China sourcing: Good Price and Quality but Limited Engineering/ R&D?

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What to do when the supplier has good price and quality, but limited engineering/ R&D?

Common dilemma: a small factory in China is excited about your order size, but they may not have the engineering chops of the big factories. The big factories have a full R&D department, but they are not interested in your small order.

A client recently asked:

I like my manufacturer but they are small, which is ok for now as I like the attention that comes with being a large client of a small but professional factory. But in other ways it’s bad, because they aren’t the fastest at developing new ideas or even getting all the kinks out of what they designed and made in the past. I am currently in talks with a couple other manufacturers, mainly for OEM products with our branding, but soon I will want to dive further into our ODM and need designers and such that I can trust. I trust that small factory a lot, but worry they can’t handle my need for R&D.

In general, these small companies are great at making a given widget at a good price when you give them your design with details of exactly how to make it. But they drop the ball when asked to create new designs.

Small factories are usually great at production but not R&D. The solution may be to let them focus on production and outsource design, to be specific, outsource the DFM (design for manufacture).

Here are my thoughts in detail:

Unfortunately, if you are doing anything new or customized, leaving the engineering to the typical small Chinese manufacturer is not the best option for the following reasons:

a) Intellectual Property Concerns.

Non-Disclosure/ Non-Compete Agreements are very hard to monitor and enforce with Chinese companies. Even if the supplier is paid for their engineering, they will feel a sense of ownership. That is very dangerous if you decide to change suppliers or stop production unilaterally. Some manufacturers will even leverage the engineering work done for your project to land other clients who may be your competitors.

b) Biased Designs.

The manufacturer will engineer the product as they see fit. That means engineering to Chinese standards rather than international standards. The engineering will also be tailored to the production methods of that particular factory, which may or may not be the design which leverages the best production efficiencies and technologies available in China at a national level. Furthermore, the engineering may be tailored for the Minimum Order Quantity (MOQ) that the factory desires, rather than the expected order size of the customer.

What are the global options for hiring an engineering firm to do the DFM?

If you find yourself in a situation where DFM work is needed but you are hesitant to allow the manufacturer or a Chinese based entity to arrange the DFM engineering files for the reasons stated above, don’t worry, there are still plenty of options.

To cut to the chase, my preference is to use China-based Western-owned Engineering firms. That means a pricing point for China-savvy engineering that is slightly more than a local Chinese firm but well below the hour rate back home. Plus they may even be willing to cap their engineering fees and ideally they have a policy to refuse to accept any compensation from suppliers. Because the last thing you want is an engineering firm that is secretly steering you towards a pre-agreed production method or location where they get a kick back. Let’s explore the other options for your reference.

> In India you will get slightly lower CAD/Engineering rates than in China, but if the production is going to be in China, they may not be capable of a DFM package fit for China in terms of using the right materials and production method. Savings gained from a good China-oriented DFM will easily out-weigh the upfront savings of Indian based engineering labor.

> Not only is N. American/EU/Australian engineering exponentially more expensive than Chinese, but also there are some common flaws:

a) A western production set up is highly automated due to costs of labor while in China there is more flexibility thanks to lower labor rates. A Western based engineering firm may not have a grasp on the realities of Chinese production. The result might be overspending on tool & dies and designs that aren’t efficient on a China production line.

b) Western engineering firms tend to operate like law firms in that they bill by the hour, sometimes without even a cap on hours in place. Also, they use junior staff behind the scenes to do as much engineering as possible in order to maximize their revenue.

c) Worst of all, engineers in the West tend to see their job as complete when the design is done, as opposed to China-based engineering that is more integrated into the trial runs and even production troubleshooting.

d) Because engineering is so expensive in the West, many engineering firms in places like the US and EU will quote engineering at/ below internal cost in exchange for a future margin or royalty when production starts. This is extremely dangerous because if the engineering firm is aligned with the supplier, they are designing for their benefit not the customers. Plus it is a common tactic to under quote the upfront engineering rates only to later raise the pricing on production once the client is locked in with the engineering/supplier partners.

One down side of using a China-based, Western Engineering firm is the time zone and ability to communicate face to face. Should you decide to have your engineering in China, make sure they have a good track record of keeping client’s happy as you’ll need to find a good communicator if you outsource your DFM to the other side of the world.

More tips for finding a partner for DFM and general engineering needs

Ask your account manager at PassageMaker for an introduction or visit the endorsed service providers list online (here) to meet reputable China-based engineering firms as we are happy to introduce the DFM firms we have used in past.

The next step is to contact the firms and learn if they will be a good fit for you. I like DFM providers that have at least 5 years of experience engineering in China for China.

Are they a legitimate company with proper business licensing?

Do they have a clear track record of performance? If they can’t give you some client references, run away. That is a very big red flag.

Are they focused on a certain set of services or do they try to do everything for everybody? Stay away from the sourcing-slash-engineering firms.

Once you narrow it down to a hand full of options based on initial talks and references, ask for an estimate on the DFM. What separates the great companies from the good ones will be the format and timing of their quote. If they take more than a few days to get back to you, it probably means that they don’t have well developed system in place. Try to avoid having your project serve as some engineering firm’s first attempt at doing DFM for China.

I like to have my payments staggered to the engineering firms so that they get paid for performance and only once pre-agreed project gates are reached.

Don’t be afraid to ask questions!Better to ask in advance before getting hit with surprise charges later.

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Wishing you successful China sourcing!

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