Chinese Company Verification: How to Vet Suppliers

Two 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.

Considering 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.

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.

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.
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.