A few years ago, in Hidden commissions between China factories and sourcing agents, I wrote about a very common practice that unfolds this way:
- An agent (usually an individual, but sometimes a company) helps an importer find a factory without charging anything. Usually they say they “already know a good factory”.
- The agent offers to follow up on developments, productions, and shipments. The fee is usually low (5% or less). The buyer, happy to save time this way, gladly accepts.
- The buying agent actually makes more money than the buyer thinks, because of a commission she requested from the manufacturer.
- The buyer might never find out about it. The agent tends to work with small factories that have no English-speaking staff, not only to keep prices low but also to make herself indispensable… and to ensure nobody from the factory talks to the importer.
I tend to see this practice as highly unethical. But not everybody agrees. Yesterday, a reader left this comment:
I’m surprised that anyone thinks this is wrong, as though it is some type of sin. As agents our goal is to make money.
If I am bringing business to a factory they would otherwise not get, that is a service and I intend to bill them for it. As long as the price my client is getting is what they need, the quality is good and delivery on time and I’m doing my very best for the client, I’m doing my job.
Everyone should know up front what the rules of the game are. If I’m hiding a bloated commission that impacts quality or price to my client, then I’m unprofessional and lack integrity. To think we do this work for free, is absurd in it’s total naivety.
Let me clarify why pretending that the job is done for free is wrong. And why charging a commission to the buyer without disclosing that another commission is charged to the manufacturer is wrong.
The main problem is that it totally distorts the agent’s incentives. The importer trusts the buying agent because she thinks the agent is on her side. If the agent is actually acting as a salesperson of the manufacturer, the tables are turned.
When things go wrong, the agent will naturally tend to defend the current relationship at the expense of the buyer’s interests. Here are two examples.
- First, imagine the factory behaves unethically and raises prices after the buyer has wired a 30% down payment. The agent will try to reason the factory, but I don’t think that’s effective in many cases. Then the agent will try to persuade the buyer that this factory is really good and that the raise is justified. After all, a deal falling through is zero commission… whereas a a higher price means a slightly higher commission.
- Second, imagine the agent notices serious quality problems. Remember, the importer trusts the agent in that regard. The agent might put pressure on the factory manager, who understands the agent’s interest and typically won’t care. The only alternative to the agent, who doesn’t want the shipment to be canceled (and her commission to be written off), is to let the shipment go out.
Would this happen with a truly honest and long-term-thinking agent? No. But such an agent would not hide the main source of her income, in the first place. Not to mention, who would seriously expect a Chinese factory or agent to think long term?
Who agrees? And, equally important, who disagrees?
++++++
UPDATE 7 May 2014:
For fun, I pasted below an excerpt from an email I received this morning from a sourcing agent:
I can be a good companion of you in China! Help you find good supplier and
settle everything during the buying trip, help to deliver your goods to your
hand from China.
MOST IMPORTANT! I won’t make any COMMISION from you!And not like other
sourcing agent charge you high charges.
All I can get ,It is just a little fees:
****Service optional****
Fees :
1.Produce price survey: Free
2.Car transport service:60 USD/day
3.Translate service/guide service:20 USD/day
4.Collect goods service/quality check service:5 USD/SHOP
I am personally rather against supplier financed sourcing, for the same reason as yours.
At least, when this is not transparent. But it may be acceptable in some situation, as long as this is transparent to the end buyer.
For instance, some companies will not be willing to have outlays for services but would be willing to include this in the price they pay for the goods. As long as this is agreed with the buyer, it seems acceptable to have the flow of money from the supplier instead of from the buyers.
However, this still means that the “negotiation” power of the buying agent on the supplier in case of quality problems later remains weakened as the supplier at fault still holds the wallet !
Another important point is whether the buying agent still plays as a real sourcing agent, i.e. search and evaluate several suppliers, or just keep working with existing suppliers and in this case is more like a sales agent or virtual trader.
Right, sometimes the buyer can’t justify to pay for services, and “supplier-financed sourcing” is the only solution.
But buyers should not delude themselves into thinking that the “agent” is on their side. They are dealing with the supplier’s rep.
If the “agent” is receiving a commission from the supplier that is a conflict of interest, period. I don’t see how anyone could think otherwise. Because once a problem happens, the “agent” is not fully the buyer’s agent and the agent is not fully the supplier’s partner…it’s an additional 3rd party. Also the “buck doesn’t stop” with anyone. The agent can always pivot responsibility in this case. Whether they do or not, that is the perception.
I’m not sure how the termed “agent” is specifically defined, but it makes me think of China sourcing from approx 1995 to 2005 when there were “jack-of-all-trade” companies and they did fine. But those companies, to change with the times should have become more specialized; have a field of expertise, have some stable product lines and perhaps start selling their product instead positioning themselves as an “agent”.
I also think it’s a misconception that if you’re not a factory, then you’re an “agent”. A company can be a valuable, “supplier” “consulting service company” (like procurAsia that is SPECIALIZED in 1 field), or “importer”. Usually an agent will source ANY job sent to them, they will not turn down opportunities, even if not in their field of expertise and this causes great problems.
In 2014, many of these “agent” style companies (not all), make buyers think they are “in the way” and the buyer thinks, “if I could just find the factory”. The agent may give a great service and give much benefit in the supply chain, but they fail to market and comport themselves as such.
Thus always leading the buyer to think there is a better way. Thus causing agents to cover their tracks and also get commissions from the factories.
Sorry for the long post ~ 1 last question. Is it typically the domestic agents (Chinese) that get the factory commission or also foreign-owned companies?
Right on point!
I think they like the term “agent” specifically because it means nothing particular. As you know, Chinese business people tend to be very opportunistic. Strategy is, at its core, about decisions of what not to do… but that’s something most Chinese “agents” don’t understand.
To answer your question, I have seen both Chinese and foreign “agents” get commissions from factories. The Chinese all seem to think it’s fine. Some of the foreigners know it’s wrong, while others don’t. That’s my impression, but I haven’t conducted a solid survey 😉
I agree this does create a big conflict of interest, but this type of thing isn’t exclusive to China. Think about in the West the most common form of agency people encounter: real estate agents. Real estate agents get varying degrees of buying commissions. Clearly the home buyer’s agent has incentive to ‘encourage’ the buyer to buy the house offering the highest commission rate. I hate this fact as well, but it’s proof that this isn’t just an issue in China.
Good comparison. And some studies have proved that real estate agents tend to take longer to sell their OWN houses than the houses of their customers. The reason? They want to wait longer and sell at a higher price. The difference in what they get in their pocket is high when they are the seller, but much lower when they are the agent (and only get a commission).
I am not sure, but I think this study was mention in the book Freakonomics.