How to Avoid Business Risk For Trading Company?

Friday, 07 March 2014 09:20

With the domestic and international trade develops, there are various risks in the process of trade cooperation, many trading companies lack of risk awareness and risk prevention awareness, so it will result in losses in the trading process. The following are several samples that trading companies meet the business risk and the final solution in the trade cooperation process. We hope it can play the role of reference to effectively avoid commercial risks.



Case I

A foreign investment company selected a domestic company as its supplier, the domestic company said to the foreign investment company that it had strong capital and it was one of the suppliers that had most complete varieties of the products. The foreign investment company signed a purchase contract after detail discussion. But after the foreign investment company paid the first payment, the domestic company disappeared. At this time, the foreign investment company realized at once that it may be cheated then they carried out investigations on the target company immediately.


After checking the archives of the target company in Administration of Industry and CommerceAIC, the foreign investment company learned that the company did not register in the Administration of Industry and Commerce, the company registration number did not exist and there was no qualification of a legal person for the company. At the same time, the foreign company conducted on-the-spot investigation according to the company's office address and found the office address was actually a commercial and residential building. There was no staff in the office and no one answered the phone. The building guard revealed that this company did not exist and he also met up with other companies that came to visit it similar like the foreign investment company. The company did not have a fixed place of business and products. The office address provided to customers was false information. It finally drew the conclusion: the target company is a "paper company", the payment paid by the foreign investment company lost. It may not be able to recover the losses by litigation. Through this painful lesson, the foreign investment company said if it can carry out the investigation to the target company before signing the contract, it will avoid the loss. They realized the importance of credit in the commercial transaction process and said that it must carry out investigation to partners before cooperation.


Tips: trading company shall carry out investigation on the other side for the new trading partners to confirm the partner is a legitimate business entities and it has fixed place of business and products, integrity, so that it can avoid dealing with a false company.



Case II

A foreign investment company was a supplier of a Chinese enterprise, the Chinese enterprise suddenly increased the order quantity and the payment cannot be returned in time. The foreign investment company carried out in-depth survey of the target company and the investigation focused on the target company’s investors, financial status, operating conditions, sales and channel.


Survey firm contacted the target company directly in the investigation and understood that the company carried out normal operations but refused to accept any kind of survey. It obtained the following information through the direct way and relevant government statistics channel:

The target company was founded in 2008. It was a limited liability company by two domestic companies (domestic joint venture). The financial statements it submitted showed there was no sales for the company from 2009-2010. In order to confirm the above situation, the survey firm contacted the local taxation bureau, and found the target company did not pay tax in local tax authorities from 2009-2010. There were two doubtful points: 1. the target company was still in business but there were no sales. Why did it only purchase without sales. 2. The financial data showed the target company had not achieve sales income from 2009-2010, but the company still participated in the annual inspection of local AIC in accordance with the relevant state provisions on time. Therefore, the survey firm conducted further investigation and conducted the investigation on the investors. One shareholder said that the legal representative of the target company had not held positions and the other shareholders had divestment, the legal representative and the shareholder information of the target company registered in the AIC was just the registration of the first establishment of the company, the company did not submit the changes of the shareholders and the legal representative to apply for the corresponding changes to AIC. At the same time, the survey firm found another "XX Limited company" is in the operation in the address of the registered target company. It was found that XX Limited Company shared office space and staff with the target company by the investigation. The legal representative is the son of the legal representative of the target company. The two companies are associated company.


The investigation conclusion: The target company was a legal entity with long-term management confusion. The related personnel of XX Limited Company conducted business by the name of target company. But the target company's financial condition was poorer and loss for several consecutive years. The debt paying ability was very weak.. Finally the foreign investment company held a meeting to make decision to suspend the cooperation partnerships with the target company.


Tips: trading companies shall be cautious on trade cooperation. When it is found that the customers carry out business by two enterprises name, it should make clear the relationship between them and focus on scale of assets and business of the legal entity that sign the contract with them to avoid unnecessary losses. When there are abnormal symptoms on the trading partners, such as frequent changes in shareholders equity, office move frequently in one year, it must remain vigilant to avoid risk.


Case III

A foreign investment company was mainly engaged in sales of chemical products. It understood on its major competitors in China, it had not enough industry and competitor information, it expanded the sale scale of product in mainland of China blindly and had invested large sums of money and recruited a large number of sales staff. The foreign investment company thought very optimistic in sales in the region but the results did not get the expected return, the product sales were poor with serious losses. At this time, the foreign investment company realized that it blindly expanded sales scale very badly, they had not enough comprehensive, profound market information and competitor situation, it is limited to access to relevant information channel, therefore it decided to conduct a thorough investigation of competitors and entrust the professional Survey firm to carry out the investigation on its competitor.


The foreign investment company first identified the top ten enterprises in the industry and then selected the list of the survey competitors. It mainly conducted the investigation on product sales, procurement, sales channels, marketing strategy, sales department structure, management team, financial status of nearly 3 years, after sale service, company's development plan of the target company and so on, especially for the product sales and channel of the competitors in the area.


Survey firm obtained information through various channels (statistics by government, enterprise internal information, newspapers and magazines, trade associations, professional personage). After conducting the depth survey of the target company and the related personnel interview, it verified the results of the investigation, comparison analysis of several target companies, analysis of advantages and disadvantages and the relevant suggestions of professional consulting organization. It provides an accurate and detailed competitors survey report for the foreign investment company. Finally the foreign investment company understood the gap between the enterprise itself and the competitor according to the survey report and developed new marketing programme. The financial situation of enterprises had been improved obviously. So the competitor investigation is important in commercial decision making and marketing strategy.


Tips: When the trading company makes new marketing plan, expands sales scale, makes an important decision, the most effective way is to carry out competitors survey, it is the so-called know yourself and know your competitor, you will succeed. As long as there is enough understanding to the competitors, it can occupy in the market, it also can avoid business losses of blind investment.



Case IV

A foreign investment company planned to purchase a batch of products in mainland of China and export to foreign countries. It would choose a domestic manufacturer which had complete product category, large-scale as a supplier. The foreign investment company selected a domestic company after screening to negotiate. In the process of negotiation, it obtained some related information from the company. It understood that it was a company registered in AIC. It   founded 10 years ago and the registered capital was 80 million yuan. After several years of development, the current employees reached more than 600, annual sales was 300-400 million yuan, the export ratio was about 60%, the main export regions were Europe and the United States, Japan, Southeast Asia with more than 200 customers. The product passed the ISO9001 certification. The above information was very attractive for the foreign investment company and it met the criterion of supplier selection.


The foreign investment company discussed and selected the company as its supplier in China. But the foreign investment company heard that the company had delayed delivery time before the contact was signed. The company had not invited the foreign investment company to visit its factories. The foreign investment company immediately commissioned a professional consulting company to carry out the relevant survey of the target company.


The survey firm conducted the investigation on the company registration information in AIC and understood the company was established for only 6 years, the registered capital was 20million yuan. The annual sales revenue of nearly two years was only more than 50 million yuan. The products were mainly sold in the domestic market and few products were exported. The information did not match the information in negotiation. After the on-site investigation on the company, they found that the company had only 200 staff, the production site scale was not as large as negotiation. In addition, it was said by the customer of the company that the product did not pass the ISO9001 certification and really delayed in delivery. All the above investigation results showed that the company exaggerated their own strength to customers to hide the actual operation situation. Finally, the foreign investment company did not choose the company as a supplier.


Tips: In the trade process, the partners often hide the actual operational situation and exaggerated propaganda because of poor strength and mislead the trading company to cooperate with it. It results in economic disputes and losses, so it should be cautious before the cooperation. It should conduct the necessary investigations on partners.



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