Trading House

A trading house is a global B2B trader that enables the home country to trade with foreign countries. Trading houses act as intermediaries that distribute domestic goods and services in the international market. They are also called Trading Companies and Export Management Companies.

These overseas marketing organizations use their infrastructure and elaborate networks to facilitate foreign trade. Their services include buying, selling, receiving, and delivering goods. In addition, they aid small local enterprises to make a presence in the vast international market.

• A trading house can be stated as a business entity that bridges the trade gap between domestic and foreign countries.
• A trader, exporter, and importer are all considered trading houses, also known as trading companies. Trading companies enable small and medium scale enterprises in selling to the international market.
• A trading company makes a profit in the form of a brokerage or commission.
• The roles played by trading companies include foreign vendor selection, price negotiation, contract negotiation, delivery, payment, customs clearance, retailing and product distribution.

Trading houses act as sales agents; they buy from local exporters and sell in the international market. In most cases, once the purchase is made, the local exporters have no say in the price of the goods.

Consider this example, a local spices dealer in Singapore does not have the reach to sell in the US, but a trading company dealing in spices can make this possible. The trading company will buy the product from the dealer and sell it to American retailers. Similarly, the commodity trading companies like Glencore and Cargill facilitate the trading of physical commodities.

Trading Companies perform the following roles.

1. Exporter: An Export Management Company supports domestic manufacturers or suppliers to easily step into the international market. They operate as a distributor where they purchase goods in bulk quantities from the manufacturing units. Then they quote a price to sell it to the retailer in a foreign country. The quoted price is inclusive of profits.
2. Importer: Another kind of trading company includes importers who buy goods from foreign manufacturers. They then sell them to in-house dealers in the local country.
3. Buying Agent: These companies procure goods or services from the international market on behalf of the in-house manufacturers. The functions of a buying agent include foreign vendor selection, price negotiation, contract negotiation, and reliable transport.
4. Selling Agent: Such Export Management Companies act on behalf of a manufacturing firm or a supplier to earn brokerage. Here, the manufacturer holds all the rights to finalize a deal, and the trading company can only guide about export prices.
5. Intermediary: An intermediary is neither an exporter nor an importer. They channel the exchange of goods or services between an in-house party and a foreign party. In return they charge a commission.

American Export House supplies the best quality conventional and organic almonds to different foreign countries across the world. California almonds are famous worldwide for their quality.

International Trading House Co. Ltd. is one of the renowned trading companies engaged in cross border trade, export, and broking. The company deals in a wide range of products ranging from clothing, baby diapers, medical equipment to instruments. These products are quality tested and manufactured in different parts of the world, especially in Tunisia. The brand also focuses on customer relationship management by meeting the specific demands of the client.

Asian Tea & Exports is an Indian company involved in tea plantation, production, international trading, and international export. In addition, it also supplies pulses, lentils, cashew nuts, soybean, etc., in the global market. The company has been certified as a Star Export House by the Indian Government.

Employing Trading Houses has the following advantages.

• International Trade Expertise: The trading companies collaborate with different business associates to effectively accomplish; delivery, procurement, and customs clearance of goods. Therefore, manufacturers do not have to deal with these unchartered territories.
• Currency Management: In international deals, parties decide to make payment on a future date. In such cases, the trading company draws a currency forward contract, eliminating currency fluctuation losses on the due date. This way, the retailers who make the purchase dodge market risks.
• Economies of Scale: As the trading houses can buy and sell goods in large quantities, they can ask for considerable discounts from the suppliers or manufacturers. Even shipping products in bulk quantities can significantly diminish the transportation cost.
• Risk Absorption: These companies protect the manufacturers from various market risks of the international market. For example, the export or import policies of a foreign country could change.
• Global Sales Opportunities: A trading company helps small enterprises sell their products in the massive international market. This is the fundamental and indispensable role of trading companies in global B2B trade.

Penetrating the international market via trading houses may not be a sensible decision for every manufacturer because of the following reasons.

• Difficult to Launch an In-House Team Later: A trading house has its methods, contacts, and a large team of personnel trained in various international business services. A newly launched in-house team cannot match this benchmark.
• No Interaction Between Manufacturer and Target Market: Since the trading company mediates the sales and purchase between the parties, they eliminate the communication between the manufacturer and buyer. Thus, the manufacturer establishes no customer relationship with the clients.
• Manufacturer Fails to Analyze Future Trend at Times: Manufacturers struggle with trend analysis due to a lack of communication with the target market.
• Difficult for Manufacturers to Fulfil Long-Term Goals: The manufacturers suffer from limited market knowledge in the long run. This hampers them from developing a relevant expansion strategy.
• Decreases Profit Margin: When the trading companies procure goods in huge quantities, they demand high discounts from the manufacturer. It, therefore, shrinks the profit margin for the manufacturers.

Japan’s renowned trading house, “Sogo Shosha”, has created history. This multilateral general trading company was established at the beginning of the Meiji Revolution, around 1955, after World War II. 

It was a ray of sunshine during government-controlled trade. The Sogo Shosha was formed by merging the ten largest private trading companies in Japan. Together, they started brokering with a diversified product portfolio. These companies are engaged in private equity and investment banking as well. The big names like Mitsubishi Corporation, Itochu Corporation, Mitsui & Co, and Ataka & Co. are a part of Sogo Shosha.

In 2020, Forbes reported Warren Buffet investing $6 billion in Sogo Shosha companies. Buffet chose Sumitomo, Itochu, Mitsubishi, Marubeni, and Mitsui.

This has been a Guide to Trading House and its Meaning. Here we discuss how it works, its examples, advantages, and disadvantages. You may also have a look at the following articles to learn more –

• Clearing House
• Trading Floor
• Laissez-Faire