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.