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Path: Sourcing News & Advice
>> Import from
China Advice >> Is it normal for buying agents
to be paid by Chinese factories?

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Is it normal for buying agents to be paid by Chinese
factories?

Posted: May 13, 2014

Image courtesy of hin255/FreeDigitalPhotos.net

by Renaud Anjoran

A few years ago, in Hidden
commissions between China factories and sourcing agents, I wrote about a
very common practice that unfolds this way:

An agent (usually an individual, but
sometimes a company) helps an importer find a factory without charging
anything. Usually they say they “already know a good factory”.

The agent offers to follow up on developments, productions, and shipments.
The fee is usually low (5% or less). The buyer, happy to save time this way,
gladly accepts.

The buying agent actually makes more money than the buyer thinks, because
of a commission she requested from the manufacturer.

The buyer might never find out about it. The agent tends to work with
small factories that have no English-speaking staff, not only to keep prices
low but also to make herself indispensable… and to ensure nobody from the
factory talks to the importer.

I tend to see this practice as highly unethical. But not everybody agrees.
Yesterday, a reader left this comment:

I’m surprised that anyone thinks this is wrong, as though it is some type of
sin. As agents our goal is to make money.

If I am bringing business to a factory they would otherwise not get, that is
a service and I intend to bill them for it. As long as the price my client is
getting is what they need, the quality is good and delivery on time and I’m
doing my very best for the client, I’m doing my job.

Everyone should know up front what the rules of the game are. If I’m hiding a
bloated commission that impacts quality or price to my client, then I’m
unprofessional and lack integrity. To think we do this work for free, is absurd
in it’s total naivety.

Let me clarify why pretending that the job is done for free is wrong. And why
charging a commission to the buyer without disclosing that another commission is
charged to the manufacturer is wrong.

The main problem is that it totally distorts the agent’s incentives. The
importer trusts the buying agent because she thinks the agent is on her side. If
the agent is actually acting as a salesperson of the manufacturer, the tables
are turned.

When things go wrong, the agent will naturally tend to defend the current
relationship at the expense of the buyer’s interests. Here are two examples.

First, imagine the factory behaves unethically and raises prices after the
buyer has wired a 30% down payment. The agent will try to reason the factory,
but I don’t think that’s effective in many cases. Then the agent will try to
persuade the buyer that this factory is really good and that the raise is
justified. After all, a deal falling through is zero commission… whereas a a
higher price means a slightly higher commission.

Second, imagine the agent notices serious quality problems. Remember, the
importer trusts the agent in that regard. The agent might put pressure on the
factory manager, who understands the agent’s interest and typically won’t
care. The only alternative to the agent, who doesn’t want the shipment to be
canceled (and her commission to be written off), is to let the shipment go
out.

Would this happen with a truly honest and long-term-thinking agent? No. But
such an agent would not hide the main source of her income, in the first place.
Not to mention, who would seriously expect a Chinese factory or agent to think
long term?

Who agrees? And, equally important, who disagrees?

++++++

UPDATE 7 May 2014:

For fun, I pasted below an excerpt from an email I received this morning from
a sourcing agent:

I can be a good companion of you in China! Help you find good supplier
and
settle everything during the buying trip, help to deliver your goods to
your
hand from China.
MOST IMPORTANT! I won’t make any COMMISION from
you!And not like other
sourcing agent charge you high charges.
All I can
get ,It is just a little fees:
****Service optional****
Fees :
1.
Produce price survey: Free
2. Car transport service:60 USD/day
3.
Translate service/guide service:20 USD/day
4. Collect goods service/quality
check service:5 USD/SHOP

Renaud Anjoran has been managing his quality assurance agency (Sofeast
Ltd) since 2006. In addition, a passion for improving the way people work has
pushed him to launch a consultancy to improve factories and a web application to
manage the purchasing process. He writes advice for importers on qualityinspection.org.

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