6 tips for background checks on Chinese suppliers
I frequently lament about the number of importers who take high risks by not doing any quality control. But the most under-rated tool to reduce risks in China is certainly running a background check on potential suppliers.
I listed 6 tips below, from the easiest to the most advanced and expensive.
1. Choose the right target
Do not waste time searching information about the company mentioned in the salesperson’s signature, or on the trade shows’s booth. They might actually steer you toward another company when time comes for payments.
Ask for the company name and address that will be mentioned on the invoice. Or, better yet, ask for a pro forma invoice (if both parties already have a good idea of the products & pricing) and look at the company name on that document.
2. Scare unscrupulous companies away
Tell potential suppliers that you’ll have their factory audited before any PO is issued, and later their production inspected before any shipment is authorized.
Mention it right away, from the first encounter/email. If the supplier refuses it or looks flaky, it is a red flag!
By the way, factory audits are the right tool to verify a supplier’s claims about their production capability. Most quality control firms, and some sourcing agents, can audit a factory based on a checklist that corresponds to your needs. Prices range from 300 to 900 USD for one day of work, in the main production areas.
3. Spend 5-10 min on a search engine
Open Google or Bing and search ”[company name] + scam”, ”[company name] + dishonest”, and a few variations. Importers who got a bad experience often try to leave a trace about it on the web (example here).
While searching the supplier’s company name, you will likely find the profiles they created on several B2B directories. Look at the addresses and phone numbers associated with the supplier’s company. If they are not the same, or if the supplier does not respond when you give him a call, he will have some explaining to do.
You might also see that they participated in trade shows recently. This is a good sign. A booth is an investment to get new customers. And repeated presence in the same trade show is the sign of a company that cultivates relationships with the same customers.
4. Use B2B directories
As mentioned above, the supplier has probably created profiles on several directories. And, if they have a paying account, some information on their profile might have been verified by the company behind the directory.
For example, Global Sources checks important data (depending on the amount of the contract) such as start date, number of staff in each department, factory ownership, amount of sales, brand names, and so on.
The tendency is to show more and more of these data out there, in the open. It contrasts strongly with China’s culture of opacity, and I think it is a very good thing.
However, if this method doesn’t help, you can pay for a background check and get information first-hand.
5. Background check, on the cheap
Most of these verifications are performed by Sinotrust (price list here). For higher convenience, you can order a report on glo-bis.com/china. Their “business credit report” (BCR) service provides these data:
Business registration report: legal representative, shareholders, business scope, date of establishment…
Financial records of the last three years (do they have assets that indicate ownership of a factory? Are they heavily in debt? Are they profitable?)
Prices are slightly on the rise (230 USD for a BCR 2 years ago, 255 USD today), but are still very affordable.
I am not sure whether the target company knows when one of their customer runs this type of verification on them. I assume they are not aware of it. If ever they learn about it, the customer should be proud of it — it shows they are a serious customer, investing to build a solid and long-term supplier base.
6. Background checks, together with professional advice
If you do not like DIY solution, a lawyer or accounting firm that works in China can help you. If you are not familiar with Chinese business practices, they can smell inconsistencies or red flags and warn you.
If you are about to place a large order with a new supplier, I highly advise to work with a lawyer, both for due diligence and for drafting an OEM agreement.
Note that, in this case, the supplier knows an investigation is under way. Again, I believe importers should not be apologetic about this.