7 Ways to Verify Chinese Suppliers Are Factories, Not Trading Companies

Many importers are eager to determine whether they work directly with a factory or a trading company when importing products from China. This is because many Chinese suppliers, including those on Alibaba, claim to be factories when, in reality, they are trading companies. As a result, blogs and articles are abundant, attempting to guide importers on verifying suppliers online. However, only some suggested solutions could be more effective in practice.
In this article, I will address the limitations of commonly suggested solutions and provide seven reliable methods to identify your supplier’s true nature accurately.

• 2 Ways Often Suggested, But Don’t Work at All
• 7 Ways to Verify Whether Your Supplier Is a Factory

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 significant registered money, then it’s a factory. Otherwise, it’s a trading company. But I’m afraid that’s not right. If your supplier is a small-scale factory, its registered capital will likely be less than some trading companies. And the registered capital of a large-scale trading company can be enormous, like more than 10 million CNY.

No matter whether 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 then. It means during the next ten years, the amount in your company’s account can be over 500,000 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 many companies can offer this service.

2. Ask for Samples. Check the Address Where It Was from.

Another suggestion mentioned by some is for importers to request samples from suppliers before placing an order. This allows the importer to assess the product’s quality and obtain the supplier’s office address. It is believed that if the office address matches the registered address on the business license, the supplier is a factory; otherwise, it is a trading company.

However, this method is not applicable in China, as well as in many other countries. It is common for a factory’s office address to differ from its registered address. Many small and medium-scale factories rent workshops and may change locations every 2 or 3 years without updating the registered address. Additionally, some factories have separate places for their workshops and offices, and these locations can even be in different cities. As a result, relying on the office address to determine whether the supplier is a factory or a trading company could be more reliable.

Part II: 7 Ways to Verify Whether Your Supplier Is a Factory

1. Check the Business License

The most crucial aspect to focus on when examining a supplier’s business license is the “Business Scope.” This information is the most straightforward indicator that a supplier cannot counterfeit. A factory’s business scope should explicitly mention terms like “manufacture” or “produce,” which would be absent from a trading company’s business scope.

To verify the supplier’s business license, you can either send it to a reliable friend fluent in Chinese for examination or hire a freelancer on platforms like Elance to provide translation services, usually at just a few dollars.

2. Check the Value Added Tax (VAT) Invoice

This method is considered highly effective in verifying suppliers. The Chinese government provides export drawbacks for various exported products to encourage trade. However, to qualify for an export drawback, a company must possess a 17% value-added tax (VAT) invoice, which can only be issued by a factory.

Here’s how you can use this approach: Inform the supplier that you have a partner in China who can help with the export drawback application and request a 17% VAT invoice issuance. Suppose the supplier refuses or hesitates to respond. In that case, they are likely a trading company or a very small-scale factory.

On the other hand, if the supplier agrees to issue the VAT invoice, you can ask for a clear picture of a previous invoice and examine the company name printed on it. If it matches the name on the supplier’s business license, it confirms that they are indeed a factory.

3. Check the Supplier’s MOQ

A valuable means of verifying suppliers is examining the minimum order quantity (MOQ) required. In the trading industry, it is common knowledge that factories generally have higher MOQs than trading companies. Therefore, you can gauge your suppliers by testing if they are willing to sell you smaller quantities of products.

For instance, if you want to purchase 5,000 mugs, you can inform the supplier that you are initially interested in buying only 300 pieces as a trial order. Furthermore, you can convey that you plan to place a larger order if the quality meets your expectations. If the supplier rejects your request, they are likely a factory, as their MOQ is typically higher than 1,000 pieces. However, a trading company might be more accommodating and accept an order of just 300 pieces.

4. Check the Products Catalogue

Typically, factories manufacture one or a few specific types of products. Therefore, if your supplier offers a wide range of products in their catalog, they are more likely to be a trading company.

For instance, I am familiar with a factory specializing in producing stainless steel vacuum cups. This factory, located around 70 km from my office and employing around 200 workers, is ranked among the top 10 in the Chinese vacuum cup industry. However, in addition to their vacuum cups, they also offer glass-made cups sourced from smaller factories. Surprisingly, the price of these glass-made cups from the factory is even higher than what other trading companies quote.

On the other hand, if your cup supplier offers a variety of products such as stainless steel vacuum cups, glass cups, plastic cups, mugs, and more, it is a strong indication that they are not a factory but rather a trading company.

5. Check the Factory Auditing Reports

If a supplier claims to have supplied products to renowned global companies such as Walmart, it is advisable to request them to provide a factory auditing rep; they are likely to refuse or hesitate to share the report; it is expected that they are trading companies rather than factories. On the other hand, if they willingly provide you with the factory auditing report, it is essential to sift through the company name stated on the news. If the name matches the one on their Business License, it confirms that they are indeed a factory.

6. Check the ISO 9001 Certification

While it is true that not every factory possesses ISO 9001 Certification, most companies with this certification are indeed factories, as trading companies generally do not require it.

However, there are exceptions, as some trading companies acquire ISO 9001 Certification. These trading companies specialize in a particular product category and maintain strong relationships with their factories. I know several trading companies that fall into this category. I can attest that working with them is often comparable to working directly with factories, even in pricing.

7. Check Where the Supplier Is Located in China

Each product in China typically has its dedicated industrial area. To illustrate this, consider the example of RC (Remote Control) toy cars. In a previous article on importing toys from China, I mentioned that most RC toys are produced in Chenghai City, located in Guangdong Province.

Chenghai City is chosen as the production hub for RC toy cars due to its comprehensive supply chain that covers all the necessary components, including motors, remote controllers, and wheels. The factories in Chenghai City focus primarily on designing the shell and packaging of the cars while assembling the various parts. Manufacturing RC toys in any other city would likely involve increased complexity and higher costs than in Chenghai, making it an unlikely factory location.

Suppose your suppliers are based in something other than Chenghai but in cities such as Guangzhou or Shenzhen. In that case, there is a higher probability that they are trading companies. While there may be a few high-tech RC toy factories in Shenzhen, they are relatively rare compared to Chenghai’s concentration of manufacturers.