Ultimate Guide Verifying Chinese Supplier! Must Read!

Everyone coming to this website is buying or planning to buy from China. However, for most buyers, they might not have a lot of experience in buying from China, or to be precise, in verifying Chinese suppliers.

China Import Forum try to put up a thorough guide on how to verify a Chinese suppliers. Please feel free to add, comment, bookmark and SHARE.

1) Visit the supplier
The most authentic way to verify a Chinese supplier is to visit them, only after onsite visit, you could tell the legitimacy of your supplier. And what is more important, to tell their production capacity, production management, factory scale, product quality, workmanship, equipment and production line.

So for buyers who could afford that, we suggest to do a site visit either themselves or to use the service of a third party company to do the visit.

2) Bank account
Making payment to company account only, in stead of personal account, except for small amount sample payment, which, if requested by supplier to avoid complicated accounting procedure, could be sent to their personal account, or pay through paypal, western union.

A company with export license should have a foreign currency company account. For suppliers that don’t have export license(hence don’t have foreign currency company account, they have RMB company account, but RMB can be transferred internationally), then normally they would use the export service of a third party export company(payment is also requested to sent to third party company).

In this circumstance, we suggest to do a onsite visit to the supplier to make sure they are legitimate, sign contract with the supplier only, and specifically mentioning the fact that payment need to be made to third party company. No need to verify third party export company, as the transaction is conducted between the buyer and the factory.

If a supplier don’t have foreign currency bank account, which suggest the supplier is not a big size and established supplier, as established supplier will use their own export license and personnel to do the exportation. Applying for export license is very easy, but for many small even medium sized factory, they find it very complicated to manage the export formalities themselves, they have to hire accountant that is familiar with international trade, need to hire experienced staff to take care of B/L, payment, tax rebate. Most factories are located in rural area and remote area, so it is hard for them to attract experienced talent to work for them.

So my suggestion is if you are big suppliers, you should use suppliers that have export license themselves, so that they can hit the ground running. If you are small to medium sized buyer, you should make your own judge, factory without export license(also foreign currency company account) maybe lack of export experience, but that might turn out to be a virgin land or gold mine, their prices are often better, they are growing fast, they will value your business(on the contrast, big suppliers will bully small buyers).

3) English and Language
We have a client from Canada, who placed an order to a factory in Guangdong province, she is buying kitchen products. The order turn out to be a disaster, the factory messed the color, messed the packing, messed everything. The client try to negotiate a way out with the supplier, but told me that they kept changing minds after 3 months of discussion. I called sales girl who the client have been in contact to figure out what is going on. I realized the biggest problem with the supplier is that the sales girl is the only English speaking staff in the factory and her English is really poor, she had problem understanding the client’s English and had problem in expressing herself in English.

The language barrier is critical, if at the stage of supplier screening, you found that the supplier’s English is not good enough to communicate, don’t hesitate, leave them now.

4) Supplier Address
In many cases, buyers want to deal with factories directly, 95% companies you met in Canton Fair or found on alibaba claimed they are factories, while with proper verification, you will find they are trading companies.

You can actually judge by their address.

Factories don’t locate in building, they are in village, town, development zone, outskirt. So if the supplier’s address is in room 1205 fortune building, it is a trading company. If it is in a residential area like building 7, unit 4, room 703, it is a small and new trading company, maybe even a fake company. If a company is in a development zone, then it is a factory. If a company is in No. 8 Fortune Road, search the road on the map, if it is in the city, trading company, if it is in the outskirt, factory.

This won’t be 100% correct. But I am sure 95% will be correct.

5) Company name
According to the Chinese company law, legally incorporated Chinese company should use a company name like “location + brand name + business nature + co.,ltd”, for example, Guangzhou Fortune trading Co.,Ltd. or Guangzhou Fortune Plastics Co.,Ltd, the former is a trading company, the latter is likely a factory.

Based on the registered capital, group company don’t need to use location, they can register as “Jiaoguang Group” or to be precise “ Jiaoguang Group Co.,Ltd.”, the registered capital for group company should be more than 50 million RMB.

99% companies have location in the company name. If the registered capital is big enough(more than 10 million RMB), they can registered as “Province + brand name + business nature + co.,ltd”, if your registered capital can reach several million RMB, you can registered as “prefecture level city + brand name + business nature + co.,ltd.”, such as Guangzhou Fortune trading Co.,Ltd, Ningbo Fortune shipping Co.,Ltd, if your registered capital is more then minimum registered capital but less than say 2 million RMB, your name mostly would be “ County name + brand name + business nature + co.,Ltd.”.

So maybe you should buy a Chinese map to study Chinese geography, it would be helpful for you to do business in China

Some old companies still use factory in their company name “Guangzhou Fortune Plastic Factory”, if you check their business license, those companies must be incorporated many years ago.

6) Email Address
Many buyers use email address to tell a supplier, to some extent, that is a good trick. If a supplier use hotmail, 163, yahoo, sohu etc free public email account, then they don’t think a lot about branding or company image.

That is correct.

But many small and growing factories use those email account, the factory owner might not be well educated, and they are at a stage killing each other with lower price. They are yet to develop a branding strategy on how to present themselves.

However, they can offer good price, good quality. They are virgin land, waiting to be discovered, explored and evaluated. I assume most buyers are small to medium buyers, they come to China to buy cheap but quality products, not brand but expensive products, which western countries are good at.

Then don’t ignore these kind of suppliers. Verify them, educate them, give them a chance to see if they are equipped(with equipment, human resource and experience) to hit the ground running. Among these suppliers, don’t use those with zero experience in exporting.

All the trading company care about their image, use email address that is related with their brand name and website.

7) Branded products
Do not buy branded cheap products from china, such as iphone, Nike, Adidas, LV bag etc. The products are either fake or refurnished(for electronics).

90% scam stories online, the victims are trying to buy cheap iphone to resell in their own country.

Reasons given in this article.

When cheap brand buyer wire payments, “suppliers” will send you fake products; they might just disappear or find excuses for one delay after another in sending you the products; in some cases, they will ship stones instead of iphone 5 to you; they might send you wrong tracking number to earn themselves more time to scam others.

Shenzhen and Jinjiang is famous for their entrepreneurship, Shenzhen is the leader of electronics products, Jinjiang are frontrunner for sports and shoes products. Shall I add that most scammers are also living in these 2 cities.

8) Hongkong Offshore company
Hongkong have almost zero threshold to set up a company while in mainland China it is more difficult to incorporate and maintain a company.

So many Chinese set up offshore companies in Hongkong.

We suggest not to deal with offshore companies in Hongkong, based on the following reason:
a. this is one man show, no office, staff, telephone, address in hongkong, it is a SHELL company.
b. Practically, if you have a dispute with a hongkong offshore company, you will have a dilemma, if you sue the company in hongkong, there is nothing there. If you sue the company in mainland China, sorry, in Hongkong, they adopt different law system, it is not a mainland China company.

I know some users here might own a company in hongkong, and must be outraged with what I am saying here. Please don’t take it personal. I know many people who open shell companies in Hongkong are good people, trying to start their own business while not able to set up a business identity in mainland China.

But from verification point of view, would you deal with a legally incorporated company or a individual? Would you sign a contract if you know a company is respectable? It is all about due diligence, about chance, about risk management.

Some mainland companies also set up an offshore companies in Hongkong to deal with payments. That is okay, if after verification the mainland China company is real and trustworthy and you sign the contract with their mainland China company properly.

9) Contract
If a supplier don’t review and amend your contract clauses, they sign the contract you draft without any amendments, this is a negative sign, this suggest they didn’t take the contract seriously.

10) trial period
Everyone is good at talk, see how they perform and deliver. It is a long process when you contact a supplier, request for information, request for quotation, send them email and get reply, give them phone calls, negotiate price, arrange sample and negotiate contract, and right before you sign the contract and wire payment, please stop here and think twice – HOW DO YOU FEEL ABOUT THE SUPPLIER? Are they reliable? Do they easily promise? Do they keep their promise? Do they deliver what they say? Are they professional or do they act like child?

This trial period is like dating before the marriage. If you stop here, there is hurt, but you can get over the hurt quickly.

Don’t mislead by their cheap price and fancy promise. Use this trial period to see if they are RELIABLE and PROFESSIONAL.

11) Going through orders and difficult times
If after all the due diligence you have made, you decide to marry a supplier, congratulations. Enjoy the honeymoon, but check them again during the honeymoon.

Only time can tell a person, a friend and a supplier. See how they perform the contract, see how they address problem, see how they solve problem.

A business relationship will only be the right track if the relationship have encounter some challenge and your supplier score a high mark in face of the challenge.

When you receive the products, you found many defected products, what is their reaction to your complaint? Are they able to come up with a solution? Did the problem come again in next order?

12) Credit investigation
For big orders, aside from onsite verification and all the verification tips mentioned above, I would suggest to do a credit investigation on the company, especially check their finance situation and litigation records.

13) Company operate in B city only but registers in A city
We have verified many chemical suppliers are operating this way, registered in Qingdao, or Tianjin or Dalian, but with an office in Shijiazhuang or somewhere in Hebei province.

This is improper and has potential risk.

We have a client from South Africa, buying Urea from one of such supplier. They registered in Dalian, but operate in Shijiazhuang Hebei province. After getting 20% deposits, they can’t deliver products before the end of Novermber, when the export duty for Urea soured to something like 110%.

So the client have to get 20% deposit back(which is 160,000USD), the suppliers kept inventing excuses. In this case, there is a lot of barrier for litigation, according to Chinese law, the client should sue the supplier at intermediate people’s court of Dalian city, however, the local court might not be able to find the company to answer the lawsuit.

14) Online reputation
One good thing about internet is you can find information easily online from any part of the planet. Words spread fast. So you can search your supplier name on google, see what you find.

If you have any thought, suggestion or objection, please let me know. Happy Sourcing!!

Source: http://www.chinaimportforum.com/viewtopic.php?f=9&t=8