A Factory Inspection Checklist: The Muddy Waters Edition

A client the other day somewhat embarrassingly told me that he had learned “a ton” from the Doing Business in China for Dummies book. I jokingly told him not to be embarrassed because I had actually for years recommended it to clients as one of the easiest to read books on the topic, and yet also quite accurate and quite good. I then told him that I knew its author, Carson Block, who has gone on to become rather famous, as Muddy Waters, “a scourge of listed Chinese companies“. I then mentioned that I, (and many other China attorneys and consultants I know) consider Block to be the foremost expert at ferreting out fraud in Chinese publicly traded companies.

But back to Block’s 2007 book on doing business in China. My phone call with this client reminded me that I used to send Block’s factory due diligence checklist to clients. I then checked Block’s Dummies book and (seeing as how its written by a true master of foreign company due diligence) it’s no surprise that it remains an excellent, if very basic manufacture’s due diligence checklist.

Block’s list suggests that your on-site factory due diligence consist of you taking into account the following:

  • Cleanliness. A sloppy workplace (including workers’ appearances) indicates a sloppy attitude, and most likely sloppy performance.
  • Organization. Be sure to take some time to understand the entire workflow. Does it make sense? Can you see any bottlenecks? If you do not understand something, ask questions. If you cannot ultimately understand why a factory’s workflow is a certain way, it may be a warning signal.
  • Machinery. Get thorough explanations of what the machines do, where they are from, and other detailed questions. Asking detailed questions about the machines will make you seem smarter (thus less gullible). Listening to the answers will in fact make you smarter. Once you have toured several factories, you can make comparisons.
  • Quality Control. The key here is the number and location of QC checkpoints. Figure out how the rejected parts are handled. If you cannot understand that, it is likely that the workers also cannot.
  • Employee Conditions. Happy workers make for productive workers. Be sure to see how the employees eat, sleep and live when they are not on the floor.
  • Location. The factory should be close to its suppliers – otherwise, there can be supply bottlenecks. It should also be close to a port from which it can ship. Finally, learn about whether there are utility quotas in the area that affect production – this is especially important for electricity.

This is a good, though really basic list and it applies to manufacturing due diligence not just in China, but everywhere around the world. It’s only flaw is the difficulty in conducting any on-site due diligence in many countries (especially in Asia) right now due to COVID.

What are your thoughts on it?