• China Company Verification: How to Vet Suppliers in 4 Steps

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    China Company Verification

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    All too often I hear Buyers making supplier selections on highly arbitrary factors, primarily the responsiveness the sales rep on the other side. Such factors are largely irrelevant. A supplier selection without the right data is often the root cause of quality issues further down the road. In this article, we explain how you can perform a China Company Verification by analyzing their documentation. This procedure can be managed from your office, and doesn’t require an on site visit.

    Consider it a first step of the selection procedure, as there are limitations to what can be done from a distance – as compared to more comprehensive, and far more expensive, factory audits. The ideal outcome is identifying a number of potential candidates. In this article, we look into two sets of documentation, company related documents and product related documents, and the role of buyer references and US customs data.

    Notice: Most of the documents and information referred in this article can only be obtained directly from the supplier, or third party service providers – in the case of US Customs Data.

    I. Company Documents

    a. Business License

    Every registered company, regardless of type, in Mainland China, has a business license. The business license contains key information about the company, that can tell many things about the supplier. For importers there are two parts of particular interest:

    Registered Capital: All limited liability companies have a set registered capital. The registered capital amount indicates the size of the company. The more, the better – and a company with a very low amount, below RMB 500,000, is likely a trading company. Not a manufacturer. It’s hard to set a minimum limit, as it varies by industry. Watch manufacturers, for example, tend to have below RMB 1,000,000 in capital. Watch manufacturing is a low value added industry, and the need for capital (both in terms of money and machinery) is rather low. However, in other industries, say LED displays, RMB 1,000,000 is far below the minimum. I suggest that you look at the ratio, between different suppliers in a given industry, rather than fixed minimum numbers.

    Business Scope: Specifies the nature of the company. For suppliers of goods, the specific type of products is listed. The business scope can be very helpful in determining whether or not you’re dealing with a ‘proper’ manufacturer, or a trader. For manufacturers, the listed products tend to be more specific, and within the same category. Also look out for terms like ‘production’ and ‘assembly’. Trading companies, on the other hand, tend to include products of very different nature (i.e. electronics, watches and textiles). If the business scope only mentions ‘wholesale’, ‘trade’ and ‘distribution’, it’s most likely a trader.

    Keep in mind that the business license is only available in Chinese language. Suppliers have no reason to refuse sending a copy of their business license, but if they do, request them to share their business license / company registration number. With this number, you can access the very same information on Chinese government websites. However, the online company databases are exclusively in Chinese language.

    Note: Both Alibaba.com and Globalsources.com verify the business license of every listed supplier, with a paid membership (however, not free members). On Alibaba.com, you’ll find most information from the business license on the TrustPass Profile, while the same can be found under the Company Profile on Globalsources.com. However, I don’t think the information is synced automatically, and some parts may therefore be outdated at times. It is, however, an important first step of the supplier vetting process.

    b. Bank Account Details

    Payment frauds are relatively common. That being said, confirming the supplier’s bank account details early on is not only a fraud prevention measure, but also quite telling in itself. This is what you should request:

    Beneficiary Name: The company name of the bank account holder must match the supplier name. Never pay to a personal bank account, or one that is not matching the suppliers English language company name.

    Country / Region: Many suppliers, especially those based in Guangdong province, hold offshore bank accounts in Hong Kong. This offshore account is almost exclusively held by an offshore company, rather than the company entity in Mainland China. Yes, it may sound complicated, but in short this means that there is no direct link between the actual manufacturer, and the seller of goods. In case of dispute, a scenario that shall never be ruled out, it’s easier for the supplier to evade responsibility.

    c. Quality Management System Certificate

    A Quality Management System (QMS) is a set of rules and processes for monitoring quality throughout the production line. There are various standardized protocols, with ISO 9001 being the most common. If a QMS is applied properly, the risk of defective products is vastly reduced. In order to prove compliance with a QMS, which is required by many overseas buyers, a supplier can choose to go through yearly audits. A passed audit results in the issuing of a Quality Management Certificate. This is what you should be looking for:

    Product Scope: The QMS is only valid for the products / product categories listed on the certificate. This shouldn’t differ much from the products specified in the business scope.

    Issuing date / Expiry date: An outdated QMS certificate might mean that the supplier once passed an audit, but failed to pass follow up inspections. That’s clearly not a good sign.

    Held by: The company name shall match the name of the supplier. QMS certificates held by other companies are, of course, entirely irrelevant.

    Issued by: A QMS certificate issued by a well known company, such as SGS, TUV or Bureau Veritas, is far more trustworthy than one issued by a small and relatively unknown (often local) auditing firm.

    d. Social Compliance and Environmental Certification

    In principle, the same checkpoints apply as for the Quality Management Certificate. But, why is Social Compliance (i.e. BSCI) and Environmental (i.e. ISO 14001) Certification relevant? Apart from the obvious ‘feel good’ factor, you should consider the following:

    1. Suppliers with BSCI and ISO 14001 have often ensured compliance to attract large overseas buyers. Such suppliers are more likely to maintain high standards in both technical and managerial terms.

    2. Social and Environmental Safety matters, even from a strictly commercial perspective. You don’t want to be associated with suppliers guilty of labor violation and contamination of the local environment. The Chinese government has stepped up enforcement of environmental protection laws, in the last few years, resulting in crackdowns in entire industries. Last year I had the unpleasant experience of dealing with a shipment, held by a supplier who was forced to halt operations due to said violations.

    II. Product / Compliance Documents

    a. Substance Test Reports

    A substance test report (i.e. REACH, CPSIA or CA Prop 65) indicates that the supplier has the capability to ensure compliance with said overseas regulations. It is not, however, an indication that the entire company is somehow ‘compliant’. Only that the specific sample passed the test. While this is not a reason to skip on compliance testing, it does tell you that the supplier is a safer bet than one that cannot provide any such document.

    However, in many industries, especially textiles, substance test reports are rare and hard to come by – even though compliance is mandatory in major markets. My qualified assumption is that most test reports are held by subcontractors (i.e. fabric manufacturers) and the overseas buyers, rather than the supplier. As such, the Company Verification process may require documents from subcontractors, and even buyers, of the supplier.

    b. Product Certificates

    A Product Certificate (i.e. FCC Declaration of Conformity) is mandatory for many products, especially electronics, machinery and children’s products. A supplier’s compliance track record is a critical factor when making a supplier selection, and you should not even consider suppliers that cannot produce the required product documents. When you’ve received a product certificate, you shall take a closer look at this:

    SKU / Article ID: Is the product certificate valid for the specific SKU you intend to buy? Likely it’s not. Compliance with product safety standards, for example the Low Voltage Directive or FCC Part 15, is only applied to the specific SKUs (one or more) listed on the product certificate. If it’s not listed, and extensively documented, your product must be tested, documented and certified.

    Held by: The product certificate is only valid if it’s held by the manufacturer.

    Issue date / Expiry date: Watch out for outdated certificates, as these may not be accepted by customers and authorities in your country.

    Issued by: A Product certificate issued by a well known company, such as SGS, TUV or Bureau Veritas, is far more trustworthy than one issued by a small and relatively unknown (often local) compliance testing firm.

    c. Technical Files

    A Technical file is an attachment to a Product Certificate, containing detailed technical specifications (i.e. circuit drawings) and testing data. The Technical file is often mandatory, and may be required by the authorities.

    III. Buyer References

    Chinese manufacturers tend to be very uncomfortable with sharing buyer references – something considered a standard procedure in most developed markets. Buyer references can, however, provide valuable insights and viewpoints from other buyers. Preferably those from your own market.

    Some, often larger, manufacturers tend to showcase big brand buyers. In order to verify that the buyer references are authentic, and not made up, you shall request the buyer contact person and email address.

    That being said, don’t assume that a big name on the supplier’s reference list is enough reason to relax your due diligence and quality assurance procedures. Big companies have the resources to ensure compliance with their own quality requirements, and international product standards. In addition, don’t assume that the supplier will treat your business the same as it treats business from bigger buyers. As always, the outcome is decided by the combined factors of your Quality Assurance procedure, and the suppliers’ capabilities.

    IV. US Customs Data

    Service providers, primarily ImportGenius.com and Panjiva.com, track inbound and outbound shipment in the United States, using customs data. Using this data, you can access information on importers, purchasing from a certain supplier. As in the case of buyer’s references, importers can tell much about the supplier by looking at its customer list. There are, however, a few limitations. As only the exporter and importer can be tracked (domestic shipments are not tracked), suppliers using export agents don’t show up in these systems.

    Verifying Documents

    Fake documents and certificates are all but unheard among Chinese suppliers. As such, the supplier verification process is only completed once all documents are verified by a third party. The procedure differs depending on the document, as explained in the table below:

    DocumentVerification Method
    Business LicenseLocal (City or Provincial) Government Company Databanks
    Bank Account Details /
    Bank Account Certificate
    Option A: Issuing bank
    Option B: Cross reference account and business license details
    QMS CertificateIssuing Company
    Social Compliance / Environmental CertificateIssuing Company
    Substance Test ReportsIssuing Company
    Product Certificates / Technical FilesIssuing Company

    When Suppliers Refuse to Provide Documents and Information

    You need to properly present yourself and your business before a supplier is ready to share internal documents. Give the supplier a reason, and refer to orders from a higher authority (to deflect attempts to avoid sharing the requested files), when presenting your case to the supplier. Introduce your company and clearly explain why you need their documentation before you can move forward with placing an order. Refer to a higher authority (even if there’s none) to deflect attempts from the supplier to avoid sharing said documents.

    However, some suppliers will refuse sharing any document. Perhaps because they don’t take your inquiry seriously, as explained in this article – or because they know that they are too weak to pass the supplier audit. Simply move on to other suppliers if that is the case. Chinese manufacturers are used to sharing data with prospective buyers, and any company refusing a proper supplier audit shall not be considered as a potential candidate.

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