for enforcement. This is particularly true when the order size is large enough ($10,000+) to provide enough bargaining power to make this worthwhile.
The contract terms should reference the ISO2859-1 random quality inspection standards and set a specific acceptable quality limit (AQL) based on your specific needs, for example 2.5% major defect is common. If the product inspection is refused, then the supplier must pay for the cost of subsequent re-inspection. It’s noteworthy than on small orders in China, it’s more common to pay the supplier to cover their labor costs when inspecting quality, even during re-inspection. The specification sheet in the contract needs to be sufficient to be legally enforceable, avoiding any ambiguity or lack of definition about any manufacturing decision.
Many ecommerce businesses have reported that suppliers in China to push back or use dishonest tactics to make quality inspections hard. For example, the supplier may insist on a long advance notice window and restrict visits to a limited number of inconvenient dates. They may say inspections are not allowed by the contract, or require unreasonable cooperation fees. They may refuse entry saying allowing it would expose their proprietary process. They may offer internal records and argue with you that inspection is redundant, a waste of time, and needless.
In these cases, having a solid contract written in Mandarin Chinese that takes into account exactly how inspections will occur, provides sufficient negotiating leverage. You can also be persuasive without immediately referencing the contract, by saying it’s your company policy, a promise made to your customers, or similar factors outside your control that show this is not up for re-negotiation.
Laboratory Testing
Your supplier needs to agree in advance that you will choose the testing laboratory. Often, the supplier wants to recommend their preferred local lab, but those are usually untrustworthy. Many certified labs in China even sell passing certifications without performing any test, so letting your supplier get involved opens the door to a variety of unacceptable risks.
Secondly, get it in writing that your inspector will visit the factory to pick samples, which will then be delivered to the lab you designated. This strategy will protect you from attempted circumvention. Another common problem to look out for is, laboratory tests are done on only a few samples because testing processes are very expensive. Dishonest suppliers take advantage of this limitation, and may try to handpick several perfect samples that they know will pass the test. Before signing a contract, insist your own inspector must have access to visit the factory and select products that are representative of what your customers will receive.
All of the above negotiations should occur during the due diligence phase before agreeing to make purchases, and not after. The possibility of being legally liable in a contract for meeting test requirements can reveal whether your supplier even intends to meet your expectations. If they are planning to cheat you the possibility of being caught will cause them to withdraw from the negotiations.
Another possibility is that the supplier offered an unreasonably low price, believing that the only way they survive in business is to compete on price alone, with only the perception of quality. These suppliers will sometimes say they need to sell at a higher price to meet your quality requirements.
Conclusion
In this article, we learned that when doing business with a China supplier, you need to do legal due diligence on the company, searching through public records and reputational channels to identify common legal risks. Looking at affiliates and beneficial owners can reveal whether the supplier has problems that otherwise wouldn’t meet the eye.
When you have decided this is a legitimate entity, the next stage is to negotiate technical due diligence: factory audits, product inspection, and testing. These control steps are taken before signing a contract and before shipping. Negotiating about how pre-shipment due diligence will occur in advance is a second layer of defense against supplier risks; it will reveal if the supplier actually intends to follow through with your deal, or if they are planning on lying to you from the start.
This is a lot of work and complexity to take on yourself. Fortunately, we have a turnkey solution so you can focus on your core business—CBL integrates legal service from its network of attorneys expert in local jurisdictions, with supply chain consulting experts and translation support services. If you’re concerned about managing China supply chain risks, make sure to get in touch.