Most Chinese suppliers are fighting to get a share of the export business. Their margins are often quite slim because of intense pressure on prices. However, the situation is not always as simple as one may imagine. The exporters of a given product often know each other… and the names of each other’s customers.

How is customer information spread around?

Sometimes buyers put their suppliers in contact, for example to reduce forwarder fees when consolidating shipments. But this source of information is negligible, compared to what happens on the supply side.

In a given industry, the suppliers tend to know each other. They go to the same trade shows, they buy from the same raw material vendors, etc. This is the case in any country. But some elements specific to China reinforce this phenomenon:

• For certain product categories, most factories are in the same city. For example, most of the world’s cigarette lighters are made in Wenzhou.
• Factory bosses talk a lot. They tend to boast about their big buyers and complain about the bad ones. Technicians and operators also spread the word; they switch jobs quickly and often stay in the same industry.
• There is no such thing as pure competition… Two suppliers can see each other as potential customers or suppliers. The most important is to get orders; the production equation is always solved–internally and/or by subcontracting.

It is also easy to know the names of the suppliers of a given importer, based on public data released by the custom offices of importing countries. But I have never heard of any Chinese supplier paying to get such data.

What are the dangers of inter-suppliers communication?

To be fair, there are a few advantages to it. A new supplier can get advice on how to do specific operations, or where to source specific accessories at the best price. But I see this phenomenon as largely negative.

As Justin Wolfers wrote in Amazing New Trade Data, “while more data can mean stronger competition, more information can also make it easier to enforce collusive agreements.” For example, in case the importer asks quotations from a handful of suppliers who are in contact, the prices will be inflated and very similar… And the purchaser will conclude that “this must be the market price”.

Competitive agreements can be about anything and everything. If the importer starts doing quality inspections, for example, the suppliers might decide to do something to avoid it. They might push back and protest very loudly. They might raise prices. Or they might tell tales of bribery to discredit the inspection company. Fortunately, importers who work with more than five suppliers can often “feel” that this is happening. Their old suppliers (who had time to know each other) behave differently from the new ones.

Another concern about excessive supplier openness concerns intellectual property. Proprietary designs are widely shared. Some samples are taken out of production and placed in the dozens of showrooms. If these other suppliers get orders for these products, the hope is that they might subcontract production in the original factory. But, in the meantime, many other importers have seen the new designs and some have placed orders…