How to Source Safely from China: 4 Key Steps

For today's blog post, let talk about the important topic of safe sourcing from China. By far, the single most frequently asked question I get in the mailbag is something along these lines:

“Mike, I found what looks like a good Chinese supplier, but it is my first time buying direct from China. I have read the horror stories and want to source safe. What advise do you have?”

 

How to Source Safely from China

Here is my answer to the question about how to source safely from China.

Dear Jim,

Thanks for your email and interest in working with AsiaBridgeLaw.

I am going to assume that you have already selected a great product and know how to sell that product online or via traditional distribution channels.  That frees me up to focus on the key issue you raised about sourcing safe.
While each client has a different situation and needs a tailored approach to sourcing safe, when friends ask me, “what are the top-level items to remember when sourcing from China”, I tell them not to skip 4 important aspects of safe sourcing:

  • Register your IP in China, before you even start looking for a supplier, if you have something to protect. (This article explains why registration back home may not protect your IP in China.)
  • Conduct Due Diligence on the seller’s business, the deal offered and the quality system.
  • Have a well-written bilingual contract in place that links performance to payment
  • Use independent quality control agents for factory audits, product inspections and safety testing. 

 

I wrote a 300-page book explaining how exactly to perform those 4 steps, so I can’t realistically cover every aspect in full detail in a single email. But let me offer the following notes in hopes of ensuring you know the basics.

Before even talking to the supplier

If you have Intellectual Property, make sure it is protected in China.  

How-to register IP in China?  The lawyers in the AsiabridgeLaw.com network can register your IP if needed.  You can download the rate sheet at www.AsiaBridgeLaw.com. Happy to let you know that IP registration is fairly straight forward and affordable in China.

Before the first order is placed


Checklist

  • Not a scam?
    First step is to make sure the seller is a real company, not some guy operating out of an apartment in Hong Kong pretending to be a factory in China.   

Here are a bunch of articles that will give you the tools to avoid scams, or you could spend a few hundred bucks and have the experts do it. For your reference, the Red Flag Assessment  and/or the Corporate Assessment can flush out a potential scam.

  • Are they experienced in the products you wish to purchase?

After confirming the seller is a real business, then you need to confirm they can actually make the product they say they can make for you.   In hopes of getting your order, Chinese suppliers always say “yes”.     It’s not enough to ask “can you make this widget”, you have to confirm they actually “have made” that widget and are likely to be able to make an order of those widgets for you. So, you need to think about doing a comprehensive audit if you are serious.   But here are three essential questions to ask that will help verify if the seller is likely to meet your targets for price, quality and lead time.

Q1. Check References
It doesn’t cost you anything to ask for references. If a supplier can’t give you a few happy clients to speak to, you should run away.

Q2: Visit in Person
Checking out the seller with your own eyes is one of the best ways to get a feel for the actual situation at the factory floor.   Even if don’t have the time to visit the factory, you want to confirm in advance that they will let you visit the factory at your convenience. If they come up with a bunch of excuses because you can’t visit, then it likely means one of two things:

They don’t have the ability to produce your product and are scared that you won’t like what you see if you visit in person or it could be they are a trading company and worried you will cut them out of the loop if you go factory-direct.

Q3. Quality Assessment
Ask to see the supplier’s written quality manual. This document explains to the workers how to assembly, package, catch defects and improve quality.  A professional factory will be happy to show you an ISO-compliant Quality Control Manual. It’s a big red flag if they don’t have a written quality system.  They may say things like “we don’t need paper work, we make these products every day and know what we are doing”.  But because workers switch jobs, managers change, suppliers are swapped out on a frequent basis in China, it’s up to you as the buyer to verify that the factory has a stable quality system in place.

If you aren’t comfortable conducting the above due diligence and factory audits on your own, then keep the following services in mind:

  • Desk Research:
    A Corporate Assessment  will look at their government records to confirm the supplier has been licenses to manufacturer products in your scope and make sure they also have an export license.  The Corporate Assessment will also identify the full name of the legal owner as well as directors.  If your contact is not among that group, you could ask the owner to clarify the relationship.   

 

  • Field Research:
    Conducting the quality audit is a key step.   Quality Audits and Legal Due Diligence are separate but complementary services.  The lawyers are great at doing due diligence and drafting contracts, but conducting a quality audit is outside the scope of the lawyer’s service. Also, since there are 3rd party quality control agents out there that can do a simple factory audit for around 400 USD, it would not make economic sense to hire a lawyer to visit the factory on your behalf. I was once a minority shareholder in www.AsiaQualityFocus.com  before we sold to a large private equity firm a while back.  So, I can recommend them with confidence if you wish to hire a professional firm to conduct the quality audit at the factory.   Feel free to mention my name if it helps when you reach out to AQF.
  • Is the seller financially sound?
    You don’t want to spend the time getting a supplier up to speed, only to have them go bankrupt in the middle of your order and disappear with your deposit!

Unless you speak Chinese, have research experience and know where to find information in the Chinese databases, paying a few hundred dollars for a Corporate Assessment will save you time and money.

  • Do you have good contracts?

A “good contract” under US law can be a dangerous contract under Chinese law. So, get with a lawyer registered in China to set up your bilingual contracts to ensure the supplier has a clear understanding of your expectations and that there will be consequences if they break the deal.  The contract should also state the quality standards. Learn more here and here.

  • Before the first payment is made/ before production starts:

Conduct the Red Flag Assessment  to ensure the deal offered by the seller has no red flags/ big risks.
Make payments per the accounts listed in the contract and obviously, make sure the contracts are signed by the authorized party before you place the actual order/send money. 
Conduct a pre-shipment inspection before further payments are made and before the goods ship out of China.  

Conclusion

As mentioned before, this is an oversimplification of the process.  But I hope it gets you pointed in the right direction. If you wish to learn more, please consider the following resources:

  • Download my book (“The Essential Reference Guide to China Sourcing”) on Amazon, or purchase it via the author’s website if you wish to access various business templates and check lists as well.
  • Check out the “How-to” courses  that I created for AsiaBridgeLaw’ s China Law, Business & Sourcing Library.
  • Hire a consultant to help you figure out the best strategy for your particular project. If you have some general questions, feel free to send me an email and I’ll do my best to get them answered (no charges needed).  If you are looking for more formal support to answer questions specific to your situation, please keep our Business Advisory Service (BAS) in mind.  The BAS is explained in detail at Business Advisory Services , the rate sheet is attached. I’m one of the advisors and would be happy to help you.
  • Use a Sourcing Agent or Trading Company if you want to outsource the entire process. 

Sorry for the long email, but I wanted to give you all the options.  Please advise at your convenience. I’m happy to help out!

About the Author: Michael J. Bellamy

About the Author: Michael J. Bellamy

Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses.  Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.

A featured presenter on China issues at seminars, trade shows and corporate events across the globe.

Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/

Mike is the author of “The Essential Reference Guide to China Sourcing
(available on Amazon).

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