Outsourcing manufacturing in China can help your brand level up quicker and grow to new levels. But it&#;s important to understand the pros and cons of manufacturing in China before you decide to take the plunge.
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The upsides include cheaper production cost, faster production, international expansion, and service quality. Downsides include communication difficulties, IP risk, high order minimums, complex logistics, and quality control issues.
Summary
One of the most well-known advantages of manufacturing in China is that it&#;s cheaper than making goods in many other countries. Lower Chinese manufacturing costs translate into better margins and lower prices for the end user. Your brand&#;s gross profit can increase with the lower cost of production.
When your products compete against others on the physical or digital shelf, a lower price can persuade many people to buy. Even factoring in shipping costs, it&#;s still usually cheaper to manufacture in China.
Improving your speed to market can help your company maintain a competitive advantage. There&#;s no other place on earth with so many factories (and workers) ready to prototype and produce new products at the drop of a hat.
You can also increase your production volume output to meet demand easily. For example, if your product is showcased on a popular shopping website, you can scale up production to cover a deluge of new orders without disappointing customers.
The Asian market is growing rapidly. If you want to expand and offer products to buyers in Asian markets, what better way than doing business in China by starting your manufacturing operations there? When done correctly, Chinese market expansion can multiply opportunities for companies. The logistics of introducing products into China and other Asian nations are also streamlined when you use Chinese factories.
Many manufacturers in the United States simply prefer to work with brands that have secured large distribution contracts or that have viral followings. In reality, not every business wins Shark Tank. It can be hard for smaller companies or conceptual products to get attention from stateside manufacturers.
Chinese manufacturers, on the other hand, are often very willing to work with small and unknown companies, as long as order minimums are met. You don&#;t have to have a brand like Nike to get good service from a Chinese manufacturer.
On a basic level, difficulties can come from the language barrier. Chinese is a hard language to learn for many westerners, and it&#;s not a language you can just pick up from airport pamphlets. Manufacturing partners usually have some level of English, but it&#;s not good to rely on that for agreeing on complex manufacturing contracts. Using a translator can be indispensable.
Another issue to be aware of is intellectual property in China. The country has made improvements in recent years, but some issues remain. Factories still exist that would like to steal your company&#;s IP and either copy or slightly modify your product and then compete with you.
Companies should register their trademarks with the Chinese Trademark Office in both domestic and Chinese language spellings. They should also invest in IP protection tools to monitor possible infringements. Intellectual property protection costs far outweigh the risks of losing reputation, revenue, and customers to fakes or companies that have stolen your designs.
Another downside of working with the Chinese manufacturing industry is that factories can have high order minimums. This is because they often have slim margins and rely on economies of scale. You may have to look elsewhere if you want one-off or small productions.
While the landed cost of an item made in China and shipped to the US can often be cheaper than a domestic product, you still have to deal with more complex logistics. Products can take a long time to get to the end user&#;up to 30 days by sea. You may want to have a distribution hub on home soil, but that adds to your cost.
Also, if you sell out of a certain item, your next shipment may be 30 days out. That can be disappointing for customers. You can always ship items by air from China, but you&#;ll have to figure out the cost on that as well.
The &#;Made in China&#; label has had negative connotations in the past. Many people are familiar with inferior counterfeits that represent a shell of the original product and fall apart upon use. However, you can find high-quality manufacturers in China today.
The key is to enforce quality standards at each point in the manufacturing process and not to assume that the first product run will be exactly like the prototype. Also, some product categories may be more prone to quality issues than others. It&#;s a good idea to work with an agent in China who will monitor quality control.
Deciding whether or not to move manufacturing to China takes careful consideration. Manufacturing needs are different for every company, and it always pays to hire a professional domestic agent who has experience and can help you avoid pitfalls and horror stories.
It&#;s essential to create detailed manufacturing contracts to avoid intellectual property issues, as well. Once your company is selling products, you can keep an eye on your IP with a brand protection software like Red Points. Our platform uses AI to uncover and take down threats so you can reap the benefits of manufacturing in China. Download our product guide to see how.
Contact us to discuss your requirements of China tool sets. Our experienced sales team can help you identify the options that best suit your needs.
Photo © Willy Shih
One of the things we teach our first-year MBA students at the Harvard Business School is how to improve operating processes. When I look at a production line (or any process for that matter), how do I improve its operation so that I get the maximum effectiveness, the highest output with the most efficient utilization of resources like labor and equipment? This often means carefully choosing a process design based on what kind of work needs to be done, identifying bottlenecks, and figuring out how to make improvements as we gain some production experience. As we practice and learn, we figure out how to do things more efficiently.
The manufacturers of almost every product rely on learning &#; reducing the costs of manufacturing their products as they get better at producing them. Although the benefits of learning in mass production were evident all the way back to Henry Ford with the production of the Model T, the formal idea that there is a &#;learning curve&#; to production came from the study of B-17 Flying Fortress bomber production at Boeing&#;s Plant No. 2 in Seattle during World War II. The cost of producing these airplanes decreased by approximately the same percentage amount with every doubling of cumulative production volumes.
The first five airplanes were delivered in September , and they took an average of 142,837 person-hours to assemble each one. There was huge demand from the War Department, and by March Boeing was able to deliver an amazing 362 units in a single month. With this volume increase came a dramatic cost decrease: assembly labor hours per airplane dropped to 15,316 person hours per aircraft. If you work through the math, that translated to a 27.9% decline in production cost for every doubling of cumulative output. The improvements came in a number of areas &#; economies of scale when producing larger volumes of parts, improvements in the specialized tools that the factory came up with that made it easier to do complex assembly tasks, production speed, and workers learning to do things more quickly and employ shortcuts or other tricks.
The benefits of this kind of learning-by-doing is a given in modern production systems. Boeing (and its investors) are obsessed with how fast it is coming down the learning curve on its 787 jetliner production (it was estimated to be an 84% curve for its 777). But the steepness of these curves is important for a wide range of products. Some curves are steeper, like for Li ion batteries, some are more shallow. If you go to one of the big contract assemblers in China and ask them to quote you a price to produce your latest high volume widget, you can often get them to offer you a price that is initially below what it costs them to do the work. That&#;s because the factory will assume that their costs will come down the learning curve as they make more, and they can forward price it to you and make it up when they are cranking out large volumes. They will learn how to assemble the product faster, substitute less expensive materials, renegotiate the costs of components that they buy from suppliers &#; all to get their cost down and their profit up. The key is that you are buying what they produce, so you are supporting them with cash inflow as they learn.
This led me to an interesting insight when I was studying the Chinese motorcycle market a few years ago. The industry got started in the s in the Chongqing area of Sichuan Province when small shops started making &#;standard&#; parts that were copies of Honda, Yamaha, or Suzuki motorcycle components. One shop made engine blocks, another made pistons, another made crankshafts, and so on. There were hundreds of these small parts makers. Other firms that started out as assemblers sprang up and bought these parts to produce complete bikes, and over time several of them grew to become quite large and successful. Many of the assemblers soon started making their own parts so that they could get better control of the supply of critical components. Of course, the bikes were not very differentiated, so there was a lot of pricing pressure on these firms. But the bikes were cheap, maybe one eighth the cost of an authentic imported Japanese bike at the time, so there was a lot of demand. Chinese consumers, especially inland ones in rural areas, were happy to have access to cheap transportation, and in the process, these manufacturers could generate cash while they learned to produce better bikes. The high volume of demand drove them down the learning curve and allowed them to keep driving their costs down. As I walked through one of the factories, I saw their processes and heard how they had even hired retired Toyota engineers to help them institute improved production methods. Their processes improved rapidly.
Photo © Willy Shih
Having a large home market in which to &#;practice&#; and get better at production is a big advantage to a manufacturer. As long as consumers will buy what the manufacturer can produce, it will generate the cash for the company to keep growing, learn, and get better. Having a large domestic market to practice with and sell into is one of the advantages that served the United States well during the twentieth century, and is now a big advantage for Chinese manufacturers with their enormous domestic markets. Today China is the largest market for smartphones, many consumer goods, cars, and will (with some help from government mandates and regulations) be the largest market for electric vehicles. That means Chinese manufacturers will get a lot of practice. It may even help them establish global leadership in markets like electric vehicles. Last year, I brought a class to visit an electric car maker in Shenzhen. They were cranking out a new electric vehicle every 90 seconds. Most of them were taxis destined for the big cities across China, so some of the students were a bit skeptical about how broadly the company might succeed. But the company was getting a lot of practice and moving down the learning curve.
Learning curves are an important reality in modern manufacturing. It is also why it is important for firms to ramp up production quantities and sell into the largest markets they can, and today that means being able to sell into China.
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