A client recently asked me a question about apparel trading companies in China, which got me thinking a bit.
In my experience, the words Trading Company, Sourcing Agency, and Import Export business, are often used in a way that can be very confusing to a buyer. They are often used interchangeably, when talking about the same entity.
This is often a simple language issue, but can be done on purpose, by certain unscrupulous business people to hide the true nature of their business relationships.
To Western buyers this is often confusing, as they usually have a distinct understanding or expectation of what each business is, or should be.
I have often been in contact with trading companies, and prefer not to use them, as they usually do not have the required control over their subcontract factories. When I mention this, I get the common reply that the Trading company has its own factory, and after a bit of digging, I find out they do not.
Last week I was in touch with a trading company, and they told me they had three subcontract factories. I then told them that this type of set up did not suit me. The salesperson’s next mail, was that her boss owned one of the factories. My next question was if he owned the factory 100%. The reply was that he only owned 30%. Big difference.
The first reply implied 100% ownership, the second only 30%. For all I knew the boss owned 0 percent. I then asked to see the document showing the trading company’s 30% ownership in the factory. Needless to say that was the last time I heard from them.
Sometimes only a factory visit and watching the interactions between all the players will lead you to the truth, along with some simple questions.
For example if I ask the “owner” how many machines the factory has, and he needs to ask someone else, you can be pretty confident that he is not the owner. If you ask him to see the sample room and the “owner” does not know where it is, and gets someone else to lead, you can be pretty sure as well.
If most of the questions you ask the “owner” are answered by someone else, usually the factory manager, or real owner, and the answers translated for you by the “owner”, you can also be pretty sure the trading company does not have ownership.
Generally there 5 types of trading companies in China, and the term is used very loosely.
1-The trading company is a totally separate entity from the factory. A factory might not have an export license, so they export in the name of a trading company which does.
2-Some factories have there own trading company, just as a tool for exporting. They are not traders in the true sense of the word. They might also export on behalf of other factories as above.
3-Then you get a trading company who simply take orders and farm them out to factories to produce. Most seem to fall into this category. These are often called Sourcing Agencies.
4-Next are the trading companies that get factories to produce stock for them, and they wholesale out.
5-Finally a trading company with their own factory. They will usually manufacture items for wholesale and take customer orders to manufacture as well.
If dealing with any trader, it is important to work out exactly which category they fall into, as there can be serious ramifications if you get it wrong.