Buying in China - Sourcing and Importing

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Buying in China - Sourcing and Importing

Pretty much every product seems to be made in China these days so sourcing and importing products from China is something that a lot of small buyers and businesses consider. Often overwhelmed by the complexities or perhaps wary of being scammed many such buyers decide to just buy products locally from wholesalers and distributors in Australia. In some cases this is probably a good decision but in many cases it is a lost opportunity.

I have been fortunate to have had a great deal of exposure to factories in China and the way that the staff and bosses of those factories think. Having lived and worked in China for 15 years and being able to speak and read Chinese has given me an insight that most foreign buyers do not get. My roles in China were varied ranging from work with a local Chinese trading company through to Chief Representative of a foreign branch office in a Chinese city for a European sourcing and procurement company with customers that included Walmart, Harvey Norman and other leading retailers throughout  Europe, the USA, and Australia. I am also an invited moderator on the trading website alibaba.com which would be the most recognised website for sourcing products from factories and suppliers.

I am convinced that sourcing and importing products from China is not difficult nor particularly risky provided that you follow careful and commonsense procedures to protect your investments. I hope to give some of the basics here in this guide that may prove useful to readers and give them the encouragment to look further at the possibilities of importing directly from Chinese factories. My points relate specifically to China but may apply to importing from other countries.

What NOT to try and import from China!

The first matter to get out of the way is that you as an individual CANNOT buy foreign brand name products from Chinese factories or suppliers for your market so dont even try or you will lose your money.

Foreign brand name companies such as Apple, Nokia, Motorola, IBM, Pandora bracelets, and any other brand name that you may think of all own the rights to the supply of their products. They may contract a factory in China to make these products on their behalf but the brand name company owns the products that are produced and the factory can only sell those products to the brand name company and/or their licenced distributors. Purchasing distribution rights to these brand name products can be very expensive but is the only way that you will have access to these products if you intend to purchase them from overseas.

So if you were thinking that you could find the factory that makes these products and then buy direct from the factory then you are kidding yourself.

The Chinese factories that secure these production contracts for these large foreign brand name companies are generally huge factories that are not going to compromise their profitable contracts for a few sales on the side. The idea that perhaps one of their employees has access to stock that he/she can onsell to you at low prices is also not realistic as these factories have serious protocols in place to prevent leakage of products and secrets!

So how come there are so many Chinese sellers offering foreign brand name products at cheap prices? Well these 'sellers' fall into a few different categories all of which represent no legitimate opportunities for foreign buyers and will result in your losing your money. I discuss these problems in trying to buy brand name products in another of my guides here at ebay.

Other items worth avoiding are electrical items that generally require certification for use in your country, mobile phones which require certification, childrens toys that may not meet safety requirements, technology items that may require specialist knowledge to ensure that you are getting what you are paying for etc.

Preparing for buying in China

Before you consider buying from China and importing yourself I recommend that you ensure you have the following:

a. At least $5,000 to cover the costs of the purchases, shipping costs, customs fees, duties, taxes, and local delivery costs. Yes you may find a supplier that can sell small quantities but in most cases if your order is very small you may run into difficulties with suppliers and you may find that the whole process is not really financially viable once you add the other costs onto your purchase.

b. A clear idea of what you are going to import and preferrably a good knowledge of that product.

c. A local forwarder company here in Australia to help you with the customs clearance etc.

d. Somewhere to store the product that you are importing

How to find legitimate suppliers?

The best way to find good suppliers in China is to visit trade shows as the suppliers that exhibit at foreign trade shows are generally the sorts of suppliers that are willing to invest in building relations with foreign customers. If you cant visit the trade shows yourself then you can generally access the list of exhibitors from a trade show organisations website. You can then track down those exhibitors and make contact with them directly.

There are a number of online websites that Chinese suppliers will list on and these can be a good way of finding suppliers but please note that those websites accept paid memberships from these suppliers so are often more interested in signing up a large quantity of suppliers rather than considering the quality of those suppliers. One such website has 'Gold Member' and 'Trustpass' members which would indicate some level of trustworthiness when in fact those titles are not an indication of honesty but instead titles that members in China must purchase in order to list on that website. So do not rely upon third party recommendations of suppliers and instead ensure that you exercise your own due dilligence as ultimately it is your money that will be lost if something goes wrong.

How to know which suppliers to avoid?

I recommend that you avoid any supplier that makes mention of foreign brand name products. If you avoid those products and those 'suppliers' then you are going to avoid the far majority of outright scammers.

Avoid any supplier that you cannot verify independantly through other sources. You want to be able to ensure that the contact details they have provided are accurate and that you can contact them by way of these details. The easiest way to check the physical address details of a supplier in China is to post them a small sample or photo of a product etc. If they receive that sample then you know at least that they exist at that address!

China is a very large country and each product has its own special area where legitimate factories tend to congregate. You will often see suppliers proclaiming that they are in Shangyu the umbrella city or the like. If you take your time to familiarise yourself with your products in relation to China then you will likely find which is the best area to purchase your products from. If you were looking at a supplier of LCD screen TV's from the Harbin area in north China then there is a good chance you would be disappointed as that area is known for its heavy industry and metal products. Another example is the small city of Putian which is in Fujian Province in the south east of China. This city is known as the city of scammers due to the large number of 'sellers' that offer foreign brand name products and technology products. Some simple research on that city would reveal that it is a low technology area known more for fishing and handicrafts - certainly not large technology based factories.

To deal with factories or trading companies?

Chinese suppliers will invariably fall into one of two categories - factories or trading companies. Most buyers who turn to China for the supply of products aim to buy direct from factories but there are advantages and disadvantages to consider here. Let me address some of the main considerations here.

a. Cheaper prices - most would assume that buying directly from a factory would get you the lowest price but this is not always the case. In some cases a Chinese trading company can offer products for a cheaper price than you can get direct from that same factory. This may relate to volume as a trading company may be a valued and regular customer of the factory which earns them good pricing that you as a newer or smaller customer to the factory could not get. It can also relate to tax rebates that are afforded to exporters in China which essentially means that the trading company may earn their money from the tax rebates rather than what you actually pay for your order.

b. Better service - sometimes dealing with factories will get you better service as you are dealing with the source directly and can communicate your concerns directly with those who are making the product. However in some cases the factory may not have English speaking staff or may have staff that are employed for their English abilities which are apparently quite lacking. Once again a trading company that has a long term relationship with a factory may be able to get them to be more flexible than you could.

c. Larger range - if you are looking for a mixed range of products then dealing through a trading company can often be the best way to go as they can work with a number of manufacturers on your behalf in securing a wide range of products which means that you only need to deal with one seller.

d. Export rights - bear in mind that not all factories in China have export rights so even though you may find a good factory that offers good prices if they cannot export the products then that is not going to be any good to you. Most such factories will have relationships with outside trading companies through which they can export their products so best check this early on with your supplier. This situation may result in the name of the exporter on documentation being different than the supplier that you are buying from - which raises alarm bells for foreign buyers not familiar with this situation even though it may be totally legitimate.

e. Product knowledge - although the technical staff in factories will have a far better knowledge of the products and production than a staff member of an outside trading company may have, this is not always true of the English speaking customer service staff in the factory. Often the salary of customer service staff in factories is lower than outside companies which means that these positions often attract recent university graduates who may have no knowledge of the product and get the job purely because they can speak English. Often these individuals are quite transient as they move to higher paying jobs so product knowledge can sometimes be more secure among staff in trading companies who are often more highly paid and may have many years of experience with the product.

So how do you know whether your supplier is a factory or a trading company? Most trading companies will say that they are the factory if you ask them which makes it difficult to know for sure. Generally they do not do this to be misleading but instead due to the fact that they may feel that they represent the factory so 'are' the factory. Some indications that a supplier may be a trading company and not a factory include:

1. A wide range of products on offer that have no apparent relationship to one another. Factories in China generally produce a range of products related to the raw material that they work with whether that be metal, wood, or plastic etc.

2. An address in a multifloor building or in a large city. Although some very large factories may maintain a city office it is pretty rare and almost certainly an outside trading company.

3. Great service and/or impressive English abilities. With the exception of some very large factories you will find the English ability of the sales staff in most factories to be lacking as those positions are generally more lowly paid than trading company positions. Also factory sales positions are often less attractive as they often involve the sales staff living in the factory which will almost always be located in a rural or fringe area. It is not unusual for factory staff to leave positions within a factory for more highly paid, city based jobs with trading companies.

Why cant anyone understand English!!!

In dealing with suppliers in China you will indoubtedly encounter this frustration but bear in mind that if every supplier in China could communicate in perfect English then your business would be superfluous as your customers could then deal directly with your supplier!

Most English speaking sales staff are young university graduates. Bear in mind that English ability in China is based upon test results so even though someones English reading and writing may be pretty good it does not necessarily mean that they can understand nor speak English. Their employers may not understand English so can only go off the test scores when employing English speaking staff. You will invariably find that most customer service staff will want to communicate via email or messenger as it gives them a buffer!

Another consideration is that many sales positions are based upon a very low base salary with sales commission incentives on top of that. This often results in a high staff turnover which means that you will be continually dealing with newcomers whose English abilities may be lacking.

So in your communications with Chinese sales staff I recommend that you keep the contacts simple, use bullet points and avoid using a lot of text, include pictures or diagrams where necessary, and most importantly get confirmation from the sales staff that they have really understood what you are asking of them.

Payment terms

Most factories are going to offer prices in USD and on FOB terms. Free on Board (FOB) is probably the most common incoterm for pricing and essentially means that the price includes all costs up to loading on the ship so includes product price, packaging, transportation to the port, export taxes, duties, and fees. You as the buyer will be responsible for shipping costs, import duties, taxes, and fees; and transportation fees from the port to your location.

You may choose to pay for your order either by Telegraphic Transfer (TT) which is essentially a bank to bank cash transfer. or Letter of Credit (LC) which is an arrangement between your bank and the suppliers bank. With TT payments the receiver gets the cash with no requirement of performance so there is a risk to the sender of the cash. With LC the funds are not released unless some performance indications are met which does not make the transaction 100% secure but certainly more secure than a TT. If the value of the order is under USD10,000 then TT is probably going to be the most economical model but is somewhat less secure than LC.

Never use Western Union to pay for order from China. Never make TT payments to an individuals bank account in China and only make payments to a company bank account. Most suppliers in China will not accept Paypal for payment of orders as it is not a standard trading mode for them and I am doubtful as to whether it is really a secure method of payment as there are ways that a seller can cheat the Paypal system to their advantage.

The standard terms when dealing on a TT payment basis would be 30% deposit paid upfront upon placing your order and the remaining 70% payable upon order completion and after your goods have been loaded onto a vessel for shipping. Once your goods have been loaded onto a ship your supplier will give you a copy of the Bill of Lading (BL) which is your proof of loading and you can then make final payment. Once you have made the final payment the supplier will send you the original BL or surrendered BL (you need to discuss this with your forwarder in Australia) and you will need this document in order to get your goods released to you in Australia.

Please refer to my advice in a latter section of this guide about ensuring that you are getting what you are paying for as once you have made full payment you are at the mercy of the supplier.

Price negotiations, minimum order quantities, and placing a first order

My advice is never to push prices too much on a first order. Chinese people have a cultural understanding that price and quality are related. So if a supplier is offering a certain item and you push the price down on that product then they may automatically assume that you are willing to accept a lower quality in order to acheive that price. So while you may be assuming that you have successfully pushed the price down by 20% on a certain product, the factory is equally assuming that want a product that is 20% cheaper so they will create a quality to match that price. This is generally not dishonesty on behalf of the supplier but instead a cultural misunderstanding. You should take the time to learn what a fair price for the product is rather than push a supplier for a low price just because you think you can! The best way to secure the best prices is to purchase in higher quantities.

Most suppliers are going to require a minimum order quantity (MOQ) for each item. Trading companies can often offer lower MOQ than factories due to their relationships with the factories and the fact that they bring regular business to the factory. Essentially the more you purchase the lower the price you can expect. In previous years suppliers in China would require MOQ's of thousands of pieces per item and perhaps a total minimum order quantity of a container load. If you could not order that much then they were not interested in dealing with you. In recent years this has changed considerably such that many suppliers are offering MOQ's of 30-100 pieces per item. This has had an affect upon prices however which have risen quite dramatically to counter these low MOQ's. So feel free to start out purchasing at the quantity that you feel most comfortable but bear in mind that the more you buy the cheaper you will be able to buy for.

Once you are ready to place an order then ensure that the supplier is absolutely clear about what you are buying, what you are paying for it, when they need to finish it, and what sort of packaging you require. Get all of this in writing and get the factory to stamp it as a record for both of you to refer to.

How to ensure that I get what I pay for?

In my experience very few legitimate factories will be intentionally dishonest but even the largest and best factories will invariably make mistakes. So the best way to ensure that you get what you are paying for is to ensure that you have communicated effectively with the factory in the first place and ensure that nothing has been left to chance. If a factory has a choice of two decisions to make they will inevitably make the wrong decision and this could be a disaster to your investment. Bear in mind that once your product is packed into the container for shipping any problems inside that container will be yours to deal with. You cannot expect the normal situation of returns or refunds that you would expect when buying from a local distributor.

The best practice when dealing with a new supplier or with the purchase of a product that you have not purchased before is as follows:

a. Obtain two identical samples from the supplier. You will most likely need to pay for these samples and the shipping costs.

b. Check, sign and date both samples with a permanent mark.

c. Photograph and document in details sizes and materials and colours etc and put all of this together in a document that you can send to the factory to act as their guide for production.

d. Then the most important step of all - return one of the signed samples to the factory to act as the production sample. You keep the other sample yourself. This way both parties have an identical sample as a reference. The factory should compare the signed sample against production and if you have an agent checking the production for you they can work off this confirmation sample to ensure that production is the same as the sample. If you receive production that is different to the sample then you have a reference to go off in describing and constrasting the problems.

e. Employ an inspection agent in China to check production before you make final payment and before it ships to ensure that any problems are caught before they leave the factory. Inspection agents can either be trusted individuals or global companies. You may not need to use an inspection agent on every shipment but they are a good idea on first shipments and random shipments after that.

I welcome any questions or comments about this guide which can be sent to me via the ebay messaging system.

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