Chinese trading companies and their dirty little secrets

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…