In the past few decades, China has grown to become a major economic power. Much has changed for the country since the government decided to allow international trade and embrace the global market. China’s economic wheel began to turn very fast. These days, China is a giant, not only in terms of manufacturing but also in purchasing power. The country’s GDP is expected to reach $13.2 trillion in 2018. China’s large population plays a crucial role in both aspects. The large workforce means relatively inexpensive wages and a huge market to sell products.
It is not surprising, then, that even the biggest most reputable brands in the world have for a long time now been shifting manufacturing to Chinese factories. They get the benefits of low production costs and, in many cases. direct market access to Asian consumers.
China’s outsourcing market grew by 30% in 2014, and a lot of companies from other countries have moved their own headquarters to China to establish a business. Compared to many of its neighboring countries, China does a better job of retaining its place in the low-end industry segment. The government has been hugely supportive of this, introducing subsidies, incentives, and good infrastructure to keep local companies in an extremely competitive global market.
However, this does not mean that China excels only in manufacturing low-end products. There has been an on-going effort to make higher-value products. HSBC reported that China’s transport-equipment and machinery industries grew 46% in 2015 (a significant increase from 21% in 1995) even when its lower-value exports actually declined.
The main reason to consider manufacturing in China is almost always the lower manufacturing cost. Especially for mass-market products, low production cost means that you have enough supply to maintain competitiveness in the market. Some companies also choose to outsource to manufacturing facilities in China to ease the distribution process to other countries. When the manufacturing process is properly handled elsewhere, your company can focus its resources on research and development for future products.
Here’s a more detailed explanation of some of the biggest advantages of manufacturing in China.
1. Lower Production Cost
Working with a manufacturing facility in China means you can reduce the production cost, without reducing volume output. This is by far the primary reason why U.S firms and entrepreneurs put up with the disadvantages of manufacturing on the other side of the world.
2. High Output in Less Time
Some domestic factories in the U.S. are limited in capacity and time, but this is never the case with their Chinese counterparts. Once again, cheap labor costs play a crucial role in this aspect. You can hire more people to complete volume-demanding production while requiring less money than domestic facilities do. There are certainly ethical considerations when it comes to the low cost of labor in China, but not all facilities are exploitative. Do your due diligence.
3. Easy Market Expansion Opportunities
When you have products made in China, chances are you can also market the goods to the local market. Companies that outsource production actually do more than just overseeing the manufacturing process. They follow-up by establishing a supply chain and local marketing efforts. They hire local employees and acquire equipment to support their ventures.
There is no need to ship the goods from overseas because the factories are already in China. With over 1.3 billion potential consumers, you get the promise of good returns. This is a big advantage if you plan to sell your product abroad.
The biggest caveat to all of this is that manufacturing overseas typically only makes sense if you’re dealing with very large production runs. Manufacturing in China also comes with a lot of drawbacks, and these can only be offset when you are taking advantage of bulk ordering. Depending on the type of products you plan to make, overseas outsourcing may not be a viable option at all. Weigh the benefits of cheaper labor against the following significant disadvantages:
1. Finding a Factory
The first challenge is the difficulties finding the right factory that’s willing to manufacture your products. It takes extra effort to develop relationships with facilities located on the other side of the planet.
It’s important that you do your due diligence here, not only so you know you’ll receive good service, but also to make sure that the facility you’re considering is reliable and above-board. You should make at least one trip over to visit them for yourself, if you can.
You can look for companies online or visit tradeshows. This involves added costs, stress, and time. It can also be difficult to find factories in China that are interested in dealing with you at all unless you’re looking to manufacture hundreds of thousands of units.
Here’s a worst-case scenario that’s more common than you’d believe. A factory will agree to take you on as a client, but because they are typically dealing with multi-million-unit orders, you barely register on their radar at all and your product order is delayed and neglected.
China has opened itself up to international trade, but that doesn’t mean that everyone is proficient in English, and you probably don’t know much Mandarin or Cantonese. Hiring a translator can make the business run smoother starting from the initial negotiation to the production process. There are a lot of things you’ll want to discuss with your Chinese partners, making a translator necessary. But, again, this is a cost that you need to weigh against the savings in labor costs.
Shipping can be a real pain. Shipping from China means having your products packed up and put on cargo ships, which then sail around the globe. This leads to long lead times and significant shipping costs. Depending on your distribution network, these costs can vary. How you deal with the items once they arrive State-side is also an important consideration.
It is usually much easier in this regard to deal with local manufacturers. Inventory management becomes very important when you’re dealing with international lead times. If your items are out of stock, your customers will go elsewhere. The added time spent in transit means you always need to be thinking two or three steps ahead when dealing with overseas manufacturers.
4. “Made in China” Versus “Made in the U.S”
There is a certain stigma attached to the ‘Made in China’ label, and a certain prestige attached to products ‘Made in the U.S.’ Whatever you might think about the validity of these notions, the reality is that many consumers value domestically manufactured products and are often willing to pay a premium for them.
This is something to consider if the margins you would be making by manufacturing in China are marginal. Once all the shipping, travel, and translation costs are taken into account, consider the fact that you might be able to sell your product at a higher price point with that coveted “Made in the U.S” label.
5. Quality of Work
We’ve all seen those knock-off purses and sneakers that are made in China out of shoddy materials and are quick to fall apart. However, manufacturing in China isn’t necessarily a death sentence for your product. In fact, Chinese manufacturers produce good products more than they do bad ones.
There is one caveat to that, which is that you shouldn’t manufacture complex, sophisticated items in China like electronics or clothing with intricate designs. If your product is a simple textile or gadget with just a few parts, you shouldn’t come across any problems as long as you vet your manufacturer. Make sure to routinely check the factory for quality. If you do go with the Chinese manufacturer, connect with an agent who can ensure the factory is always following best practices and that the goods are being produced accurately and on time.
6. High Minimum Order Quantities
Because Chinese workers typically work for less (meaning lower profit margins), the factories require very high minimum orders. If you’re looking for small-batch manufacturing or one-offs, you’ll have trouble getting your needs met in China.
7. Intellectual Property (IP) Risks
One of the concerns associated with manufacturing in China is the risk posed to intellectual property (IP). The enforcement of IP protection is an issue consistently raised by the US-China Business Council (USCBC), and fortunately, the Chinese government has recognized this concern and IP protection is improving. For example, the Chinese government has begun to increase the number of IP courts to help manage IP issues.
However, there are still challenges. With long-standing issues in terms of uneven enforcement, trade secrets, and procedural barriers, it’s important for companies to be aware of the level of IP protection that they’ll need and to then develop corporate protection strategies to combat these risks.
Ways to Counteract Intellectual Property Risks: Patenting is a simple way to reduce the risk to your IP. Prior to manufacturing, you should register your IP with either a trademark, brand name, copyright, or domain. This prevents copy-cat manufacturers from stealing IP without consequence, as well as preventing someone else from patenting your IP. You don’t want to be in the position where you have to buy the rights for your own IP in order to continue manufacturing.
Changing the value chain of a product’s development can also help protect IP. One way to do this is by splitting research and development tasks between departments in the US and China. Compartmentalization can help keep critical components of the manufacturing process out of China, therefore reducing the risk of copy-cat manufacturers employing reverse engineering tactics. Without the full picture, there is less risk to IP.
Alternatively, a company can set up a Chinese research and development department to strengthen its relationship with Chinese partners. By creating a level of trust with your manufacturing partners, there is a greater incentive to avoid leakage. In addition, developing a good relationship between your company and the Chinese workforce is important. If employees feel secure and wish to develop a long-lasting career with your company, then they will be more loyal, therefore reducing risks to IP.
Whether you choose to compartmentalize your company or expand research and development, the easiest tactic to protect your IP is to be proactive. Browse Cad Crowd’s patent services for more information on how to begin the patenting process so you can start protecting your IP.
Balance Everything Out
The advantages and disadvantages of manufacturing in China need to be balanced out. You can’t have only one without having the other. The key to a stable manufacturing process is to consider your options carefully and take precautions.
When it comes to rapid manufacturing and prototyping, you definitely want to work with U.S companies. U.S manufacturing has actually seen a bit of an upswing in recent years, as manufacturing becomes increasingly automated and the cost of labor becomes gradually less important. Donald Trump’s promise to penalize American companies who choose to manufacture overseas is also something to consider, although these promises have yet to come to fruition.
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