Ultimate Guide on Sourcing Chemical Products from Chinese Suppliers Part 1

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The water in chemical industry is really deep.

Last year alone, we have witnessed countless scams in this industry, due to the frauds, some buyers went bankruptcy, some quitted importing from China(they encountered same thing in Russia, Malaysia, and elsewhere), however, more and more buyers, regular or new, continue to or begin to import chemical products from China.

So we believe it is our responsibility to share our experience, expertise as well as lessons in supplier verification, supplier management, and order management with chemical suppliers.

1. Stick with Factory, or Established Old Trading Company(at least 4 years old)
Almost all the scammers are small and new trading companies, fake companies, offshore companies. They don’t have assets, they set up a table, a staff, a telephone line, a computer and a website, cheat the money, run away, change a name, do the same routine again.

So it is important to deal with companies that have assets and reputation. Factories have equipment, production line, investment, so they won’t disappear overnight.

If possible, deal with factory only. However, if there are decent trading companies that are incorporated at least 4 years ago, with decent export records, give you good price, pass the credit investigation and onsite verification. You could try with them.

One thing I should remind you is that according to Article 3 of The Company Law of the People's Republic of China, A company is an enterprise juridical person, which has independent juridical person property and enjoys the property right of the juridical person. And it shall bear the liabilities for its debts with all its property. As for a limited liability company, the shareholders shall be responsible for the company to the extent of the capital contributions they have paid. As for a joint stock limited company, the shareholders shall be responsible for the company to the extent of the shares they have subscribed to.

So if you are buying tens of million worth of products from a supplier, you need to make sure their company is of decent size, they should have enough property or assets to compensate you if things go wrong.

An extreme example is like this, you are going to place a 10 million dollar order to a supplier, that only has USD100,000 asset, however, you know that the owner is a super rich man, who has 10 billion dollar worth personal property. After finding that, you might feel released as you are dealing with a tycoon, 10 million dollar is not a big deal for him.

However, from legal standpoint, you are at huge risk by doing that, if the supplier fail to deliver the order and need to compensate you 10 million USD, they can file bankruptcy, you are not entitled to ask the tycoon to pay the money out of his own pocket.

2. Do Onsite Verification to Make Sure They Are Factory, Instead of Fake Company, Offshore Company, or Small New Trading Company.
Every company or fake company call themselves factory. So you need to verify that. You need to verify the following through the onsite visit:
a. verify the documents, license, and certificates
b. verify production line, production ability and capacity
c. check the size, scale, management
d. check products quality
e. talk face to face with the owner and contact person, the personality of the owner will reflect the personality of the company, the personality of the contact person will influence hugely on the order management and performance.
f. Verify if supplier are trading company or factory, if they are real and legitimate company, if they are offshore company.
For supplier verification, do it yourself if you can come to China, you are the best person to do the job, if you can’t come, ask an agent(such as Chinawhy) to visit on your behalf.

3. Do Credit Investigation After Onsite Verification
On top of onsite verification, you need to do credit investigation, especially in the following 2 aspects:
a. to check the yearly turnover of the supplier
b. to check the yearly profit
c. to check total assets or debts
d. to check the litigation records

We only suggest to do both onsite verification and credit investigation for big orders, and chemical orders(big or small). For other industries, normally an onsite verification is enough.

The finance information is acquired from local administration of industry and commerce, so the data itself is reliable. However, if you are familiar with the operation in China, you will need to interpret the finance information in the credit report as following:
a. normally the real turnover will be 2 to 3 times bigger than the turnover in balance sheet submitted to the government on a yearly basis.
b. the profit is a less important data in the report, as most suppliers will hide profit to avoid company income tax, according to our knowledge, the real profit normally is 5 to 15 times more than the profit said in the balance sheet.
c. The debt is real, if a company has debt, then it means it has debt.
d. The assets of a company is objective, normally suppliers will list all the investment in equipment, production line, as that will help them to reduce the profit and avoid tax.

As most chemical orders are mega size, so buyers need to specially pay attention to financial information like yearly turnover, assets, debt. Make sure the supplier you deal with have experience and ability to deal with the mega size order you are going to place.

The litigation record is crucial, if there is negative record in this regard, stay away from this supplier.

 

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