Here are some reasons why trading companies might be risky for you and a few actionable tips for what to do if you think your ‘Chinese manufacturer’ is, in fact, a trading company in disguise…
Why is working with a trading company instead of a manufacturer risky?
First, it’s all about understanding who your supplier is. If you know that you are working with a trading company, then there may be no problem. In fact, a trading company (acting essentially as a middleman between you and the manufacturer) with a well-established network in China can make sourcing products and bringing them to market easier for less experienced importers. That’s because you don’t need to go through the hassle of sourcing and paying manufacturers, or even handling the logistics, as they do this in return for making their own margin on the order; it’s also probably faster than you doing it yourself and they might actually be experts in the product category.
However, trading companies often pass themselves off as manufacturers because they know importers are looking to ‘buy direct’ and they want to get that business. This is risky because:
- You do NOT have any control over/knowledge of who’s in your supply chain because the trading company selects the component suppliers, assembler, etc (and they will not want to tell you who they are in order to protect their own business from you). This also has serious product compliance and safety ramifications…for example, would you even know if the trading company’s supplier is using the materials and/or components that must be used in order for your product to be compliant with your market’s standards? When asked, the trader may just tell you that everything is fine!
- They may select the cheapest possible suppliers in order to boost their own margins, with obvious quality ramifications for your product.
- They may not be upfront about quality issues because they don’t want to scare you and lose your business leaving you to receive defective goods, or they may not check quality at all leaving it to their supplier (with predictable results).
- Trading companies sometimes prefer to deal with factories they have a relationship with, either friends or family, which means that if things go wrong they’re unlikely to penalize them or push them hard to put the issue right (again, leaving you the buyer to carry the can).
Bearing in mind the above, it’s a shaky business relationship for importers who’re producing in anything other than very small volumes and have relatively complicated products.
How to detect if you’re really dealing with a trading company
Visiting the address of a factory in China isn’t enough to be sure that you’re not dealing with a trader as this example from a post I wrote before illustrates:
Last month [a friend] scheduled two factory visits on the same day, in the city of Shenzhen (between Hong Kong and Guangzhou). He was looking for a good manufacturer of LED lamps.
The factory he saw in the morning seemed to have a storage problem — they even placed some cartons in the reception area.
Below is a photo of the same reception area. You will notice two things:
- The cartons had disappeared and revealed a large logo.
- The company name on the wall was different.
Oh, and also… The prices he was quoted in the afternoon were 25% lower than in the morning!
So, if you want to know whether you are dealing with a trading company or with a supplier that really owns a factory, what can you do?
As the above example shows, visiting the factory is not enough. You have to be curious and ask many questions.
Here are a few tips that will help you find out and not fall into the same trap:
Check their legal records
A Legal Records Check on the supplier’s company can help. If their scope of business doesn’t include manufacturing, if their registered address is in a downtown area, and if their registered capital is low, it points to a service/trading company, not a manufacturer.
Use their pro forma invoice to check their company details
Get a pro forma invoice for the goods you are interested in, and see what company name is mentioned on that document. If it is different from the company you did the LCR on, ask them why they mentioned one company and then they want to use another company to supply to you!!
Do a factory audit paying special attention to company information
A factory audit can help, too. In addition to confirming what process the factory does in-house, what types of products they make, and how mature their quality systems are, the main contact person (if suspected of being an intermediary posing for a manager of the factory) can be put on a grill, too.
Here are some examples of extra checkpoints:
- Ask for the main contact person’s email address on the factory domain (such as ‘email@example.com’) if that’s available
- Take photos of the main contact person’s name card, next to the name card of someone else working at the factory
- Ask where the main contact person generally sits in the office; ask him/her to describe what is in one of the drawers (with at least 1 specific piece of information) and then ask him to open that drawer and show that it is correct.
- Ask for the factory’s general manager’s email address, and whether he can read English; if the general manager is not there, ask for the same information from another salesperson OR from the production manager.
- Pick 1 employee and ask to see that employee’s labor contract; take a photo of the name of the company mentioned on that labor contract.
- Ask if they have product certificates such as RoHS, CE, etc. for the products the customer intends to buy; take a photo of the name of the company mentioned on those certificates.
Do you find yourself in a difficult situation with a Chinese supplier? Let us know and we might answer your questions in a post like this! Contact us here.
Other helpful content
You may also find these posts and podcast episodes helpful in this case:
- What are trading companies?
- How To Find Trustworthy Chinese Suppliers?
- What are your 4 options when sourcing suppliers in China? [Podcast]
- Unsure where to start with sourcing a Chinese manufacturer? Listen to these podcast episodes! 👉 DIY Sourcing from China Series
You can also read our entire ongoing series of posts about disputes with Chinese suppliers here.
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