Say hello to daigou: the booming LA-to-China shopping pipeline you never heard of

Sam Cai had 30 pairs of limited edition Nike sneakers at his Los Angeles apartment. The sneakers were about to go up for sale—in China. Once Cai shipped them overseas, his friend there would help him sell them on e-commerce.

"I could make thousands of dollars off them," Cai said. "These shoes are relatively cheap, about $160 per pair. But when they are sent to China, they can increase two times or even three times, compared to the original price."

Cai said some of these shoes were only released in New York or Los Angeles, so it would not be possible for Chinese customers to get them unless they buy from individual sellers who lived in America. That's how he started the business.

Another buyer, Betty Zheng, purchased handbags and jewelry from Hermes, Chanel, Gucci, Bulgari and other luxury brands for Chinese customers.

"There is a huge price gap for luxury products in China," said Zheng, who said she netted $10,000 over the Christmas season last year.

Both Cai and Zheng are working as daigou, which roughly translates to "purchasing agent" and is used as both a noun and a verb (I daigou and I am a daigou). Purchasing agents buy products from other countries and sell them for a substantial profit in China, where consumers are eager for goods that are either not available there or of questionable quality.

It's nearly always cheaper to buy from a daigou than a brick-and-mortar store. The savings vary depending on the product. People could save 10 to 15 percent if they buy luxury bags such as Gucci and Chanel from purchasing agents, and they could save nearly 40 percent when they purchase dietary supplements from these agents.

In China, with the prevalence and ease of the social media platform WeChat, buying via daigou is as common in urban areas as walking to the corner store.

"Basically on WeChat, every person has several friends who are doing daigou,"  according to a recent article on the Chinese news website, Sohu News.

In the U.S., most people have never heard of daigou–it operates in plain sight, but still largely under the radar.

"If a Chinese customer constantly takes pictures at a store or purchases a dozen handbags, then he or she is probably a daigou," said Ye Wang, a student who lives in Alhambra and previously worked as a purchasing agent.

A recent report from Bain & Co., a Boston-based research group, showed that luxury purchases from Chinese purchasing agents were valued at more than $7 billion in 2015, half of all Chinese luxury consumption that year. A year later, China's retail industry lost 181 billion yuan, which is nearly $26 billion, according to the China Business Department.

Clayton Dube, director of the USC U.S.-China Institute, said that the emergence of purchasing agents symbolizes the rapid development of China's economy.

"There was a time in China [when] even [if] people knew about the new products, they wouldn't be able to afford them," Dube said. "Now there is an increasing number of people in China who have sufficient economic resources to buy the goods they want when they want them."

Although it is still unclear how many Chinese people are currently working as purchasing agents in the U.S., Insight China, a Chinese news website, said that among the Chinese population of 12 million in Australia, 30,000 were working as daigou. Experts from Insight China suggested that the number of Chinese purchasing agents in the U.S. may be even higher.

Dube said that the emergence of purchasing agents feeds the growth of Chinese consumption, especially when people lack access to equally priced products.

"In China, the distribution network is not as developed as [it] could be. Some products people can't easily access in China, or they can't access at a reasonable price," Dube said. "So the whole cycle phenomenon is based on filling the gaps in an incomplete, immature distribution system."

Even though China itself is a significant manufacturing country, Chinese customers have a large appetite for foreign goods. Better quality control, lower prices and more contemporary designs appeal to Chinese customers seeking products across a variety of categories, including luxury bags, make-up, dietary supplements, baby formula, and even salt and pepper.

"I always buy dietary supplies like calcium tablets from purchasing agents in America," said Bo Xue, who lives in Chongqing in southwest China. Xue recently bought five bottles of vitamins and calcium from a Costco purchasing agent. "Although China has these products online, I'm always worried that they are counterfeits."

The barrier to entry for daigou work in the U.S. is low, which makes it appealing to Chinese residents with limited English language skills. All that's required is the ability to find the items on shelves and swipe a credit card at the checkout counter.

"I can do it even though I don't speak English very well," said Janet Li, a homestay mom who has a 6-year-old son, speaking in Chinese. "I need to pick up my son everyday. The working time of purchasing agent is reverently flexible."

Wang said that the practice is now so commonplace in some parts of Los Angeles that there are even people who are purchasing products for purchasing agents.

"All you need is to add $10 for each item, and these people will deliver your products to your home," Wang said. "It is convenient for those small purchasing agents if they don't want to drive to outlets."

With the formation of this industrial chain, another problem has arisen. Purchasing agents usually don't pay taxes, and it is still unclear if they even need to.

Wang said that she was in a WeChat group chat of approximately 300 Los Angeles-based purchasing agents, none of whom paid taxes.

"I think it is a grey area," Wang said. "I think it is not illegal for us to not pay taxes…I see myself as buying something for my friend. Just in a very large quantity."

Dube said that daigou is a business that is currently not regulated in the U.S., but purchasing agents could draw attention from authorities if they have a large unclaimed cash flow.

"You are liable for the money that you have earned. You are liable to pay taxes on it," Dube said. "It is conceivable that if the transfers to your account are significant, then that will raise certain flags. And banks are obligated to report the flow of money into an account, especially the amount that exceeds $5,000."

Earlier this year, China introduced an e-commerce law that requires purchasing agents to pay taxes to both selling and buying countries. The law also restricts the sale of items that are not labeled in Chinese. But the law is difficult to enforce and, among the purchasing agents interviewed for this story, largely ignored.

"If we follow the rules, we can hardly do it," Wang said. "How is it possible that what you buy in the United States have Chinese descriptions?"

Dube said that despite the disruption purchasing agents are inflicting on global commerce, the emergence of daigou is a sign of China's ongoing evolution.

"It's a mark of Chinese development," he said, "and it's also a mark of the increasing global awareness of Chinese consumers."

The writer of this piece, Leah Xinyan Zhang is a part-time purchasing agent in LA. All the interviews in this story were conducted in Chinese except for Clayton Dube.