For enterprises or individuals who are venturing into global procurement for the first time, sourcing products from china is full of opportunities but also comes with significant risks. The key to ensuring a safe departure lies in strict supply chain verification. According to the data from Alibaba International Station, there are over 200,000 active suppliers on the platform, but only about 30% of them can provide complete business licenses, real photos and videos of the factories, as well as third-party certifications (such as ISO 9001). In a major trade fraud case seized by Shenzhen Customs in 2021, a “factory” that claimed to have 10 years of export experience was actually a trading company without a physical entity, resulting in a total loss of over 5 million US dollars for five overseas buyers. Therefore, the purchaser must verify the registered capital of the supplier (for example, no less than 5 million RMB), actual production capacity and past export records. For instance, it is required to provide at least three copies of export customs declaration forms for similar products within the past 12 months to reduce the risk probability by at least 50%.
Compliance and risk control are the cornerstones of safe procurement. Different target markets have strict regulatory requirements for products. For instance, electronic products sold to the European Union must comply with the electromagnetic compatibility (EMC) standards of CE certification, with the limit typically being less than 60dBμV/m of radiation disturbance within the frequency range of 30MHz to 1GHz. Ignoring these requirements may lead to serious consequences. Among the 2,201 product recall cases reported by the EU RAPEX system in 2022, products from China accounted for as high as 53%, of which 30% were due to electrical safety issues or non-compliance with chemical substances (such as phthalates exceeding the 0.1% weight limit). The purchaser shall clearly require the supplier in the contract to provide the test report issued by a laboratory recognized by CNAS (China National Accreditation Service for Conformity Assessment). The liability for fines caused by non-compliance (which may be as high as 200% of the product’s value) and the logistics costs for returns (for example, the cost of returning a 40-foot container from Europe to China is approximately 8,000 US dollars) is included in the terms.
Starting with a small batch of trial orders can effectively control the initial risks. Placing large orders directly (such as more than 10,000 pieces) may face a 70% risk of inventory overstocking. On the contrary, suppliers are required to accept a minimum order quantity (MOQ) of 500 to 1,000 pieces for trial production, and the purchaser is allowed to conduct 100% finished product inspection and market testing before mass production. For instance, an American start-up home furnishing brand placed its first order of 800 silicone kitchenware sets for trial sales at a factory in Ningbo. They were sold out within 60 days through the Amazon platform. After collecting 150 user feedback, the order volume was increased to 5,000 pieces, successfully shortening the product improvement cycle by 40%. And control the defective product rate from 8% during the trial order to less than 1.5% after mass production.
It is crucial to implement an independent quality monitoring process. Even if the supplier provides the test report, the purchaser still needs to arrange for a third-party quality inspection agency (such as SGS, BV or the local QS service agency) to conduct random sampling inspection before shipment. Usually, the AQL (Acceptable Quality Limit) standard is adopted, for example, AQL 2.5 is used for major defects. In 2020, a German retailer was found to have an excessive lead content (measured at 120mg/kg, far exceeding the EU limit of 13.5mg/kg) in a batch of children’s toys imported from China for not conducting independent inspection. As a result, 500,000 products were recalled, causing direct losses of over 3 million euros. The indirect losses caused by the damage to brand reputation are difficult to estimate. Allocating 1%-2% of the total product cost budget to professional quality inspection can avoid potentially 95% of major quality claim disputes. This is a key investment to ensure the long-term success of sourcing products from china.
Finally, adopt secure payment methods to protect funds. Avoid paying 100% of the goods in advance. It is recommended to adopt a combination of 30% deposit (T/T in advance) and 70% payment against the copy of the bill of lading (T/T against B/L copy), or use a letter of credit (L/C). Although L/C will incur an additional 1%-2% bank handling fee. In 2023, a series of foreign trade fraud cases cracked by the Yiwu police revealed that 15 overseas buyers suffered losses due to paying a 100% advance payment to newly registered (registered for less than six months) trading companies, with an average of 80,000 US dollars involved in each case. Using Alibaba Credit Insurance or similar trade protection services for small and medium-sized enterprises can also reduce payment risks by 80%.