Chinese Suppliers – Trading Companies and Manufacturers Explained

There are three main supplier categories to take into consideration when importing from China – Manufacturers, Trading Companies and Manufacturing & Trading Companies. While the type of company will not be the most important factor when selecting your suppliers, different types of suppliers will require a different approach during the sourcing process and have a major impact on the future of your import business.

Therefore it’s important to know what type of supplier you should look for when sourcing in China. Let’s begin with an introduction to the three major supplier types in China.

Supplier type #1: Manufacturers

Most importers assume that it’s always preferable to “go straight to the source” and purchase directly from manufacturers while cutting out middlemen. I tend to agree with this statement and usually it certainly makes sense to buy directly from the manufacturer when importing from China. However, doing this is not always an option for small businesses and stores looking for a wide selection of products in fairly small quantities.

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Advantages

1.) Gives the importer more options when ordering custom made or branded products (OEM / ODM)

2.) The importer works directly with the original manufacturer and is more aware of the pricing structure, the different capabilities and limitations of the manufacturer – thus making current and future product development more efficient

3.) The elimination of intermediaries can result in lower prices

4.) In case of a dispute you will be negotiation and demanding compensation directly from the manufacturer instead of relying on an intermediary to handle the negotiations. You can never be sure that the intermediary consider you to be more important than the manufacturer.

5.) Manufacturing companies are often larger than trading companies and may have more resources to compensate or remake a failed order

Disadvantages

1.) May result in a higher Minimum Order Quantity (MOQ) requirement since the manufacturer has to produce a certain amount of units in order to be profitable and to purchase a certain quantity of material and components from the material and component suppliers – who also have MOQ requirements

2.) Many manufacturers do not have an export license that is required to export products from China.

3.) Some manufacturers are lacking product knowledge possessed by agents and trading companies

4.) A large manufacturing enterprise may consider a small buyer as irrelevant which will put the buyer in a weaker negotiating position

5.) Manufacturers specialize in their industry and can only offer a limited product selection

When you should consider to buy from a Chinese manufacturer

• If you are highly specialized in a certain field of products
• If future product development is a high priority
• If custom made and/or branded products are a high priority
• If product certification is a high priority
• If your product very price sensitive

Supplier type #2: Trading Companies

Trading companies have a very long history in China and traditionally act as a broker between foreign buyers and Chinese manufacturers. The status of the Trading Company has been a decline in the last few years. The main reason is probably that more and more manufacturers in China are experienced enough to deal directly with buyers around the world. This has left a smaller piece of the cake for traders. However, there are situations when buying from a Chinese trading company actually makes sense.

Advantages

1.) Offers a lower Minimum Order Quantity (MOQ) Requirements compared to manufacturers since one batch of products can be divided among several buyers

2.) May offer a wider product selection through an established network of manufacturers

Disadvantages

1.) Often more expensive (5 – 10%) than the original manufacturer

2.) Disputes and complaints will go through the Trading Company and your refund or remake is at their mercy. In some cases they will prioritize the relationship with the manufacturer over the buyer

3.) Communication regarding quality requirements and product specifications will be filtered through an intermediary and thereby increasing the risk of misunderstandings and quality issues
You might not be able to verify the original manufacturers’ capabilities. This is something that might cause future product developments to take a very long time.

When you should consider to buy from a Trading Company

• If you need a wide product selection
• If you are purchasing smaller quantities per product
• If your product is not very price sensitive
• If product certification is not a high priority
• If custom made or branded products are not a high priority

Supplier type #3: Manufacturing and Trading Company

Many, if not most, export oriented manufacturers in China are not limited to the products they produce themselves but expands their product selection by outsourcing production to other manufacturers. The main problem here is to find out which company is manufacturing the products you intend to import from China. If the supplier is not manufacturing the products, but subcontracting them to another manufacturer, then you are exposed to the same Disadvantages and risks as if you would be dealing with a Trading Company.

Advantages

1.) Even if the supplier is not manufacturing the products themselves, the fact that they are manufacturing products in the same or similar category indicates that the supplier have a decent product and product certification knowledge. If they also have a sophisticated Quality Management System in place, it\s possible that they will apply this to their subcontractors to some extent.

Disadvantages

The supplier can be an industry leading manufacturer for Product A and at the same time being below average for Product B (which they subcontract). It all boils down to product knowledge and quality management, which is best overseen “in house”.

When you should buy from a Manufacturing and Trading Company

• If you cannot find any qualified manufacturer
• If the manufacturer gives you access to information regarding the subcontractor
• If the manufacturer applies a Quality Management System to not only itself, but also its subcontractors