Earlier this week, I had opportunities to discover two “non-standard” or “parallel” types of export businesses, right here in South China. I was happy to learn more about them, and I thought it might also be of interest to some readers.
Stock lots
I accompanied a client to visit a trading company that specializes in stock lots, in Shenzhen. They had a showroom full of garments. For each sample, there is a bunch of products sitting somewhere. Most are still in a factory (in various stages of labeling and packing), some are in free trade zones because the supplier cleared customs but the purchaser did not accept shipment, and still, others are in the trading company’s own warehouse.
There are mostly two reasons why production would be ordered yet not accepted by the original purchaser:
- The goods are rejected for a quality problem. Sometimes it is really minor (e.g. color does not conform). Sometimes the goods are just unsellable in the importer’s distribution channel, for example, because there are too many visual defects or because the products are unsafe to the user.
- The importer (or its customer) cancels the order because of excessive stock or financial problems.
The trading company told us most stock lots are sold during the Canton fair, but a few specialists like them sell stocks all year long. Some opportunity buyers are actually regular buyers–they buy only stock lots. This secondary market is somewhat organized. Which means that prices are usually lower than production costs, but not by much if the products are expected to appeal to many types of buyers. Anyway, I guess the products are sold on the domestic market when there is no hope on the export side.
There were some famous brand names, and some goods to be sold under a licence (Mickey Mouse, Spider-man…). Obviously, an importer had better think twice before buying these products. I guess they are mostly sold to developing countries with a lax legal system when it comes to intellectual property.
So, how does this supplier ensure that they sell products of acceptable quality? They said they do a quick inspection before shipment–but they admitted it is not up to a high standard… They want to avoid shipments of products covered in mold, for example.
Opportunity buyers are usually more interested in low prices than in high quality, and they are more ready to take risks than most importers. But some of them appoint inspection companies to confirm quality.
Copies of brand names
I was waiting for a taxi in Guangzhou, and I started a conversation with a fellow from France. He purchases sportswear made in China with logos of the most famous brand names and sells them to retailers in Europe and in the USA.
How does it work? Here is what he told me.
- Same factories get orders from these brand names. Let’s say an order is 100,000 pieces: the manufacturer can make an extra 10,000 pieces. These 10,000 pieces are made either in the same factory (when the importer is not watching too closely) or in another workshop that receives its share of fabric and accessories.
- For active wear, very often the factory price is USD5 and the retail price is EUR100. For running shoes, it is USD8 in China and EUR130 in European shops. The trading company can make a 50% margin and still offer a very attractive price to retailers.
- The consignee (the importing company) is set up for this purpose only, and its capital structure is not transparent.
- The shipper is a forwarder. So the factories simply deliver the products in a warehouse, and nobody can trace the shipment back to them.
- The brand is not declared to the customs. If the container/parcel is opened and checked, these goods are lost. But it only happens about 5% of the time in Europe. And virtually never in the US.
- The goods are shipped in full containers, or by express courier directly to a shop.
He told me that 10% to 50% of the sportswear garments in certain French shops are copies. And demand has exploded with the crisis since shoppers are looking for lower prices and retailers are looking for better margins.
This guy did not see any problem with his activity. “It’s an enormous market: billions of dollars here in Guangzhou!”, he told me. He admitted a certain form of ethics, though: the retailers usually sell his products for a lower price than the real stuff, and customer also benefits from this trade. And he frowns upon the retailers who keep the selling price unchanged.
So, what kind of quality control is performed in this underground supply chain? From what he told me, nothing. His customers are too happy about the good deal they get. And they are usually retailers, so they don’t know the first thing about China sourcing. Another reason is that obviously nobody wants to invite third-party companies to have a look at these copies.
What are your thoughts about this topic?
I had a client who had QC problems with its product and asked its manufacturer to destroy all of it. Within a few months, my client was getting complaints from consumers in the US who had bought the bad product on the grey market. Technically/legally, my client did not need to honor the warranty for those products, but it chose to do so from strictly a business perspective. The point here is that companies can lose more than money when these things happen; they can also have their reputations impaired. Would love to see a follow-up post on how to stop this.
Good question, thanks! See https://www.qualityinspection.org/parallel-supply-chains
Two possibilities I have heard of:
1) In a situation at one of my clients’ US factories, we had a large accumulation of nonconforming product due to a defective component spec’d by the end customer. The product in question was a brake part, so they were concerned not only with losing sales but also potential liability in case of an accident. The end customer agreed to accept the cost of the scrap, but insisted on evidence that the material had been destroyed. (They accepted a combination of photographs and a manifest from the waste company; I am not sure that I would be convinced by that kind of evidence from China).
2) I have heard of other situations where the customer requires that the defective goods be defaced in some way – cutting off logos, etc, before the goods leave the factory. This still isn’t foolproof – I’ve personally bought such clothing in Hong Kong – but the brand owner now has a different bargaining position if confronted by a buyer of the gray market goods. North Face (outdoor clothing and camping gear) sells some goods in its own factory outlets with reduced warranty; they put a mark on the product label for all the goods sold through this channel. (They fill in the “o” in “North” on the product tag with a black marker.)
Of course, before you ask for either of these, you need to be alert to the problem in the first place!
Brad
QA/Sourcing – Automotive products
Hi Brad,
Thanks a lot for writing about your experiences.
As you say, it’s not always easy to (1) be aware of these issues and (2) trust the factory to effectively take the right corrective actions. It can be pretty tough to be a buyer in China.
Hi, thanks for the info above. Here there are a few question i would like to ask you:
1) As per mention; if the manufacturer is making clothing production from a well-known branding company. Those extra/additional/rejected stocklot will be sell it through other distribution channel. I’m wondering if I buy the remaining stocklot and resell it to other country, will this consider illegal?If the branding company knows about it, what is consequences?
2)Can you elaborate more on the followings point?
# The consignee (the importing company) is set up for this purpose only, and its capital structure is not transparent.
# The shipper is a forwarder. So the factories simply deliver the products in a warehouse, and nobody can trace the shipment back to them.
3)If i order the stocklot clothing from the manufacturer, which i’m not directly send it to the retailer; in other words i will keep the stock lot for few weeks time waiting customer to buy it; will this be much more higher risk?
Mr. I,
I am not an expert, but here is my opinion:
1) You might have legal problems if the original buyer sells products under the same brand, even if it’s different models.
2) I mean the importing company takes the risks, and is closed easily and without risk to its owners if it gets into trouble. And someone brings the goods to a forwarder’s warehouse, which means the “shipper” on the bill of lading is the forwarder itself.
3) Yes, you might buy these goods and be unable to sell them. Up to you to appreciate the market risk.
Hi,
Thanks for your sharing, appreciate it a lot. Moreover:
1) What if i buy the stock lot clothing from those less famous branding company; will i have the legal problems if the original buyer found out?If yes, can you give me any advise how to avoid legal issue in trading the stock lot business.
2) will the above legal issue been solve or minimize if i buy stock lot from other country and resell it to another country (exluding the custom’s risk)?
3) The best way to conduct this business, is involved in a position of a broker/trade agent? true or false? handling trading of stock without going thought my company.
4) Can you refer any website or reading material info regarding the stock lot business?
Mr.I,
You will run a risk anyway if you buy branded products. I am not a lawyer, so I’d rather not respond to your questions precisely (it would probably be wrong).
And I don’t know any good resource about stock lot businesses.