Over the years, China has seen incredible economic growth. One of the reasons is its ability to offer cheaper manufacturing than other countries around the world. However, shifting your production to China has a number of both pros and cons - it's a matter of weighing these up and deciding if it’s worth the effort of selecting a Chinese factory over an Australian factory, or even looking at your options in other countries.
What many people don't realise is that most of the risk associated with manufacturing actually comes through sourcing the wrong factory to produce products. There is a winning formula, which is ensuring you shortlist specialist manufacturers to choose from and ensure the goods are being produced at the right price.
5 Pros of Manufacturing in China
There are many benefits to manufacturing in China, whether your main intention is cheaper prices, increasing gross profits, or something completely different.
#1 It’s Cheaper to Manufacture in China
This is well-known around the world, but it's a major benefit of opting for Chinese manufacturers. As a result of China’s burgeoning population, there is plenty of cheap labour - few countries in the world can produce merchandise 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 products than it is to make them locally.
#2 Improved Gross Profits
A lower unit cost can greatly improve the gross profit margin of your business. In some business environments, companies are unable to improve their profit margin solely by increasing the sale price of their products. This can be a result of market pressure, or even certain economic factors. If this is the case, the only way to boost profit margin is to reduce the cost associated with manufacturing - and this is a possibility for companies looking at switching their production to a Chinese factory.
The Gross Profit Margin Ratio Formula
In order to calculate their gross profit margin, a business will subtract the cost of goods sold (COGS) from total revenue, before dividing the resulting number by total revenue.
- Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue
Though it may seem simple, reducing the COGS is a good way to improve the gross profit margin of a business - even if this reduction is a marginal one. The ideal profit margin range is different depending on the sector, though this formula is used around the world.
One of the most common ways businesses reduce their COGS is through moving their production offshore, making Chinese manufactories a popular option. Over the years, many businesses throughout the world have shifted their production to China, which has contributed to the growth of its economy.
#3 Fast Turnaround Times
The sheer volume of workers available in China is what can result in a fast manufacturing turnaround. Even considering the time factor associated with freight and shipping from China to Australia, merchandise that is produced in China can still arrive in Australia faster than if produced domestically.
#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 the specialist skills and equipment needed to manufacture their product.
#5 Scalability
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 Selecting a Chinese Manufacturer
While there are some great benefits associated with choosing a Chinese factory to fulfill your order, there are some disadvantages. 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 these disadvantages can actually be managed and avoided.
#1 Intellectual Property Risk
One of the risks many people worry about when manufacturing in China is theft of intellectual property (IP). 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 produce themselves, or even sell it to someone else who will.
You may believe that you have all the right patents in place, but sometimes they may not be enough to protect you. Following pressure from the United States, the Chinese government agreed to crackdown on IP theft in late 2018. They have introduced tough new penalties, but the risk still 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 stealing 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 order quantities and won’t consider small orders. However, if you are manufacturing a product for the Australian market, you may not need as high a quantity that an American company may need to 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. This is generally the result of production quality being so bad that there was no chance of the product being salvaged or sold.
How to Overcome the Risk of Poor Product Quality
A reputable factory in China is not likely to produce poor quality merchandise, particularly if they are governed by strong quality control measures. However, it can be difficult to tell a good factory from a bad one (or whether their quality control is up to scratch) 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're Doing Business 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.
Find a Manufacturer You Can Deal With Directly
Using a factory that doesn't have any reliable recommendations is risky. It's important to 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
No matter where in the world a product is made, there must be clear communication between the business and the manufacturing factory. 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.
Overcoming 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) 6115 0118 or contact us online.
