KNOWLEDGE BASE Manufacturing In China
Manufacturing in China
China is one of the choice locations for companies’ manufacturing operations worldwide. According to Deloitte's 2016 Global Manufacturing Competitiveness Index, China is currently the most competitive manufacturing nation, with cost competitiveness being a significant driver. Many companies choose to manufacture in China even though they do not sell in China. This section will provide an overview of the Chinese manufacturing landscape, explain the pros and cons of manufacturing in China, and describe how to find a reputable manufacturer in China. You will also find expert tips and advice throughout the section.
Chinese Manufacturing Landscape
China is a large and diverse country, with many major cities and business centers. Below is a discussion of the largest manufacturing centers.
Shanghai is located on China’s central coast roughly equidistant from Beijing and Guangzhou. Shanghai is a very important economic, financial, trade, and shipping area in China. It is one of the world’s largest and busiest ports. Some of the main products manufactured in Shanghai are communication equipment, automobiles, textiles, electronics, steel, chemicals, petrochemicals, and biomedicine.
Beijing is located north of Shanghai at the northern tip of the roughly triangular North China Plain, which opens to the south and east of the city. Beijing is another important manufacturing hub in China that primarily manufactures pharmaceuticals and electronics. Beijing is also a leader in bio-engineering and information technology.
Tianjin is located south of Beijing on the west coast of the Bohai Gulf. Tianjin is Beijing’s sister city and another manufacturing giant. Tianjin is a leader in aerospace and aviation, mobile phones, automobiles, and alternative energy products.
Guangzhou is located in southern China just north of Hong Kong and Macau on the South China Sea. Guangzhou is the main manufacturing hub of the Pearl River Delta. There are thousands of factories in each of the city’s manufacturing zones. These factories manufacture a huge variety of products.
Shenzhen is located in southern China directly north of Hong Kong on the South China Sea. Shenzhen is known worldwide as an electronics manufacturing hub.
Pros and Cons of Manufacturing in China
There are many pros and cons of manufacturing in China, which vary depending on company size, budget, industry, etc., that should be carefully considered and weighed. Below is a non-exhaustive discussion of considerations each company should make.
Lower cost: It is cheaper, in general, to manufacture in China. Although you must factor in the cost of shipping and duties, which you won’t have if you manufacture domestically, it is still likely cheaper to manufacture in China.
Be aggressive in your negotiations, particularly on the price. Never pay the entire contract price before your products are delivered. 30-50% is sufficient to show the factory that you are serious about the contract. Some people split the payments into 3-4 small payments and some manufacturers will accept as little as 10% down. For more tips on payments in China, Read 7 Things You Should Know About Making Payments Into And Out Of Mainland China.
Better service: Chinese manufacturers want your business, so they will often go out of their way to get it. Some Chinese manufacturers are also happy to work with smaller companies. Be aware that service levels may change once you have signed the contract, so be sure to make your expectations for your ongoing relationship clear.
Higher output and quick turnover: Chinese manufacturers are known for their high capacity and quick turnover times. Many Chinese factories have the capacity to produce large orders and in a timely manner. When a Chinese manufacturer tells you it can have your order done in four weeks, it will very likely be done in four weeks. Make sure your contract clearly states what will happen if agreed-upon schedules are not met.
Access to Chinese market: The Chinese domestic market has grown rapidly over the past few years. If you’d like to enter the Chinese market, manufacturing in China will make it easier and cheaper.
Intellectual property protection costs: Intellectual property protection and enforcement is expensive and high risk in China. You need to ensure you have protected your IP rights from infringements by your manufacturer as well as other companies and individuals. You also need to understand the costs associated with and the time required to detect and enforce your IP rights in China. Always use an attorney well-versed in Chinese IP, which will likely be a local attorney. You can find IP attorneys in Globig’s Marketplace under Patent Services and Trademarking.
Finding a factory: It is not easy to find a reputable Chinese manufacturer, but there is a lot of help available. Details on how to find a Manufacturer in China are described below.
Language and communication barriers: Working in a foreign language is difficult, but working with another culture adds an additional challenge. Chinese business culture is nothing like western business culture, which means you must be even more diligent with your Chinese business relationships.
Stigma: Unfortunately, there is a stigma around products being made in China. This stigma is just something that you will have to learn to live with if you decide to manufacture in China. Keep in mind, people buy products manufactured in China every day throughout the world. Some of the best selling brands manufacture their products in China, so don’t let this be the deciding factor. Remember, people shop with their wallets before their patriotism.
Higher minimum order requirements: Because Chinese factories have a lower profit margin than many other countries, they tend to have higher minimum order requirements. If your business cannot accommodate these high minimums, you may need to manufacture elsewhere. You will likely be able to find a factory that is willing to product smaller orders, but the price per unit might increase.
Shipping: When companies manufacture abroad they inherently incur the extra costs of shipping, which includes tariffs and duties. These shipping costs, tariff and duty , should be part of the total cost you use to compare to the cost to manufacture in-country to determine whether manufacturing abroad is the most cost effective decision. Likewise, the extra time it takes to ship products should be considered.
Quality: China gets a bad rap for poor quality manufacturing. This may or may not be true based on your specific manufacturer and the product(s) you are manufacturing. Hiring a trusted local agent to manage and regulate your manufacturing process, including quality control, may be a great option. Either you or your agent should make in-person inspections for quality and conformity, before the entire order is completed. It is also a good idea to insist in writing that you can conduct a quality/conformity inspection at any time during the manufacturing process.
You should always require a perfect prototype of your product, multiple prototypes is better, even if this takes a bit of time and back-and-forth between you and the factory (see more on this below). When negotiating your agreement, stress quality, if that is important (which it probably is), even over speed and volume, which are what many Chinese manufacturers focus on.
How To Find a Manufacturer in China
Get recommendations and leads from:
People and companies within your network
Industry trade groups or associations
Sourcing Service Provider
Online directories of overseas manufacturers (see the resources section below for links)
Your local Small Business Administration or World Trade Center
International trade shows
An Internet search (Alibaba started out as a resource for finding manufacturers in China, it still is one of the best resources for Chinese manufacturing today)
Look for the following in a manufacturer:
A manufacturer that makes similar products. Ideally, the manufacturer you choose specializes in your type of product. Some manufacturers will offer to make just about anything, which means the quality may be poor.
Good reviews from individuals and companies that currently use or used the manufacturer in the past are crucial to finding a reputable manufacturer. You should seek reviews from companies you know, the most obvious place is the person or company that recommended that particular manufacturer, and online. You can also request references from the manufacturer’s bank(s), current and former customers.
Seek manufacturers that export mostly to the US or Western countries. These manufacturers tend to have higher quality standards and have already proven that they meet the expectations of Western importers. They are more familiar with compliance, e.g., product safety standards and labeling and packaging regulations. The also have experience with the logistics of shipping products internationally.
Reputable Chinese manufacturers are willing to provide you with their business license, documentation of their quality control system, and any other related certifications.
Once you have narrowed down your list to only a few manufacturers, you must get a nondisclosure agreement in place and then a request for quotation (RFQ). A nondisclosure agreement should be signed before you send the manufacturer product prototypes or any specific product details. Your quotation should include:
Minimum order quantity (MOQ): Every manufacturer has a minimum order quantity requirement. In general, the more units you order, the less each unit will cost.
Prices for samples: Before you commit to a manufacturer, you must have a sample of your product made to inspect its quality. Prices for samples vary widely, from free to a discount to the normal manufacturing price.
Prices for production: Find out how prices change depending on your order volume. You should also ask for a breakdown of the per unit cost, including the manufacture of the product, shipping costs, tariffs, and anything else the manufacturer includes in the price.
Time to manufacture: Determine how long it will take to receive your order, which includes the manufacture and shipping time.
Payment terms: You need to understand all payment terms, including how and when the manufacturer expects to be paid.
You will likely need to get a RFQ from multiple manufacturers. Once you have reviewed the RFQs and decided to move forward with a particular manufacturer (or a couple), you should ask for a sample. Keep in mind, there might be slight disparities between your sample and the prototype, but this is to be expected at first. It may take some back-and-forth and a couple of samples to get your product right. This is an important part of the process of creating a working relationship with the manufacturer. If you hire a local agent to act as a quality inspector, you should share a sample with your inspector so he can ensure future production is of the same quality.
Most companies will visit a factory in-person, or send their trusted local agent to inspect the factory. If your product is not complex and you find a trusted manufacturer, you may decide not to visit the factory in-person. However, if poor quality is a substantial risk to your company, you should visit the factory in-person. If you are concerned about the manufacturer’s legitimacy, you can tell the manufacturer that you will conduct an in-person visit, which is scare off fraudulent manufacturers ,while legitimate manufacturers will welcome your visit.
The Manufacturing Contract
Chinese manufacturing contracts are an imperative part of the manufacturing relationship. You should always have a written contract for all business activities in China, written in Chinese. Many Chinese manufacturers still like to use supply agreements that look like nothing more than a sloppy purchase order. While manufacturers may say they like these supply agreements because they save time, the more likely reason is because they don’t protect buyers in the way manufacturing contracts should. Do not fall for this, take the time to draft a manufacturing contract that will protect your interests.
Manufacturing contracts will vary by company, but there are many provisions that are universally included in manufacturing contracts in China. You should never use a template, but rather work with a local attorney to draft an agreement(s) for your specific company and manufacturing relationship. Finally, your agreement should protect you, but not so much so that no manufacturer will sign it. Below are some of the most important and commonly included provisions.
Your contract should be written in Chinese, not translated into Chinese from another language.
Pricing: Include detailed pricing provisions in your contract. Your manufacturer will not be shy about asking for more money several months after signing the contract for inflation and rising labor costs. If you want a fixed price for a specific period of time, a volume discount, a specific pricing model based on the bill of materials, or any other type of pricing adjustment mechanism, make sure this is detailed in your contract. If you sell some products in China and export some, you will need more than one pricing model to account for the impact of VAT and title transfer rules on the exported products.
Bill of Materials: Include a bill of materials (BOM) provision in your agreement. A bill of materials (BOM) is a list of exact components to be used in fabricating the product. A BOM will help prevent your manufacturer from substituting cheaper materials and components at his discretion.
Inspection and Quality Requirements: Include detailed product and packaging specifications, quality control, and inspection procedures. Your contract should permit you (or someone you designate) to inspect the goods at any time before the goods are shipped and you have made your final payment. You may want to inspect the products before shipping and after arrival at the final delivery location.
Product Warranty: In the past, many manufacturers would not provide a product warranty. Today more manufacturers are will to offer product warranties against product defects for which they are responsible. The warranty period is generally measured from the date of shipment since manufacturers won’t know the date of sale.
Rejected Goods: Include a provision that clearly sets out what your manufacturer will do with your rejected goods and the damages (amount) your manufacturer must pay you if he does not abide by the rejected goods provision.
Tools, Jigs, and Mold Ownership/Return: Include a provision that all tools, jigs, and molds belong to you (your company) and must be returned to you when your relationship ends. Include in this provision a penalty fee, contract damages, to be paid if the manufacturer fails to return these items to you.
Suppliers: Include a provision that requires that your manufacturer inform you and get your permission to use a new supplier.
Subcontractors: Include a provision that outlines your manufacturer’s use (or prohibition of the use of) subcontractors. Many experts will tell you to simply forbid your manufacturer from using subcontractors. If you allow your manufacturer to use subcontractors, make sure your manufacturer remains liable for anything subcontractors do. You may also include in this provision a requirement that your manufacturer inform you of and get your permission to use subcontractors, including permission for specific subcontractors.
Marketing or Selling Your Product to Others: Include a provision that prevents your manufacturer from marketing or selling your product to anyone other than you (your company). The manufacturer likely has no interest in selling your product, but has a high interest in selling your IP for profit.
Selling to Customers Directly: Include a provision that prevents your manufacturer from selling your product directly to customers. Similar to the above provision, this can be laid out in a Chinese enforceable NNN (non-use, non-disclosure, non-circumvention) agreement.
IP Protection: Although you will have already registered your IP in China (and your other major markets), you may have know-how and trade secrets that are not registerable. If that is the case, you need to protect this know-how and these trade secrets in your manufacturing contract. You should address your manufacturer's work with competing companies (whether that is permissible) and how production teams and lines will be segregated.
Contract Damages for IP Infringement: Contract damages are the most effective and preferable remedy for IP infringement. Make sure these damages are laid out in your agreements.
Dispute Resolution: Include detailed provisions on how disputes will be resolved. Because different disputes may be better resolved in different manners, you should consider the best dispute resolution, including resolution process, for each type of dispute. For example, when your manufacturer doesn’t meet product specification or deadlines, you may want to try to work that out together before initiating any formal resolution process.
Some experts will tell you that your contract should be governed by Chinese law and enforceable in Chinese courts. Others will say that it depends on the type of remedy you seek. For example, if you are a US company and you want monetary damages and arbitration, that should occur outside China and be governed by US law because China is bound to recognize foreign arbitral awards, but not US court judgments. Conversely, if monetary damages will not resolve the dispute, you may want to resolve the dispute through litigation in China. For example, if your manufacturer violates your manufacturing contract, you may want an injunction, which must be handled in Chinese courts.
KNOWLEDGE BASE Manufacturing In China