Chinese Suppliers: “Are you my factory?”

– A special guest post by Brad Pritts.

US readers may recognize the question as an allusion to a classic American children’s book – “Are you my mother?” dating to the 1960s!

Many tales have been told about difficulty identifying who the real Chinese factory is!  I will tell two stories, one from China and another from Taiwan. I will also offer some comments about the benefits and potential problems in working through trading companies – sometimes the cause of these questions. 

Much has been said about Chinese suppliers being coy or downright misleading about their ownership, in many cases trading companies representing themselves as factory operators. Because my client data is proprietary, I disguise the supplier names here and use only initials. Watch carefully or you will be as confused as I was!

Trading Company Story #1: China

I had some of these experiences early in my China quest in 2008.  I had arranged what I thought were two different factory introductory visits.  One was through a trading company (“S”) we had successfully worked with in the past (and they were candid about the factory relationship).  The trader was also introducing us to another firm offering the same items so that we could compare. Call them factory “C”. The second was with a manufacturer (call them “R”) who was offering the same products.

Our trading company S took us to a factory “Z” selling brake shoes. We had a good initial visit, including a plant tour and meeting several key people, including the general manager, chief engineer, and production manager. We knew several of these people from a previous company we had purchased from.

Two days later I was with the rep from factory R. We first saw their factory making brake chambers. (Later investigation confirmed that yes, they owned this one.) We then visited “their” brake shoe factory. It was factory Z…though now it displayed a beautifully engraved brass sign on the front door in English identifying them as company R. Met the same GM, chief engineer, and production manager. I politely told the company R rep that we knew the team from company Z from a past relationship (which was also true.) I chose not to discuss the situation with the company R rep. I don’t think that Z did either but as they spoke in Chinese I can’t be sure.

We ended up sourcing with factory Z, with Trading Company S representing them, for quite a few years. A year or so later, I was meeting with the chief engineer at Z. I noted in the back of his office he had 4 or 5 different beautifully engraved signs, one for each “relationship”!

Meanwhile, back to 2008…A few days later, I visited another brake shoe factory “H”. He told me that they also owned a brake lining factory, which hadn’t been mentioned before.  I asked if we could see it, and he agreed. Off we drove (about 20 minutes) and met…Factory C for the second time!

So went a part of my introduction to the Chinese industry! While these were the first cases of “mistaken factory identity”, they would not be the last.

Trading Company Story #2: Taiwan

This story, as mentioned, is more complex.

I had this experience in Taiwan in the early 2000s.  At that time there was a fairly large industry making replacement “crash parts” for passenger cars. These are the parts frequently replaced after collisions – fenders, hoods, tail lamps, doors, etc. Most are steel and a few molded plastic. This industry had emerged in the 1980s and grown quickly. At the time of my study, there were about 20 Taiwanese firms in this market. Although I lost touch when my contract was finished, I know that quite a few now produce all or part of their product in China.

My client was a major US auto insurance company. In the US, the collision repair industry is largely controlled by insurance companies who pay for most of the repairs. They are obviously motivated to get the best value for the parts they buy. At that time, many of the Taiwanese parts could be bought for less than half the price of the carmaker’s original equipment parts. Many, though not all, also had terrible quality and that’s where I came in.
Many of the insurance companies had the practice of specifying the Taiwanese part first, then allowing the repair people to switch to the OEM part…but only after proving that the Taiwanese part was no good. In practice, there was a lot of pressure to accept the Taiwan product…which became known as “Taiwan Tin”!

Between the ’80s and 2000s, the industry had matured somewhat but still had some problems. My firm was hired to help sort these out as technical advisors to the insurance company. I was the lead consultant for this project for 3 years.

A specific concern I studied was the tendency of the Taiwanese suppliers to change factories without notice, leading to frequent quality problems even with specific model parts that had been successfully used in the past. What I learned was that yes, this happened a lot. Further, there was a rich set of relationships and different circumstances involved. We studied the four leaders in the fender segment. All had broad product lines, with hundreds of models made. And, I knew that these were more or less genuine, as I had toured each factory. Let’s call them A, B, C, and D. The possible relationships that existed included:

1. Tooling production – most of the expense in producing the part is the up front cost of developing custom stamping dies for each model.  The producers held an annual planning meeting, where they studied the new US cars coming out and decided whether or not to compete, model by model.  (The economics only made sense for cars made in higher volumes.)  Sometimes, A and B would both decide to tool for a particular model, and compete for the business.  Other producers might avoid tooling and instead, C might agree to buy its requirements from A while D might buy them from B.
2. In another circumstance, the market might be medium-sized. In that case, C and D might agree to share a tool. They each fund half the tooling cost, and agree that C will keep the tool, run the production and sell parts to D at a low price (since the tooling cost was shared.) Both arrangements 1 and 2 would be long-term deals. And in both, it was common for the producing factory to stock packaging and labeling in both companies’ brands.
3. Yet another situation…let’s go back to #1. Suppose that A is out of stock on the model, and has a small customer order. They may contact B and buy enough to fill the current order. B will then ship the product over to A. Depending on the situation, these might be packed in either the producing firm’s brand packaging or the seller’s.

I prepared a more detailed report for the client, who was shocked. His immediate reaction — “That’s illegal!” Well, under US law it would be (the sharing of the market runs afoul of antitrust law)…but they weren’t in the US!

Eventually, we got the factories to agree to some procedures, such as identifying the specific factory that had produced the part and only substituting with parts from other approved producers. I am sure that there were still plenty of parts that “leaked” through this system!

A casual term for these relationships used in the US business press is “coopetition” – competing, yet cooperating. These relationships are quite common in many industries.  For example, in aerospace, several firms might compete for the prime contract on, say, a new aircraft. Only one will win…and generally will subcontract parts of the project to the competitor. Engineering teams will often have good relations with the competitor and cooperate effectively on these complex, multibillion-dollar projects. In many cases, like the industry described above, Chinese factories take these “coopetition” relations to a new level!

One “takeaway” from this lesson served me well in China, too.  When I did factory audits, I would review the inventory of tooling as part of the factory audit…to find out which part numbers they actually produced. Often these differed from the information in catalogs or provided by Sales. 

Trading Companies – the good, the bad and the ugly…

A particular case of unclear factory relationships in China is the active presence of trading companies, particularly those that are not transparent about their roles. 

Over the years we have primarily worked directly with factories. Our company has been unusual in the depth of relationships and supplier contact – far more extensive than many importers. With an important supplier, this might be one to two days on-site, three or four times each year. So we know who we are dealing with. In a few cases, we have stayed with a few trading companies long term, where the trader “earns their fee”. In several other cases, I found it necessary to fire the trader, and in each of these situations, I was able to easily establish a direct relationship with the factory.

How do we decide when to use a trader?

I should add that these roles are not always exclusive. Some factories will also act as traders, representing other factories that sell complementary products. We deal with two factories who also act as our traders for other items, again with full disclosure. For this discussion, the same principles should be applied in deciding whether this is a good situation.

A trader who earns his fee will:

• (a) candidly disclose their role as a trader, and identify the factory, further allowing us free access to the factory for technical work.    I respect their privacy in handling the financial relationship between the trader and the factory.
• (b) usually act as sales rep and interpreter for factory communications.
• (c)  be our advocate, ensuring timely service and attention to concerns and supporting problem-solving efforts.
• Bottom line, (d) provide competitive pricing, meaning that they need to get a better price from the factory than I could negotiate myself.  We monitor this through competitive quoting, comparing the pricing to direct business elsewhere.
• Finally, (e) operate with integrity – in particular honoring commitments to stay out of my market, or at least my customers. (It should go without saying that under no circumstances would I accept it if they switched production to another factory offering them a better deal without telling me and involving me in the decision.)

One of the best long-term suppliers is such a trading company. This is company “S” from my first anecdote. We have had a personal relationship with the founder since 2002 when he was international sales manager for a manufacturer we used. That relationship continues to this day. He moved on when the factory was sold to a US owner in 2005, setting himself up as a one-person trading company. Eventually, he brought his son into the business as well; today the father has all but totally retired. Over the years they established relationships with many different factories offering competing or complementary products. At any given time they usually represented four to six different factories. 

We did not give him our business immediately, but within a few years (and some problems with the new factory we had selected!) decided to move our business to him and a new factory. It made a big difference that in addition to the relationship with the trader, three of the managers of the factory itself had been a part of that original firm before it was sold.  This was factory Z, mentioned in the story above.

How did this trading company prove that it could be professional and helpful?

Mr. S, father and son, proved to me that trading companies can be professional and helpful.
How have they done this?
(I will admit a certain bias. Both my father and father-in-law worked as manufacturers’ representatives in the US, so I am willing to give an outside rep a try despite many published horror stories about Chinese traders.)   

First, transparency. 

From the outset, they clearly identified themselves as a trading company and introduced the factories by name. When they represented multiple factories for the same product, they advised on the pros and cons of the two.  

Second, value. 

They provide many of the sales and support services mentioned above and negotiate competitive prices for us. (We maintain multiple sources, so we can see that we are getting good pricing and terms – usually better than we have been able to negotiate on our own.)  Both father and son have excellent spoken and written English, not only for general commercial discussion but also for technical details. In two different situations over the years, they have stood behind their product quality when it mattered most. In two different cases with different factories, we had significant quality issues arise. They not only assisted with problem-solving but negotiated refund and replacement deals involving multiple full containers’ value. Others tell me that it is rare that medium and small Chinese factories will make good in these situations.  

At the strategic level of supplier selection, working through this firm has allowed us to source with smaller factories, with fewer resources.  We believe that we get the most effective factory attention when we are a relatively large customer – representing their second, third or fourth-largest customer. (There are reasons to avoid being the largest customer.) Our overall volumes are modest, so we need to work with smaller factories.  This also allows us to work with companies that have good production and engineering talent but lack the export sales skills to enter the North American market themselves. They are therefore less of a competitive threat to us in our market. 

So, I urge US firms to avoid ruling out trading companies totally.  They can play a useful role. Just like any Chinese supply relationship, choose wisely, and monitor their ongoing performance.

Many thanks to Brad for providing us with his experiences of working with trading companies in China and Taiwan and his viewpoints on how cooperating with them can be beneficial in some circumstances.

If you have any questions about this topic, sourcing in general, or your manufacturing project, feel free to contact us, or you may like to reach out to Brad on LinkedIn below, too.

About the author:

Brad Pritts has been a practicing quality and engineering consultant for over forty years, including long term contract service for several US importers.  Among other responsibilities, he served as the primary manager of one firm’s  Asian supply base since 2006 until his retirement in 2022.  Earlier, he served as quality leader for an aftermarket auto body parts supply network in Taiwan and China, from 1999 to 2003.   

He holds a B. S. (Ohio State, 1975) and M.B.A. (University of Michigan Ross School, 1982) and is an ASQ-certified Six Sigma Black Belt. 

P.S. More content about trading companies

• Is My Supplier A Trading Company Pretending To Be A Manufacturer? | Disputes With Chinese Suppliers Q&A (Volume 17)
• What are trading companies?
• Chinese trading companies and their dirty little secrets
• 7 Reasons Why Your Supplier Won’t Let You Visit Their Factory
• What are your 4 options when sourcing suppliers in China? [Podcast]
• Why First-Time Buyers Fall for Trading Companies in China