Despite the global economic challenges of recent years, China remains the world’s manufacturing leader. Some international corporations may be choosing to move part of their operations to other regions; however, China is still the number one destination for entrepreneurs seeking to turn their idea into a tangible product.
China’s skilled labor force, superior infrastructure, expertise in manufacturing for diverse industries, and first-class logistics network, are what sets it apart from the competition. But no matter how sophisticated the manufacturing industry may be, it can be challenging for a company to navigate this process successfully.
There are several common mistakes unexperienced companies fall victim to when embarking on their manufacturing journey. There is no perfect formula, but avoiding major pitfalls and following best practices could become the secret to creating a good product.
Before the process begins, every company should evaluate the advantages and disadvantages of manufacturing in China. Some reasons why you should manufacture your products in China include lower production costs, high output in less time, large number of suppliers, and future market expansion. On the other end, the number of challenges can also be considerable, among them the language barrier, complicated quality control, a high minimum order quantity (MOQ) and intellectual property infringements.
Turning an idea into a tangible product is not easy. It starts with knowing your product inside out, which is the most critical part of the process. Developing clear product specifications so the manufacturer knows exactly what is needed in terms of quality, function, materials, dimensions, etc. will save costs down the road.
By clearly specifying the exact product requirements, the quality of the product will be guaranteed and anything out of spec will be the responsibility of the factory.
Companies should also develop and test a prototype of the product. This is something that can be done locally or in coordination with the manufacturer. A prototype gives you the opportunity to review and test the physical product, find any defects, and resolve any design issues before going into large-scale production.
The second most important step is to find and vet the right suppliers. This part of the process can be the most daunting. It is difficult and time-consuming to evaluate the large amount of information available and decide what is best for your business.
Some critical points to consider when choosing a suitable manufacturer include an open line of communication that includes a non-disclosure agreement (NDA), relevant business license(s) and certifications, MOQ (the lowest volume of stock that they are willing to produce), lead time performance, packaging, labelling, and shipping, and price.
Ultimately, you will be looking for a manufacturer that can produce your product at a good price. But as the saying goes “you get what you pay for”. One of the primary reasons why buyers receive poor quality products from a Chinese factory is because they pushed for the lowest possible price.
A lack of proper planning tends to create a chain reaction of bad decisions which companies later have a difficult time recuperating from. This often leads them into the hands of the wrong manufacturer.
Having excessive confidence in one supplier, and no backup supplier, may become a problem when the current relationship needs to be ended. Also, working with a large operation could mean that they won’t put their best resources in your project.
Companies should be careful with massively over-enthusiastic supplier’s projections, without requesting a specific plan, promises of an unrealistic go-to-market date, and promises of a certain product before the product design is mature.
It is critical to sign a proper agreement at the start of the relationship that will protect you and your product. Laws and regulations in China are different and you should ensure that your intellectual property is protected.
Another common mistake is believing that a ‘sourcing agent’ will make the process easier. This is correct if the agent is paid for their work, and they follow a certain process. However, it becomes a problem if the agent handles everything and blocks communication between the buyer and the manufacturer or it is paid a percentage of the number of orders.
This incentivizes them to act as the supplier’s sales agent, rather than watching out for your interest.
Once a company knows the product they want made, the materials, and the price, the search for the right supplier can start.
There are several ways to find Chinese manufacturers, such as using online directories like Alibaba (an international business-to-business platform where businesses can connect with manufacturers), Made in China (recommended if your company is looking to manufacture industrial products and parts) and Global Sources (Alibaba’s biggest competitor - It has a rating system and reviews).
Another way of finding manufacturers is by attending the most popular trade show in China, the Canton Import and Export Fair. It is held in Guangzhou twice a year and is split into 3 phases, the first phase is electronics, the second covers home decor, consumer goods and gifts and the third phase includes garments, shoes, textiles and office supplies.
If you’re unable to attend a trade show in China, there are trade shows in the United States that Chinese manufacturers visit. These gatherings are an incredible way to meet prospective manufacturers face to face, get information from them directly and compare suppliers in person.
There are also a few trade magazines or journals that offer a list of potential Chinese suppliers or manufacturers.
A source company is a third party that helps a company find manufacturers or suppliers for products. A good sourcing company should have a system in place to find a manufacturer that is low cost and creates high quality products.
Talking to business professionals in your sector or who have a similar interest may give you valuable feedback based on their personal experiences and an insight into manufacturers you might use.
Chinese manufacturing regions are located near major cities and economic zones. Seven out of the ten busiest ports in the world are in China.
Four of the major manufacturing hubs in China include Shanghai, with one of the busiest ports in the world and manufacturing of textiles, electronics, automobiles, communication equipment and steel; and Guangzhou, near Hong Kong, known for manufacturing pretty much anything, from automobile parts to fashion accessories.
Shenzhen is the world’s manufacturing hub for electronics, and it is also home to the world’s second busiest port. Computer and technology manufacturing, electronics and telecommunications are the biggest manufacturing industries.
In Ningbo, the manufacturing industry is growing rapidly because of its proximity to Shanghai. It’s known for manufacturing everything from textiles and garments, electric appliances to iron, steel, and biological medicine.
When you begin to look for different factories to manufacture your product, you might come across trading companies and sourcing companies.
Trading companies are not factories and don’t manufacture products, they are middlemen that source products from factories then increase the price of the products and resell them. They specialize in a particular industry.
Businesses might find it easier to work with a trading company as they often provide easier communication (with translators), more products and smaller MOQs. However, in China there is a problem with trading companies posing as factories, which is why thorough research and communication is important.
Trading companies usually have fixed prices that are much higher and no control over the production and quality of the products.
Sourcing companies are a third-party that helps businesses find manufacturers or suppliers that fit their specific needs. They usually have practices in place to help businesses find and evaluate manufacturers in terms of cost, lead time and quality control. A good sourcing company will have a deep knowledge and understanding of the language, traditional business customs and international trade procedures. They can be expensive to work with, particularly if you plan on ordering a small number of products.
In China, it is not uncommon that companies working with a manufacturer they have never used before fall victim to a scam. Whether it’s fraud, poor product quality, high costs or long shipping times, businesses may be taken advantage of.
But there are ways to prevent this. Look online to see if the supplier has good reviews from companies that sell a similar product and are a similar size to yours. If you are in contact with a manufacturer, ask for reviews from other clients.
Check business licenses. Manufacturers in China have a unique company registration number that you can verify by visiting the Chinese government website or by contacting their Bureau of Industry Commerce. You should not do business with them if you cannot confirm this information.
Ask for a sample item from the manufacturer in your first email to see the quality of their products, how long it takes to manufacture and how long shipping takes.
If possible, visit the factory or company in person. This is probably the best way to verify your manufacturers; you can see what the conditions for workers are, what the products look like in person and talk about quality, prices, and lead time face-to-face.
When you meet with a potential supplier and they go out of their way to make you feel welcome, taking you out to a lavish dinner, it does not necessarily mean they are the right manufacturer for you. All this is simply the standard way of making a sale in China. It does not mean they will treat you as a VIP customer throughout the relationship.
Not all China-based manufacturers are unethical, but if you assume that there is a high chance that a random supplier you meet is risky, you will take more precautions. That’s the right state of mind when operating in China.
To reduce this type of risk, the first step is to identify the type of “ideal supplier” you need. You will have your answer when you analyze all aspects and implications of your product design and define an informed strategy and a realistic plan.
Don’t rush and find yourself in trouble. Fixing issues too late in the process is 10 times more expensive in both time and money. Companies with no prior experience in product development systematically underestimate the time and effort needed.
Setting the right expectations from the start of your new product manufacturing project will help you reach your milestones and communicate your needs more clearly to your supplier. Your manufacturer won’t know your product as well as you do, for this reason drafting a product specification sheet will be useful at all levels — for engineers working on prototypes, for purchasers, for the manufacturing staff, and for all the inspectors along the process.
Once your product is on the market and is successful, it is likely to be copied by Chinese companies and fighting them might be difficult. Before that, though, there are ways to reduce the risk of being copied.
A lawyer should draft a non-disclosure, non-use, and non-circumvention (NNN) agreement that is applicable in a Chinese court, and have every Chinese supplier sign it before you disclose anything confidential to them.
When you contact potential suppliers, show them a part or product that is different from yours but requires similar processes. Then, only show your product to the 1 or 2 ‘best candidates’.
Companies who choose to develop a new product with their new supplier often forget to specify their requirements in two areas:
Open BoM (Bill of Materials) — A good BoM includes the full list of the parts making your product, the names and contact information of all the suppliers of these parts, the price of each part, the MOQ and lead time to order each part, etc.
All the intellectual property generated during this project should be yours, and all deliverables should immediately be sent to you.
Chinese manufacturers usually prefer to cover all the costs of product development because they want to own the resulting product and foreign companies far too often go along with this, without realizing this likely means the Chinese manufacturer will end up with the product and its related IP.
Choosing the right manufacturer is one of the biggest business decisions you will make. Before working with a manufacturer, you should ask questions such as the type of clients they work with, their lead time, their payment method, how big is the factory, what kind of quality assurance process they have and where they get their materials from.
Developing and maintaining a good relationship with your manufacturer in China can be incredibly important to your business success. If you have found a good supplier, you should aim to use them for as long as possible and create a good relationship with them.
To achieve this, communication is essential. And because you’re using an international manufacturer it is even more important. You should maintain regular contact with your manufacturer, keeping them up to date with everything going on with your business and letting them know of any problems or when you are not satisfied with their service.
Business culture in China is different from the West, and you need to learn about it. Be prepared for frequent and lengthy meetings or emails when communicating with your manufacturer and expect to build a personal relationship with them as well because their culture values this just as much.
Make sure to consistently pay your bills fully and on time and if you can’t, make sure you let your manufacturer know well in advance. Remember that they are a business as well and create a contract that specifies payment terms.
You should be honest with your manufacturer about your needs. You can’t expect them to predict or anticipate them. Being upfront with your manufacturers about your expectations will make the business relationship clear.
Quality control is one of the biggest problems businesses have when manufacturing in China. There are a few steps to ensure that you are satisfied with your product. Visiting the factory is one of them. This way you’ll be able to see their quality control practices in person.
If you’re unable to visit your manufacturer, you can hire a third party to inspect the factory and give a report to you and the manufacturer. There are several companies in China that provide this service and offer translators.
Foreign companies should also take into consideration the Chinese New Year holiday and how it will impact their production. Officially, it only lasts for a week, but manufacturing companies shut down 10 days before to give workers time to travel. This means that in the weeks leading up to the holiday there is a big rush to manufacture and ship products. This can lead to increased costs and a much longer lead and shipping time.
It can also take businesses up to a month to return to normal after Chinese New Year. It is common for people to either change jobs or not return to their job at all after the holiday.
To ensure that your business doesn’t suffer any losses during Chinese New Year, you should plan and figure out how much inventory you’ll need. Order your products well in advance and contact your manufacturer right away if there are any problems.
Quality control issues are frequent before and after Chinese New Year because there is so much going on and workers don’t return to work. Make sure you’re in contact with your manufacturer and have a quality control process or checklist in place for your products.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms. Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.