Verifying Chinese Suppliers - The Facts

Sending $1000’s overseas to someone called ‘Lulu’ who you have been chatting to online is a daunting prospect. It goes without saying that there are many honest, legitimate suppliers in China – but there are also a portion who most certainly are not. It stands to reason that one bad encounter could be so costly that it makes thorough supplier verification comparatively cost negligible.

Aside from the language barrier, carrying out due-diligence is also hampered by the very different business protocols, reporting requirements, ‘standard practices’ and the massive misalignment of expectations between Chinese and Western businesses.

Firstly, there are several different types of suppliers that can assist you in China. Knowing the type of supplier you are dealing with allows you to identify their business dynamics, which is key in accurately verifying them. The main types of suppliers are:

It is important to note that all these types of suppliers serve a purpose and can be the perfect fit. The art is figuring out which supplier fits your purpose for the current stage you are in, the type of product you want and the level of scale you need. It’s also important to recognise that the type of supplier will likely change as your business model does.

There are seemingly endless complexities to navigate to get to the core information you need to accurately verify a supplier. The language barrier is the most pronounced, however there is also range of inaccurate information to contend with – from humble typos to raging, unadulterated fraud.

Compounding this are the very different business practices and protocols that are commonly employed (or regulated) in China. That is to say that something which might raise a red flag for you, may not actually be an issue and some things which seem quite normal may in fact be a screaming red flag in the Chinese business environment. For example:

You are working with a supplier and notice that their company address is different to their factory address, which is nowhere near the port the product will be shipped from. This could be a very large red flag in a western business environment, but it could actually be explainable and part of a legitimate offer in the Chinese landscape, depending on the type of supplier you are dealing with, the type of product and the volume.

In contrast, a supplier who says ‘yes’ to everything – can reach all certifications and standards, supply every product you need and can ship to your door – this could be seen as a legitimate (and very fortuitous) supplier. In reality, there are very few suppliers who can ‘do it all’ and this would raise a red flag in our local China landscape.

So where does this leave us? So far:

Step 1. Know what type of supplier you are dealing with

Step 2. Understand the dynamics specific to that supplier’s parameters

You can find an exhaustive list of verification criteria in this Chinese Supplier Verification Criteria report.

Unfortunately, the really valuable pieces of information to accurately verify a supplier requires access to China databases and of course someone who can read and write Chinese. Ideally you would check:

·        Business registration and Legal status

·        Abnormal Business Operations registry

·        Dishonest Enterprise Database registry

·        Certificate verification

·        Their operational capability and reputation

·        Verify the locations of factory/s and office/s

·        Historical legal administration

·        Ownership structure and annual returns status

·        Customs and international trade data

If you don’t have access to this information, there are China-based services who offer fast turnaround and cost efficient Basic and Comprehensive Supplier Reports to fill this gap.

A quality third-party service provider who is in China should understand the dynamics around each type of supplier and verify them using suitable criteria, not just perform generic documentation and registration checks. On top of these fact checks, there are additional ways to further your due diligence.

Order samples

Whether you have decided on a supplier or you have whittled down a shortlist, ordering a sample is essential – noting that in some instances the sample may not be exactly like the product when it is in production. This can be more likely with samples of heavily customised products. Talk to your supplier about what is different and what the changes will be at the point of production.

Search for the Supplier’s reviews

Search for their company name in any western search engine, Alibaba, Made-in-China, you will be surprised what threads (past and present) may be found. Sounds simple, but keep in mind that most consumers are very quick to leave negative comments in review and not so good at making the effort to leave positive ones. Like every industry, reviews can be altered, removed or massaged and ratings are easily bought, so interpret these accordingly.

Ask for references

Some larger suppliers in more regulated fields will be happy to offer references, others will not. Very much depends on the size and industry of the supplier and references can conflict with confidentiality.

Ask questions

Test the supplier’s knowledge of the product, the packing process, China customs clearance and international shipping, how many units fit in a 20’ and 40’ container etc. Bear in mind that the salesperson you are speaking with may not have all the answers, but they should be able to refer to their management and find out. Do the answers make sense? Are they dodging certain questions? Is what they are saying largely different to other suppliers of the same product?

Where to now? We have detailed information about their business in China, have samples and are asking a million questions – do the answers you get match the detailed information report you have on their business?

This brings us to:

Step 1. Know what type of supplier you are dealing with

Step 2. Understand the dynamics specific to that supplier’s landscape

Step 3. Leverage a third-party service provider to compile a detailed report

Step 4. Spend the time talking with the supplier and checking them through as many channels as possible

Step 5. Match the answers you get from the supplier to the facts in the report to crosscheck information

By now you should have all the information available on which to make your decision. However, one last thing…

‘Trust your gut instincts’ is often referred to when verifying Chinese suppliers – I don’t believe this adds any value and in fact, presents unmitigated risks.

If you were dealing with a supplier who spoke the same first language as you, operated a business in the same manner as you, had many of the same life and business experiences as you and employed the same idea of ‘normal’ as you, then you could quite rightly rely on your gut instincts, as both the judge and the judged have common criteria.

The very opposite is the case with a Chinese supplier. As a general rule, their ‘normal’ is very different to your ‘normal. So, if your instincts are using your ‘normal’ set of criteria on which to base a feeling, how could that ever be an accurate assessment? It is like a dog judging a cat on the quality of its bark – doesn’t make sense, right?

What does make sense is basing your feelings and assessments on objective, accurate information. Relying on an instinctive assessment of Chinese suppliers can easily lead to missed opportunities, or worse, financial loss.

So now we have outlined the most suitable tools to verify a Chinese supplier. In saying that, there is always a level of risk dealing with someone on the other side of the world. If you are still uncertain, you can engage a supply chain consultant in China to mitigate risk and manage your affairs on your behalf,providing they are trustworthy and well educated in China’s supply activity space. We offer low cost consultancy options from basic guidance and risk mitigation through to full corporate strategy, which provides the ultimate due-diligence.