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December 5, 2008
7 Min Read
Things are not always what they seem in China. One manifestation of that is an animal encountered by many of us who buy tooling in China—the “trading company.”
What is a trading company? In general terms, it is any business that makes its living by buying and reselling goods, usually across borders. In terms more specific to the Chinese tooling industry, it is a business that sells tools that it purchases from Chinese manufacturers to customers located in developed countries. In order to understand the trading company, the role it plays in the export tooling trade, its plusses and minuses, and how to recognize one, it is useful first to consider some important facts about the tooling industry in China:
1. The Chinese tooling industry is vast. In Guangdong Province alone, home to more than 100 million people, there are thousands of tool shops, ranging from the massive and sophisticated corporation with thousands of employees to the family-run, one-room shop with one Bridgeport knockoff and an old grinder.
2. As is implied by the prior statement, the level of capability in China’s tool shops ranges from very basic to extraordinary (Please note: Great capability and large size do not always go together, but frequently do.)
3. Most of these thousands of tool shops have no English capabilities, and not a clue about how to reach out to the export tool market.
4. There is a world of difference between toolmakers that primarily serve the domestic Chinese market and toolmakers that primarily serve the export market (for much more on this, see “Sourcing injection tools in China: The two types of Chinese moldmakers”). In this article, we are dealing with export moldmakers, of which there are also two general types.
The two types of export moldmakers
A. The poor marketer. The lowest-cost export tools in China are made by small and medium-sized shops with the lowest level of marketing capability. Typically they are owned by mainland Chinese, have no sales and marketing staff, poor English capabilities, and extremely low overhead. The lack of marketing sophistication doesn’t necessarily imply a lack of engineering and manufacturing sophistication. However, such shops need a third party to provide a link to the customer; they can’t get there on their own.
B. The good marketer: The highest-cost export tools in China are made by large-sized shops with strong in-house marketing capability. Typically they are Hong Kong- or Taiwanese-owned, have their own sales and marketing people (also usually from Hong Kong or Taiwan, and therefore more expensive), with strong English skills, and as a natural consequence of those factors, their overhead structure is very expensive. Such shops maintain a direct link to their customers.
The role of the trading company
The good marketer doesn’t need the trading company. The poor marketer does. The trading company provides a link from the poor marketer to customers in the developed world, primarily North America, Europe, and Japan. As such, trading companies perform a very useful function, but how do the economics of this arrangement actually work?
As mentioned earlier, there is a big gap between the cost structures of the poor marketer and the good marketer. The trading company exploits this difference. Using hypothetical numbers, a tool that costs $50,000 if manufactured in North America might cost $40,000 if made by the good marketer, and $25,000 if made by the poor marketer. The trading company buys the tool from the poor marketer, resells it to its customers overseas for $35,000, and can still be cheaper than the good marketer.
You might believe that the poor marketer is being ripped off by the trading company, but the former really has no other way of getting to market. The trading company’s customer is happy, as they are getting a less expensive tool in any case. So all is well, right? Perhaps.
The darker side of the trading company
There is a darker side to this whole business, and that lies in the approach that many trading companies take with their customers: They pose as manufacturers. You may receive an e-mail boasting of the capabilities of “our” plant. You then visit a website, where you may see a beautiful factory with the latest European- and Japanese-made equipment. You follow through with a visit to China, and may even find a real facility (that may look a little like the photos), and a smiling, eager program management staff. Yet everything is a hoax, and the company you think you are visiting is not at all the company you are actually visiting.
The fact of the matter is that a large minority (probably an outright majority) of the companies marketing to Western companies and claiming to be manufacturers of tools in China do not own a single hard asset. The head of our Shenzhen office, Henry Yi, has told me that he believes there are hundreds of trading companies operating as pseudo-manufacturers out of Shenzhen alone.
You may ask, “If I am getting the tools I need at a price I like, why should I care?” You should care, for three reasons:
1. First and most importantly, there is trust. If you are being misled about the fundamental nature of a key supplier, how can you be sure you will get the straight story about quality and timing during the tool build? How can you be sure your tools are even going to be built at the factory where you think they are going to be built? Explaining away lies as “cultural differences” is a cop-out and an insult to the large majority of Chinese business people. You deserve honesty from your suppliers, regardless of their geography, so demand it.
2. If the trading company doesn’t control the assets, can it deal effectively with a quality or timing issue if it arises? The answer may be “yes” if the trading company does a lot of business with the manufacturer, and therefore has a lot of leverage, or the answer may be “no.” There may be no way to find out which is the case until it is too late.
3. Obviously, you are paying a margin to the trading company over the price they are paying for the tool. That may be OK if the final price to you is still good and the trading company is providing value-added services. Make certain that they are. You should expect to get outstanding communications including frequent regular updates, technical assistance, and help with onsite visits if required. Most importantly, you should be getting a meaningful warranty, backed up by a 100% cost reimbursement guarantee, just as if you were buying the tool in the United States or Canada. If you are not getting all of this, you are paying more than you should for a tool and getting nothing for it.
It is very easy to start a trading company to sell tools, and fast and easy to set up an impressive website by pirating language and photos from legitimate businesses. Make sure the company selling you a tool is more than just one guy, a desk, and a phone. Behind the impressive-sounding name of something like “Ever Prosperous Tool & Die” may be one ambitious young tooling engineer with a talent for English. He may sound like a nice guy on the phone and in e-mails, but his warranty won’t be worth the rice paper it is written on.
So remain alert, manage your tool suppliers closely, and demand of them everything in terms of services and candor that you would expect of a supplier based in North America.
Author Carlton Harris ([email protected]) is president of Asia Tool Source LLC (ATS; www.asiatoolsource.com), a U.S.-owned sourcing company with several lines of business: procurement and program management services for customers wishing to buy plastic injection, rubber, or metal stamping tools in Asia; rubber parts sourcing; and full box build and packaging services of consumer products.
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