Trading Company or Factory: Which Chinese Supplier Should You Use?May 20, 2018 in Blog, China & Culture, Importing
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.
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.
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.
|Less variety of products
|Trading Company||More variety of products
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.
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 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.