Pros and Cons of Sourcing Products from Hong Kong Trading Companies

16 JUNE 2019

Hong Kong was the world's 7th largest trading entity in goods in 2018. Given its geographical location, well-developed financial services and international outlook, Hong Kong plays an important entrepot role for the trade between the Mainland China and the rest of the world.  In 2018, the value of goods re-exported through Hong Kong from and to the Mainland was US$467.6 billion, accounting for 89.1% of Hong Kong's total re-export trade value.

Today we'd like to talk about the Pros and Cons of doing business with a Hong Kong entrepot trading company.

Pros

  1. One-stop Shop for a Wide Range of Products  - A Hong Kong trading company is a one-stop shop designed to deliver a broad variety and deep assortment of products. This is probably the biggest advantage of working with a Hong Kong company who does all the footwork for you in terms of market research, quality inspection and cost analysis.
  2. More Competitive Price - Hong Kong trading companies often work with smaller factories that have lower prices than some easy to find competitors online.  They have little overhead and enjoy tax-free profits, which enables them to work on very learn margins, usually around 0.5%-2%.
  3. More Flexible on the Minimum Order Quantity - They accept low quantity orders. Benefiting from long-term relationships with their suppliers or having product stock on hand, they're able to offer lower order quantities.
  4. Better Customer Experience - Flexibility is the cornerstone of a trading company. They understand customer services more so than factories. They are willing to go the extra mile while the factory sometimes won't. Whether choosing a special specification or a unique design, a Hong Kong trading company can find solutions to meet your special needs.

Pros

  1. One-stop Shop for a Wide Range of Products  - A Hong Kong trading company is a one-stop shop designed to deliver a broad variety and deep assortment of products. This is probably the biggest advantage of working with a Hong Kong company who does all the footwork for you in terms of market research, quality inspection and cost analysis.
  2. More Competitive Price - Hong Kong trading companies often work with smaller factories that have lower prices than some easy to find competitors online.  They have little overhead and enjoy tax-free profits, which enables them to work on very learn margins, usually around 0.5%-2%.
  3. More Flexible on the Minimum Order Quantity - They accept low quantity orders. Benefiting from long-term relationships with their suppliers or having product stock on hand, they're able to offer lower order quantities.
  4. Better Customer Experience - Flexibility is the cornerstone of a trading company. They understand customer services more so than factories. They are willing to go the extra mile while the factory sometimes won't. Whether choosing a special specification or a unique design, a Hong Kong trading company can find solutions to meet your special needs.

Cons

Under normal trade, the parties signing the sales contract directly complete the handover of the goods. Under the Entrepot Trade, the goods are transported directly from the producing country to the consuming country, but there is no trade connection between the shipper and ultimate consignee. Instead, an intermediary trading agency signs purchase and sales contracts with the producer and the importer respectively, and the trading agency earns the bid-ask spread.

In most cases, the Hong Kong Sellers are Entrepot Trading Agencies who have no real assets. The Seller is no more than a small office with a phone and computer and sometimes a few sales staff.  All the productive assets are in the hands of companies located in the PRC with no direct legal relationship to the Hong Kong entity. Trading or contracting with a HK company without considering the legal relationship to the Mainland factory could sometimes jeopardize your operations due to the following risks:

  1. Warranty Claim Risk - Although the Hong Kong Seller signs a back-to-back contract with its own supplier in the PRC, it largely depends on the manufacturer's good will to back up the warranty claim. In case the manufacturer refuses claim, the Hong Kong Seller does not have the financial means to back up the claim in terms of parts and labor. If things go sour between the seller and the manufacturer, the seller also does not have the resources needed to litigate in Chinese courts.

  2. Losing Control on Late Delivery -If the actual supplier delays the delivery of goods, the Hong Kong trading company shall bear the responsibility to the importer according to the sales contract. However, the Hong Kong company as an intermediary agency has little control over production. In most cases they don't have enough margin to cover later delivery penalty.

  3. Capital Risk - A Hong Kong trading company must purchase the products from their suppliers at a reduced price. But sometimes price volatility is inevitable due to a large fluctuation in the currency or time delay in a triangle contract signing process. When trading margins are under pressure, companies are looking for alternatives to improve margins. The worst case scenario can be losing the down payment paid to the Hong Kong Seller whose margin does not allow to sustain completing the transaction.  

Nowadays business intelligence is vital to international trade success. Before making the right decision, the first thing you need to do is to conduct a 360-degree background check on the companies you plan to work with. With the right business intelligence tools, commercial risks can be minimized by using forecasting techniques and keeping a careful watch on the changing business conditions.

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Jamsine Song

Head of risk analysis @ tiidan

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