Buying From China: Manufacturers vs Trading Companies vs Sourcing Agents

This post is by Ashish Monga, the founder of IMEX Sourcing Services.

There are many commonly held beliefs in the West about getting a company to manufacture your goods in China. It is true that you can vastly reduce your production costs, even when you have to ship products halfway around the world.

But it isn’t true that dealing directly with factories is always the best way forward. Trading companies and sourcing agents, though they sometimes have a poor reputation, can be a very good way of starting your foray into Chinese manufacturing, with experts on the ground able to help you in a very alien environment.

In this article I’m going to explain the differences between manufacturers, trading companies and sourcing agents. Then I’ll help you understand which is right for your unique business and products.

Finally, I’ll give you some advice on how to approach these companies. Chinese suppliers can get hundreds of inquiries every day, so you have to “sell” your business to them just as much as they have to prove themselves to you.

Let’s start by taking a look at the similarities and differences between manufacturers, trading companies, and sourcing agents.

Manufacturers in China

Manufacturers are often seen as the best and only source for your goods. You can communicate your needs directly with them and, if they are the right factory for you, they will have a high level of expertise in the manufacturing process.

Factories will make products to your specifications and within the tolerances you demand. The factory you choose will have probably been making similar goods for some time – you wouldn’t want a smartphone case factory to build the smartphone itself!

Finally, cost is frequently the main reason people go to factories direct as it is often thought that you will get the best price by that route (this isn’t always the case, as will be discussed when we look at trading and sourcing agents below).

If you have decided to go to a factory, you must be aware that in China it is quite common for trading companies to masquerade as manufacturers, and they often will try very hard to fake it for as long as possible. Though there are good reasons to go for a trading company, particularly if they are upfront about being one, if you specifically want a manufacturer here are eight ways to smoke them out:

Ask them outright if they are a trading company or a manufacturer. Often trading companies, particularly the ones you may wish to work with, will come out and say that they are immediately.
If they do say they are a factory, tell them you’d like to pay them a visit. Manufacturers will leap at the chance to show off their factory and try to set up a date to meet, where someone with something to hide may be evasive and not be so willing to let you pay them a visit.
Look at their product range. Manufacturers will tend to specialize in a much narrower range of goods according to their tooling and expertise. Trading companies will have a network of contacts so will have a far greater range of products on offer. Rather than investing their resources heavily in new lines, they can just pick up the phone to a specialist factory and get them to make the product.
Some manufacturers are also trading or sourcing agents. They will make a narrow range of goods in-house but will outsource production for other lines. This is far harder to spot, so in this case if you have suspicions you should offer to visit them, or see points 7 and 8 below to examine them in more depth.
Is their listed mailing address on the outskirts of a city or is it an office in the central business district? As with western cities, manufacturing areas tend to be on the outskirts where the land value is lower. A trading company however only needs an office and could well be in a central location of the city.
How much do they know about the production process? A factory boss will know his lines intimately and be able to give good answers to good questions. A trading company will give much vaguer answers. A very detailed knowledge of the product on your part will go some way to persuading them that you are a serious buyer as well – more on that later.
Get a third-party report on them: A simple company verification report can be the easiest way to find out if a company is a manufacturer or a trader before you invest in a factory audit which can cost a bit more.
Ask for a third-party factory audit. There are specialist auditors in China who will examine your contact’s claims and research the factory, as well as any certification they have, before you sign anything with them. A trading company might be evasive about this, as they would be reluctant to disclose their sources.

Trading companies in China

Trading companies are sometimes seen as an expensive and unreliable way of getting your product made. This is not always the case, and despite what you may have heard the trading company route may be the right one for you if your circumstances are a good fit.

One of the important differences between sourcing agents and trading companies is that trading companies will have a high level of expertise in a specific field. With multiple importers wanting similar goods, and a number of factories that make those goods, the trading company may well have a level of expertise that is close to that of the factory themselves. They may be able to advise you as to how to customize your product and improve its saleability, which again could boost your bottom line when it comes to selling the product.

They will act as middle men. The good ones will have a number of contacts with factories in their region, and may well be able to get your product at a lower price per unit than going direct to a manufacturer because they will be able to achieve economies of scale with their client factory and bolt your order on to an existing line of very similar goods. This is one of the strengths of going to a trading company – they can get a far lower price per unit than you might be able to at the scales you want to order.

One of the issues to look out for is that unlike sourcing agents, trading companies should be considered as being on the side of the factory should any dispute arise. They will be your point of contact at the factory – not the factory itself. They will often seek to protect their manufacturer’s interests, the lines of communication will be longer and disputes harder to resolve.

Those are the main points that describe what a trading company does, but the lines are often a little blurred between trading companies and sourcing agents. They do similar things and can often resemble one another.

Sourcing agents in China

Sourcing agents, like my company IMEX Sourcing Services, work on your behalf to source a manufacturer and deal with the issues that arise in China. Unlike trading companies their loyalty will be to you rather than the factory, so when a dispute arises they will represent your interests.

As with trading companies the sourcing agent will have a number of existing relationships with factories. Though their position is more on your side of the line, they will deal with the same factories on a regular basis and like trading companies, will often be able to drive some economies of scale into the final cost per unit.

Sourcing agents should have a good grip on Quality Control (QC) processes that can be applied to a range of products. This includes contracts in Chinese, product inspections, follow-up and putting a QC system in place. They can ensure that your product matches the specifications you have set and tackle any disputes on your behalf.

Sourcing agents will have a wider range of interests than a trading company, so they won’t know your niche to the same depth as a trading company. A specialist trading company will often know your product right from the start, but the onus is still on you to know what you want and write detailed product specifications for them to go to the factory with.

Sourcing agents specialize in the supply chain (logistics) as much as the production process. A good sourcing agent should be able to take over your entire sourcing process, right from finding the factory, to Chinese contracts, inspections compliance and logistics to your door. This saves time and allows businesses to focus on sales and marketing operations.

A trading company might be better at reducing the factory price per unit. A sourcing agent might be able to drive greater savings in your supply chain overall.

Which type is right for you?

So how do you decide whether you should be working with a manufacturer, trading company or sourcing agent?

This decision is unique to each importer and is based on several factors, such as:

Experience importing from China.
Understanding and knowledge of import regulations and processes.
Understanding of compliance requirements in the country where the goods will be sold.
Size of your order – the total order value, as well as order value per product and per supplier.
Resources available to manage the import process.

If you are a large buyer that can comfortably meet the factory’s MOQs, have a good understanding of the import processes and compliance requirements, and have the time and resources required to manage the back and forth communication, you might consider going factory-direct.

If you have larger orders and can meet MOQs, but are short on experience, you can go factory-direct and work with a sourcing agent as your nominated representative on the ground. They will manage the operational part of the process as well as your risk and quality requirements. About 20% of our projects are with factories nominated by our clients, where we are essentially doing project management, quality control and handling contracts and logistics.

If you are looking to buy a wide range of “related products” within the same industry but your quantities are not large, a trading company can be a good option for you. Trading companies specializing in a given industry will often develop a wide product range with their products being manufactured at several different factories. This provides you with the option to carry multiple products in the same niche, and at the same time be able to import smaller quantities per product.

When working with a trading company, you can also use a sourcing and quality control company to manage risks, due-diligence, project management, quality control and logistics requirements.

You can also use a sourcing agent in most importing scenarios. They can be contracted to find new suppliers, or work with your existing suppliers. Being on the ground in China, these companies are in a much better position to find root-level factories and skip the trading companies that often dominate B2B portals. Sourcing agents can also be used to outsource the entire sourcing process as mentioned above.

Finally, sourcing agents can add great value when things go wrong. For example, if issues are found during pre-shipment inspection, which is often the case, this often requires intense negotiations with the supplier to get them to re-work the goods so that they meet your expectations. Having a Chinese person on the ground negotiating the reworking terms can make a huge difference.

Why do you have to win suppliers over?

There is a belief in the West that Chinese companies are competing very hard for your business and you’ve just got to send a mass email to get them fighting to make your product.

The reality is very different. Chinese companies are often overwhelmed with emails from importers who (most of the time) are not serious buyers and will never place an order. Why spend hours dealing with impersonal emails that in most cases are just for price comparison? 99% of emails to Chinese companies are just that, and they know it.

At core, if you want them to take you seriously then you must take them seriously. I’ll explain how to do that next.

How do you win them over?

The best way to make first contact is with a detailed and targeted email to the company. Then make a follow up call within a few days to confirm that they have received it and are dealing with it.

Here are eight tips to make sure that they pay attention to you when you make that approach:

#1. Know your product

If you are approaching a manufacturer directly, they will pay more attention if you have a very detailed product specification. If you have clearly spent a lot of time doing your research before making the initial approach, they are more likely to give you the respect that your approach deserves. A general email covering just a few points is going to get little attention.

If you know the product well, they are also more likely to give you a better quote too. The more competitive you seem, the more likely that they will wish to compete for your business.

#2. Tell them your order volume

In your email, set out the numbers of units in your order as a whole. If you don’t they will quote for an MOQ (minimum order quantity) that could be significantly different to what you seek.

You may want much smaller quantities than they are willing to make, for example, and that will be off-putting for them. By being upfront from the start, so you should be able to find the right match more quickly.

#3. Specify compliance requirements

You should cover the legal and regulatory requirements for the goods in the country (or countries) you will be selling to. Some factories aren’t set up to meet these, while other factories do it all the time and will be more able to deal with your requirements.

#4. Stand out from the crowd

There are three essential requirements for a factory to consider you immediately:

You are ready to buy right now
You have the capital to buy at least the MOQ immediately
You have great “repeat potential”

Many factories operate on wafer thin margins, so the prospect of repeat custom is very important. You can make this look possible with your detailed product knowledge (as described above) as well as having a professional company website with a business address. They are far more likely to do business with a company than an individual.

If you have done business with China before, say so in your opening gambit as this will signal that you know how things work there.

#5. Follow up

Give them a call within a few days of sending the initial email. In the West this may seem impatient or rude, but in China personal contact is more important than “cold, impersonal” emails. The call will help them remember you and, in their eyes, start forming a personal relationship as you work on the product together.

#6. Communicate their way

Consider getting an account with QQ Chat, which is one of the best means of working day to day with Chinese businesses. An English version can be found here. As you build your relationship and get into the detail of the deal, you can get a lot of things done on QQ Chat. Many companies will also have Google Talk and Skype among other services.

#7 Visit China!

If you can’t afford to travel and spend time in China speaking face to face, then what are the prospects of you investing in the product and having it delivered to your home country? Businesses in China still hold great stock in face to face meetings.

#8. Work in their time zone

Consider working on Chinese time one or two days a week. If they can get an instant response from you during their 9-5 routine, then they will feel a lot more comfortable working with you. You will have invested a lot of time and money into this project, so it can be worth your while working around them too, as they are playing a significant role in your new business venture.

Make it work for you

Getting products manufactured in China is not simple.

There are factories, trading companies and sourcing agents, and either one might be right for you depending on your circumstances.

When you do work with Chinese companies, you are building a business relationship, not buying products off-the-shelf. In a good relationship, you need them and they need you. It’s not about dictating terms or demanding compliance, it’s about working together.

But you can make it work. Find the right company, give them a compelling business proposition, and treat them with as much respect as you expect from. That’s the way to do business in China.

This post was by Ashish Monga, the founder of IMEX Sourcing Services. IMEX is a sourcing, quality control and product development company helping businesses import from China while managing their costs and risks, with particular expertise in ecommerce and selling on Amazon.