I read an article that you wrote about working with trading companies and the advantages of going direct to the factory. However, I had understood that there was a structural problem on the Chinese side, that to export you needed a special license which is not easy/inexpensive to get, hence the need to use a trading company. Is that not the case? Have I been misinformed?

Answer

In the past (as recently as 10 years ago), it was indeed hard for a manufacturer to get an export license and thus trading companies were often engaged by the manufacturer to export the product. But as China has opened up in past years, especially since joining the WTO, most professional manufacturers who have clients overseas organize their own export license, since engaging a 3rd party adds costs. However, there are some special cases-

1. If the manufacturer is newly opened or small scale, they may not have made the investment in time and capital to get their own export license. Also, during the first years of a new company, they are generally classed as “small scale tax payer” and only once they have a track record of paying tax and exporting well, does the government move them to “normal tax payer” status. Once at normal tax payer status, they can get the full VAT rebate at export. Since the trading company may be mature and at normal tax payer status, it sometimes saves money in the beginning for mfg to outsource the export if the mfg is small or recently opened.

2. A hand full of sensitive industries (national security or dangerous materials) are highly regulated and a trading company may be required. But those industries are few and far between.

Word of caution-
a) If a trading company is telling you that you must deal with a trading company and can’t go factory direct, it is probably a sales pitch rather than the truth. Especially if they won’t tell you where the manufacturing is actually taking place. Keep in mind that if you find a manufacturer you like, and they don’t yet have their export license, you can always work with them to find a trading company to arrange the exportation in a transparent fashion. For example,PassageMaker provides this service. In short, put your energy on finding the right supplier first as the suppliers ability to meet the price and quality and lead-time you desire is most important.

b) Having said that, be cautious of new or small manufactures that don’t have their own export license as they may lack experience exporting and you don’t want to be the first client that they test out their ability to manufacture to international standards. Ask for client references and do your due diligence. If you need a 3rd party to Audit their QC systems, keep Asia Quality Focus in mind. I highly recommend CBI Consulting for financial due diligence to determine if the supplier is of good reputation and financial standing. Don’t forget to pay attention to the # of years they have been in business too. For example, if you do a search on Global Sources , focus on suppliers that have a track record of selling overseas, have been established for a few years at least and have a decent star ranking in the Global Sources verified supplier list. If you prefer to outsource the entire process of finding and managing vendors, know that companies like Silk Road International and PassageMaker can be of service.

I hope the information above is of value to you. Let me know if I can be of further service. Best wishes on your China sourcing.

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