Are You For Real? Vetting Suppliers on Alibaba
It wasn’t until their IPO last year that Alibaba really started to become a household name in the US, but for those of us working in China, Alibaba has been a key component of our toolbox for much, much longer. As one of the oldest and largest directories of products and manufacturers, Alibaba is my go-to search tool when I need to find a specialty supplier in China. Like any tool, the more you know about how to search, the more effective your searches will be.
Before we get into using Alibaba, we need to talk about some general background about doing business in China. Your goal, regardless of how you are being put in contact with people in China, is to understand all of the players involved in the transaction. I call this the push for transparency. Transparency does not come easy in China, but only in having transparency can you protect yourself for the ways in which things can go wrong. There is nothing wrong with buying through a distributor, but if you think you are buying direct from the factory when you’re really buying from a third party, you can get in a lot of trouble when things don’t go according to plan.
Factories, Trading Companies, and Agents
At trade shows around the world, you’ll meet people claiming to represent Chinese mainland factories. I say claiming because there are several different types of people and relationships that you will run into, all of whom say they are employed directly by the factory. Some of these people may indeed work for the factory directly, some work for trading companies or distributors, and others are independent “agents” that try to match up buyers with factories and take a cut from being in the middle (sound familiar?).
Your greatest challenge, regardless of whether you’re at a trade show, or searching online, is to determine which of these three people you are dealing with; all three types can serve a purpose but transparency is key. Unless you’ve really hit the ground running and have hundreds of thousands of orders to play with for your first foray into China, there is a case for using each of these the three types. The challenge is to get past the smoke and mirrors to understand how to get the best value out of them. You should not be opposed to any creative relationships which help you deliver your goods, but you must always push for transparency.
Agents, especially those that specialize in a particular area, likely know a lot of local suppliers of a particular genre of goods. An agent sourcing vacuum formed plastics is likely to know quite a few vacuum formers, and will be able to help find one that is the right fit for you.
Factories in China, like those in many other areas, do not necessarily want to deal directly with all of their customers, especially before they get to know you. As in other countries, factories in China sometimes use distributors or trading companies to handle the finer details of their transactions. Factories make the goods, but then the trading company sets up the payments, currency conversions, the export of the goods from China, and dealing with the after sales service to the customer. A trading company may trade goods from many factories or just one, they may specialize in a particular type of good or dabble in anything; some offer value added services like on-site project management, while others do nothing but facilitate exports and file paperwork. Really important to note that China participates in VAT (value-added tax) refunds, claimable upon the export of goods. What this means is that your trading company is likely receiving a government tax refund equal to anywhere from 7-17% of the value of your transaction with the factory. So, unless the trading company is performing work worth more than that, they should not be adding any cost to your transaction.
Another very important note about trading companies: sometime you will need to use a trading company in cases where the factory does not have an export license for the goods that they are producing. Unlike many nations, China has both entry and exit customs, meaning that the firm exporting goods from China must have a license to export that classification of goods. There are many cases of factories setting up their own trading company to buy and export their goods; this is typically done for tax advantages.
The last category of person, the agent, is often the least helpful in transactions. These folks will meet you at the airport, take you around to lots of factories (and lavish restaurants/karaoke/etc), but they are often not incorporated as trading companies, so while they likely have good customer service skills, the transactions set up by agents are often very complicated: you’ll find yourself visiting several factories, then when it comes to purchase, a new trading company will need to be involved to handle the export. You may need to pay your agent, who pays the trading company, or you’ll pay the trading company and they will give a kickback to the agent. Typical agent commissions are around 5%, but you’ll never really know for sure unless you push for transparency.
So in summation:
Agents know a lot of factories, and are potentially good for introductions but don’t normally add a lot of ongoing value. In a transparent relationship you will most likely want to attach a static value to the services of an agent; you might negotiate for a set price plus X dollars per day of taking you around to factories and translating. Remember also that the factories are paying them a commission for bringing in a customer, provided you do buy.
Trading Companies do add value in many cases. They sit in the middle, offering more benefit than an agent in the transaction, but you’re still one step removed from the factory. In the Push for Transparency, you need to get a good understanding for how much power the trading company has over the factory; this is usually fully apparent in the first meeting in which factory management, you, and the trading company are all sitting at the same table.
Factory direct relationships offer the most control, provided that you have taken the time to build a good relationship, and you have rewarded that factory with orders on a semi-regular basis. Forego this last part and the factory is likely to get bored with you after 2-5 quotes that don’t result in an order.
As we push for transparency, there are a few important tests that you can perform easily. I will talk about them in the context of our on-the-ground tours of China, but these same exact tests can be performed on suppliers that have listed on Alibaba as well. As always, common sense prevails, and the simple tests that are the most effective: make sure a factory is really a factory, make sure the name on the bank account you are about to pay matches the name of the factory with whom you’re interacting.
Another great test is to explain that you travel to China frequently (regardless of whether this is true or not), and will likely visit their office or factory during your next visit. Gauge their reaction, are they excited or do the excuses start immediately. Is it “ok, the only time we may not be available is a customer visit next week on Monday and Tuesday” vs. “we’re moving the factory to a new location, so the new location is not ready to tour until next month, but our sister factory is performing all of our work for us right now”
The chop test
China is one of the only places in the world where I have done business where a rubber stamp has the same power as the founder of the company. In China it’s called the “Company Chop” and it usually lives in a safe in the general manager’s office. This circular rubber stamp can basically make any document into an official document. Everything printed by the company will generally be stamped by the company chop, from tax filings to pay stubs issued to employees. I’ve seen firms absolutely debilitated when one founder makes off with the company chop, rendering the firm unable to make or accept payments.
One other item that needs a chop is the invitation letter that a firm would write in order for you to get a visa to visit China. You may have a visa already…they don’t need to know that; By asking for an invitation letter you will now have a copy of the company official name, before even setting foot in China. The name shown on the chop needs to match the signs on the factory, the name on staff business cards, bank accounts, etc. You don’t need to speak Chinese, just match the pictures.
Firms in China usually have official company names that include either the city or state in which they are located (there are some exceptions to this but it is rare). As an example, when we incorporated the representative office of Lynx Innovation in the city of Jiashan, it became “Jiashan Lynx Limited”; later when we formed a WFOE (Wholly Foreign Owned Entity) in Jiaxing, it was called “Jiaxing Lynx Innovation Limited”. Unlike in the US, firms in China, when incorporated, must have a factory or office registered at the time of incorporation. In the case of professional service firms, this office is likely in a high-rise building downtown, in the case of manufacturers, they’re likely to have leased or purchased a factory building. In either case firms need to have to have their name, in Chinese character, posted somewhere on the property. This can be as simple as having your business license hung in a frame in the lobby to (more popularly) a carved stone or metal front entrance sign at the gate to your factory.
The photo here shows one of the most common types of entrance signs that you will see in China. One of the easiest ways to verify that you are dealing direct with the factory is to compare the name on this entrance sign with the name on the business cards of the people with whom you are interacting. If the names on the cards don’t match the name of the factory that should be a huge red flag. Again, don’t run at the first sign of these issues, but rather use them to push for transparency.
One important note, don’t worry the factory does not have their own corporate email; many firms forgo having their own email addresses, instead every person at the company just uses their personal email. As recently as 2012, I’ve even received business cards from government officials that had “@qq.com” or “@163.com” email addresses. Similarly salespeople rely mostly on WeChat and Skype to interact with their international leads, so don’t be surprised in they ask for your Skype name in the first 5 minutes of meeting them.
Be very wary, however, of professional firms that don’t have an office or manufacturers that don’t have a factory that you can visit.
Just as firms in China need to have a registered business location, they must also have a registered business bank account (only one!). When making a wire transfer to a bank in China, you’ll be required to add in the name of the payee, in Chinese character. Make sure that the payee name is the exact same name as the company as shown on the factory. If it does not match, beware! You will have little recourse if you make a payment to your agent and they fail to transfer the money to the factory producing the goods. I’ve heard so many creative excuses from firms as to why I needed to make a payment to some other account, most of which bordered on hilarious; some of the best include:
- Send the money to my cousin’s account, since our bank branch here in town flooded with heavy rains
- Our manager stole the company chop, so please send the money to my wife
- We’re moving to a new city so you need to pay our sister factory because they will do the assembly for us
The list goes on. Don’t be surprised, if upon challenging an excuse you get another one in reply. I always said sometimes it feels like an agent or trading company just tries all of their excuses out to see which one you’ll believe.
Ok, you’ve got some background now. Lets get to the real reason that you came here: Using Alibaba to find factories.
A lot of the above lessons that apply to in-person and on-the-ground sourcing trips also apply to Alibaba as well. As with trade shows and in-person meetings, listings on Alibaba are made by all three types of people mentioned above; Actual Factories, Trading Companies, and Agents. As with in-person meetings, there are many tests that you can perform in the virtual world as you push for transparency in your sourcing efforts.
The first thing that you’ll want to do on Alibaba is to set up an account. You don’t need to have an account to search, but having an account enables you to save suppliers to your “favorites” and, more importantly, an account gives you access to the Alibaba trade manager, a chat program that many suppliers use to communicate with customers. For those suppliers that do use trade manager, I have found their response times lightning fast.
When searching for suppliers, the first thing that you will want to do is limit your search to a specific geographic area. You can do this in two ways; firstly, Alibaba has a built in filter function which allows you to drill down into countries, states, and cities. While this function works ok, I’ve found that it is far easier and usually produces better results to simply add the name of the state or city into the search box. For example, if you’re in Shanghai and looking for plastic injection molding, you may get better results by searching for “Shanghai Injection Mold” than you would by searching for “Injection Mold” and then filtering by “Shanghai”.
Alibaba has, over the past few years, added on quite a few extra services to help vet suppliers; they have their own auditing, and verification process. These systems are relatively new, however, so I can’t say how great or reliable of an impact they are having on finding suppliers within Alibaba.
Alibaba’s vetting services aside, there are quote a few signs that you should look for once you’ve identified potential vendors. Some vendors make it easy by posting photos of their factory and business licenses into an Alibaba photo gallery. Again, as with meeting suppliers in person, you’ll want to take a good look at the business license posted; take note of the company name, and again compare this name to the name shown on their Alibaba listing as well as any other names that you see in their photos, business contacts, etc.
Most suppliers will have examples of their work in a photo gallery or mini site on Alibaba. One of the most important things to look for is consistency of product. Is everything that they’re showing made using the types of machines they would likely have if they are the type of supplier that they claim to be? For example, if they claim to be in the injection molding business, are most photos examples of injection molding work, or do they show machined metal, gift boxes, and television remote controls? If a listing shows many different types of products, its much more likely that you are dealing with a trading company or agent than with a real factory. For narrowly focused suppliers, like metalwork or injection molding, you’ll likely find that most suppliers incorporate their specialty into their company name. you may find suppliers named “Guangdong Gold King Plastic Goods Injection Molding Company Limited”
When working with suppliers in most western environments, it’s common to send the supplier your drawings or your vendor requirements to determine wether they can build what you want or meet your supplier qualification requirements. In China things work a bit differently. Generally you have to start with a existing product from the supplier’s gallery. If they supplier makes coffee cups, you might start with “hey, we love model 3571, what’s the cost and MOQ?” and then a little later you might start making adjustments. “Hey, great coffee mug, but can you make the handle a bit larger?” and so on, until you’ve gradually created the product that you want (See my notes about the MP3-O-Tron in this previous post). We often remark that product development in China is done one phone call at a time; ask for too many changes at the start and you risk overwhelming the vendor.
The image on the left shows a recent search for Mainland Chinese plastic supplier. The top supplier (Blue arrow) is likely, based on their name and the very diverse products in their listing would lead us to believe that they are a trading company. Compare this to the lower listing (red arrow) which is likely a factory (or someone pretending to be a factory) that specializes in molded rubber products.
There are a lot of suppliers in China. It is the sheer volume of suppliers that is, as we face rising costs, one of the factors that will keep us in China for a long time to come. As an example, in Shenzhen or Shanghai you are likely to find suppliers in nearly any discipline, in nearly any size. Ideally, you want to minimize the time that you spend traveling from one supplier to another. For example, if you’re making a product that requires plastic, electronics, and packaging comprised of cardboard and a vacuum formed tray. You should endeavor to find suppliers in each of those disciplines that are in close proximity to one another.
Time to Go
There is no substitute for time spent on the ground with suppliers. Once you’ve developed some relationships with suppliers online, it’s time to get on a plane and go for a visit. Although there are risks, one of the easiest ways to arrange your trip once you arrive is to stay in an area near your suppliers, and have each of them pick you up and drop you off at your hotel.
You should leave your schedule fairly loose, as visits to factories often take far longer than you expect. I normally budget 2 days per supplier, firstly because inherently supplier visits take a long time, and secondly because your will often find that once on the ground you will identify new suppliers that you would like to visit. I often get a lot of these leads from the primary suppliers with whom I had scheduled visits while in the US. A plastic supplier that makes a lot of small products probably has one or more good packaging supplier that they work with. Lastly, for the uninitiated, Chinese business culture is built on relationships and those relationships are normally built over time, and more often then not over food and drink. These things take time, so take it easy on your first trip.