Company Screening: Why it is Important (with Real Worst Practices 😨)
Working with a new supplier, distributor or business partner may provide ample opportunity. However, there is also a risk because at the start of a relationship there is not yet that much experience in cooperation and a lack of trust. Risks may end up in delivery issues or payment defaults. Hence, vetting a business partner may expose potential challenges and support in designing applicable delivery and payment terms. Within this two-part blog we will first consider WHY it is important to vet a business partner and in the second part, we will explain HOW a company may receive some initial screening.
We will start with a look into "worst practices". It has to be pointed out that these are rare examples of things going wrong. Only 2% of the enquiries we receive handle such "business partner issues". Hence, ☝️ most business (between Vietnam and Germany) seems to work seamlessly. ☝️
😨 Worst Practices
Over the years, a number of companies has approached us regarding issues they had with their business partners. Please note that these occur on the German as well as on the Vietnamese side. There are some "black sheep" in both countries.
Here are original tones from our customer's issues:
👨💬 “(Our customer has) failed to pay invoices (…), appears to have gone into some form of administration – although we have yet to receive any formal communication from them on this despite repeated requests. (…) The actual amount outstanding is €16,086, which is a significant sum to a small consultancy like ourselves.”
👩🦱 💬 “Currently our company is conducting negotiations transactions and forward purchase contracts signed shipment of 50 tons of frozen pork in Germany. However, when verification information provider based on the provider of information has brought, we can not validate the existence of the supplier.”
👲 💬 "In February we ordered Nitrile gloves (...) They asked for a deposit payment of 132,000USD which we paid (...) Unfortunately the company was not able to delivered the goods that we ordered. Despite several contact attempts and an agreement to return the deposit by instalments we have not received any payment from them."
👩🦰 💬 “This February we attended the Ambiente Trade Fair in Frankfurt for the 7th consecutive year. There we met the German retailer – COMPANY. Last week, we discovered that (they) filed for bankruptcy in January but they placed an order with us on 19th March.”
👩🦲 💬 “We signed contract with COMPANY for ash logs. We paid them 24843EUR deposit (…). But it's been more than 1 year they didnt make any shipment. We called and emailed them but no reply.”
🧔 💬 "I write this mail to you in order to accuse about the cheating behaviour of COMPANY. They have cheated us to send deposit to load order of oak log and they go away."
👵 💬 "We are now facing very big loss because of these 2 containers bad quality. But what disappointed us the most is the attitude of COMPANY when we asked them to solve these claims properly for us. They offered us very good cargo and delivered the worst cargo we had ever seen. We are now suffering a lot."
When approached with such challenges, we support the parties with solving the issue at hand. Because we are not a law firm we mostly try to re-establish contact. However, salvaging such problems is mostly not leading to a peaceful end. It is very hard "to lock the stable door after the horse has bolted". In most cases either the allegedly damaging party is not reacting to mails/calls OR is putting blame on the allegedly damaged counterpart. Heading to a lawyer or arbitrator is usually not an option because contract values are deemed to small to warrant additional efforts and expenses.
Hence, such disputes mostly end up in a loss of the business in question and/or of company relations in general. This is especially hurtful for small enterprises for whom lower five figure (EUR) contract volumes have a severe impact on the overall result.
🤕 Why Things go Wrong
"Positive Discrimination" Against Germans (and Europeans)
This is more of a challenge on the Vietnamese side. Europeans in general - and Germans in particular - enjoy a favorable societal image in Vietnam. In most cases this is surely warranted. However, there sometimes seems to be a tendency of Vietnamese of putting to much trust into Germans because of their "good" image. This "positive discrimination" can lead to challenges because in every larger group "black sheep" will appear.
Lack of Communication
From our perspective this is the main reason for most challenges. Firstly, communication does sometimes not flow smoothly. Germans tend to demand clear deadlines or outcomes while Vietnamese are reluctant to transmit "bad" news. Secondly, oftentimes the two do not regularly communicate at all. This leads to situations in which expectations are building up while they are not being reflected with the other party. Many challenges originate here in regards to delivery dates as well as quality and technical issues.
Ignorance of Country-Specific Business Practices
For foreign companies, it is often hard to "read" their counterparts. What is deemed "professional" or "legal" in Vietnam/Germany? This is hard to understand. For example, in Vietnam it is absolutely OK to use "gmail" domains in a business context. In Germany, a company homepage must have an "Imprint" and info on data security. There are certain conventions on invoice formats and taxes in both jurisdictions. If a business partner does not know how to evaluate its counterpart's behavior it runs at risk of creating false assessments potentially leading to challenges later on.
Insufficient Company Screening
Many issues can be prevented by probing business partners. While many companies seem to do their homework in this regard there are some enterprises heading into new business relations without much preparation.
🌀 Which Companies and Sectors are Affected
As pointed out above, there are challenges on the German AND on the Vietnamese side. It seems noteworthy that so far we only have seen "fake companies" or "professional tricksters" in Germany.
There seems to be an agglomeration of cases in the field of food/agriculture as well as in timber. In both industries, traders - not the producers - play an important role.
Overall, most of the issues are generated in commodities. Our impression is that these are often traded without much personal contact which might lead to a loser understanding of "commitment" between the business partners and to an increased risk. This seems to be different in other industries, such as in investment goods, where relations seem to be closer leading to increased trust and decreased risk.
🤷 What to do
Firstly, it seems to be key to develop trust within an international business relationship. German and Vietnamese partners should therefore exchange regularly. This might increase cost but it also massively decreases risk.
Secondly, coming back to the title of this article, it is important to vet a new business partner. This may become very clear after reading the original tones and comments above. We will provide a guide on how to do an initial investigation of a new partner in Germany/Vietnam next week.
If you would like to know more about our company screening services you will find further info here.
And if you're a Vietnamese/German company experiencing trouble with a German/Vietnamese partner, feel free contacting us anytime!