Many importers are dying to know whether they are dealing with a factory or trading company when importing certain products from China. Because almost every Chinese supplier claims that they are factories, including suppliers on Alibaba, though they are actually trading companies. So there are lots of blogs and articles that teach importers how to verify suppliers on the Internet, but most solutions they suggested didn’t make any sense in reality.
In this article, I’ll first explain why solutions that lots of people suggested don’t work, then offer 7 correct ways to find out what your supplier really is.
Part Ⅰ: 2 Ways Often Suggested, But Don't Work at All
1. Check Supplier’s Registered Capital
Some blogs mentioned checking the supplier’s registered capital to verify whether it is a factory. If with large registered capital, then it’s a factory, otherwise, it’s a trading company. But this is totally wrong. If your supplier is a small-scale factory, its registered capital will be likely less than some types of trading companies. And the registered capital of the large-scale trading company can be very large, like more than 10 million CNY.
No matter you register a company or a factory in China, your registered capital is usually more than CNY 500,000. But it doesn’t mean you must have ￥500,000 in your hand at that time. It means during the next 10 years, the amount in your company’s account can be over 500,000 on any day, and it’s legal.
Another thing is you can easily borrow ￥500,000 to deposit in your company’s account for one day, then transfer it out the next day. It only takes hundreds of US dollars to get this one-day loan as there are many companies that can offer this service.
2. Ask for Samples, Check the Address Where It Was from.
Some others recommend the importers ask for samples before placing the order to the suppliers. Then you can check the product’s quality, and get the supplier’s office address. If the office address is the same place as the registered address on the business license, the supplier will be a factory; otherwise, it’s a trading company.
But this method is not applicable in China, or even many other countries, because it’s quite normal that a factory’s office address is not the same as the registered address. Many middle and small-scale factories’ workshops are rented, so they may change to rent another place after 2 or 3 years, but they won’t update the registered address at that time. And some factories’ workshop and office are divided into different places, even different cities.
Part II: 7 Ways to Verify Whether Your Supplier Is a Factory
1. Check the Business License
The most important part is “Business Scope” (经营范围) when checking a supplier’s business license. This is the easiest and most direct way which your supplier cannot counterfeit. A factory’s business scope must include words like “manufacture or produce” (生产，加工，制造), which a trading company’s business scope won’t have.
Send supplier’s business license to a reliable friend who knows Chinese well for a check, or you can go to Elance to find a freelancer for translation, which only costs several dollars.
2. Check the Value Added Tax (VAT) Invoice
This is the best way to verify suppliers. Chinese government offer drawback for many kinds of exporting products in order to encourage export. But if a company wants to get export drawback, 17% VAT invoice is must needed which can only be issued by a factory.
So there is the way: tell the supplier that you have a partner in China who can help you apply for export drawback, so ask for issuing a 17% VAT invoice. If the supplier refuses or hesitates to reply to you, they probably are a trading company or a very small-scale factory.
But if they agree to issue the VAT invoice, you can ask for a clear picture of the invoice made before, and check carefully the company name on it. If it is the same name on the supplier’s business license, then it must be a factory.
3. Check Supplier’s MOQ
Factory’s MOQ is normally higher than trading company’s, and it’s almost common sense in trading. So that you can verify your suppliers by testing if they can sell you fewer quantity products.
For example, you are finding a supplier for purchasing 5,000 mugs made of glass, you can tell the supplier that you are buying only 300 pieces for a try, and will place big order in the future if the quality is good. They will say no if you are dealing with a factory as their MOQ won’t be less than 1,000 pieces. But a trading company may accept your 300 pieces order.
4. Check the Products Catalogue
A factory usually is specialized in one or several kinds of products, if there are lots of kinds of products in your supplier’s catalog, then it’s more likely to be a trading company.
I know a stainless steel vacuum cup factory (200 workers, around 70Km away from my office) that is among the TOP 10 in the Chinese vacuum cup industry. Except for vacuum cups, they also sell glass-made cups, but these are supplied by other smaller factories. This company’s glass-made cups price is even higher than other trading companies quoted.
But if your cup suppliers supply stainless steel vacuum, glass, plastic cup, and mug, etc. they are not factories.
5. Check the Factory Auditing Reports
If the supplier told you that they have supplied products for world companies like Walmart, then you can require them to send you the factory auditing report.
If they refuse or hesitate, then they probably are trading companies. If they send you the factory auditing report, you need to check the company name on the report. If it’s the same name as the one on Business License, they must be a factory.
6. Check the ISO 9001 Certification
Not every factory has ISO 9001 Certification, but most companies who have this certification are factories because the trading company has no need to have it.
But still, some trading companies get this certification, and all of them are only specialized in one product category and have a solid relationship with their factories. I know several of these types of trading companies, and I have to say working with them will be no much different from working with factories, even on price.
7. Check Where Supplier Is Located in China
All products have their own industrial areas in China, and let’s take RC (Remote Control) toy cars as an example. I wrote another article about how to import toys from China and mentioned all RC toys are mostly produced in Chenghai City, Guangdong Province.
Because this city has a complete supply chain for all parts of RC toy cars, such as motors, remote controllers, and wheels. The factory only needs to design a car’s shell and packaging, then assemble all parts together. Producing RC toys in any other city will be more complicated and higher cost than in Chenghai, so factories will be not likely located in other places.
If your suppliers are not located in Chenghai, like in Guangzhou or Shenzhen, they are probably trading companies. Maybe there will be some high-tech RC toys factories located in Shenzhen, but very few.