By Richard N. Frasch and Charlotte Zhanghaixia Westfall
Horace Greeley, the famous early American newspaper editor and founder of the New York Tribune in the mid-1800s, famously responded to the question of how to become rich with the statement “Go West, young man!” The same advice is often slightly reformulated and given today as “Go East, young entrepreneur!” Although people today can argue about the correct direction to go to China from the United States, the essence of the statement still holds true today!
Many people predict that China will be the largest economy in the world in the 21st century and will soon surpass the United States. Although the relative cost of manufacturing in China has risen in recent years, the country is still often the cheapest location for American retailers and manufacturers to source goods or parts.
This article is first in a series exploring how U.S. companies can source goods in China, and it focuses on how those companies that cannot afford to establish overseas offices or manufacturing operations can effectively and efficiently source suppliers in China. We will focus on how a smaller U.S. company can and should go about locating suppliers in China.
1. Internet Search
The easiest and most cost-effective place to start a search for suppliers in China is on the Internet via search engines such as Bing or Google, and B2B sourcing platforms like Alibaba, Global Sources, and Made-in-China.com. Thousands of suppliers are listed on these sites, and you can streamline your search and increase the number of legitimate sources by filtering results for only those entries labeled as “gold member,” “verified supplier,” “onsite supplier,” or “accredited supplier.” Good reviews offer some indication that the supplier is legitimate. Some B2B sourcing platforms have endorsed service provider lists and supplier blacklists. For example, Alibaba has a list of banned members.
Some sites also offer special services to further protect buyers. For example, Global Sources has credit-check services and supplier-capability-assessment services that will provide suppliers’ key business information including company status, production capabilities, and product quality.
Be aware that verified suppliers at these sites may only mean that the companies are verified to exist; it does not necessarily mean that their reputation, production capability, or quality have been verified (for example, a gold member at Alibaba is a paid status). Further, while these sites have large directories of “suppliers,” some are simply traders or wholesalers, not manufacturers. You won’t get the best price from traders or wholesalers, so you need to do your own diligence on potential suppliers.
It is worth mentioning that Global Sources also has China Sourcing Reports (CSRs) that have in-depth studies focused on specific sourcing industries in China. In the CSR, you can find qualified suppliers and their verified contact information. This report also provides industry overviews, top-selling products, and other pricing and market information, although such information may not always be up-to-date.
2. Social Media
Social media is not necessarily an ideal platform to identify suppliers. Only some suppliers have a social media presence, but they can be a good source for feedback or reviews of potential suppliers. Therefore, be cautious when relying on such platforms and remember to do your own due diligence as the information provided is often unverified, reviews are often anecdotal, and sample sizes may be small.
Also, there are now many professional LinkedIn groups focused on sourcing in China:
- China Sourcing
- China Sourcing Forum
- China Sourcing, Networking, Import, Export, Trading, Manufacturing
- China Sourcing Group
- China Trade Group
In addition, some forums such as the Alibaba forum, Smart China Sourcing at Global Sources, and China Sourcing Blog offer good tips. Finally, be sure to check on any complaints other people may have shared at Ripoff Report.
3. Trade Shows
Trade shows are another way to find legitimate suppliers. By attending trade shows, you have the opportunity to talk to potential suppliers face to face about their companies, products, production capacity, quality-control procedures, and other key business areas. Such direct interaction can help you evaluate suppliers and verify their abilities.
Two trade shows in China are worth mentioning. The Canton Fair is the largest trade fair in China and is held twice a year in Guangzhou, located near Hong Kong in southern China. The Canton Fair attracts thousands of attendees with a huge variety of products. The East China Fair is the largest regional trade fair in China, and is held once a year in Shanghai. There are other regional trade fairs in China that are usually industry-specific. Search China Sourcing Fairs for specific industries.
If you want to avoid the headache of traveling internationally, there are also trade shows in the U.S. that have a significant Chinese presence. These trade shows are generally industry-specific. For example, the International Consumer Electronics Show (CES) in Las Vegas has many Chinese participants. The downside of such shows is that you may be limited to a small pool of potential Chinese suppliers because many of them will not attend these trade shows, and therefore you may not get the best deal possible. Also, you may be out of luck if the product you are sourcing is not covered at one of these domestic trade shows.
Effective communication is very important when attending trade shows. The good news is that most exhibitors have handouts in English, and many speak English. The bad news is that many have limited spoken English skills. Consequently, if you decide to pursue a transaction with a Chinese company, you will have to retain a translator later on in the diligence and negotiation process. Finally, be aware that not all suppliers at these trade shows are manufacturers (some are traders or wholesalers), so be sure to ask them about this directly.
4. Verify Suppliers
It is essential to perform adequate diligence on potential suppliers. The information provided by a potential supplier on its website and other media channels is a good start, but you need to verify whether a supplier in fact exists and is what it claims to be.
This verification can be done in a number of ways. Arrange a visit to the relevant local government agency to check the company’s registration. You need to know whether the supplier has the necessary production capability, certificates, and communication and technology skills to meet your expectations in terms of quality, quantity, and delivery times. You also need to confirm in some fashion the supplier’s financial statements by, for example, requesting audited statements from the supplier, or at least requesting statements prepared by a reputable Chinese accounting firm, in order to get a sense of the potential supplier’s assets and capital base to estimate whether you would be able to recover any loss should a contractual dispute arise.
5. Buying Directly from Suppliers
Once you are able to identify, verify, and vet a potential supplier, you can buy products directly from them or through a B2B sourcing platform. Buying directly from suppliers can save you money if everything goes smoothly, but it also leaves you open to the risk of being scammed or not getting your money back if the products turn out to be of poor quality.
Another important issue is the type of payment. Safer payment options include paying through a bank letter of credit issued by your bank or an escrow with a reputable third party. Other higher-risk payment options such as credit cards, wire transfers, or similar payment methods can also be used, but many of these methods do not always provide reliable dispute mechanisms to recover payments when fraud or other contractual problems arise.
6. Commission-Based Sourcing Agent
If buying directly from a supplier sounds like too much trouble and risk, you can seek help from a commission-based China sourcing agent who has sourcing experience. These agents can help identify and verify suppliers and facilitate communications. Their fees can range from 3 to 10 percent of the purchase price.
While sourcing agents may do some of the “heavy lifting,” including identifying and verifying suppliers, you still need to stay closely involved with the purchase transactions. Often, commission-based sourcing agents are not equipped or sophisticated enough to manage production and quality control effectively or to make sure transactions are done cost-effectively. Be aware that there might also be hidden commissions between sourcing agents and Chinese manufacturers. The good news is, after working with sourcing agents a few times and familiarizing yourself with the process, you can eventually manage your own deals without their help.
7. Sourcing Service Provider
If you want someone who can help you with the entire sourcing process from end-to-end, hire a sourcing service provider, which can provide a wide range of services: supplier identification, price negotiation, supply management, quality control management, logistics and shipment management, and other sourcing matters.
Sourcing service providers charge certain fees for managing purchase transactions, but there are pluses and minuses to consider. On the plus side, a sourcing service provider can relieve you of the hassle of identifying and verifying suppliers, production inspection, product quality control, and logistics arrangement. However, using such a service denies you the opportunity to learn about the Chinese markets. Also, the cost of using a sourcing service provider runs higher than using a commission-based sourcing agent, so expect more upfront costs at the beginning of the transaction.
8. Trading Company
A trading company may be a good option if you want to buy a small amount of products and don’t wish to deal with all the complexities of sourcing in China. The trade-off is that your costs will generally be higher, as a trading company will make a margin on the goods being sourced. You will also find it hard to discover information about the supply chain, and you will still need to be on the lookout for product quality issues.
Sourcing goods in China poses many risks for U.S. companies, ranging from poor quality goods to fraud to difficulty in enforcing contracts. Of course, all of these risks are not unique to China but because it is still a developing country, the potential for such risks are often much greater than in developed countries. However, the potential for significant cost reductions may make this risk worth it as long as you do your research beforehand and proceed with caution.
Be sure to read the second article in this series: Sourcing Goods and Suppliers in China: 8 Common Mistakes U.S. Companies Make.
Charlotte Zhanghaixia Westfall is a corporate and securities attorney based in San Francisco with both U.S. and Chinese legal training, who advises U.S. and Chinese clients on cross-border business strategies and related legal issues.