How do you know if a supplier is a trading company?

How do you know if a supplier is a trading company - production experience?
How do you know if a supplier is a trading company?

Red Flags will arise when doing your due diligence in investigation of a business to make sure your supplier is not a trading company.

This article is second in a series Why should you assume that all potential suppliers are middlemen? ... and we are going to talk about how do you know if a supplier is a trading company?

Assuming that you want to go factory directly and the people you’re working with are telling you that they’re a factory, here some red flags that they might not really be the factory.

Avoid “factories” that refuse to list the name or location of the place of production

Example:

We were doing some research early on in my career; we were buying a doll.  I found three suppliers in Guangdong province, which is the province that I live in—the city of Shenzhen.  They were all about three hours away.  The first supplier we found was clearly a factory.

  • Their website looked great;
  • they had a lot of detailed information;
  • they even had their business license that I checked out in advance.

I was really sure that the first company was a factory.  So I got in the car and drove three hours one way, we had a great visit, the price was okay, we came back.  Six hours in the car, just to go talk to this doll factory.

My assistants did some research, and they had two other options for me to visit.  We weren’t sure if they were factories or not.  I kind of had reservations, but the second option offered to give us a really good warranty term.  God forbid, something went wrong with the dolls we were buying, they would replace them.  And the third company that we found had a really low price, so I thought “Okay, it’s worth going to visit”.

Red Flag Alert: The supplier wouldn’t tell us where the location was. Trading Company?

So on day No. 2—they wouldn’t tell us where the location was, which was a little fishy—the “factory owner” came to pick me up. He picked me up at the office, we drove once again for three hours, and I was starting to recognize the highway, the scenery, and exit was the same.  And sure enough, we pulled into the parking lot of the factory that I visited the day before.

Red Flag Alert: Be explicit that there eventually may be a production location audit

I told him “I was here earlier.  I want to go to the factory directly.  You’ve offered some interesting terms, offering the warranty and preferential payments, but I can probably get those from the factory as well, because my order volume is the same whether I place it with you or them.”  So the supplier is a trading company and kind of disappointed.  They had been exposed and they knew I wanted to go to the factory directly.  They did kindly take me all the three hours back to Shenzhen with their tail between their legs.

Red Flag Alert: The price looks almost too good to be true. Scam?

And then the next day, I thought “Okay, that wasn’t a good experience, I know I found a factory that’s reliable.  I can probably go with that, but let me do some extra homework.  This third option, their price looks almost too good to be true.  But if it is true, I can make lots of money.”  So once again, they wouldn’t tell me the address, they came and picked me up, and just like day No. 2, I’m starting to see the same scenery, the same exit.  I said to myself “Oh my God I just drove another three hours to go to the same factory.”  So here were two trading companies representing the same factory, telling me that they were the factory, that they were the owners.

Red Flag Alert: Be explicit that there eventually may be a production location audit

This third option, the reason the price was so low—as I later found out—their gimmick, their trick was to give this low pricing to get foreigners interested, show them this factory, and then try to get the deal, and later find every excuse to raise the price.

I’m so glad that I did my homework, and I found the real factory.  There were three companies purporting to be the factory.  Of course only one was legitimate; the other two were fakes.  Not fakes, trading companies but “implying” they are factories.

So, like I said, assume everybody is a middleman until proven otherwise.  And avoid those factories that won’t tell you where the address of their factory is.  If they’re the real factory, they’re happy to tell you.  “Here’s the Google Map address, here’s the GPS coordinates.  Come and see our factory.”  If they’re not the real factory, every excuse why you don’t know the address and then they bring you along, hold your hand, and manipulate the situation, hoping that you don’t realize that it’s not actually their factory.

If you are planning to do business with the Chinese suppliers in the future or in a current negotiation you may consider engaging ABL for due diligence as the above red flags would have certainly been discovered and also consider the contract review after to get protected based on China law.

In the next blog post, let’s talk in detail about what does it mean when the supplier supplies a large range of products….

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About the Author: Michael J. Bellamy

About the Author: Michael J. Bellamy

Originally from Upstate New York, Mike moved to Asia in 1993 and is a China business advisor to both Fortune 500 companies and small businesses.  Recognized as an expert on doing business in China, he has been interviewed by WSJ, CNBC, FT & Bloomberg.

A featured presenter on China issues at seminars, trade shows and corporate events across the globe.

Learn more about Mike and AsiaBridge Law at
https://www.asiabridgelaw.com/business-advisory-services/

Mike is the author of “The Essential Reference Guide to China Sourcing
(available on Amazon).

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