In China, there are two basic types of suppliers that you will find: trading companies and factories.
What is the difference between these two types of providers? In this article we will address the differences between these two and when you should use each.
Factories in China
A factory in China is exactly what you think it is: it is a factory that produces various products. They normally have some type of machinery to produce these items, although the sophistication of that machinery can vary drastically. For example, imagine a textile factory that may simply have sewing machines as its main machinery compared to a metal counterfeit that has much more complex and expensive machinery. Factories almost always specialize in a particular type of product and material; that is, a textile factory would not also manufacture stainless steel products, since the machinery and skill set are completely different for each type of product.
Factories tend to have lower prices than commercial companies and you gain more control over your products as you are in direct communication with the factory in charge of manufacturing your products. However, factories have a much smaller variety of products and also higher minimum order quantities (MOQs).
A business enterprise does not actually produce any good. Instead, they source a variety of products from one or more factories (they often work with multiple factories). They are similar, although not identical, to what we would imagine in the West as a distributor or wholesaler. Their great advantage is that they can offer a wide variety of products. In the past, before the opening of China, trading companies were essentially the only way to import from China, but now everything has changed.
A good trading company will source hard-to-find products from hard-to-find factories (not all factories are on Alibaba!). If they are doing their job, they will also do some kind of quality control. The downside to a trading company is that they generally have higher prices than factories as they have a markup on the factory and you will have less control over the actual production of your products..
The difference between factories in China and trading companies is between a small line
One important thing to recognize in factories is that almost all factories source some components and parts from other factories. Imagine a textile factory that produces T-shirts. This factory probably does not produce the thread and fabric for the T-shirt, but they buy them from another factory and sew them. Especially when a product involves many types of complex parts (imagine an Apple iPhone, for example), a particular factory could be working with dozens or hundreds of other factories. Additionally, many factories will also outsource their work to other factories during peak hours.
If you work with a factory, it is important to understand what exact components of the product that factory actually makes.
How to identify a trading company or factory
When trying to determine if a supplier is a factory or a trading company, simply ask them directly if it is a factory or a trading company. If a supplier tells you that they are a commercial company, then you have a conclusive answer to your question. However, if they tell you that they are a factory, then you need to do a little more research, asking them specifically what exact components make the product.
Both trading companies and factories have a purpose for importers, but it is important to know when to use each type of supplier.