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How Buyers can help themselves

February 25, 2011 Another China Blog, Blogs

The CSIC will be featuring 2 posts recently written by our founders Mike Bellamy and David Dayton.  While both were written in response to the recent allegations of fraud against Alibaba,  these articles are also important for sourcing from China in general.

Buyers have to know to protect themselves.  Do the work, and your China Sourcing will go much smoother.  If you need assistance please feel free to contact the China Sourcing Information Center at anytime here-

Mike Bellamy’s Article about the recent situation at Alibaba below-

What Buyers should learn from the recent scandal at Alibaba

The Wall Street Journal headline reads “Alibaba.com CEO Resigns in Wake of Fraud by Sellers” and goes on to expose how thousands of suppliers on the e-commerce site committed fraud by scamming buyers. Any buyer who has done research online and later visited Chinese factories in person will tell you that the websites, catalogs and trade show booths of the majority of suppliers exaggerate to some extent the supplier’s true capabilities.

Unlike in the medical and legal professions, companies and individuals who provide sourcing services or run a factory are almost totally unregulated in terms of truth in advertising, codes of conduct and service standards. There is no board of examiners to self-regulate the manufacturing industry. Combine this with the tight margins that most suppliers operate under, and it is no surprise that many vendors take liberties with the truth in order to capture the order.

Exaggerating the truth in terms of manufacturing capability is one thing, but claiming to be a factory and disappearing with the buyer’s money is a whole different level of fraud. But that fraud has been happening for years in China—nothing new. What makes the situation at Alibaba so shocking is that Alibaba markets itself as a safe place for buyers to find suppliers and provides a host of services to put them in touch with each other. But now we learn Alibaba staff cooperated with the thieves to scam the buyers.

Fellow buyers, here are your takeaways from this situation.

1. In the article, it states that most of the scams happened to buyers who purchased $1,200 or less of high-demand electronics at low prices. This makes sense for a couple of reasons:
a. Small buyers generally do not have the experience to know when they are getting scammed and fail to do their due diligence in advance.
b. Unfortunately, because they may be on a tight budget, many small buyers do not utilize third-party quality control to check the quality of the goods before final payment is made.
2. Do not source knockoffs (iPhone clones for example) or buy items that are too good to be true. These are two big red-flag areas that often lead to sorrow for the buyer.
3. What can the buyers do to avoid the scams?
a. Regardless if you are buying $1 million or $1,000, you should visit the supplier in person to confirm they are an actual factory and not someone working out of an internet café who is going to bolt as soon as your funds arrive. If you do not have time to visit China, most third-party Quality Assurance agents will conduct an audit in-person at the factory for a few hundred US dollars. If you cannot afford to do an audit, then you really should not be sourcing. If you are placing larger orders, know that service providers can do a very intense level of financial and reputation due diligence to complement your quality auditing of potential suppliers. China Sourcing Information Center, a nonprofit where I volunteer, keeps a list of reputable third parties that can help you safely find and manage suppliers in China.
b. Structure your payments so that you are not as exposed. It is not realistic to expect all of your suppliers to allow you to pay them after the goods arrive in your possession. But you certainly want to have yourself or a third-party inspection agent check the quality of the goods BEFORE the order ships and BEFORE you make the final payment. The simple fact of telling your supplier that you will be doing an inspection before payment will weed out 90 percent of the scammers.
c. Ask your suppliers for a list of references. If a seller cannot give you a handful of happy clients to talk to…RUN AWAY.
4. During the past few years all the major online directories have been promoting their verified supplier services in order to help stem the rising tide of sourcing projects gone wrong. The theory is that if suppliers are audited to some degree by the staff of the online directories, the companies who are not professional or with a poor reputation will be removed from the system. Now we learn that one directory, Alibaba, was in cahoots with the scammers. Scary. Truth be told, Alibaba and other online directories make their profits from the supply side. They charge the seller, not the buyer to use the online platform. So a supplier has to be pretty unprofessional to get removed. I think the best thing online directories such as Global Sources have done is to increase the cost of being a verified supplier. Yes, at a fundamental level, suppliers can buy a better rating, but the fact that they have paid more indicates that they have significant cash flow to support participation on websites such as Global Sources. Based on my 10 years of sourcing in China, the scammers are not the high-ranked suppliers who spend tens of thousands of US dollars each month on marketing and trade shows. On the contrary, the scammers are the bottom feeders who may have a nice website and polished English, but they do not have the big and expensive footprints at trade shows or online directories.

In summary, pray for the best but plan for the worst. Do your due diligence when selecting a supplier and tie payments to delivery.

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