February 2014

How to Source From China Without Putting Your Money at Risk

If you’re looking to source from China, one of the first things on your mind will be the risk involved. Sourcing from any location carries some risk of the deal going bad and money being lost, but this risk can be especially high in China.

The good news is that there are many well-established ways to reduce your risk when sourcing products from China. The even better news is that we’ve listed out some of the most effective approaches for you here.

Quickly Eliminate the Obvious No-Goes

Sadly, the majority of bad sourcing situations we get contacted about could have been avoided with just a little bit of due diligence early on. Sometimes it is hard to believe the circumstances in which people will gladly wire their money to someone they’ve never even met. However, spotting the obvious warning signs might not be easy without experience, so let’s cover some quick pointers.

Firstly, if you’re sourcing from Alibaba or other similar sourcing websites, absolutely avoid unverified, unpaid suppliers. This includes all free accounts, unrestricted accounts and any kind of account that seems relatively easy to set up. If a supplier is unable to pass the basic test of setting up a professional, paid account, then something is clearly amiss. You might want to read about the Alibaba Gold system to learn more about this issue.

Secondly, always view or request documentation from any potential supplier. At a minimum, you should see a copy of their business license. You will probably want to see specific documentation related to the product or service you’re sourcing from them as well (examples). If they can’t or won’t show you this, it’s a big warning sign that something is not right.

However, another rule of safe China sourcing is 'be wary of documentation'. This means that when viewing bits of paper you are shown, you should bear in mind that:

  1. The documents prove next to nothing on their own.
  2. The documents are easy to fake.

The point here is that whilst you should require documentation as a bare minimum to quickly eliminate no-go suppliers, seeing the documents should not be seen as any kind of verification. That’s the next step.

Verify That Your Supplier is Registered

It’s very important to independently verify all documentation you are shown. In other words, you go to the organisation that granted the documentation and double-check with them that they do indeed have this documentation on record and that their records corroborate exactly with what you’ve been shown.

We’ve previously covered how to verify a Chinese business license and how the business registration number system works. The process should be easy but in reality it can be quite difficult, and requires some knowledge of both the system and the Chinese language. Have a look at our convenient company verification services for a straightforward solution.

We’ll reiterate the most important point of this article: verifying a Chinese supplier is necessary but not sufficient to ensure a safe deal. If the supplier’s official registration can’t be verified, then they are to be avoided. If it can be verified, then you can continue down the chain of further checks and verifications.

Verify Your Supplier’s Bank Account

As well as checking that the company you’re dealing with is officially registered, it’s also wise to confirm that they have a licensed bank account and that you’re being given the correct details for it. The document that can help you with this is the bank account license, and all but the smallest of Chinese companies will have one.

The bank account license is intended to show that a particular bank account belongs to a particular company, and that it is a business account that has been officially registered with the authorities.

Whilst you should only ever make payments to business accounts (never make payment to a personal account), it is not uncommon for Chinese companies to request payment to a business account other than the one on their bank account license. There are many legitimate reasons for this; read the article linked to above for more discussion of this issue.

Confirm Business Type and Business Scope

Apart from the fact that it exists, another important aspect of a Chinese supplier’s business registration is its name and business scope. As there are some requirements placed on Chinese company names, you can use them to determine what type of company you’re dealing with.

For example, you should be very interested to discover that the ‘factory’ you’re communicating with is registered as a 贸易公司 (trade company). You should also note, though, that many Chinese factories also establish and operate their own registered trading companies to facilitate trade without involving third parties. In these types of situations, you should also confirm that they have a registration for an organisation that will actually produce the goods.

You can determine what exactly a given business is registered as providing by looking at its business scope. This lists out the products and services that the company is legally permitted to produce and engage in. Look carefully at the wording to confirm what the company is permitted to do with the items in its scope; ‘trade’ and ‘consulting’ are very different to ‘production’.

Look at Registered Capital and Date of Establishment

You can also glean a lot of valuable information by looking at a Chinese company’s registered capital and date of establishment. Admittedly, if the company’s registration shows that it was established a long time ago, then there isn’t a lot of insight to take away from that. It may generate some trust depending on your situation and perspective.

However, if the company was established recently, and / or with a surprisingly small amount of registered capital, that can raise interesting questions. You may also find that companies claim to have been operating for longer than their registration shows (we recently saw a company that claimed to have been operating since 1988, but could only show a registration for 2012).

This information (business type, scope, date of establishment and capital) can be gold in communications with suppliers, because you can directly compare their claims with an official record. A China company verification report gives you easy access to all of it, as well as other information you can use in discussions with a supplier.

Carry Out Audits and Inspections

A surprising number of businesses sourcing from China fail to carry out factory audits and inspections during the process. This is an essential part of the sourcing process. If you get to the stage of sending auditors and inspectors, or visiting yourself, you’re already quite far into the validation process. That doesn’t mean you can relax, though; onsite work is what makes sure all of the above verification work was not a waste of time.

Also, don’t be fooled by Alibaba’s ‘Onsite Check’ service for their Gold Supplier system. The word ‘joke’ would not be out of place in a definition of ‘Onsite Check’. It is absolutely no substitute for arranging your own audits, inspections and factory visits.

See the excellent Quality Inspection blog for more advice on that aspect of China sourcing.

Don’t Drive Costs Too Low

A common mistake made by people looking to source from China is to doggedly pursue low costs to the point where the supplier has no choice but to either reject the deal or cut corners to make it feasible for them. The usual relationship between cost and quality applies in China just as much as it does anywhere else, even if Chinese suppliers may be able to offer some things cheaper.

Remember that the supplier needs to make a reasonable profit too, and that if you bring them good business you are much more likely to take priority in their production schedule, staff allocation and so on. You may well be mistaken if you believe that a supplier desperately needs you and your business.

Have a Contract

The final point we will make here is on the importance of having a contract, and having it in Chinese. As with every other point in this article, this is no guarantee that everything will work out smoothly for you, but it’s one more protective element that you should add.

A central benefit of a contract is not what it provides after things go wrong (which may end up being very little), but its potential power to prevent things going wrong in the first place. By using a contract, you can take responsibility for the details of the deal and make sure that everything is spelled out clearly. It also demonstrates that you’re taking the deal seriously and are committed, which helps to both ward off lower-quality suppliers and to increase trust from good ones.

Verify a China Company.

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Further reading