Can a China "contract manufacturer" sell domestically in China?

Full Question I found a good contract manufacturer and I found a good tool and die shop to make the plastic injection molds that the contract manufacturer will use to produce my product. Both are based in the PRC. The tool vendor tells me his license is "contract manufacturer" and he can't sell domestically and must export 100% of his tools in order to get preferential tax status from the government. So they plan to export the tools to Hong Kong then bring them back into the PRC. This will add transportation costs and also cause us to get hit with duties and VAT (value-added tax) when the items are returned to China. What should I do?

Answer The simple answer is to find a new tool maker. But let's assume that this particular tool maker is doing something unique (that would be pretty rare in China as tool and die shops are a dime a dozen) and you are set on doing business only with them.

• In previous projects, I have found cases where the tooling vendor was actually a trading company or the trading arm of a manufacturing group that was 100% export oriented, but the actual tool and die shop could sell domestically. Are you sure the vendor is one and the same as the maker of the tools? Since the so-called toolmaker says his license is for contract manufacturing (which is odd for a tool and die shop), I am betting they are separate companies and he is hoping you buy from him so he can add a markup to the tooling made by another entity. This also causes problems in that the seller and the maker of tools are not the same. If something goes wrong, they will blame each other and neither will stand up to fix the problem. I don't know the companies involved, so I am just speaking from general experience. I tend to plan for the worst and think the worst about suppliers until they prove to me they are legit. In one case, we did some due diligence and learned the actual toolmaker could sell domestically, but they were close friends with the broker. So we sorted out things by paying the broker a finder's fee and dealing direct with the tool maker for our order. Everybody was happy and we saved a ton of money by avoiding the duties associated with a trip to Hong Kong and back for the tools.
• On another project, the buyer had some purchasing power and told the supplier to change their business license to allow for domestic sales. It is actually not that hard or expensive. If push comes to shove, this may be an option for you if you are a big customer for this company.