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

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.

  1. 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.
  2. 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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