T RADING INDUSTRY

The most important thing trading companies are doing is to create the market so that buyers and suppliers can make the deal that otherwise would not happen without the existence of the intermediary. There are enormous amount of researches on the trading industry already. Majority of them conducted in-depth analysis on the meanings on why trading companies exist and what values they bring. There are two ways for a trading company to create values. One is by reducing the financial, operational, and product costs and risks for the customer via the help of professional and experienced intermediary.

The other is through bringing the added value realized by its capabilities to integrate the value chain in the complex activity network.

2.2.1 Transaction costs

One of the most important values that a trading company can achieve is reducing the transactions cost. The so-called transaction costs include the costs of searching for information, dealing with contracts, controlling the production quality and costs, and supervising the execution of the contract. (Casson, 1982) As summarized by Wong (2004): In international trade, the buyer and supplier are unable to make a deal because they do not understand the economic and political situation of each other’s country. There are language and cultural barriers between them and the market itself contains a certain level of uncertainty. With all the risks considered, it is extremely costly to find a reliable buyer or supplier especially in the international market where the dispute may be more costly to resolve than executing the deal itself if it happens.

Due to the difficulty in controlling the quality of the products or the execution of the contract between buyers and sellers, intermediary justifies its existence with one of its core values to the customer: the guarantor and enforcer. Leveraging its capability of

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communication, negotiation, integration and control in both parties, the intermediary can guarantee a smooth execution of the deal with minimum risks. It can serve as a

trustworthy and neutral arbitrator when a dispute occurs. (Wong, 2004)

Many may argue that the intermediary exists due information asymmetry and question about whether information costs money. Therefore, they believe once the buyer and supplier are connected to each other, there will be no need for intermediary as the information are transparent. However, managing information is actually not free of charge and the costs attached to it may be high. The entire flow of information starts from gathering, processing, and organizing to be valuable intelligence. Afterwards, storage and delivery of the useful and applicable information for the buyer and supplier will be carried out. In every steps of the above process, someone must verify the quality and quantity of the product at the scene and control the flow of activities to meet the clauses of the contract. In addition, the intermediary also needs to collect information about the political and economic situation of the country and the background of both supplier and buyer. The efficiency and effectiveness of collecting and controlling the above

information is what the intermediary specialized in. The buyer and supplier will have hard time to replicate it (as the long learning curve) and it can be very costly. As a result, the profit of [a trading company] can stem from the difference between the value and cost of information. (Wong, 2004)

Although transaction costs are one of the profit determinants intermediary relies on, they have been decreasing in importance as information asymmetry has diminished over time thanks to the advancement in technology and the Internet. Furthermore, many industries have grown into the maturity stage, in which it was no longer necessary to search for information, select and filter buyers and suppliers, build the trust, and

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understand each other. In addition, barriers for international trade have been lifted gradually and many countries are doing their best to secure political and economic stability in order to encourage the commercial development. All of the above factors reduce the transaction costs significantly. As a result, it is no longer cost-benefit justifiable. Trading companies are now in an urgent need to find and shift to new core values instead of relying on saving costs in transactions and they need to reposition themselves in the business cycle from declining stage back to growing stage.

2.2.2 Added value of intermediary

Aforementioned, the required capabilities for each kind of intermediary (exporter, importer and triangle trader) are quite different. The expected values for customers also vary. For an importer, control of quality and on-time delivery are the most important, while for an exporter, it is the market opening and payment collection. As for a triangle trader, the key value is the total supply chain management from upstream to downstream.

The triangle trade could be simple with few suppliers of a single product in one country and few buyers in another. Or it could be very complicated, such as what Li & Fung group did, where materials, components, or final products could be transferred in between countries to countries several times for processing, assembly or sales purposes.

The value of information

Information is a valuable asset not only because it helps prevent and reduce transaction costs, but also it creates more value with knowledge. Most of the time, suppliers and buyers prefer specializing and focusing on what they do and stay in the country, or they simply cannot afford for internationalization due to financial and language barriers. Intermediary could, on one hand, provide them with consultancy ad intelligence with regards to the international market trend, industry-wide development

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and global forecast of demand and supply etc. On the other hand, it could also coordinate them in terms of product specification, quality control and international logistics with its professional knowledge.

The value of services

Other than information, intermediary creates values through providing

multidimensional services according to the requirement of its customers. Traditional services that trading companies offer are normally buying and reselling, logistics in import and export, assistance in procurement or opening new market, quality control.

More and more services are added in the past few years: consultancy, design, and backwards or forward integration. Furthermore, intermediary could provide financial or arbitrator services by dealing with both parties if they have doubts and are unwilling to take the risks (Wong, 2004). In other words, in order to fill the gaps that lie between the buyers and suppliers, trading companies can provide all kinds of necessary services and that is the value of them.

The value of network

The position of the intermediary itself has an intrinsic value created by the interactions of the players in the industry- the value of networking. Most of the time, producers are rivalry among themself and buyers are competing with each other. Given this natural conflict of interest, it provides advantage for the intermediary to work with different suppliers and buyers at the same time without their being on guard against each other. Therefore, competitive intermediary is able to leverage its relationship with many parties to create a network that buyers and suppliers could not do by themselves due to their embedded limitation. Network is another asset intermediary possesses and grows in scale over time. The bigger the network is, the more resources, both tangible and

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intangible, are available to the intermediary. With a strong network, intermediary may also gain a wider view of the industry and obtain more insightful information that they can cross check between upstream and downstream. This gives them elasticity and flexibility to adjust according to the fluctuation of supply and demand.

The value of reputation

Besides having a strong network, the reputation of the intermediary also plays an important role towards success. Relationship is an issue many people ignore because it cannot be quantified. However, relationship proves its greatest value when the buyer and supplier do not trust each other. An intermediary with better reputation enjoys higher loyalty from its upstream and downstream partners. Both the buyer and supplier may take the risk of doing business with each other based on the trust of the intermediary.

Therefore, reputation is a value of intermediary that buyers or suppliers need when they are new to the market or there is an issue of trust (Wong, 2004). Bigger network implies supply (or demand) stability and variety as well as a good source of information while reputation implies lower risk and security in conducting business. As a result, suppliers and buyers are more willing to work with a sizable intermediary with long history because of its network and reputation.

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