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manufacturers in China

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Trading companies vs. manufacturers in China

Posted: March 09, 2016

By Neale O' Connor

How
do you identify ‘trading companies’ who may pose as full-fledged
manufacturers?

It
appears that not every booth at a trade show is a factory. When you place
orders, they turn out to be a trading company. How do you identify the
difference?

That’s
a good question. To be honest, you can never know for sure. When you walk around
these factories, you will never know for sure. You’re really skillful if you can
do that. But you can do a few background checks.

First
off, you can check if you have, for example, a Chinese contact. If you have a
turnover of more than RMB 5m annually, then you will most likely have an export
business license. If you don’t have that, then you will for sure be a direct
factory owner. If you have the export license then, of course, you are exporting
more; you could ask to see pictures from the factory. If the factory seems very
small, then something’s odd. You could ask to see pictures from the
showroom.

If they have one or two types of materials, then it’s a factory. If they have
more than five or seven, I would expect them to be a trading agency because they
cannot have the core competency for so many different materials. So I would ask
to see pictures from their showrooms and from their factory get the idea if they
trade with many different items or just one. Normally with a few of the items,
more likely it’s a factory. But you can never know for sure until you visit
them.

If
you work with a trading company instead of a factory, what should you look out
for?

That
is always a grey zone. I have been working in companies where I have frankly
said “I don’t mind doing business with you, I know you are a trader. That is ok.
I know I paid too much for my products, I know I can get the price maybe 20%
lower if I went directly to the factory. But what you can do, and what your core
competencies are those when you say that it’s delivered to me at noon, then I
can be absolutely sure that it is delivered Wednesday afternoon. And that is why
I am doing business with you. So I’m not saying that you should totally avoid
trading companies. They just need to have another competency at the price.
Because they are for sure 20%, at least, more expensive than the factories
themselves. But maybe they will have other qualities, maybe they will have a
better understanding of the quality level, maybe they will have some better
understanding of the delivery terms, maybe you can get better payment terms. But
you need to get something better, but that’s not the price because that’s what
you get from the factory owners.

My
question was that is there anything else you need to think about other than what
we just discussed when dealing with trading companies? Negotiations?
Relationships?

I
would say that it would be easier to negotiate with the factory themselves
because they are the ones who make the decisions. Whereas if you are in a
negotiation with a trading company, they first have to go to the supplier and
then go back and then go back to you, so that takes a longer time.

Though
I would say in a negotiation, it would be faster to negotiate with the Chinese
suppliers, and it will also be more trustworthy negotiations. Do you know what I
mean by that? They are most likely to honor what you agreed in this negotiation
because it’s their work, and they sat down at the negotiating table. Whereas if
you do negotiations with the trading companies, they don’t have the same
responsibility because they always say “Oh I tried to make the supplier do that,
but they just didn’t. I took what we agreed in this negotiation and told them,
but they just didn’t perform, what can I do about it?” So they’re most likely to
do like this and just saying it’s not my fault it’s their fault.

If
you negotiate with a trader, then I would say have more bullet points. Have more
things written down? Be more thorough in your details, contract maybe. Follow-up
more than with a direct supplier.

Dr
Neale G O’Connor FCPA (Aust) is a Cofounder of China Sourcing Academy, a complete training
system for professional buyers seeking to source from China. He is the director
of Ricebox
(Hong Kong), a China risk management consulting company, and is the founder
of the China
Supplier 1000 Project that focuses on helping suppliers to develop their
international business. He has two books on operational and risk management in
China that are available on Amazon, and is an Associate Professor in Accounting
at Hong Kong Baptist University.

Want
to know how to work with factories to produce your unique products? Join
the Smart China Sourcing Summit to learn sourcing best practices, April
17-19, 2016. Co-located with Global Sources 3,000-booth trade show in
Hong Kong. Learn more at http://www.GlobalSources.com/summit

Keep
updated on sourcing best practices and the Summit. Join the Smart China
Sourcing Facebook group at http://www.facebook.com/groups/SmartChinaSourcing

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