Finding the Best Product Manufacturers: OEMs vs Trading Companies

Finding and thoroughly vetting a qualified factory in your product category isn’t easy. To help, we’ve put together some basic guideposts to identify the two main kinds of product manufacturing companies out there—primarily original equipment manufacturers and trading companies—so that you can evaluate and find the right factory for your custom product.

In this post we share part of our Right Fit Factory™ Process which we use to help guide our clients to their winning factory. In this article you’ll learn:

Why it’s so hard to search for factories overseas
What the overseas manufacturing landscape looks like
The primary differences between factories and trading companies
How to distinguish OEMs from trading companies

The Challenges of Overseas Factory Searching and Vetting

The factory marketplace is overflowing with companies all loudly vying for your business. Navigating the options can be overwhelming, especially if you haven’t built up a network of overseas contacts.

False starts with unqualified suppliers is the top reason we're sought out for our factory search and product development services; we’ve heard and experienced it all. Here’s why it can be so difficult to search for factories overseas.

Reason #1: Some factories aren’t actually factories.

In a pool of hundreds of potential overseas suppliers in your product category, your first big challenge is sorting out which ones are making original, quality products and which ones are simply buying and reselling those products to others.

The latter is often called a reseller or a trading company, and they differ in many ways from a traditional factory. Not only in how they operate, but in who they serve, how they turn a profit, and how they would approach making your product.

These are the businesses that rely on being the go-between, or middleman, of the manufacturing industry. They are similar (though not identical) to wholesale distributors in the U.S. But the trouble is that trading companies will advertise their services much like factories do—and it can be nearly impossible to tell the difference without knowing what to look for. They will often try to convince you of their capabilities, even if they lack the specialization required to deliver on those promises.

Reason #2: Many factories don’t want to deal with you directly.

Finding a direct contact at the factories—and skipping the aforementioned trading company “middlemen”—can get complicated due to differences in how manufacturing industries are set up in various parts of the world. Connecting with the right people at the right factories can be a long, arduous process.

To start, many factories are not listed in the most common company directories, and others expect you to go through their preferred agents or reps on websites like Aliexpress, Alibaba, Taobao, and/or Tmall. When you go through these sites, asking for a direct company contact is futile. This is especially true in China. There, relationships come first—and the system is set up so that every level gets a piece of the pie. We’ve seen product makers take years to get into a factory simply because they didn’t understand how the system worked. Finally, factories may also have limits set up—like prohibitively high order minimums—that make it hard to work with them unless you go through a reseller.

Reason #3: Vetting factories from far away is challenging.

Critical to the success of any manufacturing project is working with a well-qualified, reliable, and honest supplier. Finding a factory and evaluating the quality of their work is already a challenge when you’re in the same country. Throw in a steep language barrier and a supplier halfway across the world, and it can feel downright impossible! The task of assessing a factory’s qualifications—across time zones, cultures, legal systems, and industry practices—is one not to be taken lightly.

Understanding Your Factory Options

A simple Google search can yield thousands of factory search results, all of which can start looking the same after a while. Furthermore, because trading companies serve a very similar clientele as factories, they don’t bother doing much to distinguish themselves. Things can get confusing. So to help you figure it all out, let’s first break down the differences between OEM factories and trading companies.

What is an OEM?

An Original Equipment Manufacturer (OEM) makes products, or the parts that go into other end-products, for other businesses, retailers, wholesalers, and traders without using middlemen to do so. Traditionally, OEMs do not sell to the public.

To understand the relationship between OEMs and other end-product manufacturers or wholesalers, let’s take the example of a factory that makes auto parts and an automobile manufacturer. The individual auto parts that go into a vehicle (like the exhaust system or the brake cylinders) are manufactured at a number of different specialized factories (OEMs). These auto parts are then sold to an automaker or manufacturer which in turn assembles those parts into a full vehicle. (The car is then distributed to an auto dealer, who in turn sells it to a consumer.) In the future, to maintain or repair that car, the consumer's dealership or mechanic will often order parts from the OEM.

Generally speaking, OEM products are considered to be of the highest quality, aka, “the real thing.” This makes sense because as the original manufacturer, with the right expertise and the original specs and blueprints, they are best equipped to produce a product that aligns with the patented design and conforms to the materials specified in the original product.

The Pros of Working With an OEM

There are lots of reasons OEM suppliers are a great fit for original, custom products. That's because they offer:

Cost-savings & the economy of scale. Dealing in larger volumes enables OEM factories to offer more competitive pricing over trading companies. Though there are exceptions, high minimum order quantities (MOQs) are the reason that OEMs are almost always the more affordable option.
A tech-forward approach. Experience designing products from scratch typically give OEM factories strong technical capabilities and expertise that can lead to a more streamlined production process and higher-quality products.
A more direct line to production. With no middleman to work through, you’ll be able to communicate directly with your production team (and with less confusion). You won’t be waiting for a trading company’s contact to send the messages to the factory and then relay them back to you.
More control over your IP. When you develop and supply your own CAD files to the OEM, you reduce the number of parties that can access your files and thereby lower the risk of compromising your IP.
Faster production. Having all the blueprints and materials on-site at the OEM shortens production time and promotes clarity. Because there’s no third party between you and the OEM, there’s less back and forth required to identify and fix any problems.
Technical precision & quality. OEM manufacturers are more equipped to supply the kind of quality an American product maker is looking for and are accustomed to the standards and practices of the North American market.

OEMs are the type of overseas supplier we help our clients find to produce original products with lots of market potential. There’s plenty to look out for though, so let’s take a look.

The Cons of Working With an OEM

Though a great manufacturing partner for all kinds of products, it's still a good idea to be prepared for the ways in which OEMs can be a challenge to work with, such as:

Access can be slow, hard, or impossible. Many OEMs aren’t in the business of dealing directly with inventors and prefer, when possible, to go through their factory agents or sales reps. It can take time, diligence, and networking finesse to gain access to large, restricted, or unlisted factories if you don’t know the system.
Difficult customer service. Although dealing directly with an OEM reduces the layers of between you, that does not always guarantee solid communication or good customer service. OEMs usually operate with fewer staff and therefore have less time to work with those unfamiliar with the product development process. Meanwhile, trading companies are great at giving customers the perception of great customer service. Their business largely depends on it. For that reason, you may find working with a trading company a more pleasant experience than working with a traditional OEM.
Fewer factories to choose from. Another disadvantage of OEMs is that there are a limited number of suppliers, particularly for specialized items. Trading companies tend to outnumber OEMs. With fewer options comes greater demand, tighter production schedules, and fewer choices in manufacturers.

Should you choose to work with an OEM to manufacture your product, it’s possible to run into any of the above issues or more. But if you’re proactive, and discuss your concerns with your supplier(s) ahead of time, you may be able to avoid or mitigate some of these risks.

How to Find an OEM

There are lots of places to find OEMs and factory suppliers, some for free, and others for a fee. Below are the most common online marketplaces:

Visiting trade shows and expos is another great way to find manufacturers.

Beyond online directories and trade shows, you can always try cold calling factories and researching NAICS codes. NAICS is the North American Industry Classification System, a standard used by North American federal statistical agencies to classify businesses and products. NAICS codes can be referenced to learn more about the products they appear on.

Don’t miss our resource guide, "Find the Right Factory to Manufacture Your Custom Product Overseas." In that resource, we share our due diligence checklist to help you select the right factory for you.

Find the right factory to manufacture your custom product overseas

What is an Overseas Trading Company?

Sometimes referred to as a distributor or reseller, a trading company is a business that does not make its own products. Instead, they act as a go-between for producers and buyers. They contract and “trade” with other factories for wholesale prices to resell goods for a profit, sometimes under a subsidiary brand. They are similar, though not identical, to wholesale distributors in the U.S.

If you’re working with a good trading company, they can take over all the tiny, annoying, and difficult production-related moving parts for you. The best of the bunch will throw in some sort of quality control, and extra customer service offerings to boot. But on the other end of the spectrum, some simply buy and resell products as nothing more than profit-skimming middlemen.

So that you can make the right choice for you, it’s important to understand under what circumstances working with trading companies might be advantageous.

The Pros of Working With a Trading Company

Trading companies can be best for smaller projects like those with a smaller order volume, multi-category product line, or projects with a lot of sourcing needs. They can also be a perfectly fine option for projects that take an existing product and put new branding on it, or for projects with a lot of complex, moving parts.

On the whole, trading companies offer the following:

Enhanced customer service. More customer-focused than factories, trading companies will often work just as hard if not harder to win your business and deliver a quality product (as their entire job and profit margin depend on it).
More product variety and options. Whereas factories specialize, trading companies can offer far more product categories than OEM factories and are the go-to choice when sourcing for a product line, or a wide variety of products..
Easier communications. With customer service as one of their top offerings, trading companies often have the advantage of having more English-proficient agents in their employ (although that’s not always a given).
Faster results on simple or small orders. Insider contacts, labeling capabilities, and/or overstock supplies sometimes enable trading companies to get you what you need faster. Generally speaking, this is only true on small or specific orders.
• Markups as low as .05%. With rent so cheap in China, a trading company's overhead is so much less than a factory's that they can get away with low margins and markups—as low as .05%—which, price-wise, greatly narrows the playing field. (While their margins may be low, that doesn’t mean they automatically beat OEMS in price. Always check what everything costs “all in,” including materials, shipping, transport, QC, etc.).
Expertise in unlisted factories or hard-to-source materials. Trading companies tend to specialize in hard-to-get items from difficult-to-find, unlisted factories (such as special materials and machinery). Therefore, for certain product categories, trading companies are an essential part of the manufacturing process.

Conversely, let’s see what you might need to look out for when working with a trading company.

The Cons of Working With a Trading Company

It's important to understand all the facets of working with a trading company before you begin, including the downsides. Look out for the following:

Higher prices for the same products. When you include everything from soup to nuts, on the average, trading companies generally cost more than OEMs. And while most throw in a little extra value in the form of improved customer service, there are many that just buy and resell goods, adding nothing more to your buying experience than a higher price tag.
Another cook in an already-crowded kitchen. The more layers you put between yourself and your product, both in the chain of communication and the number of steps the product goes through, the longer the total time spent and the greater the complexity can be.
Lack of technical expertise. Many trading companies lack the technical experience needed for working with complicated specs and the project management skills required to oversee larger projects.
No "boots on the ground." Often located in different cities than the actual factories, trading companies play a little-to-no supervisory role in your product development process, and can do nothing in the way of a hands-on supervisory role. And with no production supervisor on site, you’ll likely end up dealing with all the familiar issues: slower communication, schedule gridlock, long delays, etc.

How To Find Trading Companies

You can trip over trading companies pretty much everywhere on Alibaba, especially when you purposely select them by filtering by “business type.” In addition to Alibaba, here are a few relevant wholesale marketplace websites:

You can also find them through trade fairs, cold calling, and researching those aforementioned NAICS codes. Filter your results by business listing on websites like Alibaba to pull them up in a cinch. If you happen to go this route, bear in mind that there are many different kinds of trading companies.

The 9 Types of Trading Companies and What To Look For

Though they largely do the same thing, different trading companies specialize in serving different segments of the market, so it’s helpful to understand the spectrum of suppliers and subsuppliers when you start your search. Here are the nine different kinds of trading companies you’ll likely come across:

Sourcing Companies. Simply another name for a generalized trading company, sourcing companies do exactly what it sounds like they do: source materials and products for their customers. With many specializing in hard-to-acquire materials, these convenient intermediaries are helpful in managing the supply chain headaches inexperienced importers tend to experience.
Certain-Field Trading Companies. These trading companies are well-versed in a very specific niche, having long-standing relationships or a deep history in that product segment. For this reason, these companies can usually offer very competitive pricing, even compared to factories. These companies are best for specialized importers in narrow markets.
Factory-Group Trading Companies. Made up of multiple manufacturers or production facilities in one large trading entity, factory groups cover a variety of different products and materials. These are groups that join together for a common good, such as sourcing, exporting, invoicing, or shipping.
Combined Factory & Trading Companies. To satisfy customer demands, sometimes suppliers will operate as both a manufacturer and a trading company, using their own resources to make goods and trade or sell them, along with other products made by other factories. These companies are harder to spot because, at least in part, they do make certain products. However, deciphering what they make versus what they trade in can be difficult because oftentimes they try to serve as either or both depending on where they can make a profit.
Marketing and Sales-Focused Trading Companies. These companies represent themselves as factories on Alibaba but are predominantly the marketing efforts of a small number of sales agents, or even just a single English-proficient sales agent contracting out to several factories at once. They'll market for factories to brand and sell various products on Alibaba, usually on the side. Importers who need various types of products may use an agent or company like this in order to gain relationships and access to a lot of factories at once.
Grocery-Type Trading Companies. Best for importers who deal in daily consumables such as groceries, these companies source a wide range of products in very high volume orders, and/or deal with imports for a number of companies at once. For that reason, this type of trading company has a reputation for often being busy, overwhelmed, and/or poor at customer service.
Hot-Selling Trading Companies. Specializing in identifying market trends and capitalizing on them, these often short-lived companies are best at selling the hottest products that hit the market. Their aim is to sell out of their new product in as little as 2–3 months' time, and then close up shop (until they find their next target). Ever-popular with investors, these companies will often gain a reputation for being unprofessional and opportunistic.
SOHO Trading Companies. SOHO means Small Office, Home Office, and just like it sounds, these companies are usually staffed by 1 or 2 people (often former employees of larger factories who poached a few customers from their old job and started a business). Similar to a sales and marketing-focused trading company, a SOHO simply means a mom-and-pop shop offering anything from attentive, white-glove service, to the unpredictable chaos of a one-man-band. Use at your own risk.
Hong Kong Trading Companies. Hong Kong was once a place where much was made, but as manufacturing shifted to mainland China in the 1980s, many trading companies kept their offices in Hong Kong. These then formed into one giant trading conglomerate that today manages large manufacturing groups out of Malaysia, Cambodia, Vietnam, and trading regions outside of mainland China that might operate under slightly different rules than most Chinese trading companies. Unless you work in these regions, these likely won’t apply to you.

What To Know About Alibaba Suppliers & Manufacturers

Alibaba is the largest and most commonly used marketplace to find suppliers, specifically in China. A majority of their listings are manufacturers allowing you to speak directly to the factory regarding specs, requirements, and quotes.

The biggest issue with suppliers on Alibaba is not trustworthiness, but the high ratio of trading companies to factories found on the platform. To help, Alibaba has created both an extensive supplier profile system, as well as a verified account program, to help create a safe, reliable, and trustworthy buying environment. In fact, Alibaba will even step in to help you settle disputes if you can provide evidence that an order was not delivered to your specifications (i.e. with documents like a sales contract, email exchanges, communication via the platform, etc.).

However, Alibaba won’t necessarily be able to help you ascertain what kind of supplier (trading company or OEM) you’re looking at when you begin your search. If you’re having trouble, you can enlist the help of some product experts. If you’re going it alone, it’s essential to know exactly what you’re looking for, and how to weed out the trading companies from the OEMs. Read on to learn how.

How To Distinguish OEMs From Trading Companies During Your Factory Search

Not only is it hard to choose between the different kinds of suppliers, but even telling them apart from each other can be a challenge. At Product EVO, we send our clients to OEMs—and not trading companies or other kinds of factories—as our top choice for the production of any custom product.

However, even when you know what to look out for, a few things can still trip up the search. Here are some additional considerations while you’re searching for OEM suppliers. And learn how to spot the trading companies before you inadvertently hire one. Here are twelve tips to help you out.

Check for a company website. They should have a standalone website, not just a listing on Alibaba.
Dig into the business’s listings. Look for the type of business license they carry, their business category, and their ISO certification to ensure they’re not actually listed as a trading company.
Confirm they aren’t branding and selling products themselves. Check to see if they have products for sale on their website. If they do, they’re likely a trading company in the business of product sales and even marketing–a bad sign in our book.
Look for factories offering a single product category as opposed to offerings across multiple categories and materials. If they don’t specialize, they’re probably a trading company.
Request samples to review a factory's quality of work. Request samples of products similar to your own. If they hem and haw, they're probably not an OEM.
Throw them a curve ball and see how they react. How nimble is the factory if things change? Do they seem in control of their own production schedule?
Ask them a hard question directly. See which factories give you a straight answer and which do not.
Request references. Seeing what former and current customers and clients have to say is vital information.
Evaluate a factory’s capabilities, equipment, and expertise in person. If possible, paying your potential factory an in-person visit tells you far more than any virtual visit can.
Ask the right questions and listen for informed answers. Be explicit, direct, and respectful when you communicate. Ask clear, succinct questions. In turn, listen for confident, clear, and knowledgeable answers. Remember: clear communication is key.
Beware the phrase, “No Problem!” When you ask, “Can you make this?” or, “Can you change this?” you'll often hear a quick, “Yes! No Problem!” from your sales representative. Over there, it’s standard practice to say yes first, then figure it out later. So don’t necessarily trust what a factory says during that first encounter.
Use a “Show Me” Policy. For the above reason, Product EVO uses a “Show Me” instead of a “Tell Me” policy in our factory search. If a factory can produce a timely sample that meets our specs, great! And if they can’t, it’s easy to eliminate them from the running.

For a more in-depth guide on the above tips, check out our full post, "Find the Right Factory For Your New Custom Product,” which walks you through the process in much greater detail.

Here are just a few more tips we want to share with you so that you can find the best product manufacturer possible for you and your business.

Before Choosing a Factory: Other Must-Do Items

Obviously, the type of product you're trying to manufacture matters a great deal when selecting a factory, so ultimately choosing the partner that’s right for you is entirely your choice. Here are a few must-do items that should not be forgotten or overlooked.

1. Make sure your product is actually ready for production.

You can find the best factory in the world, but it won’t make a difference if your product idea isn’t sound, if your design isn’t well-tested, and if your market strategy isn’t well-developed. Learn what a thorough product development process can do for your product and why it’s so imperative to your overall success in the marketplace and as a business.

2. Get your product files designed by a pro.

Unless you're working on a very specific kind of project, we advise against using a trading company or other kind of factory to design your product files. Instead, when working with an OEM, we recommend using a product development company, a product designer, or an experienced engineering firm to help you draft your first set of design files.

3. Partner with experts.

Did you know that you can hire a U.S.-based manufacturing partner or a local production manager to oversee all of these operations, including your factory search? Either stateside or locally, manufacturing experts can help you handle negotiations, speak the local manufacturer's language, and can even work directly with the manufacturer to help solve production issues as they arise. These manufacturing partners can get you past those frustrating “false starts” so that you can get started on the important action items right away.

At Product EVO, we know the work that goes into bringing a new and exciting innovation to life. We want to see you have the best, most efficient experience possible when working with overseas manufacturers. By working with an OEM, and not a trading company or other kind of factory, we believe you can limit some of the errors and frustrations you might otherwise face in your manufacturing journey.

The result of these efforts means one day holding the very same product you envisioned right in your hand. We hope we’ve helped you move one step closer to that goal.

Need Help Finding The Right Factory?

Product EVO has helped hundreds of innovators build the know-how, trusted relationships, and business strategies to get through just about any design or manufacturing challenge imaginable.

Download our free FACTORY SCORECARD to help evaluate your suppliers across a variety of categories. If you need any other guidance in the product manufacturing space, we offer tons—just give us a look!

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