China lawyersIn part 1 of this series, we looked at the pros and cons of using an intermediary between you and your China manufacturer. As regular readers of this blog know, we are generally not big fans of China sourcing agents. It is not that we think they never have value — because they often do. It is just that there are so many bad ones out there. I often describe China sourcing agents with the following: “Ninety percent are crooks or incompetents and most are both of these things. But ten percent are worth more than their weight in gold.”

What makes a China sourcing agent part of the elite ten percent and how do you find that person or company? Why even bother trying?

Way back in 2013, in How to Find Your China Manufacturer, I discussed some of the issues that can arise when using sourcing agents:

Engage an intermediary (trading company, sourcing agent or factory representative) to conduct this research on your behalf. This you are going to have to pay for, one way or another. Some of these companies charge you an upfront flat fee for the work. Some charge a percentage. Some charge a set amount for the product and then buy it for less from the manufacturer. There are pluses and minuses to all of the payment methods, but generally, the more you pay early, the less you will pay in total.

Some intermediaries are invaluable. Others are completely incompetent or, even worse, flat out crooks. Some do not even reveal that they are acting as an intermediary, leading you to believe you are dealing directly with the factory.

It should go without saying that you should first determine whether you need an intermediary and if you do, you must choose that person or company very carefully. What does need to be said though is that if you are using an intermediary, your contract with your intermediary and the contract with the manufacturer should mesh and should be written so as to protect you, and not your intermediary or your factory. Far too often companies come to us with bad product and upon reviewing their contract with their intermediary and the purchase orders between the intermediary and the factory, we have to tell them that they have no chance of any remedy.

How do sourcing agents charge and how should they charge? Some charge a large upfront flat fee to find your China manufacturer and to negotiate terms with that Chinese company. Some charge a percentage of your manufacturing transactions for some set period of time or a some set number of transactions. Some tell you that they will charge you X dollars per widget and then they find a great Chinese manufacturer who charges them X minus Y and their profit is that difference. This last category is technically more of a reseller than a sourcing agent and they usually step in for the manufacturer and guarantee the quality and timing of your purchase. Some do combinations of the above.

The best payment method for you will depend on your own individual situation. Speaking broadly, if you don’t have much money to spend, going with one of the last two methods will likely make the most sense. The key though with any pricing arrangement is that your sourcing agent be straight with you.

The problem with all sourcing arrangements — especially the first two described above — is that it is so easy for the sourcing agent to go cheap with your Chinese manufacturer and then split the “savings” with the Chinese company, without your ever being the wiser. The Quality Inspection Blog just wrote about this problem in the The Danger of Choosing a “Cheap” Chinese Factory;

 

It is still possible (and not all that uncommon) for your intermediary to strike a side deal with your China manufacturer to get a 5-40%+ secret commission on every sale. If your intermediary does have a side deal with your manufacturer, it also has incentive to use a too-cheap manufacturer so as to be better able to hide its secret commission from you. Too-cheap manufacturers are more likely to have quality control and delivery problems.

I wrote about hidden commissions before–-it is considered normal and to be expected.

In addition to the hidden commission, sourcing agents generally get paid a percentage on the total order value, contingent on the fact that the order gets shipped and paid. It means they have an incentive to see the order go through. A high price obviously makes it harder for the purchaser to place the order (and it will take longer to that that order approved), therefore it is to be avoided.

The post goes on to rightly note how “many factors will push you in the arms of cheap suppliers, and it might not be in your best interest.”

But enough about how bad sourcing agents can be. What does a good sourcing agent bring to the table and how do you find such a sourcing agent and what do you do once you have one.

A good sourcing agent will accomplish some combination of the following for you, depending on your own priorities:

  • Find you a China manufacturer that can make your product, or tell you that is not possible.
  • Find you a China manufacturer that can make your product at the quality standard you need, or tell you that is not possible.
  • Find you a China manufacture that can make your product at the price point you need, or tell you that is not possible.
  • Not cause you to lose your vulnerable IP at any stage of the process. This means your sourcing agent should either not reveal your IP or turn you over to legal counsel to protect it.
  • Continue working with your Chinese manufacturer after it has been chosen to ensure high quality or even to ensure that your products are evolving to meet changing technologies or demand or whatever.

There are a lot more things that good sourcing agents do beyond just the above, but this list should be a start.

How then do you find the right sourcing agent? How do you find a sourcing agent “worth more than their weight in gold?” The best way I know, unfortunately, is word of mouth. I say “unfortunately” because this means you already have to have in place or at least know someone who works with China manufacturing enough to be able to make you a recommendation. Our firm has a long list of good sourcing agents, divided up by the type of product to be sourced (we don’t recommend someone on the medical devices list to someone making socks and we don’t recommend someone on the clothing list to someone making an Internet of Things product) and by the way they charge. I assume that other China attorneys that do a steady stream of China manufacturing work have similar lists. Logistics companies can be another good source. China entry consultants and those with a long history of having their own products made in China can also be good referral sources. Just start asking and digging, but do so.

In the third and final post of this series, I will discuss the contractual issues that can arise when using a sourcing agent to have your products made in China.

Do you use sourcing agents? How did you find them? How have they worked out?