The coronavirus pandemic has accelerated e-commerce growth — it’s been forecasted that online sales grew by 32.4% in 2020. The types of products consumers are interested in have also shifted, with exercise bands, kayak accessories, kitchen furniture, and others seeing increased growth.
If you’re looking to capitalize on these trends, you need to find the right supplier for your product.
You may be searching for suppliers in China or another low-cost country. And if you’ve browsed Alibaba and other platforms, you’ve probably realized at some point that not all of the suppliers you find are factories — some of them are trading companies.
So what’s the difference between factories and trading companies, and how can you make the best choice for your situation? Here we answer these questions and provide some important considerations to help you decide.
What is the Difference Between a Factory and a Trading Company?
A factory is an industrial site where workers use specialized equipment and skills to make your product. They might use different manufacturing methods to turn plastic, metal, wood, or other raw materials into finished goods.
But a trading company doesn’t own a factory. Instead, they have a relationship with a factory — or perhaps they work with multiple factories that make their customers’ products. A trading company earns its money through a markup on the product.
So, you might be wondering why you would work with a trading company. Is it worth it to pay their markup?
There isn’t a single right answer to that question — it depends on the circumstances and whether the trading company is adding value. And trading companies can often provide additional value that makes the relationship worthwhile.
Trading Company or Manufacturer: 4 Considerations
While not all trading companies are great, if you find a good one, you can put yourself in a position to have more success as an importer. Let’s discuss some key considerations to help you decide whether to work with a trading company or manufacturer.
Consideration #1 – Communication and Customer Service
When you’re dealing with a supplier abroad, having clear lines of communication is important. One advantage of trading companies is that they’re often easier to communicate with. They may have people on staff that speak better English, and since they aren’t involved in manufacturing, they tend to be more customer-focused and put more effort into customer service.
If you’re communicating with factories and encounter communication difficulties, perhaps you can find a trading company that excels in this area. Another consideration is your experience with importing products from abroad.
Consideration #2 – Level of Experience With Importing
If you’re new to importing from China or Asia, working with a trading company can make things a little easier. It takes time to build a relationship with a factory, and since a trading company already has that relationship, you can benefit from it.
If you’re a small importer, getting some additional guidance and handholding from a trading company might allow you to save precious time and effort. Also, trading companies can sometimes save you money as well.
Consideration #3 – The Cost of Your Product
Of course, you want to get the lowest price possible, whether you’re working with a trading company or factory. You might assume that since trading companies are adding a markup that they’ll give you a higher price.
This isn’t always the case — if they already have a long-term relationship with the factory, they may be able to get better pricing than you would. They likely buy high volumes across all their different customers and can achieve economies of scale. If you’re a newer importer, you may not be ordering high volumes.
Consideration #4 – The Size of Your Orders
One of the first things Vietnamese, Indian, and Chinese factories will ask you about is your order quantity. If your order does not meet their MOQ (minimum order quantity), you may be out of luck.
For importers ordering in low volumes, a trading company can be a better choice since they already order large volumes from their factories and may be able to offer you a lower MOQ. They may also be able to offer you a wider variety of products allowing you to place a mixed order.
In the end, your unique situation and the specific companies you‘re talking to will determine which option is best.
Look at the Value Proposition and Your Goals to Make the Best Choice
While trading companies add a markup to the cost of the products they get from the factory, they can sometimes offer additional value that makes it worthwhile. As a buyer, you need to consider whether a particular trading company is adding enough value to make ordering from them the right decision.
Trading companies often make good partners for newer or smaller importers — that’s not to say that they can’t be ideal for experienced importers either. But it’s best not to get too hung up on labels, and instead look at value.
Try to determine what value the trading company is offering and use that information to determine the right choice. You might also consider working with a sourcing agent to help you find suppliers that fit your needs.
I noticed that factory websites write titles like “Factories are your ideal supplier” and trading companies write sentences such as “Why trading companies are better than factories”. In the end, each company writes in its best interest, and it is quite normal since this is simply “promotion.”
However, we provide our readers with facts and honesty, and this is what makes us different.
No one is “better”. The truth is that each of the two providers has pros and cons, just like anything else. It depends on the customer’s needs and wants, and this is what plays a major role in deciding the direction of the client.
As a sourcing company ourselves, we encounter and work with hundreds of Chinese factories that put great effort into manufacturing and sometimes work exclusively with trading companies since many of them do not hold an export license.
Our team of professionals is confident that we can offer help in the entire supply chain in the best way possible and from beginning to end. Our relations with Chinese manufacturers are well-grounded due to our great records of collaboration.
Trading companies are typically engaged as “middlemen” in the production and distribution of goods and services. They usually buy, sell, and deliver goods to retailers in other geographical areas or even to a final consumer that wishes to buy wholesale.
Trading companies are usually located at or around areas of high manufacturing activities, or have offices close by. As a result, they are typically engaged in wholesale trade which involves buying from manufacturers and handling eventual sale through their distribution channels.
If you have ever bought anything on global ecommerce marketplaces, then you must have dealt with trading companies. Apart from maintaining online storefronts on digital platforms, trading companies usually have physical locations too.
Many of these locations are devoted to retailing products from multiple manufacturers. In some instances, they may even become licensed distributors for specific manufacturers in a geographical area.
Key considerations in starting a trading company
As with starting any other business, there are important things to keep in mind when starting a trading company. Some of these include:
Deciding on location: although no business can be entirely digital, you need to decide if you want to carry out most of your activities on the internet. If you decide against digital, then you will have other considerations such as securing a physical office location, furnishings, and equipment.
Product focus: you should determine what products you would like to trade. Your options include being a distributor of several products or focusing on distributing a single product.
Product sourcing and licenses: when you have made your decision, you next have to decide where to source your products from. Trading companies must have a good relationship with the manufacturers that make the products they want. So, this is something to keep in mind.
Distribution network: you cannot have a trading company without an established distribution network. You need to be able to move whatever goods you stock and your distribution network will be vital to this.
Delivery and shipping solutions:consider what options you want to provide for delivery and shipping of products. Some options include air or sea freight and last-mile delivery solutions. B2B portal sites often provide logistics options you can use.
Labor and payroll: trading companies do not necessarily need a high staff count. You can do plenty, even with just three to five employees. But this depends on the size of business you want to build.
Buyer protection means any product sourced from a Chinese supplier have some degree of guarantee in a variety of ways.
Buyer protection from the manufacturer: In the case of a manufacturer and buyer having a dispute on the product order, the manufacturer will protect itself and their interests.It is rare a manufacturer will sacrifice their own interests, even in the short-term, for a buyer.
Buyer protection from the trading company: A dispute between manufacturers and buyers when it comes to a trading company depends on a variety of different reasons. Trading companies do their best to protect the interests of the buyer.It is important to note the relative position of the manufacturer and the buyer is an important fact in determining the position of the trading company.Buyers of a high-quality and using an alternative factory mean the trading company will favor the buyer’s interests. If the buyer is from a small company working with a well-established, long term, cooperative factory, the trading company is much more likely to favor the manufacturer’s interests.
Buyer protection from the purchasing agent: Unlike the first two, a purchasing agent seeks neutrality first. The purchasing agent has to take its reputation on the Internet and its reputation within the supply chain into account at all times. The Chinese business model is “ugly words in front.” This means all of the issues and potential negativity are addressed at the start of the business agreement. A purchasing agent that promises 100 percent backing of the buyer is speaking marketing language to make the buyer feel more comfortable. In truth, the purchasing agent has no control over the factory.Here is an example: A factory makes a buyers products to spec. If the buyer decides to make changes after the order is complete, the purchasing agent has no leverage in making the factory change anything or eat the costs of new production. In fact, if the purchasing agent makes trouble in this way, it can cause serious problems within the supply chain.Dispute resolution options include:
Product specification documents
Quality control with third-pary inspections
NDA
Patent protection
There are plenty of purchasing agents who will accept bribes and buy from a manufacturer. In the event of a dispute, there is no protection available.
When it comes to sourcing high quality products from China, the sheer number of products is substantial. However, each of the three who source products vary in product range and variety.
Product range of the manufacturer：Most Chinese manufacturers specialize in a single production and sale of a particular product. The product depends on the production machinery, craftsmanship and skill labor force.As an example, a manufacturer that makes ceramic mugs will not make glass or stainless steel. These are all three mugs, but the production process, necessary equipment and raw materials are completely different for each. If your business goal is to sell mugs of a variety of materials from Chinese manufacturers, you will have to work with several different manufacturers.
Product range of the trading company: The trading company will also have a single product focus. The trading company often has a solid cooperative relationship with various factories within a single industry and are well aware of the advantages and disadvantages of each factory.A trading company that sources mugs will source mugs of various materials – ceramic, glass or stainless steel.
Product range of the purchasing agent: Purchasing agents have a wider range of products. Their understanding of a single product may not be as good as that of manufacturers and trading companies, but thanks to their deep understanding of the industry chain and streamlined operations, they can meet the diverse needs of customers.
A lot of our new China sourcing customers request us not to source products from trading companies. We are more than happy to abide by customer wishes, but I wanted to create this article to introduce people to the hidden aspects of a trading company that most guides won’t tell you.
A lot of the guides I read focus entirely on getting your products for the lowest price possible. But we say otherwise.
Any DIY importer looking to turn pro needs to streamline their sourcing process. And a great way to do this is to look at trading companies as much as manufacturers.
So, I am going to be super biased here and list a bunch of reasons why trading companies are are going to be better for you and your streamlined importing process.
Our Seven Reasons
Trading companies understand customer service more so than factories. Their focus is entirely on the customer so it is often easier to communicate with them.
They build the relationship so you don’t have to. A trading company will often work very closely with multiple factories and have very good relationships. They pass these relationships down to you in an effort to increase their worth to their customers.
They are willing to go the extra mile when the factory won’t. If you want multiple items sourced for one product, they can help. If you need special package or special labeling, a trading company can help.
Trading companies often use factories that are not big enough to have their own international sales team or export license. This means, they are working with factories that have lower prices than some easy to find competitors online.
Trading companies have little overhead, so they can offer lower prices. Their markup is sometimes as little as 0.5%. Rent is cheap in China and trading companies don’t need to be huge. A team of four to ten workers at a trading company can have a much lower overhead than a factory of 100 employees or more.
Trading companies are great for small quantity buyers. They often have great relationships with their factories or have product stock on hand, able to offer lower order quantities for the small sized importer.
They offer more products and are often happy to send you additional product samples for free. I always tell my clients to request their trading company send them three of their best selling product samples in every shipment. This is a great way to source more products and do so quickly and efficiently.
Thinking Twice about Trading Companies
So before you run away from the idea that a trading company is just another middle man stealing pennies from your profits, understand the massive benefits they can bring. It isn’t uncommon for serious importers to only use trading companies because of how much more enjoyable they are to work with.
Want to see for yourself? Request trading companies be added to your sourcing report and we’ll be sure to include all the benefits they’ll have on your production!
Have you used a trading company in the past? How did they differ from factories you’ve also used?
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.
An important thing to recognize with factories is that almost every factory sources some components and parts from other factories. Imagine a textile factory that produces t-shirts. This factory will likely not produce the string and the fabric for the t-shirt. Instead, they purchase these from another factory and sew them together. Especially when a product involves many types of complex parts (imagine an iPhone for example), a particular factory could be working with dozens or hundreds of other factories. Furthermore, many factories will also outsource their work to other factories during busy times.
If you’re working with a factory, it’s important to understand what exact components of the product that factory actually makes.
Neither factories nor trading companies are inherently bad or good. Although I often hear importers insisting they will only work with factories. I have worked with many trading companies during my importing life, even when I know the exact factories my trading companies work with.
A trading company will normally be more expensive than a factory, but a good trading company should add additional value through sourcing, quality inspection, customer service, etc. The problem is that some trading companies offer little additional value and essentially buy and resell products with no value added.
Working with a factory directly gives you one major advantage: you have a more direct line of communication with the factory. When a problem occurs or when you are trying to customize a product, it will be easier to communicate with the factory (opposed to a trading company which will essentially be a filter between you and the factory). Working with factories also affords you potentially the lowest prices, especially if you are ordering a reasonable quantity.
In my experience, if you are ordering at a single time a 20′ container or more of a single product, then it’s usually wise to work directly with a factory. You should also try to work directly with a factory if you are customizing a product or inventing a completely new product. For importers purchasing small amounts of product and/or need a variety of products, working with a trading company is also a wise decision.
Trading versus manufacturing business
As you have seen, trading and manufacturing companies can be quite different, even though they both focus on producing and distributing tangible goods.
Trading companies may require a potentially lower capital outlay than manufacturing companies. But this can vary, depending on whether you choose to outsource some parts of the production process, and the size of the manufacturing company in relation to the trading company.
Despite their differences, trading and manufacturing companies enjoy a complementary relationship. While one produces the goods, the other can be key in getting them shipped to consumers in markets all around the world.
Ultimately, regardless of which entity you pick, you’ll still be just as instrumental to presenting quality products to buyers in global markets.