Everyone wants to stay away from Trading Companies and go directly to factories when buying from China. That said, it’s not always clear when the trading ends and the manufacturing begins. In this article, I aim to explain what a trading company is, and how they differ from manufacturers.
Further, I also cover the different types of trading companies, some of which are good and some of which are less so.
What is a Trading Company?
When do the trading end and the manufacturing begin? That’s not always clear cut.
Manufacturers procure materials and components that they turn into a finished product. For example, a watch factory doesn’t make every single part in their own facility. Instead, they purchase the case, movement, strap and packaging from an individual, and highly specialized, subcontractors.
That said, they do assembly, testing, and packaging. This is what makes them a manufacturer.
A trading company, on the other hand, doesn’t do any assembly at all. They receive your order and forward your deposit to a local partner factory. In many cases, that’s also everything they do, without offering any added value.
Types of Trading Companies
1. Traditional Trading Companies
Once upon a time, export licenses were hard to come by for Chinese factories, and they didn’t have anyone in their office that could communicate in English with their overseas customers.
This was the time when Trading Companies thrived in China, as they could effectively sell products made by local factories without investing in their own stock. Business was good back then, as they could add 20% to 40% on top of the factory price.
In a way, the trading companies acted as gatekeepers.
But, times have changed. Today, virtually every export factory in China have at least one English speaking sales rep, and they all have export licenses in place. Unfortunately, the Trading Companies have not kept pace in this development, and still, try to act as gatekeepers in a time when companies like Alibaba.com makes the market more transparent than ever before.
This is why they fail to keep up
a. Trading companies don’t offer lower volumes compared to if you’d buy directly from the factory. Instead, they only forward orders they receive from buyer’s to local factories
b. Trading companies generally don’t invest anything into developing their own products, or even supporting their customers with product development.
c. Trading companies make the supply chain less transparent and can’t be trusted to implement a strict quality assurance process.
On top of all this, they also charge more than factories.
As such, it’s hard to see a future for traders offering none to little added value in today’s significantly more transparent market.
That said, some Trading Companies do keep up with the times and offer value-added services. I’m not sure why, but many of those that do are based in Fujian province.
2. Hong Kong Trading Companies
If we go even further back in time, Hong Kong was the place for manufacturing. However, while manufacturing moved to the Mainland in the 1980s, Hong Kong-owned trading companies still maintained their offices in the city – even to this day.
Some Hong Kong trading companies have even expanded into large manufacturing groups, operating factories in Mainland China, Vietnam, Malaysia, and Cambodia.
Many of the smaller ones also operate a single factory on the Mainland and offer both expertise and transparency that you’ll hardly find elsewhere. Some of the best companies I’ve worked with have been Hong Kong-based trading firms.
Offshore companies in Hong Kong
That said, far from all Hong Kong-registered companies are actually operating from Hong Kong. There are plenty of offshore trading firms without a presence in Hong Kong, that can only be traced to one of the many virtual offices in the city.
Unless such an entity is tied directly to a factory in Mainland China, I advise you to stay away.
3. Factory Group Trading Companies
Some larger manufacturers operate multiple production facilities, covering different product types and materials. To simplify their exporting and invoicing procedure, they trade through a single trading entity.
There’s nothing wrong with being efficient.
4. Combined Manufacturer & Trading Company
Picture yourself manufacturing watches in China. Naturally, your customers will also start asking you for leather straps, boxes, and perhaps completely unrelated products.
Clearly, as an aspiring Entrepreneur, you will try to help your customers while adding a bit to your own profit margins. Before you know it, you’re selling a range of, often related, products made by other factories in the same city or province.
Thus, you have no become what we classify as a Manufacturing & Trading Company.
If you browse Alibaba.com you’ll find that this is by far the largest category of the supplier. They have their main product scope, which they produce in their own factory, but they are also selling products made by partner factories.
As such, it’s important to know what your factory is making themselves, and what they buy from outside.
Do Trading Companies offer lower MOQs compared to factories?
As Trading Companies generally forward orders to local factories, they themselves have to match the factories MOQ requirement. If they require an order volume of 500 pcs, then the trading company must pass on this MOQ to you as a buyer.
This is also why it often doesn’t make sense to buy from traditional trading companies. There are, however, exceptions. Some trading companies purchase stock from factories that they sell to the customers at a lower volume – and for a higher price.
Product compliance issues when buying from trading companies
Let’s say that you buy a power bank from a trading company. Assuming they can provide you with test reports, the listed name on these documents is almost certainly that of the factory. This is a big deal.
Authorities in the US and EU require that the product SKU and even purchase invoice matches up with the test report. If you pay a trading company and show a test report that specifies the name of a different company that may or may not be factory – there’s simply nothing showing that the test report is valid for your product.
This is also why Amazon requires that you submit both compliance documents and the invoice, to prove that you actually purchased the product from the supplier that holds the test report.
The problem here is that trading companies rarely, if ever, bother to get products tested in their own company name.
Even if you are, as is often required, to get the product tested in your own company name you’ll still face a major issue. If you don’t know anything about the factory making your product, how can you assess whether they are capable of manufacturing a compliant product in the first place?
As such, one of the biggest problems with traders come from the fact that product compliance becomes, at best, a lot more difficult.
What’s the difference between a trading company and a wholesaler?
A Wholesaler, unlike a Trading Company, actually has products in stock that they can sell in lower volumes at any time. They can ship tomorrow, while a trading company must place the order with a factory and wait 30 to 60 days before the products are ready for shipment.
“I heard that Alibaba is only for Trading Companies”
I hear this statement quite often.
Yes, there are Trading Companies on Alibaba.com. In some industries, they still add a lot of value, so it wouldn’t function without them.
That said, traditional Trading Companies are not the majority of suppliers on Alibaba.com. Perhaps that was the case 15 years ago, but not anymore.
How to identify a trading company on Alibaba.com
- The company name includes the term “Trading” or “Commodity”
- They offer a wide range of seemingly unrelated products (e.g. power banks and t-shirts)
- No test reports or mention of product standards
- Lacking ISO 9001, BSCI and other company certificates
- Low registered capital (RMB 500,000 or below)
- Defined as a ‘Trading Company’ on their page
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