Cheap Chinese Suppliers: Beware of those with the Lowest Prices!

If you’ve been sourcing suppliers from China for any length of time you will know that there is a very wide range of pricing options. Cheap Chinese suppliers may be attractive, but with lower prices comes a unique set of risks that are probably not as likely if you pay more to work with suppliers in the middle-to-higher price brackets.

So, if you have found a supplier offering temptingly low prices for your products, take a moment to pause. Let’s go through this situation…

“This supplier sounds great and is cheaper than the rest!”

Here’s an example scenario based on real situations we’ve experienced with Sofeast customers who’ve sourced cheap Chinese suppliers.

• You’ve done some sourcing work and initial factory audits and one supplier on your shortlist stands as being ‘far cheaper.’
• Based on the sourcing information found the supplier also claims to have already sold products to some big-name store chains in the USA and Japan.
• They are accustomed to making products similar to yours, therefore they probably have the in-house skills and competencies needed for your production.
• They are likely to be able to comply with necessary regulations for your market, which are not very common in that industry in general.
• The price they quoted for fabricating the plastic injection molds for your product’s plastic enclosure is over 50% less than other suppliers.

This sounds amazing, but is it all too good to be true?

What’s wrong with this picture?

Sorry to burst this bubble, but there are several worrying points to address from the situation outlined.

• “The supplier is by far the cheapest option to start with” – that may be a red flag if there is a big price difference. Even if they give you a remarkably cheap price now, they might later find a way to cheapen your product or an excuse to raise the price on you after you have sent a deposit. If your product is interesting and unique, they might even be planning to tempt you to start working with them, share your product IP, and then sell your product behind your back. Consider your gut feeling at this point…does it all seem above board?
• “Their products are already sold to big-name chain stores in Japan and the USA”– did they provide you with reference customers who you have confirmed this statement with as being fact? Initial supplier due diligence done during sourcing often includes information based on a supplier declaration, and this needs to be further investigated to confirm its veracity. For instance, they might tell you they’ve sold to big-name brands when in fact they might have done orders indirectly through a trading company that took care of buying the materials and doing a lot of inspection…that’s very different from working directly for a customer. Or, worse, they might have just made it all up to impress you.
• “They are certain they can comply with uncommon industry regulations’ requirements”– have they been able to show examples of other products for which they managed compliance to those requirements? If not, how can they be sure? Don’t take claims about being able to comply with regulations at face value, you need to see proof. Otherwise, it’s your neck on the line when market surveillance authorities seize the products at the border.
• “Molds quoted by the other suppliers we sourced are all priced at around 50.000RMB while this supplier quoted less than half of that price”– this seems strange and is not a good sign. Double-check that they have quoted for molds using the same hard steel, same lifetime, etc.? Have they agreed on signing the usual contract confirming your ownership over the mold? If mold fabrication costs are so much lower this suggests that the supplier might be subsidising them and will assume some or all ownership of them and your associated IP.

How typical is this case and what are the risks when working with cheap Chinese suppliers?

This is a pretty typical case where an importer is attracted to a cheap Chinese supplier who offers a low price. While nothing has gone wrong yet, it’s a difficult decision because it could be a trap. (Many cases like this turn into disputes later on when things have turned sour).

Maybe the importer makes a 7,000 USD margin per batch with a moderately priced supplier, but they can make double that margin (and often at a higher velocity, as they can sell the products faster at a more competitive price) with an aggressively priced supplier.

How can they estimate the risk of using the lower-price source, and balance it with the potential for extra margin? Not easy.

One common trap is excessive greed, not tempered by a serious risk analysis. That’s a very serious trap for inexperienced buyers, but we sometimes see more seasoned purchasers also fall into this trap.

6 common risks from cheap Chinese suppliers

1. Price increases after you have transferred a deposit payment
2. Price increases from one order to the next with no relation to production costs
3. The supplier is unreliable: Ships late, doesn’t communicate, etc.
4. They’re unable or unwilling to meet your required quality standard
5. Your Product IP rights are trampled over
6. They lack transparency into who they work with and how

All 6 are applicable here! Even worse, doing business with cheap Chinese suppliers that will also make and keep your expensive tooling is more dangerous, since they might believe they have more leverage over you, the buyer.

In the worst case, a batch is paid for, all the shipment costs and import duties are paid, but, unknown to you, the products are defective and are delivered to you anyway. Naturally, you then complain and refuse to pay, but the supplier refuses to give you any compensation.
In the end, you may have to move to another supplier and pay for new tooling either because it is prematurely worn out, it generates defects, or the supplier simply refuses to release it. The supplier may lose the order’s balancing payment, but you’re probably going to do worse out of the deal because you’ve got products you can’t sell, need to spend time and money finding a suitable new supplier, need to make the large investment in tooling again, and the old supplier still has a lot of your product IP in their hands.

(Read about these in more detail in this post: 6 ways Chinese suppliers can cheat their customers) 

What Sofeast suggests for avoiding quality risks from a new supplier that you have some question marks over

On the quality assurance side, we suggest following this process of actions and checks:

• Preparing a detailed product checklist.
• A pre-production meeting at the factory before they open the tooling, to review your requirements etc. with them and ensure they are aware of them.
• Reviewing samples with parts off of tooling before mass production starts.
• When they start assembling the first order, a first article inspection as soon as they have finished products, to give them feedback as early as possible so issues can be corrected before they cause a lot of trouble.
• A final random inspection before the shipment to act as a safety net in case any problems crept through.
• If your manufacturer uses your tooling, have a third party take custody of the tooling between productions so you keep control of your valuable investment and the supplier is used to you ‘pulling your tooling at will.’

After the first order, depending on the findings from it, this series of QA activities can be continued on subsequent orders or can be relaxed if the results are positive.