Types of “Manufacturers” in China

When dealing with overseas manufacturing, you will encounter the following players: trading companies/importers, buying agents, sourcing agents, representatives, wholesalers and factories.

Let us dive into the different types of suppliers and what differentiates them:

1. Trading Companies/Importers

There are two types of trading companies: the low value-added versus the high value-added trading companies. They typically make money by adding a margin to the cost of the actual production costs, and usually deal with a wider array of product categories. Trading companies have local China offices with a team of project managers that can be helpful depending on the complexity of your product. In addition, they may have great relationships with factories and help with communication in Chinese.

a. Low Value-Added Trading Companies

Low value-added trading companies boost value to the supply chain by linking buyers with sellers like a match maker. Typically, they help factories that are weak in sales and marketing abilities with business development by bringing them clients. This facilitates business and communication between two distant entities. They tend to help solve smaller problems, improve communication and assist in logistics. Project management isn’t their forte, and they do not have robust systems in place for early detection of issues and production delays.  Differentiating between a factory and low value-added trading company can be difficult as some pose as the manufacturer at trade shows or even on Alibaba. Typically, these companies are small 1-5-person operations, and some cases one will hear that they have disappeared and dropped off communication.

Pros: Help link buyers with hard to find suppliers, offer a low cost purchasing solution

Cons: Weak project management skills, high risk of problems, weak quality control systems, low accountability

b. High Value-Added Trading Companies

High value-added trading companies provide enhanced support around supply chain management with a combination of the following capabilities: supply chain expertise, logistics support – shipping and warehousing, quality control, intellectual property protection, economies of scale valuable to both buy and sell side, financing solutions, distribution channels and domain expertise.

These full-service trading companies are not just for smaller brands who may not have experience in product development and need small quantities, but these companies are also used by larger corporations, even those with China offices. For example, larger companies may not have the bandwidth or experience in a new product category and might need help to get their supply chain setup in that category.

Full-service trading companies benefit from economies of scale which can help get competitive costs on low volume projects. With buying power and strong project management skills, project schedules are more likely to stay on track even during stressful times like Chinese New Year.

Pros: Provide services that add value to supply chain, risk reduction, increase the pool of potential manufacturers, consolidation, economies of scale and reduce management resources.

Cons: Value must be placed on additional services otherwise additional costs are not justified.

Important note: Some trading companies will pretend to be the actual manufacturer with their own factory; therefore, it can be hard to figure out with whom you are dealing with. If they outsource the manufacturing, then they are probably aware of the applicable product regulations and processes; therefore, the fact that the items are not made in house may not be an issue at all.  

Factors to consider when speaking to a low value-added or high value-added trading company are:

Technical Support: Do they have any technical expertise or engineers on staff? Many trading companies just care about price and do not stand by the quality of the products. They often disappear if any issue arises. Lack of technical expertise results in mistakes, and mistakes result in severe quality issues.

Manufacturing Transparency: Confirm if these trading companies are transparent about the factories they work with and if you can be a part of the selection process.  Request if the factories they work with are audited, and also ask vetted partners for related reports.

Quality Control: Check what quality control systems and procedures are in place.  Ask your trading company if they stand-by the delivered products and if they provide a manufacturer warranty. It is important to note that quality control should be focused on avoiding problems first and then finding them second.  It is critical that a trading company needs good systems in place as well as an independent quality team to manage the project.

IP: Copycatting products is an issue especially if you are slow to market.  Ensure they tell you what they do to protect your IP and ask for references from brands working with them from your own country.

Financing: Do they provide any financing solutions to help with the first order and/or repeat orders?

Logistics/Distribution: Do they work with logistic agencies like 3PL providers to help assist in getting your product to you? Can they help with China distribution and/or distribution in your country?

c. Importers

Importers can be low service to high service trading companies, but the main point of difference with trading companies is the footprint. If most of the company is in the US or your home country, they are called an importer.  This larger local footprint may result in higher overhead costs; thus, they might have to charge higher margins.  If the footprint is mainly in Asia, they would be called a trading company.

Pros: Local presence, more cultural alignment and understand your market better, possible local warehousing support

Cons: Further away from the manufacturer, higher overhead

2. Buying Agents or Representatives

Buying Agents or Representatives may provide some of the services listed above and they typically work based on a contract or exclusivity arrangements based on cost plus; therefore, they do not have as much financial exposure.

Pros: Transparency, consolidation, risk reduction

Cons: Incentives are often less aligned (agency problem), risk of lower accountability

3. Wholesalers

Wholesalers buy a product in bulk and then sell the product off in smaller lots. Businesses who deal with wholesalers often do so because they may have some western representation with warehousing in America, Europe or Australia.

The main advantage of using wholesalers is that lead times are shorter and minimum order quantities are much smaller.  Most wholesalers deal with off the shelf products and do not offer made to order products other than custom logos and packaging.

When starting out with a new business line, it can make sense to begin with a wholesaler to reduce risk and inventories.  Once the business is mature enough to purchase made to order product from China, the savings can be enormous.

Pros: Transparency, risk reduction, easy access to parts, local access, great for low quantities

Cons: Expensive in large volumes, off the shelf product

5. Factories

In theory, when trying to manufacture a product, working directly with factories would be the most cost competitive option. However, it is very important to separate theory from practice.

Here are the challenges in working factory direct:

Sourcing: Choosing the right supplier is half the battle.  You need to filter through a lot of potential suppliers in order to identify who is qualified and to ensure that you are working with competitive pricing.  This process requires a lot of time and manufacturing experience to be done correctly including in person factory visits.  Therefore, getting lower price comes at a cost and a risk of making a mistake.

Project Management: Factories vary in their capabilities.  Some factories have international quality service and require little management, but they also charge you for that service.  Other factories are qualified but require lots of hands on management to ensure that you get the results that you need.  Often pricing is inversely proportional to the amount of management that is required.  This project management requires very experienced and knowledgeable people otherwise mistakes are likely to occur.

Quality Control: A big part of managing a factory is ensuring that quality will meet requirements.  This requires a strong internal team and systems or third-party inspections at an additional cost.

Where to find factories? Alibaba comes to mind when companies think of factories. Many companies listed on Alibaba are trading companies that sell products in which they buy from factories. They often hire English speaking representatives to respond to incoming demand from Alibaba. Factories are also listed on Alibaba, but how to tell the difference?

Quick tip: Ask for the manufacturer’s business license which indicates the type of company they are. This document will tell you what type of company they have registered as. On the business license, you will need to look at the ‘Business Scope’ or Jīngyíng Fànwéi 经营范围. Then use Google or a mandarin speaker to translate.

Pros: Direct control and relationship with the actual producer

Cons: Requires more management resources and expertise, higher risk of delay or quality issues, reduces the pool of potential manufactures

Conclusion

Improving your supply chain is a continuing process and business in China relies heavily on relationships.  Each company has a unique situation which means there really is not a one-size-fits all answer to which option is best.  You should assess your resources and the product that you need to manufacture.  Then make an educated decision based on what resources and options you have available to you.  When deciding, try to factor in both hard and soft costs and an estimated cost tied to risk.  If your business is complex enough, you will likely find that using all the above options will make sense at times.

Here at Genimex we offer a unique manufacturing solution for our clients. 

With 40+ years of full-service contract manufacturing experience, Genimex specializes in product design, engineering and production. Our team helps brands bring new product ideas to life. We have a long history and passion that has enabled us to build trusted relationships with multinational companies, corporations, retailers, established brands, start-ups and investors. Our services can help you streamline your supply chain by providing timely ongoing product development support, ensuring intellectual property confidentiality and reducing manufacturing risks and costs without compromising quality. This allows you to focus more on your sales and marketing efforts. Contact us to learn more about how we can help you with your manufacturing needs today.