China export manufacturing: who makes money?

by Renaud Anjoran on 16 October 2012

Many readers of this blog purchase from China. But I regularly get questions from would-be company founders who want to be involved in the China sourcing world and who hesitate over what specific project to follow.

So I make a list of the players who have made money by sourcing in China:

1. The main actors

1.1 Companies that import directly from China and sell in other markets

Most of the money has probably been made by importers. Their profit margins are typically much higher than those of manufacturers.

They run a high risk at the beginning, tough. They need to bring a certain capital to cover the minimum order size (the famous MOQ) and other expenses necessary for a first order: quality control, international freight, import duties…

And many of them have gone out of business because of an “accident” (an order that can’t be sold) or because of increased competition on prices in their market.

Which ones make money? In general, those who follow some of the advice I wrote a few months ago here:

  • Focused on a profitable niche, building a brand or special relationships,
  • Willing to invest in smarter product design and/or packaging optimization,
  • Constantly on the move to new and cheaper locations, as soon as the quality level is satisfactory,
  • Working closely with a few manufacturers to improve operations and reap the benefits of lower prices & higher quality.

1.2 Manufacturers and middlemen

Someone has to make all these products. But Chinese manufacturers, on average, are happy when they make 3% net margin on their sales. The more commoditized the category, the lower the margin.

Many middlemen also get a slice of the pie. There is no rule: the profit margin goes from 0.5% to 50%. It has gone down a lot recently, though.

2. The other actors

Some other actors are making money in the China export manufacturing industry.

Their strategy is often selling pickaxes during a gold rush: during the California Gold Rush, “some of the most successful business people such as Levi Strauss and Samuel Brannan didn’t mine for gold themselves but instead sold supplies to miners – wheelbarrows, tents, jeans, pickaxes etc.”

2.1 Sourcing agents

Many buyers feel the need to work with sourcing professionals to find good suppliers and/or “manage” production.

This is a very wide category, as I wrote in three types of sourcing companies.

Competition is raging among sourcing agents. Most of them are amateurs, attracted by the massive amount of money exchanged every day. If you want them to be really hands-on, make sure they follow a project management approach and they share information continuously with you.

2.2 Freight forwarders and custom brokers

In Shenzhen alone, there are thousands of offices of freight forwarders. This is a low margin business with very high competition.

I guess the keys are to set up personal relationships with large importers as well as a really good internal organization.

2.3 Inspection companies

The competition is also tighter and tighter in the quality control business.

The work is much less standardized than that of freight forwarders, though. There can be large differences between two QC firms. The key is to manage humans properly, to develop a good company culture, and to enforce procedures rigorously.

The profit margin is higher than that of freight forwarders, but the work is much more labor intensive.

2.4 Testing laboratories

A few big companies (Bureau Veritas, Intertek, SGS, UL/STR ,TUV-SUD…) are making 30+% margins in their consumer product testing branches. And, all combined, they probably have 80+% of the market in China!

Hundreds of other labs are ISO17025-accredited. But the big company reputation is hard to replicate. So most small players have to compete on price.

2.5 Repair centers

Did you know that many companies specialize in sorting and repairing defective batches that are delivered from China?

I don’t know much about this business, but it sure fills a need!

2.6 Marketing companies that help Chinese suppliers reach foreign importers

I am thinking of B2B directories, trade shows, and other consultants.

Big money is made by a few media & event companies. The smallest booth on a trade show is 5,000 USD per 4-day session. And a nice profile page on a leading B2B directory is usually much more than that!

2.7 Others

  • Lawyers and accountants: help set up and manage buying offices or factories, draft OEM contracts, take care of trademark registrations…
  • Manufacturing consultants: bring technical help where it is needed.
  • Consultants: some of them help in cross-cultural communication, while others can frighten a factory boss into doing what a buyer wants. They come in every shape and color!
  • Software companies: ERP providers sell their IT solutions to manufacturers and importers that need to manage a complex array of orders (stock, incoming orders, outgoing orders…).
  • Airlines, hotels, translators…

What did I forget?

  • ROHAN

    HI
    THERE IS ANY BENIFFIT TO EXPORT AGENT AT CHINA FROM GOVERNMENT ?

  • http://www.qualityinspection.org/ Renaud Anjoran

    Some import & export companies are owned by a local government. Some of them have made a lot of money over the years. Is this the object of your question?

  • Makingmoney

    Great article

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