There’s no market as piping hot as China right now. The country’s export is booming, and businesses around the world are making the most of the low prices and great products. However, importing from China requires some skill and experience as novice buyers can easily fall prey to the lure of low prices and end up making some common mistakes in sourcing from China.
You may have already have heard the horror stories of certain foreign buyers experiencing losses due to misunderstandings with their Chinese suppliers, production delays, or poor quality products. However, these common mistakes in sourcing from China can be easily avoided with proper guidance, the right sourcing agent, and the information detailed in this article by our team of experts at Minden Intl. To understand how to lower the risks of importing from China, you need to know about these five common mistakes in sourcing from China and how to avoid them.
1. Poorly Defined Specifications
Probably the most costly mistake you can make as a businessmen sourcing from China is failing to put your requirements across in the most efficient manner. When dealing with Chinese suppliers, there are several barriers in the way of effective communication. There are two ways in which you can make this mistake: By not clarifying the product specifications as precisely and accurately as possible or by bombarding the supplier with too many details. Keep in mind that the supplier might be good at his work, but he can’t work well with poorly defined specifications.
In the first case, when you haven’t provided all the details, you can end up with containers full of products which might not be any use to you. Assuming that the supplier would take care of the product design and leaving such an important decision on your Chinese suppliers will be like (with all due respect) living in a fool’s paradise. If the supplier gives input in the design, they can have a claim on the intellectual property right (IPR) of your product. The final product would be entirely different from the idea in your head, the design would not go well with your target market, or the barcode won’t be machine-readable – these are just a few dangers of not defining the specifications.
The language barrier is a big reality when sourcing from China, but aren’t you already aware of it? Knowing the problem and still going in unprepared is your fault. You can solve this problem by hiring help to lay down your requirements as clearly as possible. Another problem is when companies provide too many details and then relax. Even if you have defined the specifications, confirm and recheck to be sure.
A four-point solution to this mistake is:
- Make engineering and manufacturing teams work separately for product design
- Make specifications extremely clear to the supplier
- Confirm and Recheck if the product meets your specifications
- Get help from someone experienced for the job.
2. Not Understanding the Actual Cost
Imagine this: You are happily getting the quotes from Chinese suppliers and are already dreaming about the big profits you’ll be making. However, you realize that the cost of the sourced goods is exceeding the quoted amount, and you suddenly start to panic. This is the scenario that often takes place when businesses fail to grasp the idea of total landed cost. If you are not aware of the term “total landed cost,” click here to read more about it.
In short, it is the overall cost of sourcing a product from China, from start to end. However, most suppliers would quote just the unit cost. Look out for terms like FOB, CFR, or CIF, and understand that they do not mean total landed cost. There are a number of dominant and hidden costs that you must consider.
The best solution for this mistake is to calculate the total landed cost before purchasing and make a list of all dominant costs, like quality inspection, marketing cost, warehouse cost, insurance, customs duty fee, inbound and outbound cost, and hidden costs. Having all the costs in black and white in front of you will provide a better understanding of the actual cost of the sourced goods.
Secondly, avoid price-related common mistakes in sourcing from China by discussing the all-in prices with a professional. Important decisions like whether you’ll be investing in the equipment to the factory or providing customized tools and specifications, what will be the safekeeping or insurance cost, and how much will you pay for shipping and logistics. Also, keep an eye on the fluctuating currency rates or lock the price if possible. Lastly, be prepared for emergencies or last-minute expenditures.
3. Not Conducting Due Diligence
A number of businesses underestimate the power of due diligence, and this is what leads to disastrous consequences. Conducting due diligence should be on your to-do list when sourcing from China. After all, an intelligent businessman like yourself would never wish to become a target of scams.
It is natural to get impressed by the sophisticated-looking stands at trade fairs or the experienced-sounding representatives from Chinese suppliers. However, the reality of the production facility may not be as pleasant. Most of the time, the representatives won’t even know the reality of the suppliers themselves as they are simply inter-mediators.
Even if you are cent percent sure about the credibility of your supplier, it is always best to conduct due diligence. Based on your product needs and the intricacies of your deal, due diligence will take its time. You can ask for regular information about the supplier, including the licenses they hold and what previous clients have to say about them. Alternatively, you can dig deep to verify the financial balance and factory environment of the supplier. There are several ways in which you can carry out due diligence, some of which are detailed below:
- Online Reviews: If your supplier has an online presence, try to go through the online customer reviews. You will get a superficial idea of the problems the supplier has had with the customers in the past. However, do not completely rely on these reviews as there is a chance that they can be fake reviews from zombie accounts or paid reviews.
- Literature Review: Go through the supplier’s website and contact them via phone to gather as much information about them as possible. If the supplier does not have a website for whatever reason, try to use other resources to contact them and get to know them better.
- Check Licenses and Certificates: If the supplier is affiliated with a B2B giant like Alibaba, you’ll be saved from the need to do this. However, to conduct due diligence, you’ll need to verify their registration, certification, and licenses. The supplier will most likely provide you a copy of their Chinese business license with details like the name, address, legal owner, registered capital, and other information about the company. If the supplier refuses to show you the license, it’s a red flag. Also, verify the local registration of the supplier at the Administration for Industry and Commerce (AIC). It is an official registration, and the records can be verified online using the company’s registration number. However, there is a chance that these records may not necessarily be up-to-date. Since all the websites and documents are in Chinese, you will need the help of a Chinese speaker.
- Visit the supplier in person: Visiting the suppliers in China in person will have long-term benefits. Being there in person would help you understand everything and carry out the interviews face-to-face. You can also hire third-party facilitators to assess suppliers and inspect their facilities. Learn all about the suppliers, including their production capacity, quality-inspection process, R&D capacity, and other significant factors that may affect the product.
- Hire a reliable sourcing agent: Since sourcing agents are experienced at performing due diligence, you can hire one to do the job quickly and efficiently for you. Read our article on Sourcing from China, How to Find the Right Sourcing Agent?
4. Not Auditing the Factory or the Source
So, your Chinese supplier has given you his word for ensuring the best product quality. Great! But, is this promise enough when money and your business’s reputation is on the line? No, it’s not, and not understanding these risks is another of the common mistakes in sourcing from China. When sourcing products from China, auditing the factory and setting up a quality control and assurance system is imperative. There is no supplier in this world who would promise to supply a low-quality product, and Chinese suppliers are no different. They will show the best of the best to secure you as their client. The sample products will be perfect, but quality control will determine whether the remaining products in the lot have the same quality or not.
We would recommend that you trust your supplier but also actively ensure that the quality of the product is in compliance with international standards. Hire external quality control experts to conduct audits and inspections. While finding the right person to do the job can be tricky, Minden Intl’s team of professionals can certainly make the process a lot smoother for you.
5. Not Signing Written Contracts
Written contracts are your lifeline when sourcing from China. The biggest mistake you can make is not to sign a contract with your supplier. In this day and age, oral agreements and mere payment slips hold no substance. A detailed written contract serves as a legal binding and protection for your interests. Foreign businesses make this mistake when they do not realize that the legal structure in China is different than in their home country.
Your contract should include the details of all the parties involved, the terms and conditions accepted on samples, price, quality, and logistics. All terms should be clearly defined, such as product quality, timely delivery, etc. The contract should also have terms of payment, choice of law, the liability of breach of contract, dispute resolution clauses, and attorney’s fee.
Even if you have a contract you used in the past, it is advised to consult an attorney to draft a new one and also negotiate the terms on your behalf. Your best option is a cross-border transaction attorney with experience in dealing with Chinese suppliers. Signing a written contract with your supplier in China would provide you peace of mind.
For more details on how to avoid the mistake of not signing written contracts, go through our articles:
Sourcing from China is profitable, and by avoiding the aforementioned mistakes, you can keep it that way. Successful business handling requires experience, and if you are new to the field, you need a top-rated sourcing agent to help you reap the benefits of importing from China. We, at Minden International, are ready to help you.