Any business plan for expanding, relocating, merging, or partnering operations will necessarily include good due diligence of the partners with whom you to plan to join forces. Who can imagine deciding to set up a business with someone you know hardly anything about? What Chief Executive would decide, based on only the word of the potential partners themselves, that the organization was viable, their management capable, and their financial status sound and appropriate?

Common sense tells us that no company would behave this way, indeed, that no company would be allowed by its Board of Directors and its shareholders to make decisions in this way.

But it happens in China all the time. Some of the world's largest and most prestigious companies have come to China and based major investment decisions on nothing more than the name of a company, a few introductions, and a few promises.

Why?

In the early days of China's reform, it would have been difficult indeed to perform any kind of recognisable due diligence, as both government and society were very closed, and standard commercial priniciples and concepts had not yet resurfaced. Business was done through Ministries and their subsidiaries at provinicial and city levels, special companies were set up by the government to negotiate and sign commercial contracts and provide import and export functions, and no real private commercial sector existed at all.

Companies who wished to do business in China met with whom they could at government level and were grateful to have any door at all through which to enter the market. Lack of transparency was, of course, a huge issue, but that was second to building and capitalising on market opportunities.

With the structural reforms which have taken place particularly since 1995, however, more and more commercial activity is occurring in the private sector, and the relationship between government and business has been reorganized. Much that was under the direct control of the government is now independent. The rules for foreign investment have been revamped, and foreign companies are now actively investing with private companies as their partners. This means that foreign companies find themselves in an interesting paradox. On the one hand, they have gotten what they wanted, i.e. a freer hand to operate in China. On the other, however, they are subject to whatever the market has to offer, with very little way of differentiating between and among the validity and viability of individuals, companies, and organizations.

Many companies therefore skip any real due diligence process at all and go straight to negotiations with their designated partners. And they wonder later why the operation runs into problems!

The relative openness which now exists in China now allows a due diligence process to take place. Unfortunately, very few companies are able or willing to provide this sort of service, preferring instead to focus on creating what they hope is a good legal and financial framework between the foreign and Chinese parties who have decided to operate together, in the expectation that this framework will suffice to alleviate and resolve any problems which may occur between the partners. The problem is that this framework is often built on a very unstable foundation.

This is where China Channel can help. Our strength is understanding your business requirements, and channeling them into appropriate business structures with proven and reliable partners and supporters. If you already have potential partners, we will help you find out more about them, and we will give you our findings and our recommendations based on those findings.

After all, isn't this what you would do anywhere else in the world?