Posts

Manufacturing in China pros and cons: Compare your options here!

Manufacturing in China Compare some proscons of your options here

Time to compare your options for manufacturing in China

When it comes to manufacturing in China there are a number of options for companies to choose from such as registering a WFOE, dealing with a sourcing agent or partnering with a contract manufacturer. Finding the right manufacturing solution for your company and its specific needs is certainly possible, but the question you have to ask yourself before you risk wasting your time, your money and possibly losing your nerve is, “Which of these solutions fit in best with what my company needs?”.

Knowing the pros and cons of each of these options all of this and how each different option may fit in with your specific needs is the very first step in deciding how you want to take on manufacturing in China. To this end, PassageMaker has compiled an infographic that provides a head-to-head of the pros and cons of some of the available options for companies looking to manufacture in China. Our infographic covers:

  • WFOE
  • Contract Manufacturer
  • Trading Company/Agent

Take a look below to discover what the manufacturing in China pros and cons are…

shenzhen_infographics1

An insider’s look at options for manufacturing in china today!

An insiders look at options for manufacturing in China

Manufacturing in China from my perspective

During my 20 years living in Asia, I’ve owned or operated a number of different business entities in China, ranging from manufacturing WFOE’s to US-China joint ventures to trading companies to buying offices. I’ve also dealt with agents, factories and service providers of every variety imaginable, from professional companies to total scam artists.

China is not only a massive market but it changes rapidly, so I don’t claim to be an expert on all aspects of your China business. And anybody that claims to know “everything about China” should not be taken seriously! I’ve had my share of success as well as failure, and this has prompted me to compile a whitepaper where I’d like to share some of the key lessons, pitfalls and best practices that I learned the hard way when answering the deceivingly simple question of “what are the options for manufacturing in China?”.

Read on to find out what you can expect from this whitepaper and how it will benefit you…

“What can you expect?”

This whitepaper covers each of the following options for manufacturing in China:

  • WFOE
  • JV
  • Contract Manufacturer
  • Sourcing Agent

For each of the above mentioned supply options, as well as some of their lesser known variants, I go over the pros and cons in great detail, share information on their costs and divulge insider information based on my experience.

How can you benefit from this whitepaper?

My goal is to help the reader identify the best option for their particular needs as selecting the right partner is the single most important step in the overseas manufacturing process.  And the “right” supply option is highly depending on the buyer’s particular mix of order size, budget, available time, quality level, intellectual property exposure and general China understanding.

Below you can see the 5 key criteria I have used to help readers make a decision about which production option is best for their particular needs:

1. Level of Chinese Expertise Required
How well do you need to know the language, business culture & legal systems.

2. Typical Order Size
Does the buyer have to be a certain size?

3. Control over Lead-times, Intellectual Property, Quality Standards, Social Compliance & Price
How exposed is the buyer to non-confirming goods and are there additional costs needed to ensure quality standards are achieved? How hard is it to be a responsible corporate citizen in terms of workplace safety, labor practices and environmental protection? How exposed is the buyer to having their ideas ripped off?

4. Transparency
Does the buyer get to know the true identity, compensation and motives of the key players in the supply chain?

5. Tax Complications
What’s the impact on global taxes and the costs of filing at home or abroad?

 

Contract manufacturing in China: Fight gray channel imports!

Contract manufacturing in China Fight gray channel imports

The following is a case study on how to protect your brand and prevent gray channels out of China from cannibalizing your markets.

I was recently contacted by an overseas brand of electronics to help them understand how and why the marketplace was being flooded with defective merchandise made under their brand.

Background: Contract manufacturing in China

Buyer designs and distributes electronics around the globe under their own brand.

They have almost a dozen suppliers/ contract manufacturers in China.

Brand is very serious about quality, customer services and maintaining their margins.

They recently discovered their products for sale online in China and suspect this may be the source of un-authorized “gray channel” imports into their major markets in N. America and Europe. The gray channel exports are priced well below MSRP and appear to have serious quality issues and could impact the global reputation of the brand.

Step One: Investigation

Technical review of samples found in the unauthorized gray channels confirmed that the products originated among the brand’s contract manufacturers in China. The factories do not admit responsibility.

Key finding:

Further investigations confirmed that the majority of products in the gray channels were directly linked to the batches of production in China which were rejected by the buyer due to quality issues.

Strategy implemented by PassageMaker (the sourcing services provider brought in by the brand to investigate and solve the problem):

Purchase Order Templates were adjusted to clarify that rejected goods must be destroyed by supplier at their cost.

3rd Party Inspectors would be hire to record the destruction.

Client’s brand was registered in China. Previously registered only overseas. With the IP now protected in China. The brand holder can take legal action in China if needed.

3rd Party Investigators were retained to monitor both Chinese and English language websites like TaoBao.com and T-mall as well as the websites of the contract manufacturers to look for unauthorized products.

3rd Party Investigators were retained to monitor tradeshows in China and HK to look for unlicensed products.

Brand holder clarified its marketing materials and product packaging to state that only product purchased from authorized distributors are under warranty. In this fashion the demand side could also play a role in preventing gray channels.

Between production runs the tooling was removed from the factory and stored at a 3rd party facility in China to avoid unauthorized production. (Visit  “Tool & Die Steward.”)

Important Concepts:

Before the adjustments above, the suppliers were essentially selling rejects out the factory back door to subsidize their costs of production. In some cases, because of the tight quality requirements of the buyer combined with the poor quality system of the supplier, this back door income was a significant source of revenue for the suppliers. Cutting off this source of revenue was hard medicine for the supplier to swallow. Two methods proved successful to remedy the situation.

Some suppliers were dropped and a sourcing feasibility study was conducted to find more professional replacements suppliers who could meet targets for price, quality, lead-time and trust.

The suppliers worth continuing to do business with were given a sit down to explain why it was good for the supplier as well as the buyer to cut out the gray channels. Key points included:

Unlicensed products cannibalize revenue of the brand owners. If they lose money, they can’t place as many orders to the factory.

Brand holder is no longer tolerating unlicensed products and the parties involved face significant financial risk when caught.

The defective goods finding their way into the market are hurting brand reputation. If the brand reputation is gone, the orders for everybody will be lost.

Perhaps the most important message conveyed to the suppliers is that the brand wanted to have stable long term relationships with partners who could be trusted. To show their commitment to the suppliers, and to help the suppliers, the brand owners provided the following:

Accurate annual forecasting and projections. Suppliers love stability almost as much as they love volume.

Technical support and training to help suppliers upgrade their quality systems and finally understand that avoiding defects in the first place, not selling defects out the back door, is the best way to protect the supplier’s margin.

Periodic engineering reviews with suppliers to look for ways to reduce costs in production methods and materials, yet not compromise quality. These saving were shared between the factory and brand holder.

Interesting Side Note about www.TaoBao.com :

To our pleasant surprise, once ownership of the brand was confirmed to belong to our client, www.TaoBao.com was cooperative in helping to remove unauthorized product from their website. Moral to the story: register your brands and IP in China even if you don’t plan to sell there. Here are some blog posts and videos addressing how to register and protect your IP in China:

Protecting your Intellectual Property

Where can I find a partner to help distribute a product under my license for the IP?

China’s Legal System

Michael Jordan forgets to register his IP. Learn how not to make the same mistake.

Land Rover fails to register their IP (lessons for buyers)