China Sourcing Negotiation Contracts and Payments

Avoid middlemen in your China supply chain and save on all fronts

There are good agents and bad ones. The good ones add legit value, the bad ones cause problems. For the sake of this article, a “bad middleman” or “under-performing agent” is an intermediary who provides little value (or sometimes negative value!) in the supply chain, perhaps only playing match maker but building in a margin.

Having an intermediary is not always a bad thing, but far too many middlemen actually provide negative value in the supply chain!  Because they don’t know their options, many importers are paying brokers, agents and middlemen a commission to actually mess up their China supply chain!

These bad brokers get paid to lose money for the client! The reason it happens so often is two-fold:

1. Sufficient research was not conducted by the client when selecting an agent to represent them in China. Essentially, they have picked the wrong partner.   It’s not fair to place all the blame on the buyer, as many of these agents have a very slick marketing message. Plus, most business people simply don’t have the in-house experience to know what questions to ask when engaging an agent on the other side of the world.  They don’t know how to separate the good agents from the bad one.

We’ll offer solutions in this blog post.

2. Agents have all sorts of tricks and techniques to lock the client in for the long term. So the client can’t leave, even if they want to. Here are three common examples:

a) Buyer doesn’t know the identity or location of the actual manufacturer. So they can’t go factory direct and cut out an under-performing agent.

b) Tooling and other upfront costs are paid by the client but the ownership of this tooling remains with the agent.  Bad idea!  You paid for it, but can’t move it if the agent messes up.

c) The agent will convince the client that problems with quality, lead time, price are the “client’s fault.” Because the client may not have experience dealing with China, the agent is able to convince the buyer that their expectations are unrealistic in China. When in reality, the root cause is actually the agent’s inability to get the job done in China. And that leads up to the next big question “why can’t these agents get the job done?”

Why do agents fail to improve costs, quality & lead times?

Here are the three most common traits found among buyer-agent relationships that have failed. 

1. Great marketing- Horrible service

If the client doesn’t have any China experience, then even an agent with just a tiny bit of China experience is going to look like an expert in the eyes of the client.  You shouldn’t put your agent up on a pedestal just because he was an exchange student in China for a few months! Just because your agent is Chinese or speaks Chinese, doesn’t mean they know how to manage people, projects or supply chains!

It’s so easy for startup agents to make a nice website, attend some trade shows and buy some Google adwords.  Marketing skills do not equate to sourcing skills!

2. Too much product knowledge – Too little sourcing skills

Buyer of technical, complex or customized products, often make the mistake of engaging agents based solely on their product knowledge. The result is that the representative on the ground is very familiar with the product but lacks the China-side understanding. This problem is particularly evident when the sourcing agent is a “one man band”. 

At the end of the day, it’s you, the agent’s client,  that has the deepest product knowledge. You may be in for a rude awakening if you are assuming an agent on the other side of the world knows your product and your customers as well as you do.  So I would encourage you to find an agent that has strong account management and customer service skills plus a clear track record of completing complex projects in China. Even if those projects have somewhat different BOM from your own.  

An agent can be trained up on a new product or technical feature in a short period of time. But it takes years to develop general sourcing skills in each of the key areas: negotiation, contract law, quality systems, project management, leadership, IP protection and especially language skills. 

3. Their interest is aligned with the factory not the client.

We will cover this problem in detail later in the blog post.

Are you really going factory direct?

Are you really going Factory Direct in China

You would be surprised at how many buyers think they have established a factory-direct relationship when in reality they are dealing with an intermediary.  Here are some tips and red flags regarding middlemen and how to spot them:

  • Assume they are middlemen until proven otherwise!
  • The most common spin you will hear from the western middlemen is that “they leverage their overall buying power to help you get the best price with the factories they have pre-qualified.” 99% of the time this is not true and is simply a slick sales message to make the buyer feel safe and keep you at arm’s length from the factory.
  • Chinese middlemen may even say that they “own the factory”, but when it comes to factory visits you hear excuses like “the power is off” or “let’s just meet at our HK sales office” in hopes you never get to see the production base.
  • Avoid suppliers that refuse to list the name or location of the production facility.
  • Be aware that polished English skills do not reflect manufacturing skills. Often the most polished websites are set up by trading companies.
  • Be aware that Chinese language skills do not necessarily reflect China sourcing skills. Just because somebody speaks Chinese, doesn’t mean they understand quality systems and know how to manage supply chains!
  • Ask for ownership papers of the agent. Do they have hidden partners with hidden agendas?
  • Be explicit that the production location may be audited by you in person and that this location cannot be changed without approval from buyer. Tricky middlemen will take the buyer on a visit to a nice factory only to change the location to a less expensive and poor quality option after the buyer leaves!
  • Most important: If the intermediary is not transparent in where their margin lies, then most likely the actual value  for their inspection or project management service has been greatly inflated. Before you sign up with an intermediary simply ask that they separate the costs for their “service” from the “production costs”. If they fight this, then you know they are trying to hide the fact that their actual value to you is minimal.

Hidden dangers of letting the agent introduce a supplier for free

Wake up. Nobody does anything for free. There is always a catch when a valuable service is provided for “free.” Here is an insider’s look at what is really happening behind the scenes.

1. Many agents claim to be independent, but behind the scenes they have close relationships with certain factories. Essentially they are the sales team for the factory rather than the buyer’s representative.

2. “You get what you pay for”. They don’t plan to conduct in-depth research on a national level. If someone is providing research for free, they may not be as conscientious about understanding your goals and helping to find the right supplier. Keep in mind that finding the right supplier is the single most important factor in determining if your project will succeed or fail.

3. In exchange for doing the supplier selection for free, they won’t disclose the identity of the factory and will build in a hidden mark up on the production.  If they do not disclose the actual manufacturer, then you have no way to validate the quality process in place and you have lost control over who has access to your intellectual property. They plan to cover the internal costs of the initial research by charging you an inflated per-unit cost once production starts. In the long run, the buyer pays too much.

In China quite often the “for free” model is the most expensive in the long run. 

“Can I trust the China sourcing agent if I am paying them a commission to represent me?”

Unfortunately, even if you pay a company in China to represent you, you can’t automatically assume they are looking out for your best interests. It is common in China for trading companies to milk both ends, in other words charge the buyer for a research fee or commission while getting a kick back or other commission from the supplier. Therefore, you must perform due diligence on your research partners as well. I know it sounds crazy, but in the China sourcing game, you need to do due diligence on the agents you are hiring to do due diligence on the suppliers!

How to find an honest and affordable buyer’s agent in China?

When considering an agent in China, make sure you ask about the following:

  • ownership
  • formal service agreement detailing compensation structure & services to be provided
  • client references
  • non-compete clauses
  • research methodology
  • full disclosure of sub-supplier pricing and identity
  • company history
  • warranty terms 
  • plan for protecting your intellectual property

Ideally they understand the importance of trust and transparency, so it’s absolutely clear where compensation comes from and that the agent’s interests are 100% aligned with the buyer. 

Conclusion

On the surface, in order to have more perceived value, the agent may claim an intimate relationship with the factory, but if they don’t allow you to communicate directly with the factory, then you are dealing  with a middleman. If the intermediary is providing legitimate value (for example logistics, project management and/or quality inspection) then perhaps there is a place for them in the supply chain. Perhaps I’m jaded after 20 years of doing business in China, but I assume the worst until proven otherwise when it comes to agents, brokers and middlemen.

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