When you start manufacturing in China, you'll hear three terms used almost interchangeably: contract manufacturer, sourcing agent, trading company. They are not the same, and confusing them is how you end up paying a hidden markup to a middleman you thought was the factory. Here's what each actually is and how to tell them apart.
The three definitions
Contract manufacturer (CM). A factory that builds your product to your design. They own the production lines, the SMT machines, the workers. You control the relationship directly — your engineers talk to their engineers, your money goes to the people making the product. Best for stable designs at volume where you want maximum margin and direct control.
Sourcing agent. A person or firm that finds factories, negotiates, and manages production on your behalf. They don't own a factory; they work for you and (if honest) charge a transparent fee. Their value is access, language, on-the-ground QC, and catching problems before they ship. Best when you don't have a team in China and can't fly out for every issue.
Trading company. A reseller. They buy from factories and sell to you at a markup, and they control the factory relationship — you never see who actually builds your product. Sometimes legitimately useful for tiny orders or consolidating many small SKUs. Often a hidden margin with no QC value.
Where the money is — and who hides it
The real difference is margin transparency.
A good sourcing agent charges a stated fee. A reasonable model is a 5-8% commission on order value (with a floor, e.g. a $500 minimum per order) — you see the factory's actual price and you see the fee. Nothing hidden.
A trading company makes its money by not telling you the factory price. Their markup can be 15-30% buried in the quote, and because they sit between you and the factory, you can't benchmark it. On a $50,000 order, a 5-8% transparent fee is $2,500-4,000; a 25% hidden trading markup is $12,500. Same order, very different cost — and with the trading company you can't even see it.
Which makes sense by volume
- Under ~$3,000 / many tiny SKUs: a trading company or consolidator can be the pragmatic choice; agents and CMs often won't bother.
- First runs, $3,000-100,000, design still moving: a sourcing agent earns its fee — finding the right factory and running QC is where orders go wrong.
- Stable design, high recurring volume: go direct to the CM and cut out every intermediary.
How to tell a trading company posing as a factory
This is the most common trap. Ask these questions — a real factory answers them instantly; a trading company gets vague:
- "What's your factory address and can I video-walk the line right now?" Real factories show you. Traders stall or show a generic "showroom."
- "Which other products do you make on this line?" A factory has a focused capability; a trader "makes" everything from speakers to kitchenware.
- "Can you do a DFM review on my schematic and BOM?" Engineering answers come from people who build; resellers deflect to "our engineers will check."
- "What's your business license scope and registered capital?" Manufacturing scope vs. "import/export trade" on the license is the tell.
- "Who do I pay, and is it the same legal entity that makes the product?" Mismatched names = a layer in between.
If the answers are evasive, you're talking to a middleman, and you're paying for it.
The action
Before you place an order, decide which of the three you actually want, then verify it with the questions above. If you can't be on the ground in Shenzhen yourself, work with someone whose fee is stated up front — an engineering-led agent like China Sourcing Agents, run by a hardware engineer who reads BOMs and audits factories in person on a transparent 5-8% commission, gives you the agent's access without the trading company's hidden markup. The factory relationship and the real price stay yours.
Top comments (0)