Small importers — many of them Amazon sellers — want to focus on product development and marketing. They want someone in China to take care of production, and that includes finding the right suppliers and managing them on a daily basis.
Unfortunately, there is a big disconnect at three levels.
1. High cost
The buyer wants a sourcing agent with at least 5 years of experience in sourcing, good English, and some experience in quality inspection. However, people with this profile generally expect to earn 8,000-15,000 RMB a month. And they are not an expert in logistics or in drafting contracts.
Why are salaries so high? The minimum salary for a worker in Shenzhen is around 2,000 RMB, but a skilled worker earns multiples of this amount.
To be sure, some junior sourcing employees earn somewhere between 4,000 and 8,000 RMB. But very few of them are capable of managing a company’s sourcing operations end to end while making few mistakes. Don’t expect them to be respected by suppliers.
2. Opacity and hidden commissions
More than 90% of “sourcing agents” will get a commission from the factory’s side and won’t tell the importer about it. It is rooted deep in business practices here. The small agent in his apartment does it, and the largest trading company in Hong Kong also does it.
Not only does it add substantially to the importer’s costs, but it means the “agent” works for the supplier and will often defend the supplier! This is compounded by the fact that he/she will get much more face time with suppliers than with their employer/client.
Worse, sometimes the sourcing employee will find suppliers but will not disclose them to the importer. He/she actually becomes a trading company. This serves several purposes:
- The importer is left in the dark and knows nothing about the supply chain. They can’t stop using the agent even if the price goes up very fast.
- The buyer can’t even question the factory about the middleman’s commissions. It means the “agent” might make a 50% margin on some products.
- The factory can’t communicate directly with the buyer and show that they are perfectly capable of dealing directly with export customers.
3. Legal matters
Paying an “employee” or a “contractor” in China without setting up a proper company here is illegal.
It may become a serious problem if your operations grow and you end up forming a Chinese company, as Dan Harris wrote in China’s Legal Landscape:
An American company will hire, say, three “independent contractors” in China. The Chinese government will come to the American company three years later and say, “What are you doing? You have three employees but haven’t paid employer taxes for the last three years or withheld employee taxes. We’re going to say that you’re doing business in China because you have these three employees, so you owe company income taxes. And by the way, employer taxes and benefit taxes equal, like, 40% of what you paid them in salary for the last three years. And we’re going to charge you interest and a penalty. And if you don’t pay, we will shut down your business here and we may not let you leave the country.”
It is also a problem if the “agent” steals your designs and sells them to your competitors. You will never be able to sue him/her in China, even if you signed a contract, since you were doing something illegal in the first place.
In some cases, the solution is to work with a professional sourcing agent that charges you for the time spent on your orders.
When this is not economical due to the small amount of your orders, you are better off taking care of the sourcing and procurement processes yourself. It is actually not that difficult. Make sure to find a good supplier, use an inspection company to confirm quality, and get a good freight forwarder to manage logistics.