Before you read this post, I have to emphasize that some trading companies here in China–including Hong Kong–truly create value for their customers.
What I wrote below does not apply to all intermediaries. But I observed it so many times that I believe it is true in 80%+ of cases.
The problem is that the interests of trading companies are seldom aligned with those of their customers. And it takes mainly three forms:
1. Trading companies tend to work with low-grade factories
A trading company is in a delicate situation. It has to make a margin and keep its selling price competitive. And it has to ensure that its customers and its suppliers don’t start doing business directly together.
The solution is usually to work with factories that are not quite used to exporting themselves. These manufacturers typically have a low cost structure and are not properly organized. Another advantage (in the eyes of traders) is that they seldom have any English speaker on staff.
When this is the case, the factory needs to be coached extensively to reach the quality and timing expectations of the customer. Needless to say, American/European/Australian purchasers do not tolerate what domestic buyers put up with. This coaching process starts being effective after 3 or 4 orders, when things go well…
2. Trading companies seldom tell their customers about quality issues
A trading company sells products to importers. Therefore, if a foreign buyer is not satisfied about the way an order was handled, the trading company can lose money: the purchaser can ask for a discount or a shipment by air, or even cancel the project. So these intermediaries often keep their mouth shut when they know of serious issues, for fear of frightening their customer.
To make things worse, many trading companies do not do check quality at all in their subcontractor factories. Their job is match-making, communicating, and shipping. After all, if the buyer is serious about quality, he will come and check it by himself, right?
The importer should take the lead and send inspectors in the factory. When this is the case, the intermediary has a strong incentive to avoid quality issues. For maybe 3% of their shipments, trading companies that work for my clients ask me to postpone an inspection because “[their] internal QC rejected the products, and re-work is under process”. When no inspection is scheduled, they never write this to my clients!
3. Trading companies often do not have any control over the factories
I had discussions with Hong Kong business people who invested in a factory in the mainland. The same remark came back over and over: “we really had to own the factory; if you don’t own it, how can you control it?”
A very small minority of trading companies have a stake in the factories in which they place orders, even though they generally pass themselves as the owners. They conduct friendly business (no contract, no penalties). When things go wrong they have no real power over the manufacturer, who knows that the middleman will absorb charge-backs and airfreight imposed by the importer rather than lose a customer.
Factories generally prefer to work directly with foreign buyers, who switch suppliers less easily than local traders. It means they will focus their efforts on making their overseas customers happy, and the trading companies’ orders don’t have the priority (unless they represent 40%+ of the manufacturer’s business).
What implications for importers?
I am not implying that all importers should choose direct sourcing and buy from manufacturers. There are good and bad intermediaries, just like there are good and bad factories. And factories often sell what other manufacturers make, so things are seldom black and white.
But foreign buyers should avoid two mistakes:
- Trusting their “agent” for everything, including quality control. QC inspections are necessary, especially when a trading company is involved.
- Giving all their business to one trading company, without using competition as a leverage for better service and pricing.
One quick tip: you should spend 30min asking for quotes from other suppliers of the same product (using globalsources.com or alibaba.com) before you confirm an order to a trading company. Getting an idea of the “average market price” is quite easy. Some intermediaries apply a 20% markup while providing very little service…
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I have had the trading company experience way back when US buyers (1990s)would only consider buying stuffed toys that are made in Korea. Due to lack of English speaking factory owners, trading companies were common. I had a few production runs that were completely unacceptable we had to sue for chargebacks. The picture nowadays are brighter. Due to the different economic circumstances nowadays in China as in most Southeast Asia manufacturing facilities more young people have university degrees and could speak and write English. They find work in Chinese factories as product managers or merchandisers which helps tremendously when developing products or when you are chasing and on time ship date.
Lora,
I agree. When you are lucky enough to communicate with a clear-headed and experienced English-speaker who represents the factory, everything is easier!
I’ve found that most trading companies do nothing that you can’t do yourself. They are timid and value the relationship with the factory, they don’t care much about the relationship with the foreign buyer. Their profit margin is normally small, but they just don’t add any value.
CT,
You are right, most of them are matchmakers and protect the factory more than the buyer…
Depends, i own a small trading company since 2007 (family business) and i never had troubles until now but i can tell you that i refused many contracts from clients (buyers) because they always asked for smaller prices and most of them they really don’t care about the quality, they just want to make money, so i told them to ask another companies and i give them also the web addresses. 3 of them contacted me again after 10 months, another one after one year. It depends what kind of owner has the trading company and how greedy it is, i make money enough for a normal living not for buying one villa on the island, as for the QC inspections I consider myself to tough, but, that’s why i sleep very good night time…
Adrian,
Thanks for the comment. I never wrote that 100% of trading companies are bad apples. I also know a few ones that seem to be doing a good job. I hope you don’t feel offended by what I wrote.
adrian,
i need a trading company for some products, contact me
I am from Caracas, Venezuela, I have been traviling to Guangzhou, China for 4 years now… I am starting my own trading company, I have been training my self for these last 4 years, I understand all these opinions because I have been on boths sides… So, My vision is to be that correct middle man that takes care of his client and works with that high quality manufacturer in China that meets my standards and my requirements!!! One of my best clients is one of my best friend now a days… It is a win win situation when all of the people involved are the correct persons to work with.
Honesty, Trust, and Respect can get you anywhere in the world… Shibari Trading Co.
Djcolly,
You are right, honesty, trust, and respect are the right way to go. Glad to see there are (a few) good people in this business.
Hi Renaud – I understand what you are saying and I also just finished reading the book ‘Poorly Made in China’; having worked in China and having created a good sized business here, I found the book interesting, and agree with the general theme about how China operates and also about how cavalier Importers are. Outsourcing, manufacturing and importing is serious – it is technical and it is complicated. Illusions of ‘easy buying’ is always dangerous.
Also, the Trading business ‘industry’ is growing up, and China is changing. Traders/Agents, like any business, were in the business of arbitrage, buy low sell high, and had geographic advantages or being where the production is.
Importer requirements have changed and due to the development of B2B websites, the arbitrage opportunity has shrunk tremendously; if you want to survive in this business, you need to provide significant value, in terms or service, control and pricing.
I define my company as an importers value-added buying office – we represent the importers interests in China. While we have our supplier base which can only help to accelerate a client’s china buying process, we are transparent in getting competitive quotes and opening up the supply chain, in terms of factory selection, product development and production. Furthermore, we have technical people and specialise in product areas. Importers need this kind of service, and need their partners in China to understand their business model, so that all parties win. There are costs to this. I don’t say China is cheap anymore, especially if you need your product up to standards; China can provide tremendous value, if managed correctly.
Most importantly, is that importers need to know how to buy from China and how to work with their buying partners, be it directly with factories or with value added agents, who need to ‘add value’!
Deepak,
Thanks for your comment,which makes perfect sense.
we regular buy from chinese suppliers, and only 2 cases of fraud, we still claim our money does anyboyd know any company that can cash money from trading disputes ??? thanks!
Matias,
You should read http://www.qualityinspection.org/scams-by-chinese-suppliers/.
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