Chinese factories are entities that produce parts, components, and materials for particular products. Chinese trading companies do not produce the actual goods; rather they partner with wholesalers or distributors who source goods from one or more factories.
Knowing the differences, advantages, and disadvantages of working with a factory versus a trading company can help you make informed decisions about the best choice for your particular business venture.
As you begin your due diligence in establishing a working relationship with a Chinese company, you’ll likely encounter early in your process the terms factory and trading company. In this article we explain the important distinctions between the two, how to identify one versus the other, and some advantages and disadvantages of working with each.
Chinese factory: Defined
Chinese factories produce various parts, components, and materials for particular products. Factories typically have some type of physical machinery that they use to produce those parts, components and materials, but the range of sophistication in the machinery in different factories falls across a wide spectrum. Most often factories will specialize in manufacturing particular parts and components for a limited set of applications, but it is very common for almost any Chinese factory to source components and parts from other factories.
- Lower prices
- Greater control over the product
- Direct communication with the factory
- Great ability for customization, fixes, and new model development
- Shorter lead times
- Higher minimum order quantities (MOQs)
- Smaller parts and components offerings
Chinese trading company: Defined
A Chinese trading company does not produce parts, components, or materials; rather, it sources these goods from one or more Chinese factories. Chinese trading companies are roughly equivalent to what we would call a distributor or a wholesaler. Decades ago, a Chinese trading company was the only way to import materials from China, but with China’s expansion as an economic power, there are other options for procuring parts, components, and materials from China.
- Ability to source a wide variety of parts, components, and materials from one or more factories
- Ability to source difficult to find parts, components, and materials
- Can offer additional services such as sourcing, quality control, inspection, and customer service
- Smaller MOQs
- Higher prices due to mark-ups
- Less control over production
- Lack of transparency to gauge the quality of the actual factory making the goods
- Loose liability protection in case of defective goods
- Some offer little to no additional value when they just buy and sell products
Verifying the status of a Chinese entity: Factory vs. Trading Company
There are numerous methods you can use to verify if the entity with which you are working is a Chinese factory or a Chinese trading company. As with most due diligence exercises conducted when researching Chinese businesses, it’s always prudent to use more than one method or technique and approach your work from several angles. In addition, when reviewing official Chinese business documents, you’ll need to examine them closely for potential forgery or alteration.
Below we list several methods for verifying a factory or trading company.
Check the Business License
All companies in Mainland China conducting business are required to have a valid Chinese business license. While this document will indicate whether the entity is a factory or a trading company, it may not indicate if that entity is qualified to produce your parts and components (if a factory) or be able to procure them for you (if a trading company). To verify that component, you’ll want to examine the business scope area of the business license, or (经营范围 – Jīngyíng Fànwéi), that indicates the company’s category and what parts, components, goods, and materials it is authorized to offer.
Check the company’s registration record against the SAIC
Reviewing and validating company’s registration record remains a critical step to verify the type of entity. These records are available from the State Administration of Industry and Commerce (国家工商行政管理总局 in Chinese), often referred to as the SAIC. The SAIC is a national administrative body with many regional, provincial, and municipal bureaus that regulate commerce and industry activities in their respective jurisdictions. An SAIC office provides you with important information about the legitimacy of a Chinese company, most critically, its official registration records. This document is an excellent cross-check against the business license and business scope materials.
Check the company’s ISO-9001 Certification
The China ISO 9001 certificate is a document that indicates approval of the Chinese company’s quality management system. A valid ISO 9001 certificate indicates that the company can provide products and services in a consistent manner that meet or exceed both customer and regulatory requirements. You should use this document only as an ancillary point of validation, as they sometimes are easy to forge.
Ask a Technical Question
A direct method of verifying if the entity is a Chinese trading factory or a Chinese trading company is to ask a technical question about the product and gauge the response. If there’s a delay in the response by several hours, chances are you are dealing with a Chinese trading company that is not the actual end manufacturer.
Mention you plan to visit the factory or facility
Another sure-fire way to add to your bag of verification techniques is to mention you plan to visit the actual factory at a date in the near future. If the entity is a true Chinese factory, it will welcome you for a visit to its operations. (Be sure to press for an actual factory visit, not a meeting in a conference room). Reluctance or refusal of such a visit is a warning sign that the entity is not a factory, and is indeed a trading company.
Schedule a video call with engineering or other product managers from the factory to review product requirements
While you may need a translator to conduct a video call, holding a meeting where you can ask questions about the production process, testing, or other capabilities can easily reveal the entity’s knowledge level and its ability to showcase its equipment. You also can ask for those individuals to walk around the factory floor and provide video evidence of its operation. A failure to do so also rings an alarm bell that the entity may not be a factory.
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