Today, most suppliers in China hold export licenses. But, it was not always that way, and there are still factories that lack them.
In this article, we explain what Importers must know about Export licenses in China – and how you can buy from a suppliers without one.
What is an Export license?
An Export license, or Export permit, is a document issued to companies by China’s Ministry of Foreign Trade and Economic Cooperation.
The Export license is required for shipping goods out of China. Without such a license, the cargo will not be cleared through the Chinese customs.
As such, most export oriented suppliers, both manufacturers and trading companies, hold Export licenses.
Shall the Supplier or the Buyer apply for the Export license?
The Export licenses are only issued to Chinese companies, that wish to export goods from China to overseas markets.
Hence, overseas buyers don’t need to obtain license or permit in China.
Do buyers need to pay any export fees or taxes in China?
Overseas buyers are not required to pay any import duties or taxes in China. However, there is a set of ‘Export clearance fees’ that are ultimately paid by the Importer, on a per shipment basis.
However, the all such costs are included in the FOB (Free on Board), CIF (Cost Freight Insurance) and DAP (Delivered at Place) price quotations.
As such, many Importers are not aware that they are paying these export fees (and perhaps more importantly, not bothered by it).
If you import goods via EXW (Ex Works) terms, the supplier is not including the export fees in the quoted price. That is still not a way to reduce costs, as you must still pay it to another party in the end.
Why do some suppliers not have Export licenses?
In the past, say 10 to 15 years ago, it was relatively common that manufacturers did not obtain export licenses, and therefore relied on trading companies and export agents to export the cargo.
There are various reasons for this. First, obtaining an export license used to involve a lot of bureaucracy, and it came at a cost too.
Things have changed, and China is far more business friendly in 2017, as compared to 1997.
In addition, the production cost is higher, resulting in less profit margin for manufacturers to share with trading companies.
That said, there are manufacturers, that to this day, lack export licenses. These tend to be smaller manufacturers, without direct exposure to other markets.
In many cases, they act as specialized subcontractors, only focused on making a certain kind of material, component or processing for a larger – and more export oriented – manufacturer.
Should we only work with suppliers that hold an Export license?
In most cases, the answer is Yes, you should only work with suppliers that hold an Export license.
Export licenses are sort of taken for granted these days. As such, you should on the other hand not assume that a manufacturer is qualified, only because they hold an Export license.
While ‘having a license’ may not add a single point to a suppliers score, ‘not having the license’ does take many points away – as it comes with negative implications for your business.
As I mentioned, manufacturers that lack Export licenses are normally not exposed directly to overseas markets.
While such factories can be slightly cheaper, they come with a whole range of issues for the buyer:
1. You need to navigate the bureaucracy of exporting the goods out of China
2. They only communicate in Chinese, as they don’t have a need to hire English speaking sales representatives.
3. The role of the Export manufacturer is generally to keep track of their subcontractors, and implement some sort of quality assurance procedures. If you cut them out, then you must manage quality ‘on site’ in the factory. Don’t rely on them to do it for you.
4. Need to ensure compliance with a whole range of product safety standards? Don’t ask this type of factory for help. They can’t even spell “REACH”, and have never even heard of CA Prop 65.
Can I get a lower price from a manufacturer without an Export license?
Yes, you can get a lower price. However, the slight reduction in cost is guaranteed to be a fraction of the extra costs, and not worth the risk, resulting from all the extra processes and administration required – when working with small ‘unlicensed’ factory.
The only buyers that can save costs by going further ‘upstream in a supply chain, are those that meet the following two criteria:
1. Buy large volumes on a yearly basis, to offset the extra administrative costs.
2. Have a permanent presence in China, to manage the operations.
Hence, you need to take the role of the ‘Export manufacturer’ to offset them. This is the way many established brands operate in China.
How can suppliers without a license, export product?
Suppliers without the required license, can use an Export agency.
When the supplier receives an order from overseas, the supplier issues an invoice to the Export agency, which in turn holds an export license, and issues an invoice to your company.
Once the Export agency receives the funds, they forward the money to your supplier.
This is of course not done without a fair commission, normally set at between 2 to 3% of the total order value.
Notice that an Export agency is not operating in the same way as a Trading Company. The latter is actively marketing and selling products, often within the same category but produced by many different factories.
An Export agency does none of that, and its only function is to ‘rent’ its export license (and other permits) to smaller factories in China.
What should we think about before paying an Export agency?
The main issue you are facing, when paying an Export agency, is that the bank account beneficiary is not the same as the manufacturer.
If something goes wrong (for example, quality issues or a failed lab test), you can be sure that the Export agent will not take any responsibility.
On the other hand, how can you prove that the supplier is responsible for the failure, if they claim that they didn’t even get paid? (Remember, you paid the Export agency, not to the manufacturer’s bank account).
To avoid this kind of situation, you need to do as follows:
1. Identify the company name, address and bank account details of the export agency;
2. List all their information in the sales agreement;
3. Also state in the sales agreement that the supplier must accept a payment to the specified export agency account;
The objective is to prevent the supplier from using any excuse, involving the Export agency, to delay your order, or justify quality issues.
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