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Trading Company or Factory: Which Chinese Supplier Should You Use?

In China, there are two basic types of suppliers that you will encounter: trading companies and factories.

What is the difference between these two types of suppliers? In this article I’ll address the differences between these two and when you should use each.


What is a Factory?

A factory in China is exactly what you think it is: it’s a factory that produces various widgets. They normally have some type of machinery to produce these items although the sophistication of that machinery can drastically vary. For example, imagine a textile factory which may simply have sewing machines as their primary machinery compared to a metal forgery which has much more complex and expensive machinery. Factories almost always specialize in a particular type of product and material; i.e. a textile factory would not also make stainless steel products as the machinery and skill set are completely different for each type of product.

China factory
An example of a very basic factory in China.

Factories tend to have lower prices than trading companies and you get more control over your products as you are directly in communication with the factory in charge of making your products. However, factories have a much smaller assortment of products and higher minimum order quantities (MOQ) as well.

Related Reading: 2020 Buying on Alibaba Guide: Price Negotiation, Payment, & Shipping

What is a Trading Company?

A trading company does not actually produce any goods. Instead, they source a variety of products from one or more factories (often they work with several factories). They are similar, although not identical, to what we would imagine in the west as a distributor or a wholesaler. Their big benefit is that they are able to offer a wide variety of products. In the past, before the opening up of China, trading companies were essentially the only way to import from China but this has all changed now.

An example of a trading company in China.
An example of a trading company in China.

A good trading company will source difficult to find products from difficult to find factories (not all factories are on Alibaba!). If they’re doing their job, they will also perform some type of quality control as well. The downside of a trading company is that they typically have higher prices than factories as they take some markup over the factory and you will have less control over the actual production of your goods.

What Are the Advantages and Disadvantages of Trading Companies and Factories?

There are both advantages and disadvantages of both trading companies and factories.

Advantages Disadvantages
Factory Lower prices
More control
Less variety of products
Higher MOQ
Trading Company More variety of products
Lower MOQ
Higher prices
Less control

The Difference Between Factories & Trading Companies is a Blurred Line

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 it together. Especially when a product involves many types of complex parts (imagine an Apple 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.

Related Listening: E276: How to Do Sourcing Right – A Guide for Veterans and Novices

How to Identify a Trading Company or a Factory

When you are trying to determine if a supplier is either a factory or a trading company, simply ask them directly whether they are a factory or a trading company. If a supplier tells you they are a trading company then you have a conclusive answer to your question. However, if they tell you that they are a factory then you must dig a little bit further, specifically asking them what exact components they make of the product.

A supplier’s profile on Alibaba says they are a trading company.

Should You Use a Factory or a Trading Company?

Neither factories or 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, and so on. The problem is that some trading companies offer little additional value and essentially buy and resell products with no value-add.

Related reading: How to do a Quality Control Inspection (and Why You Need One)

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 who 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 normally wise to work directly with a factory. You should also try to work directly with a factory if you are a customizing a product or inventing a completely new product. For importers who are purchasing small amounts of product and/or need a variety of products, working with a trading company is also a wise decision.


Trading companies and factories both serve a purpose for importers but it’s important to know when to use each type of supplier.

Which type of supplier do you prefer to work with, trading companies or factories? Share your preference below. Also, if you have any questions about trading companies or factories feel free to post your comments and questions below.

Dave Bryant

Dave Bryant has been importing from China for over 10 years and has started numerous product brands. He sold his multi-million dollar ecommerce business in 2016 and create another 7-figure business within 18 months. He's also a former Amazon warehouse employee of one week.


  1. Can a company be a manufacturer and trading company at the same time? I asked this question because some companies write “Manufacturer, Trading Company” on their statuses. If yes, what are he implications of this?
    Thank you.

  2. Hi Dave, great article! I am from China and worked in both trading company and factory(trading) before, the service quality between the trading company is really different, a lot of trading companies are pretending to be a factory and have little control over the factory (quality) unless you are a big buyer. I am now working for a brand in the U.S., I never thought how incompetent a lot of trading companies are(mostly in sec-level cities): not professional, avoiding direct problems from a customer, and especially for the small trading company is not able to take full responsibility on the quality problem because of little money they have. And the pure factory (for my industry) requires big volume quantity, it is very hard for small/independent brands to enter.

    Friendly reminder:
    1. Don’t place an order before the prototype, if you have problems in the prototype the chances are the quality will be bad in bulk.
    2. Alibaba lists are misleading a lot of time, companies are posting fake pictures and videos

    If you are looking for an eyewear factory in Wenzhou, China, please stay away from Jxxxxs Exxxxxx.

  3. Is there a Top 5 or list of Trading Companies you would do business with. Not looking to start Amazon FBA but just expand our product lines at our brick & mortar. Thanks.

    1. Nope – too broad of a request. There’s millions of different products in the world :)

  4. We started importing textiles like pants, shirts, jackets, sweaters, swimwear, bed linens etc. from China in 2020. We research the products on Alibaba and then place the order with the manufacturing Co or trading Co. We paid each supplier directly through Alibaba and they shipped by DHL.

    Then we found a trading company who agreed to become an aggregator for us. We do all the research, and create a list for him. Let’s say 15 to 20 different products from different suppliers.

    We make one payment to the aggregator, he buys the products from the list we provide him, he puts them in larger boxes and then using a freight forwarder he ships them to us by DHL. Saves us on shipping one package at a time.

    Our orders are not huge. $5,000 to $10,000.

    I still don’t understand how the trader/aggregator makes money. I asked him and he said he makes money from the exchange rate difference between US$ and RMB. Is the exchange rate difference that big?

    If not, how does the aggregator/trader makes money? I asked him if the suppliers pay him a commission, he said no.

    So how do they make money? I want to know for the sake of greater transparency. I don’t mind him making money I just want to know how.

    I don’t mind paying him a percentage as long as that helps me get better pricing.

    1. I’d be shocked if he isn’t getting a lower price/’commission’. He could also be getting the VAT rebates from China (technically a discount IMO).

    1. Man, this is hard! I am extremely paranoid about carrying chinese products, or going through a trader to get stuff dropshipped from my webstore.

      I wish i didnt have to get a test item from the factory, or who im talking to on alibaba.. any reccomendations on legit businesses on alibaba for good- same as pic quality items for a landscaping business.. lights, garden, lawn, anything in that catagory would be amazing.. i dont have funds to buy items from there to stock.. too many items, too much of a hassle.

      If i buy lighting from a us suppier, its the same as in the pics.. just everything is 100% trust type deals.

      I may not even use alibaba, unless you can point me to 100% top notch people in every regard..

      Even return policies ect that are quick, easy, and good to go would be nice.

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