Are you performing The Ferrari Test?

Don’t let the fact that the companies in this article are all large lull you into to thinking you’re too small to get ripped or that you’re too important a client for your factory to pull these kinds of tricks on you:

Despite well-known risks in China, auditors there often are not inquisitive enough or alert to possible fraud, some experts say.

Auditors in China may pore tirelessly over documents and yet “fail to spot the red Ferrari parked on the doorstep and fail to ask who it belongs to, how it was paid for,” said Peter Humphrey, founder of ChinaWhys, a Shanghai-based anti-fraud consultancy that has investigated white-collar crime and fraud at scores of multinational firms in China.

China experts said it is difficult to do business there without encountering demands for gifts or kickbacks.

Transparency International, a corruption watchdog, surveyed business executives who said Chinese firms in 2011 were second only to Russian companies in being most likely to pay bribes abroad.

As always, the key to being successful in any work in China is the Due Diligence done BEFORE the project begins–and don’t fret if this DD takes longer than the production time of your project itself.  It’s time well spent.

If you’re spending more money than you can afford to lose (or can afford to pay double for the same qtty’s) then you need to go to China BEFORE you ever start any work or sign any agreements.  Visit factories/suppliers actual facilities, not just their trade-show booth.  Go to at least 2-3 different cities as well (and I don’t mean three neighboring cities like Dongguan, Songgang and Huizhou either).  Spread your visit out over multiple provinces and cities so that you can really get a feel for the level of development in the surrounding area (likely where all the sub-suppliers will be located).

A trip to multiple cities in China for 7-10 days can cost less than $5K.  Compare that with the cost of being 14-30 days late or the cost of shipping incorrect, poorly produced and/or unacceptable product back home.

There are things on the ground that you can never get from Skype, email, photos and even trade shows–you have to be there to know what it’s really like.  Spend the money now to be assured that you know what you’re dealing with or spend it later on repairs, rejects, late-delivery and other hassles.

Good luck!

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