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Path: Sourcing
News & Advice >> Import
from China Advice >> What buyers should learn from the recent
scandal at Alibaba

What
buyers should learn from the recent scandal at Alibaba

Posted: February 23,
2011

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.

Mike Bellamy serves as the Chair of the China
Sourcing Information Center's advisory panel and is the founder of PassageMaker.

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