Chinese trading companies and their dirty little secrets

Sourcing New SuppliersBefore you read this post, I have to emphasize that some trading companies here in China–including Hong Kong–truly create value for their customers.

What I wrote below does not apply to all intermediaries. But I observed it so many times that I believe it is true in 80%+ of cases.

The problem is that the interests of trading companies are seldom aligned with those of their customers. And it takes mainly three forms:

1. Trading companies tend to work with low-grade factories

A trading company is in a delicate situation. It has to make a margin and keep its selling price competitive. And it has to ensure that its customers and its suppliers don’t start doing business directly together.

The solution is usually to work with factories that are not quite used to exporting themselves. These manufacturers typically have a low cost structure and are not properly organized. Another advantage (in the eyes of traders) is that they seldom have any English speaker on staff.

When this is the case, the factory needs to be coached extensively to reach the quality and timing expectations of the customer. Needless to say, American/European/Australian purchasers do not tolerate what domestic buyers put up with. This coaching process starts being effective after 3 or 4 orders, when things go well…

2. Trading companies seldom tell their customers about quality issues

A trading company sells products to importers. Therefore, if a foreign buyer is not satisfied about the way an order was handled, the trading company can lose money: the purchaser can ask for a discount or a shipment by air, or even cancel the project. So these intermediaries often keep their mouth shut when they know of serious issues, for fear of frightening their customer.

To make things worse, many trading companies do not do check quality at all in their subcontractor factories. Their job is match-making, communicating, and shipping. After all, if the buyer is serious about quality, he will come and check it by himself, right?

The importer should take the lead and send inspectors in the factory. When this is the case, the intermediary has a strong incentive to avoid quality issues. For maybe 3% of their shipments, trading companies that work for my clients ask me to postpone an inspection because “[their] internal QC rejected the products, and re-work is under process”. When no inspection is scheduled, they never write this to my clients!

3. Trading companies often do not have any control over the factories

I had discussions with Hong Kong business people who invested in a factory in the mainland. The same remark came back over and over: “we really had to own the factory; if you don’t own it, how can you control it?”

A very small minority of trading companies have a stake in the factories in which they place orders, even though they generally pass themselves as the owners. They conduct friendly business (no contract, no penalties). When things go wrong they have no real power over the manufacturer, who knows that the middleman will absorb charge-backs and airfreight imposed by the importer rather than lose a customer.

Factories generally prefer to work directly with foreign buyers, who switch suppliers less easily than local traders. It means they will focus their efforts on making their overseas customers happy, and the trading companies’ orders don’t have the priority (unless they represent 40%+ of the manufacturer’s business).

What implications for importers?

I am not implying that all importers should choose direct sourcing and buy from manufacturers. There are good and bad intermediaries, just like there are good and bad factories. And factories often sell what other manufacturers make, so things are seldom black and white.

But foreign buyers should avoid two mistakes:

  • Trusting their “agent” for everything, including quality control. QC inspections are necessary, especially when a trading company is involved.
  • Giving all their business to one trading company, without using competition as a leverage for better service and pricing.

One quick tip: you should spend 30min asking for quotes from other suppliers of the same product (using globalsources.com or alibaba.com) before you confirm an order to a trading company. Getting an idea of the “average market price” is quite easy. Some intermediaries apply a 20% markup while providing very little service…

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Comments

  1. Lora Brady says

    I have had the trading company experience way back when US buyers (1990s)would only consider buying stuffed toys that are made in Korea. Due to lack of English speaking factory owners, trading companies were common. I had a few production runs that were completely unacceptable we had to sue for chargebacks. The picture nowadays are brighter. Due to the different economic circumstances nowadays in China as in most Southeast Asia manufacturing facilities more young people have university degrees and could speak and write English. They find work in Chinese factories as product managers or merchandisers which helps tremendously when developing products or when you are chasing and on time ship date.

  2. Renaud Anjoran says

    Lora,
    I agree. When you are lucky enough to communicate with a clear-headed and experienced English-speaker who represents the factory, everything is easier!

  3. CT says

    I’ve found that most trading companies do nothing that you can’t do yourself. They are timid and value the relationship with the factory, they don’t care much about the relationship with the foreign buyer. Their profit margin is normally small, but they just don’t add any value.

  4. Adrian says

    Depends, i own a small trading company since 2007 (family business) and i never had troubles until now but i can tell you that i refused many contracts from clients (buyers) because they always asked for smaller prices and most of them they really don’t care about the quality, they just want to make money, so i told them to ask another companies and i give them also the web addresses. 3 of them contacted me again after 10 months, another one after one year. It depends what kind of owner has the trading company and how greedy it is, i make money enough for a normal living not for buying one villa on the island, as for the QC inspections I consider myself to tough, but, that’s why i sleep very good night time…

    • frankie says

      I like this comment,
      i am owning a small trading company in Guangzhou,China and my team is just consisted of several staffs those who had ever been worked for the foreign trading company,representative buying office and gained rich sourcing experiences and expereinces in dealing with chinese suppliers as we are chinese and we know better the chinese people and culture that leads to a better communication. And a rather proper and professional communication with your product provider or producer is of great importance!
      We are small but we are open and transparent to share all.and we know of what values and worths we can give the customers and understand what they need from you,and you can proactively meet the needs and help them to grow up their orders,business. Overall we are working happily with the customers,and more to friendships. One of my client in spain,he shares me a lot of his things,his outdoor travel trip,sending me funny photos,etc
      Can not say all trading company is bad or good,and can not say all buyers are perfect. It depends on the balance point in between and how you decide to work with for both agent and buyers.
      frankie.smartkay

  5. Renaud Anjoran says

    Adrian,
    Thanks for the comment. I never wrote that 100% of trading companies are bad apples. I also know a few ones that seem to be doing a good job. I hope you don’t feel offended by what I wrote.

  6. says

    I am from Caracas, Venezuela, I have been traviling to Guangzhou, China for 4 years now… I am starting my own trading company, I have been training my self for these last 4 years, I understand all these opinions because I have been on boths sides… So, My vision is to be that correct middle man that takes care of his client and works with that high quality manufacturer in China that meets my standards and my requirements!!! One of my best clients is one of my best friend now a days… It is a win win situation when all of the people involved are the correct persons to work with.

    Honesty, Trust, and Respect can get you anywhere in the world… Shibari Trading Co.

  7. Renaud Anjoran says

    Djcolly,
    You are right, honesty, trust, and respect are the right way to go. Glad to see there are (a few) good people in this business.

  8. says

    Hi Renaud – I understand what you are saying and I also just finished reading the book ‘Poorly Made in China’; having worked in China and having created a good sized business here, I found the book interesting, and agree with the general theme about how China operates and also about how cavalier Importers are. Outsourcing, manufacturing and importing is serious – it is technical and it is complicated. Illusions of ‘easy buying’ is always dangerous.
    Also, the Trading business ‘industry’ is growing up, and China is changing. Traders/Agents, like any business, were in the business of arbitrage, buy low sell high, and had geographic advantages or being where the production is.
    Importer requirements have changed and due to the development of B2B websites, the arbitrage opportunity has shrunk tremendously; if you want to survive in this business, you need to provide significant value, in terms or service, control and pricing.
    I define my company as an importers value-added buying office – we represent the importers interests in China. While we have our supplier base which can only help to accelerate a client’s china buying process, we are transparent in getting competitive quotes and opening up the supply chain, in terms of factory selection, product development and production. Furthermore, we have technical people and specialise in product areas. Importers need this kind of service, and need their partners in China to understand their business model, so that all parties win. There are costs to this. I don’t say China is cheap anymore, especially if you need your product up to standards; China can provide tremendous value, if managed correctly.
    Most importantly, is that importers need to know how to buy from China and how to work with their buying partners, be it directly with factories or with value added agents, who need to ‘add value’!

  9. says

    we regular buy from chinese suppliers, and only 2 cases of fraud, we still claim our money does anyboyd know any company that can cash money from trading disputes ??? thanks!

  10. Peter Paul says

    hi,
    I hope your well, am in Tanzania dealing in Mining trade, we look
    for partner joint venture in our mines eg Coal,Gold, Copper ore, Iron
    ore, Uranium and Tanzanite. we have license/permits we decide to look
    for any partner in order to develop our mines our side we lack
    Equipments and Working capital, also we are ready to work with any
    Exploration companies.

    Thanks
    Peter Paul
    http://www.goldbergtz.com
    skype;peter.nyema
    facebook;peter paul nyema.
    +255 716 731486

  11. Judith_Chu says

    Yes, agree that many cases happen as you pointed above. However, I work in a special company that combines quality assurance and sourcing together to ensure what our clients get is what they ordered, and this is the key to maintain our business life. To know more about my company, please visit: http://www.qrasia.com.hk. Thank you!

  12. henry says

    fully agree, worked and lived in china for 16 years. you should read, ” poorly made in china”, also, forget IP control, unless you are fortune 500, you have no hope to avoid trading companies and manufacturers mis using your IP. for any complex products, dont single source, even do final assembly outside china. it’s like a patriotic duty to rip off the gweilo. that being said, there are good people and there is great opportunity. but always take nothing for granted, and with every part of your business operation. “expect what you inspect”
    there is no legal protection for SME’s in china, unless business dipute relates to large $$$, you will not get any support from police, courts….its not their job.
    and usually your chinese trading partners will “out-relationship” you with the authorities.
    bon chance

  13. jlo says

    i am a hair retailer in us (new company) i have searched alibaba, you are correct about agents, but how do you find ctcs for direct factory manufacture

  14. michael says

    nice analysis,but business always invovles 2 parts,the role of importer is not to be negeleted,plenty of them do NOT know what kind of quality they need (very few buyers could provide drawing nor quality standard for instance),but do over-focused on price,one thing leads to another,if you know what I mean.

  15. Charles says

    Agree, but from my experience, it will all depend on the person you are dealing with. There are factories playing tricks, and also trading companies doing honest job there. I am working in a manufacturer actually, I think the main reason why the importers prefer to purchase from the manufacturers is that finally the manufacturer will be the one who take the responsibilities. So the buyers feel safer to do buiness with manufacturers. But for the buyer who need to purchase wide products ranges, the trading company will be a necessory partners to help here. And for QC agents, it is the same case, it will also depand on the individual you are dealing with. I have met too many 3rd. party QC inspectors who knows nothing about the products, only check according to the formated sheet and complete a formated report to finish the job. Even some of the QC inspectors will directly ask for charges to pass or pending the bad quality goods. Comparing with QC agency, I guess the trading company may have more responsibilities, as they are afraid of lossing the client, or panalty, but for QC agency, they don’t have far less risk, the final responsibilities will still be taken by the client or the manufacturers. Of course, if you get the right guy, he will just bring you the right products on time.

  16. Guanke says

    The most funny thing it’s, these trading companies mainly are running by the customer’s own countries people. Just remember one things, the trading company in China that does not mean that trading company is a Chinese trading company. Deeply as the problem from where? Ask the customer himself please.

  17. says

    Good point. Although i am an foreign sales worded for both trading company and factory. i experienced the two molds of exporting. and i feel that factory can bring a lot of convenience for both importers and exporters. Will give an attention on your future article!

  18. says

    Thanks for this website. I find the discussion very interesting. As I look up to developing an active trading relationship with some manufacturers in China, it is indeed helpful to read about your tips and suggestions.
    John

  19. surinder says

    i am furniture importer from china in Canada and i am dealing directly with chinese manufacturer and have qc staff to do communication with suppliers and inspect goods when ready . but i have couple factories which has no export liscense and i need to do consolidation of goods in one container and i need agent or trading company to do documents and use export liscense to do so . any body can recommend ? what should be the percentage or fee for this work / any idea ?
    surinder

    • Renaud Anjoran says

      The manufacturers without the export license can find an agent to process the paperwork. It is legal and it should cost 1 to 2% of the value of the goods.
      For the consolidation of goods in one container, you can simply instruct each manufacturer to bring the goods in a forwarder’s warehouse. Then the forwarder does the consolidation easily.

  20. Dominique says

    Hello how are you, I am a hair retailer in us i have searched alibaba and i also visit china. But i am having a hard time finding a good hair manufacture. i plan to go back in October, but i dont want to make the same mistake so i would like to get some knowledge on how do i find a hair manufacture. i have been dealing with a trading company for 4 years and have lost a lot of money. Is it any way someone can help me.

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