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Why Alibaba Is Not Your Complete Answer To China Sourcing

By Dan Harris on Posted in China Business

More than three years ago, I did a post, entitled, “I Hate Alibaba (The Website, Not The Company),” voicing my concerns with foreign companies thinking that they were safe sourcing through Alibaba. My concern at that time stemmed from the fact that many of the calls my office was getting regarding really bad or never delivered product were coming from people who had sourced through Alibaba.  

Just back from China (Hong Kong, actually), where I saw a television interview with Jack Ma of Alibaba. He never fails to impress the hell out of me and every time I see him my first thought is BUY.

But then I think about all the harm Alibaba has caused to so many Western SMEs and I change my mind about calling my broker/brother. Alibaba makes the naive think China sourcing is easy. I realize blaming Alibaba for the mistakes companies make in using its site is really not fair to Alibaba, but at the same time, I do not see much use for the site beyond its serving as a really good directory of potential manufacturers of particular products.

Sourcing from China is not easy and my concern with Alibaba is how so many who use it start to think it is easy and then they fail to take precautions and then they call my firm because they are out hundreds of thousands (more or less) of dollars. Seems it is even worse than I thought. 

Now we learn from Time Magazine that not just some of the companies that list on Alibaba are fraudulent, but that Alibaba engaged in fraud as well:

An internal investigation by independent board member Savio Kwan revealed that beginning in late 2009, Alibaba had noticed an increase in fraud claims against sellers designated as “gold suppliers,” which means they had been vetted by an independent party as legitimate merchants. The investigation revealed that about 100 Alibaba sales people, out of a staff of 5,000, were responsible for letting fraudulent entities evade regular verification measures and establish online storefronts.

The company said it uncovered fraudulent transactions by 1,219 of the “gold suppliers” registered in 2009 and 1,107 of those in 2010, accounting for about 1% of the total number of gold suppliers during those years. It further said that “the vast majority of these storefronts were set up to intentionally defraud global buyers” by advertising consumer electronics at cheap prices with low minimum-order requirements. 

Whether you use Alibaba or not, there are certain “rules” you should follow when sourcing from China and those rules include conducting due diligence on your potential supplier, notwithstanding the color of star by their name.

Alibaba. A force for good or for evil? What do you think?

UPDATE: Michael Zakkour of the China Business Blog did a post, entitled, “Alibaba Fraud Case Not Surpising,” in wihch he talks of visisting two grossly inferior factories that looked just great on Alibaba. Makes for some good (and funny) reading.

  • LD

    Alibaba is neither good nor evil. It is a good list of companies that make what you want. That’s it. From there it is entirely up to you to make sure the company is legitimate, to make sure that you have a good agreement with that company, and to have a quality control program in place to make sure you are getting good product. I have used Alibaba for years as a first step, but no more. Those who trust it to do the thinking for them deserve what they get.

  • http://www.qualityinspection.org Renaud

    What most importers do not realize is that online directories are only the 1st step in sourcing a good supplier.
    Even if Alibaba were totally honest, they DO NOT pretend to (1) verify that each listed supplier is legit and has export experience, (2) make it obvious when they don’t own a factory, and (3) ensure that only the products they make are shown in their profiles.
    And even if Alibaba pretended to do these things and did them well, buyers would still need to do their homework and wonder: is this factory a good fit for me, are their operations reliable, do they have enough capacity, do they work on the right markets, will they protect my IP…

  • Chris

    Having never dealt with Alibaba, I’ll leave the comments for others, though I’m a huge fan of its sister consumer site Taobao.com
    The lessons from Alibaba are key lessons for every business: keep your sales force well managed, compliant and on a very short leash. It is clear Alibaba experienced a breakdown of internal controls that allowed its sales force to receive illegal payments / kickbacks from fradulent suppliers in return for Gold Supplier rating.
    Every business faces threats from its sales team – and many are the result of internal not external pressures. Dan frequently writes on FCPA compliance which is primarily a sales force problem. Ensuring long term relationships with retailers / sales channels requires stringent internal controls to ensure an ethical approach to commercial partners.
    Internal pressures to just sell, without questions about how, who, what and why, will lead to major problems. Unrealistic sales targets with no plan or funding for longer term market development will result in many illegal short cuts. A low salary / high commission remuneration model for sales staff will result in poor sales, unhappy customers and staff willing to steal from the company.

  • http://www.plexus.com John Tsang

    The scam had nothing to do with foreign sourcing. It was entirely aimed at mainland Chinese looking to buy cheap gold. If you’re going to criticise, please get your facts right.
    The scam bypassed Alibaba’s protocol checks, they’ve sacked over 100 staff and two main board directors have resigned. Ebay & Amazon has also had problems in the past. Businesses have problems, and Alibaba got caught out by devious criminals. They’ll tighten up and make sure it doesn’t happen again. There’s no need to slate them for it or suggest they’re unfit for foreign sourcing.

  • Ken K.

    Not sure why you are getting attacked on this one. I agree many people think that if a supplier has a good Alibaba rating that they will be safe and so they let down their guard. I think it makes sense to choose highly rated Alibaba suppliers but then to remain vigilent and careful.

  • Dan

    @ John Tsang (a/k/a Shiva),
    The scam had everything to do with China sourcing. The scam was to list poor and even fraudulent Chinese companies as gold star suppliers.
    I did NOT suggest Alibaba was “unfit for foreign sourcing.” I merely argued that no matter how one sources, one must be careful and one should not think a gold star from Alibaba means one can let down one’s guard. Do you actually disagree with that?

  • Ben Fulladen

    @John Tsang – agreed – think this critique was hastily written. Alibaba are big boys and will learn by this. CLB “hating” AB is a bit harsh.

  • Dan

    @Ben Fulladen,
    Please read my post on “hating” Alibaba. That was the headline. I don’t hate Alibaba. I hate how people think that by using Alibaba they are completely out of the woods.

  • http://www.silkroadintl.net/blog david

    First, Renaud is right. You need to do DD–and a lot of it. The worst thing to do, and what we see a lot of is people assuming that China is risky anyway so they just don’t do any DD at all. Crazy! And only slight less crazy is the all too common idea that “if they’re online” or “if they speak English” or “if they have a website” of if they were on a sourcing site (ANY sourcing site) then they must be professional/safe/honest and so we’ll just send them money and wait for product to show up.
    Second, John Tsang you can’t bash other people for getting their facts wrong if you yourself are only going to tell 1/2 the story. You’ve conveniently left out all the other complaints against Alibaba such as false companies, stolen monies and price collusion that have a LONG and storied history. Yes, this latest round was about gold and domestic suppliers, but to claim that it has never or will never happen again anywhere else in the company is just as irresponsible. Never say Never.
    For example, I personally have had Alibaba sales reps in my China office offering, for a price ($6000USD), to help me “look like a factory.” I was offered Gold Supplier status (which is supposed to be based on sales history and other audit standards) for a price too. I don’t sell gold and I don’t sell to the domestic market. The sales reps told me “every one is doing it” and “its great for getting new customers that don’t come to China themselves.” If they are offering it to me, you know that others have bought it already too.
    Further, like you said, I agree that other companies have problems too. But I don’t agree that that justifies what happened (which is how you’ve used it) or that we should just move on now that they’ve fired a few people (which is again, what you’re suggesting). Alibaba IS a questionable source for foreign sourcing as are MANY OTHER venues all across the internet and trade-show world.
    But good or bad or just irresponsible, Alibaba is the 800lbs gorilla in the sourcing world. Like it or not, you have to deal with it since there are so many suppliers in one place; like a virtual version of the Canton Fair. But, just because it’s big does not mean that it’s the best quality or even a safe option.
    Regardless of how you find a supplier (online, trade-show, referral, coffee shop) you need to be doing a LOT of additional research before you send any money to them. At the very least you should visit their facility personally. Of course, more is always better. I suggest:
    1. Search for only suppliers that been verified by a third party out side of the website that hosts their information.
    2. Pay for background information and document confirmation for any potential supplier before you make any commitments or pay any deposits.
    3. Include in contracts with your supplier mandatory 3PQC visits during production and before the balance of payment is made at the completion of the project.
    4. Have a third party testing company test your products to confirm quality and components.
    5. Have container loading confirmation send you verification that what you’ve ordered, testing and checked is indeed what you’re being shipped.
    ***Full Disclosure*** I have worked for both Alibaba and Global Sources. For Alibaba I was once a “Buying Expert” and moderated disputes between buyers and Alibaba-sourced suppliers and answered questions about how to resolve buyers concerns about fraudulent suppliers–Alibaba asked me to do this to help them improve their image. For Global Sources I am an invited 3rd party trade show speaker. I have NEVER been paid by either company for any of the work that I do with/for them.

  • Graham Thompson

    @Dan – using headlines stating hatred of Alibaba – as you did – is somewhat aggressive to put it mildly. Then stating you actually don’t then makes the picture confusing. If you’re going to use aggressive headlines I think you should expect some negativity towards that. You need, I suspect an editor to tone down some of your personal rhetoric. It can become unpleasant.

  • William Oakley

    “Alibaba a force for good or for evil”. Great question. Overall, it’s a force for good, but it is far from flawless and those who fail to recognize this may end up paying the price.

  • SourcingAmateur

    I have been reading this blog for a few days now, I have been sourcing in China over 8 years now and I still think i am an amateur, I have used Alibaba, Made in china, Global Sources and many other sources and trade shows in China and around the world. My 2 cents here are
    1. International Sourcing is not a simple task, just because Alibaba gave a gold rating doesn’t mean much, frankly who are they to give gold rating? actually in all websites of sourcing manufacturers I prefer Global Sources, they atleast rank the suppliers from 1 to 6 stars, and have various details about the factories, clearly mentioning if the factory is really a factory or not, no other websites do this. Also can really find genuine manufacturers there. And none of them really advertise the pricing of the products as all of us serious buyers know we don’t want to see pricing, we want to see what the factory can do
    2. I think Alibaba is a directory and only a directory, I search a product and I get like 1000′s of suppliers its crazy to even think there can be 1000′s of suppliers / manufacturers of products I source
    So all in all I think its all fake promises ” Alibaba.com makes it easy for millions of buyers and suppliers around the world to do business online”
    Best of all Alibaba.com is a directory service that lists millions of people on the website that may or may not be able to provide products they advertise, as far as Alibaba is paid for it.
    Coming to the issue of resignation of the CEO, it surely has to be more than whats in the news, a CEO of a company who has such amazing records and career, doesn’t just resign, even in the wake of a fraud, without a single personal statement from himself. All statements I have read are from Alibaba’s PR or Jack Ma. I do think it is a game to get more publicity by Jack, who may be trying to launch a new service or product in Chinese market, or may be just trying to get back power. (David had become to face of Alibaba and no body talked about Jack , simple politics?)
    Let me end at this note, and hope no offense to all my fellow posters above

  • http://www.sunchine.com.cn Laurentius Metaal

    What we see in our business is that people come to us with Alibaba prices for which manufacturers can not produce and ask us to buy for them in China through the contacts they made on the web. We refuse to do so as in sourcing, in our case the PV markets, you need to have a good face-to-face relationship with your manufacturer.
    SME’s simply need to buy that plane ticket and make the contacts where businesses have made them for many years: Trade shows, exhibitions etc. You’ll learn the friendly faces in the market and will rarely come across your typical fraudulent Alibaba company, well the ones you read about when things go wrong I mean Just like the companies that want to be cheap and think they can source from behind their desk the suppliers that do the same are unlikely the ones that spend money on trade shows so this strategy acts like a very good filter for buyers.

  • http://www.qualityinspection.org Renaud

    I absolutely agree with the above comment from “SourcingAmateur”.

  • Steve

    Alibaba is sourcing for idiots and complete idiots. It should only be used by intelligent people to get a rough feel of the market and of the industry one wants to source from and maybe for alipay if 3% is a better deal than any other payment method.
    Idiots get scammed/ripped off. Complete idiots well… I’ll let your imagination think of what happens to them.

  • http://www.chinawhy.net Steven

    I am a gold supplier on alibaba English version, and trustpass member on alibaba China, meanwhile, I have been providing sourcing service for clients, so have been using alibaba for many years, I would like to share my 2 cents here:
    1) Alibaba do verify their supplier
    Alibaba outsource the verification to a third party company, they will call the supplier to check the registration information they get from Chinese government, remote verification on telephone and checking a supplier’s registration information by paper will not be able to tell if a supplier is manufacturer or trader, decent or shabby, but it can be used to judge whether a company is legally incorporated or not.
    2) scam and fraud
    2 years ago, I wrote an blog article telling a story that one of my UK client had been scammed on alibaba by a fake company(that company was later on removed from alibaba after our client made a complaint), and from time to time, I heard the same stories.
    Alibaba has stricken their membership qualification procedure, it is become cleaner, fake companies selling fake branded products era has gone.
    I would second what John Tsang said “stop buying cheap gold” from china, on alibaba or whatever platform.
    3) Alibaba is great resource
    I agree alibaba is not the complete answer for your china sourcing project, but alibaba is definitely one of the greatest platforms.
    The suppliers on alibaba are mostly small and medium sized, so that is perfect match for small and medium sized buyers to cooperate with, I think SME buyers should not try to dig out the biggest or most reputable company in this industry, you will not get the VIP service there.
    Let me give you 2 examples:
    a. I have worked in a big manufacturer who selling to Wal-mart, Target with yearly turnover of 50 million USD back in 2004, they are big, they are decent. If there have to have a delay for delivery, your small order(maybe not small to you, but small to them) will be sacrified. They normally assign these orders to new graduate salesman to practice.
    b. recently a factory I know get big order from a US big chain store, many small to medium clients get notice that they will get delay in delivery, you either accept delay or you go.
    So from that point of view, alibaba is a great resource where you can find small to medium sized suppliers, with good service attitude, trying to serve your needs and grow with you.
    4) I agree with LD that you need to make due diligence, sign a contract properly, do the quality control, that is lesson from many hard stories. Even you are dealing with a reputable company, you have to do due diligence properly too.
    Regards,

  • Sally

    Hello! I have found all your posts very interesting!!! I just had a question for you more experienced Alibaba users!!!!
    I am looking at importing something and I can see that the supplier is in Canada and I can see a well known company that is supplying these products. Does that make sense? Does that mean you can buy from this site and there is no copyright issues??
    My limited understanding of Alibaba is that it is a site with Chinese manafacturers – not other countries? Is this incorrect??
    Looking forward to hearing some response hopefully!!!!!
    Saly

  • Steve

    Alibaba is ofcourse not the answer for b2b importers. When u search anything, you find thousands of suppliers and then tough to recognize actual quality supplier. I got fraud from many of suppliers of alibaba and blocked this for sourcing.
    I like globalsources module, they have right pattern to source from small, medium & big companies by rating them in star, also there 3 verifications system confirm quality of suppliers they are advertising.
    Also, suppliers pay huge amount to advertise with globalsources and i believe only good suppliers can advertise with them. Sourcing experience with globalsources is awesome and my buying team use this site only.

  • http://www.cysbearing.com sunny

    we want to start to do export business in China, decide to advise on alibaba or made-in-china, but do not have a fininal decision, which one is better, when I google this two B2B, I see so many people have been scammed on alibaba, and aslo on made-in-china, should I still insist to do advisement on these two B2B portal?

  • http://www.light-code.com welsie

    I also want to know the answer of the question by Sunny. Alibaba and Made-in-China which one is better?

  • Alex

    Good points Dan, I will also add that you should really travel and see vendors before transferring your hard earned cash. An alternative is to use a china sourcing company to help and have your understand the process. They will reduce the risk of running into problems and do the local running around. The success in china sourcing is creating the relationships necessary to make your business thrive.

  • http://www.unitedgs.com/ UGS

    I could not agree with you more. Sourcing is a much more complex issue than people try to make it out to be. There are a lot of specifics that Alibaba customers do not take into account,

  • http://www.importingfromchina.com.au/ Lionel Thomas

    Alibaba is a good source, but for the novice importer I would say
    consider attending the Canton Trade Fair and/or using a Sourcing Project
    Manager such as ChinaDirect Sourcing. Want to do it yourself, and use Alibaba,
    then I would have find out a good import process first, read up on the costs, pitfalls
    and culture; there is an import process listed on the ImportingFromChina site,
    with additional information available.