Sourcing in China: go platform or go direct?

Currencies Direct March 24th 2016 - 7 minute read

There are many reasons why online retailers source their products in China: lower costs, a vast range of suppliers to choose from; and not least, the fact that sourcing platforms such as Alibaba and Global Sources have made the research, selection and purchase process much, much easier.

This is not to say that sourcing in China is problem-free: distance, language differences, problems with payment security and recourse, very little by way of intellectual property protection and a high incidence of scammers complicate matters. The overriding cost advantage however still makes Chinese suppliers an attractive business proposition.

But if you are an online retailer, looking to source from China for the first time, how do you go about it?
Most opt to use a B2B sourcing platform such as Alibaba or GlobalSources.com . There are in addition a number of smaller sourcing platforms– but a quick ‘google’ of reviews for these revealed some very unhappy buyers; so in this article we focus on the ‘big 2’.

They both offer advantages.

 

Make it easy to do the leg work

Like a global version of your local trades directory, a sourcing platform is a good place to start. With access to thousands of suppliers, you will find contact details, product catalogues and trading histories. Happily, given the overwhelming number of suppliers listed, you can also filter your search by various criteria: in GlobalSources.com, for example, by business type (eg manufacturer, trading company or wholesaler); size and length of experience in exporting; minimum order quantity; target price and so on.

 

Some verification for ‘legitimate’ sources

The emphasis here is on ‘some’. You need to restrict your search to ‘legitimate’ sources, i.e. only those businesses that have been ‘validated’ or ‘pre-qualified’ by the platform.

Global Sources, for example, offers supplier pre-screening services to help to reduce sourcing risk:
 

  Verified Suppliers 
Ensures that each supplier is an authentic company with valid registration, as confirmed by Experian and Dun & Bradstreet. Suppliers are verified with at least three in-person visits by a Global Sources' team.
     
  Credit Check 
A credit reporting service provided by Experian and Dun & Bradstreet and covering up to 13 key business areas, including company status, shareholders and licenses.
     
  Supplier Capability Assessment 
In partnership with Bureau Veritas, Global Sources enables buyers to audit suppliers immediately across several key areas, including production facilities, capabilities and product quality.

 

Global Sources also offers a ‘six-star ranking’ system. This is not a quality rating, but it can be useful in filtering for the type of business you want to deal with as companies with more stars are generally larger and more experienced exporters.

For its part, Alibaba offers a ‘Gold Supplier’ scheme, with three different levels of verification:

  • ‘Onsite Check’, carried out by Alibaba’s staff to ensure operations actually exist at the claimed location. The suppliers’ legal status is also confirmed by a third-party verification agency. This is required for all Gold Suppliers in Mainland China, Taiwan and Hong Kong.

 

  • A&V Check, required for all Global Gold Suppliers, these businesses have passed authentication and verification inspection by Alibaba as well as a third-party verification company. All legal business licenses and contact persons are verified for those who have been A&V checked.

 

  • Assessed Supplier – an optional service for Alibaba Gold Suppliers in Mainland China, Taiwan and Hong Kong, this provides an independent and impartial third-party verification of prospective suppliers, using a well-known company such as TÜV Rheinland or Bureau Veritas. Alibaba Gold Suppliers who choose to pay for this have assessment reports available to download from their Alibaba profile page.

 

Drawbacks of using a sourcing platform

BUT along with the benefits, there are some negatives that also need to be taken into consideration – particularly in the case of Alibaba:

  • Quality issues with suppliers: suppliers pay Alibaba to be a Gold Supplier, which means that Alibaba is ‘policing’ what is in effect a considerable income stream. Secondly, the required ‘Onsite Check’ by Alibaba and ‘Verified’ by Global Sources just checks that there is some kind of operation at the location claimed by the supplier. There is no evaluation of the way the supplier operates its business or of its track record with buyers.

 

  • Not all manufacturers/suppliers choose to be included in these huge sourcing platforms. Some feel that they have been flooded with inexperienced buyers not serious about doing long-term business.

 

  • Both platforms have large numbers of middlemen or sourcing agents and don’t always make it easy to distinguish between these and manufacturers.

 

  • Potential for scams – both from bogus suppliers and, in 2011, from Alibaba’s own employees who granted Golden Supplier status (a mark of supposed integrity), to 2,236 businesses who subsequently defrauded buyers.

 

Alibaba vs. Global Sources

 
Taking account of the pros and cons, if you opt for the major sourcing platform route, should you go with Alibaba or Global Sources or try both?
 
Alibaba is the biggest platform, but Global Sources is considered by many to have higher quality suppliers and companies with more export experience. Also, the task of weeding out middlemen from manufacturers is easier on GlobalSources.com than on Alibaba.com as identities are more transparent. Plus, rather than being a ‘jack of all trades’, Global Sources focuses on specific sectors: electronics, fashion and accessories, home and gift items.
 
But perhaps the biggest advantage Global Sources has over Alibaba is the ‘offline’ side of its business as a long-established organiser of trade shows in Asia. Attending these trade fairs gives buyers the opportunity to meet and vet suppliers and physically appraise their products. Indeed many suppliers who are on the Global Sources platform also exhibit at the fairs, adding to their credibility.
 
If you decide not to use one of the big two sourcing platforms – or you’ve used them in the past but feel ready to move on – what are your alternatives?

 

Going direct

 
This may be a more complex and higher risk route but it can work to your advantage. For example, if your competitors are all buying from the same small pool of suppliers on Alibaba and you find a supplier who is not on this platform, you could differentiate yourself in the market and it could work out cheaper – provided everything goes smoothly.

The 64 million dollar question is – how do you find these suppliers initially?

 

Trade shows at home and in China

Trade shows allow you to cover a lot of suppliers quickly and to establish a personal relationship that is useful when it comes to negotiations. They are a good way to identify new trends and also to discover new products that suppliers have not yet revealed online.

By virtue of the investment necessary to attend, trade shows outside of China will attract a much lower number of Chinese companies. Industry-specific trade shows in particular, however, have an increasing Chinese presence and you could still make some useful contacts, despite the smaller supplier pool.

There are many trade fairs in China and Hong Kong: general fairs like the ‘grandaddy’ of them all, the famous Canton Fair; and industry-specific fairs such as the Hua Qiang Bei electronics market in Shenzen. There are regional fairs too, of which the biggest is the East China Fair. They tend to be huge; and in the case of the Canton Fair in particular, you need stamina, focus and a clear timetable/plan if you attend. You will meet a broad spectrum of suppliers and a high number of agents will also be present.

You could also attend one of the Global Sources trade shows. These are mainly based in Hong Kong – although some take place in South Africa and the USA – and they focus on electronics, home, gift and fashion.

Whichever fair you attend, it’s always worth checking if the company you are talking to is a manufacturer or trading company.

 

Referrals

You may be fortunate to find suppliers through business contacts, online forums or other social media: LinkedIn, for example, has a number of Groups focused on sourcing in China. But if you do find a company that seems a good fit – don’t forget that you will still need to carry out thorough due diligence to reduce risks.

 

Commission-based sourcing agents

Moving up a level, you can hire a professional agent to identify and verify suppliers – and facilitate communications with these. Be aware, however, that agents’ fees can be anything from 3 to 10 percent of the purchase price[1] – and there may be ‘hidden’ commissions between sourcing agents and Chinese manufacturers. Also, their remit tends not to cover the later stages of the process, such as production and quality control or logistics.

 

Sourcing service providers

And moving up still further, you could employ a sourcing service provider to help with the whole sourcing process: finding suppliers, negotiating prices, managing the supply chain and quality control, handling logistics and shipment – everything from soup to nuts. They have established networks of suppliers – and may be able to negotiate better pricing and terms for you. Of course, their fees will reflect this additional level of commitment; but they could save you a lot of pain, allowing you to focus on other aspects of your business.

At the end of the day, you don’t need to follow a single approach. You might want to try the sourcing platforms as a starting point – but simultaneously build up your own knowledge of and contacts in China through trade fairs and online media. Or you may decide that this is too important a decision to leave to chance and opt for the expert partner. You are the only person who can decide the best sourcing route for your business.

 


[1] Forbes: Sourcing Goods And Suppliers In China: A How-To Guide For Small Businesses, 6 Jan 2014
 

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