There’s no denying, manufacturing in China has its pros and cons. It’s a matter of weighing them up and deciding if it’s worth the effort of manufacturing in a Chinese factory versus a local one. What many businesses do not realise is most of the risk comes with sourcing the wrong factory to produce their products. The right specialist factory manufacturing the products for the right price is a winning formula.
5 Pros of Manufacturing in China
There are many benefits to manufacturing in China, five of the biggest are:
1. It’s Cheaper to Manufacture in China
Because of China’s burgeoning population, there is plenty of cheap labour - few countries in the world can produce products more affordably than China. Even when you factor in freight and shipping costs, it’s often far cheaper for countries around the world to import Chinese goods than it is to make them locally.
2. Better Gross Profits
A lower unit cost can greatly improve a business’ gross profit margin. Some businesses can’t improve their profit margin by increasing the selling price because of market pressure so the only way to is by reducing the cost to produce the goods.
The Gross Profit Margin Ratio formula is:
Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue
By reducing the cost of goods even marginally can improve the gross profit margin.
3. Fast Turnaround Times
The volume of workers mean fast manufacturing turnaround is possible in China. Even with shipping times taken into account, goods produced in China can still arrive in Australia faster than it takes to make them here.
4. Specialist Manufacturers
Due to the size of the manufacturing industry in China, many factories specialise by industry or manufacturing type. Some countries don’t have access to these specialist skills and factories with the equipment needed to manufacture their product.
If your product is a success, a big advantage of getting it made in China is that it is usually easy to scale up production. An abundance of labour supply and efficient manufacturers with years of experience makes it easy for you to grow.
5 Cons of Manufacturing in China
Ask anyone who has had a bad manufacturing experience in China and they will give you a long list of cons but, with the right experience and contacts, many of the disadvantages can be managed and avoided.
1. Intellectual Property Risk
One of the risks many people worry about when manufacturing in China is IP theft. Not every factory in China is looking to steal your IP but the reality is there are plenty that will. If you don’t have a solid relationship with the manufacturer and they think your product is valuable enough, they may rip it off to manufacture themselves or sell it to someone else who will.
Even if you have all the right patents in place, they may not be enough to protect you. Following pressure from the US, the Chinese government, in late 2018, agreed to crackdown on IP theft. They have introduced tough new penalties but the risk remains.
How to Overcome the Risk of IP Theft:
If your product uses IP that’s worth stealing, use a broker that has a long, established relationship with the factory. A factory is far less likely to steal IP if they are jeopardising a lucrative contract with the potential of years of work from multiple businesses. There is far less downside to steal from one company.
2. Large Minimum Order Quantities
Chinese factories love big orders. Large factory workforces mean they can manufacture big quantities quickly and keep staff busy. Many factories set high minimum quantities and won’t consider small orders.But if you are manufacturing a product for the Australian market, you may not need the quantity of goods that an American company may order.
How to Overcome High Minimum Order Quantities:
There are factories in China that are set up to handle smaller orders but it may take you time to find one. Be persistent with your enquiries and you should have success. If not, an agent may know of one or can leverage their relationship with a factory to complete a small order. Negotiation is important, no matter which factory you are dealing with.
3. Poor Product Quality
It’s true, there are many horror stories of Chinese-made products that were binned straight off the wharf. The production quality was so bad, there was no chance of the product being salvaged or sold. Other poor quality products that were sold have destroyed the brand image.
How to Overcome the Risk of Poor Product Quality:
A reputable factory in China doesn’t produce poor quality goods. But it’s difficult to tell a good factory from a bad unless you visit the factory or you get a strong recommendation from a trusted source. Having a relationship with a factory also helps ensure the product meets your expectation.
4. Not Knowing Who you are Dealing With
When you make an enquiry online, you may think you are dealing with the factory direct but sometimes, it’s an agent or middleman who will farm the work out to a factory of their choosing while taking a cut of the money. Sometimes communication stops and they leave you wondering if they will ever produce your product. Worse still if your delivered product is wrong, you may have no recourse for a fix or refund.
How to Find a Manufacturer You Can Deal With Directly:
Using a factory you don’t have a recommendation for is risky. Try to find someone in Australia who has used a Chinese factory to manufacture a product from the same materials . While it’s no guarantee, you’ll reduce the chances of disappointment.
5. Communication Difficulties
It doesn’t matter where a product is made, there must be clear communication between the you and the manufacturer. With so many things that can go wrong, clear communication is the only way to make sure everything goes smoothly.
Most Chinese students learn English in school but, in practice, English language skills are generally poor when doing business in China - less than one in 100 Chinese people speak English.
How to Overcome Communication Problems:
Use clear diagrams, photos and easy to understand instructions during the design phase. Never assume the producer knows what you want.
Always ask for a sample of the product so you can check there hasn’t been a communication break-down.
If you are finding it hard to communicate with your supplier during the early interactions, chances are it will only get more difficult from there. Keep looking until you find one that has sufficient communication skills.
Reducing the Risks of Manufacturing in China
Vara Allied has long-standing relationships with suppliers in a range of manufacturing industries. It’s this trust and experience that ensures our clients’ products meet their expectations.
If you are having an issue with your current Chinese manufacturers, call Vara Allied on (08) 6161 8041 or contact us online.