Many western companies outsource manufacturing to China to cut business costs and leverage the nation’s huge labor market.
However, you need to account for the organizational challenges and possible outcomes of shifting the production of components to another country. A prior understanding can help you devise an effective outsourcing strategy that fulfills your business goals.
In this article, we’ll discuss the seven key benefits and four major limitations of outsourcing manufacturing to China. We’ll also explore nine effective tips to help you successfully outsource your manufacturing processes to China.
Let’s get started.
Table of Contents
- 7 pros of outsourcing manufacturing to China
- 4 cons of outsourcing manufacturing to China
- 9 practical tips to follow while outsourcing manufacturing to China
7 pros of outsourcing manufacturing to China
Here are the seven advantages of choosing China as your manufacturing partner:
1. Find labor at affordable rates
According to the 2022 Statista report, China’s labor force approximately amounts to 784 million. Such a vast labor market invariably contributes to the low cost of hiring any Chinese worker.
The low labor costs favor any big manufacturing company requiring an extensive labor force for its large-scale production requirements.
In fact, as per the current exchange rate in April 2022, the average salary in China is 55,290 USD (US dollars). In contrast, the average salary in the United States and New Zealand is 94,700 USD and 67,558 USD.
Naturally, companies from North America and Europe can save a lot by outsourcing manufacturing to Chinese workers instead of hiring from the home country.
2. Apply latest manufacturing technology
Due to the abundance of skilled workers, China has been able to implement western innovations faster, helping to ramp up production and deliver high-quality products more efficiently.
In fact, as per the China Standards 2035 plan, the country aims to digitize almost every manufacturing process by 2035. Additionally, it intends to introduce several innovations in intelligent manufacturing equipment, electrical devices, semiconductors, spacecraft components, and much more.
China can help you access cutting-edge technology (like Augmented Reality, 3D printing, etc.) and release new products that consumers will love.
3. Improve core business processes
One of the benefits of outsourcing is that it allows you to contract ancillary tasks to any third-party service provider. Such a strategy helps you focus on your core business activity, enhancing your competitiveness and market position in the long run.
You can reach out to any Chinese manufacturer based in Shanghai, Hong Kong, or other regions for your manufacturing requirements. Consequently, your in-house team can focus more on other essential processes like testing product quality, performing R&D, and strategizing attractive launches.
4. Create a flexible supply chain
Many U.S. companies and businesses from North America or Australia contract manufacturing processes to China to scale the production of manufactured goods up and down as per their choice. It contributes to creating a reliable supply chain.
How so?
Usually, the Chinese supplier or vendor serves more than one client and tends to produce manufactured goods in bulk. So you can access their raw material and stock when you need them urgently.
On the other hand, if the Chinese supplier has surplus products, they can ship them to you in your next monthly order.
5. Leverage infrastructure investment
According to the 2022 Statista survey, China’s average infrastructure spending in 2019 was 10 times higher than that of the United States. Even the 2022 Trading Economics report reveals that China’s share of GDP from manufacturing will increase in the subsequent years.
Investment in infrastructure improves the ability of the Chinese economy to manufacture high-value goods.
So any foreign company can contract manufacturing processes to China with the assurance of getting high quality, on-time delivery of products.
Moreover, the Chinese Government has introduced the Made in China 2025 initiative to:
- Make manufacturing outsourcing more innovation-driven.
- Focus on quality more than quantity.
- Adopt sustainable product development practices.
- Improve the Chinese manufacturing industry through employee training.
- Support growth of skilled labor in the Chinese market.
6. Avail favorable government policies
Of all the countries in East and Southeast Asia, China enforces some of the best business policies to attract investors for offshoring or outsourcing manufacturing.
In 2019, the Chinese Government issued the Catalogue of Industries for Encouraged Foreign Investment. According to this, any foreign company can enjoy the following benefits:
- VAT applicable only for imports and flexible tax policies for exports.
- Exemption from customs duty.
- Additional perks and investment discounts for European or American companies that reinvest in the Chinese market.
- Reduced income tax rate (15%) for enterprises engaged in energy and transport sectors.
More than 80% of the policy encourages investment from any foreign country into high-end manufacturing.
7. Create a global footprint
Being an active participant in world trade, China imports from and exports to several countries in Asia, North America, and Europe. As a result, outsourcing manufacturing processes to China can give you easy access to lucrative markets.
Further, your knowledge of the Chinese market can provide insights into general consumer trends and preferences in other Asian countries. And since the world’s two most populous nations are in Asia, you can build a large consumer base. It can positively impact the bottom line of your business.
Now that we know the multiple benefits of partnering with Chinese manufacturers to produce goods let’s discuss some drawbacks.
4 cons of outsourcing manufacturing to China
Let’s look at a few challenges you may face while outsourcing manufacturing to a Chinese company.
1. Language barrier
Your Chinese employees may not be that fluent in English, making it difficult to understand the project brief, leading to errors or poor work quality.
Increased risk of miscommunications is one of the biggest cons to outsourcing work to any Asian country, be it China, South Korea, or Taiwan.
Ideally, you’ll need to hire a proficient translator or have a few bilingual speakers in your outsourcing team to mitigate the risks.
2. Lack of quality control
While China offers low manufacturing costs, its products are often of subpar quality compared to those manufactured in any foreign country.
It’s because Chinese products don’t meet the international standards of certifications or undergo strict regulations before being released into the market. And distributing low-quality goods can be a risky move for your business and may damage your company’s reputation.
You can tackle this problem by appointing personnel at the manufacturing facility to conduct frequent audits and ensure that only high-quality raw materials are used.
3. Risk of intellectual property theft
Before outsourcing manufacturing to any Chinese factory, you should carefully examine China’s trademark, copyright, and intellectual property laws.
Intellectual property theft is a common problem in the outsourcing industry. It happens when the service provider has access to your technical know-how and product design. Their manufacturers may exploit this knowledge to create and sell duplicate samples at a much lower cost.
To avoid this problem, you can draw up an NNN (Non-Disclosure, Non-Use, And Non-Circumvention) agreement preventing your employees from disclosing, using, or selling your trade secrets.
4. Longer lead times
Outsourcing manufacturing to China can significantly increase your lead times, i.e., the time it takes to create a product and deliver it to a consumer.
It may occur due to shipping delays, worker strikes, or energy shortages.
An effective way to eliminate this issue is to coordinate and follow up with your suppliers from time to time regarding the expected delivery dates.
Next up, we’ll explore some critical tips to keep in mind when you outsource the production process to any Chinese manufacturing facility.
9 practical tips to follow while outsourcing manufacturing to China
Before you tie up with any Chinese company, you need to learn about the best practices for outsourcing to China.
Here are nine effective tips that can help you successfully outsource manufacturing to China:
1. Hire a local sourcing agent
Local sourcing agents have connections with companies in the outsourcing destination and know where to find supplies for manufacturing. They can negotiate on your behalf with a Chinese supplier to get the best discounts.
The agents can also handle other manufacturing outsourcing issues like import or export duties, tariffs, and taxes. These can be challenging for American manufacturing companies who aren’t familiar with the norms of the Chinese market.
So you can use your agent’s skills to reduce expenses and also move goods more quickly along the supply chain.
2. Run supplier background check
You’ll need to verify the credentials of your Chinese supplier before you confirm the deal.
To choose the most suitable manufacturing partner from the shortlisted service providers, look into the following:
- Check that they are genuine manufacturers (not traders or middlemen) who can offer you the best price.
- Ensure they can meet your production requirements.
- Cold call each supplier’s office in China. Probe them for more information and see if their answers match the details they provided earlier.
- Ask each shortlisted Chinese factory for their business licenses, foreign trade and customs registration certificates, and bank account certificates.
- Visit to evaluate the factory conditions and if they’re aligned with quality control and worker safety measures.
3. Build cordial business relations
You need to respect the Chinese norms and social customs to maintain a healthy working relationship with a Chinese manufacturing company.
For example, the Chinese consider business cards an absolute necessity. So if you’re planning to meet your Chinese supplier, make sure you’ve sufficient cards where your designation and company’s market position (startup or MNC or SMB) is clearly stated.
These efforts can go a long way in solidifying your business relationships. It can help you negotiate future deals better and positively impact your sales and success.
4. Draw up an NNN agreement
NNN agreements are essential as they help protect your confidentiality and intellectual property rights during your dealings with any Chinese manufacturer.
Here’s what your NNN agreement will cover:
- Non-disclosure: It prevents trade secrets and proprietary information from being stolen or made public. It ensures that the outsourcing company leaks no confidential information.
- Non-use: It means that the outsourcing company can’t use the manufactured product for any purpose besides what is agreed upon in the contract.
- Non-circumvention: It keeps the Chinese company from undercutting your customers. For instance, if you’re increasing the product price, the outsourcing company cannot sell your product directly to your customers at a lower price.
If a Chinese company refuses to sign the NNN agreement, you should take it as a hint and discontinue any business discussions with them.
5. List product specifications and inspect frequently
Clearly state the quality of components you want to use during the manufacturing process.
Also, frequently audit the production line in the Chinese factory to identify any cheap raw material, worker negligence, or other manufacturing issues during the production phase itself.
This early intervention will allow your outsourcing company to deliver goods as per your specifications and expectations.
6. Place orders in high volumes
Buy the raw material most integral to the manufacturing of your product in bulk. You can avail huge discounts, save on manufacturing costs, and even the shipping cost as you’re just paying a one-time delivery fee for a huge order.
A large order can also establish your credibility and authority over the factory, reducing the chances of neglecting your bulk order.
7. Contact logistics service provider
Figuring out the shipping logistics is critical to successful manufacturing outsourcing.
Many American companies have turned to logistics providers to transport their manufactured goods and improve supply chain efficiency in recent years. These third-party service providers ensure that your goods are safely delivered to your warehouse right from the production factory.
8. Get your team on the same page
Once you’ve decided to outsource manufacturing jobs to China, you’ll have to send an official notice to all your employees.
For example, internal departments related to inventory management, logistics, and quality control may initially resist the decision to outsource and face job insecurity.
However, if you communicate the cost benefits of outsourcing and the new responsibilities expected of them, they will get on board. This way, you’ll also ensure maximum success and smooth business operations.
9. Opt for productivity monitoring tool
Supervising your outsourcing employees can be tricky, especially from a different continent.
To reduce absenteeism and decrease employee distractions, you need a performance monitoring tool like Time Doctor.
With this productivity management tool, companies can track how long employees are taking to finish specific tasks.
As more companies become remote-friendly during the pandemic, Time Doctor helps them monitor employees’ work efficiency with absolute ease.
Here are some other robust features of Time Doctor:
- Track outsourcing employees’ work hours with silent and interactive time tracking.
- Reduce employee inactivity by sending idle time pop-up alerts.
- Create comprehensive employee productivity reports for performance analysis.
- Assign daily tasks and projects to your employees.
- Distribute workload fairly and set up work schedules for every employee.
- Reduce manual entries and streamline employee payments with payroll integration.
Final thoughts
Many companies from North America or Europe prefer outsourcing manufacturing to China due to their low labor costs and innovative manufacturing technology.
However, you need to conduct thorough research, enlist your business objectives, and partner with a reliable outsourcing firm to maximize your profits.
You can go through the advantages, disadvantages, and other effective tips highlighted in this article to make the best decision for your business.
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.