Stock lots and brandname copies

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 a production would be ordered yet not accepted by the original purchaser:

1. The goods are rejected for a quality problem. Sometimes it is really minor (e.g. color is 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.
2. 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 benefit 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.