Outsourcing to China: Pros, Cons & Best Practices for 2021

Outsourcing to China

Outsourcing to China is a strategy that has led several businesses to success. 

However, it can also lead to financial losses if done with insufficient information and poor planning.

But, don’t worry! 

We’ll guide you through it.

In this article, we’ll discuss the 9 key benefits and 4 major challenges of outsourcing to China. We’ll also go over a few steps you can take to outsource to China successfully.

This Article Includes:

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Let’s get started.

Learn more about outsourcing before you go further.

9 Key Benefits of Outsourcing to China

According to Grand View Research, a business consulting firm, China’s outsourcing industry had contracts worth around $223.7 billion in 2019. 

In fact, American companies like Amazon, Apple, Pfizer, and many others have outsourced to China. 

The country is a popular global outsourcing hub because it offers these benefits:

1. Cheaper Labor

China’s low labor costs are a huge selling point for labor-intensive industries.

As of July 2021, the average wage in China is 29,300 Chinese Yuan (CNY) per month (approximately 4,530 US Dollars, according to the exchange rate in July 2021). This means that their average salary is almost half that in the United States (about $7,900/month).

Businesses can further access lower labor costs by outsourcing to developing cities like Wuxi, Jiangsu, Chengdu, and Sichuan instead of larger cities like Beijing.

In addition, low labor costs can help companies with a high turnover rate (percentage of employees leaving the company).

How?

By outsourcing to China, those companies may spend less capital on hiring and training employees. This way, they’ll lose less when an employee resigns.

2. Cheap Products

China houses the world’s largest manufacturing sector and produced 28.7% of the global manufacturing output in 2019. This means that your business in China doesn’t have to import these products, helping you avoid import tariffs.

Additionally, the business ecosystem in Chinese cities has enabled manufacturing companies to build products at lower costs. 

These cities have cultivated a system that supports the China manufacturing supply chain. A Chinese factory can easily access component manufacturers, low-cost workers, technical workforce, assembly suppliers, and customers. 

This arrangement reduces the cost of production, enabling the manufacturers to sell products at lower prices.

3. Frees Up More Time to Focus on Core Competency 

China has the talent and resources to handle IT, customer service, manufacturing, accounting, and more. This means that you can outsource almost any part of your business confidently to the country.

By outsourcing, you’ll have more time to concentrate on expanding your business or optimizing current business processes.

Your in-house team can focus on core competencies, like team building, leadership, and product development, instead of doing paperwork or other mundane tasks. An increase in performance in core competencies can help you increase your competitiveness and profits.

4. Increased Flexibility

Most companies outsource manufacturing, production, bookkeeping, and other non-core business processes to contractors for the ease of scaling up and down.

For example, a western company outsourcing manufacturing to a Chinese manufacturer can reduce or increase its orders without any legal issues.

How?

Contract manufacturing service providers usually have more than one client and manufacture stock for all of them. As a result, they can arrange additional products whenever you need them.

Similarly, they can manage excess production by manufacturing less for the next order. Manufacturing contractors may agree to immediate scale-downs more readily, giving you the flexibility to reduce your production quickly.

Moreover, China has a large potential workforce which enables Chinese contractors to scale up productions cheaply.

5. Access to Mass Markets

China is geographically situated between the Asian and European markets and is an active participant in world trade. As a result, outsourcing processes to this Asian country can give you easy access to profitable markets. 

Additionally, since China itself is a huge market, offshoring to the country can create huge opportunities for companies. The low labor wage, resource-intensive manufacturing, and exports make offshoring to China a profitable option.

6. Fast-Paced Innovations and Research

According to the Global Innovation Index (GII) 2020, an annual ranking of countries based on their innovations, China ranks 14th among 113 countries. It comes before countries like Japan, the Philippines, and India.

Additionally, the GII also said that Chinese companies are on par with the best Switzerland, Sweden, and US companies when it comes to innovation.

This is because China houses tons of innovative companies, including high-tech startups like Weltmeister, an electric car brand.

According to a list of the 50 most innovative companies published by Boston’s Consulting Group (BCG), Huawei (a popular Chinese multinational smartphone company) ranks 8th in the world. The list also includes Alibaba (14th), Lenovo (25th), Tencent (26th), and Xiaomi (31st).

Outsourcing to a country with huge research potential, like China, can give you quick and easy access to technology. This will provide you with a competitive advantage over your competitors from other countries.

7. Supportive Government Policies

The Chinese government tends to welcome any foreign company that shows an interest in outsourcing. 

Additionally, China continually amends its outsourcing laws and works towards improving its infrastructure to ensure smooth outsourcing. In fact, the country spent around 10 times more on infrastructure than the US in 2018. 

But China’s investments in infrastructure stretch beyond bridges and railways. The country has also successfully developed digital infrastructure, particularly broadband and digital payment systems. 

8. Great Startup Culture

Startups offer business agility, access to new technology, insight into target markets, and customer-centric innovations.

As a result, outsourcing to the Chinese economy with tons of startups will get you access to resources that can help you overtake your competitors.

In addition, your business can get services or products from startups at lower costs when compared to established companies.

Chinese cities like Hong Kong, Shanghai, and Chengdu help high-tech startups flourish. They do this through initiatives that improve infrastructure and by giving access to top talent.

Additionally, these cities are politically stable with an open culture due to globalization. Such an adaptable and friendly environment makes outsourcing convenient and pleasant.

9. Access to a Skilled Workforce 

China saw 7.6 million students graduate from its universities in 2018, which is almost double of all degrees earned at American universities.

On top of that, China established a Thousand Talent Program, which aims to attract scientific talent to the country. This plan recruited over 7,000 scientists to the country, further increasing their research and talent pool quality.

4 Major Challenges of Outsourcing to China

Let’s look at a few difficulties you might face while outsourcing to China:

1. Low Service or Product Quality

The quality of Chinese products is sometimes lower when compared to foreign products.

Often, Chinese products don’t meet international standards and aren’t valued much despite their affordability. 

To avoid this, outsourcing companies must stay vigilant to ensure that their products are of high quality. You can do this by conducting regular quality control reviews or hiring an agent in China to run inspections for you.

2. Different IPR Laws

IPR (Intellectual Property Rights) laws differ from country to country.

You’ll need to do some research on China’s copyright and trademark system, especially when the service provider has access to your products, designs, and more.

Even though the Chinese government and most outsourcing companies adopt strict IPR measures, manufacturers could make and sell copies of your new products at lower prices.

If you’re concerned about protecting your intellectual property, you could draft an NNN (non-disclosure, non-use, non-circumvention) agreement instead of the traditional NDA (Non-disclosure Agreement).

Why?

An NDA focuses only on preventing the service provider from releasing your trade secrets to the public. In contrast, a NNN agreement prevents your employees from disclosing, using, or selling your trade secrets.   

3. Language Barriers

A Chinese company may find it hard to employ citizens with decent proficiency in English.

Outsourcing to such service providers can make it difficult for your employees to communicate with the outsourced company, interrupting work completion. 

In addition, if you outsource your customer support processes, your customers might not be able to communicate with your Chinese agents due to language barriers.

4. Time-Consuming Set Up

Each Chinese city has a different technical and outsourcing potential. The wrong outsourcing destination can lead to a lengthy setup procedure and a long supply chain.

That being the case, you need to consider the strengths and weaknesses of cities before you outsource. For example, you should know how far your service provider is from your target market, the availability of required talent, the cost of resources, etc.

For example, it’s best to start your company in Dalian (a port city) if you want to export products overseas. Setting it up in a city like Beijing will cost you a lot of money in transportation.

Outsourcing to China the Right Way

Let’s look at a few tips that will help you outsource to China successfully:

1. Contact a Local Sourcing Agent

A local sourcing agent (a third party that helps you with major outsourcing decisions) can help you select the right Chinese supplier and prevent you from investing money in the wrong place.

In addition, they can guide you on outsourcing to a suitable city, legal outsourcing procedures, and how to kick-start your business.

However, hiring a local agent isn’t a mandatory step for successful outsourcing to China.

2. Verify Your Supplier’s Credentials

Once you’ve shortlisted a few outsourcing providers, verify their credentials

Recognize your outsourcing needs as China has many talented manufacturers and traders. You should choose a suitable outsourcing partner depending on your business needs. 

While verifying supplier’s credentials, you should:

  • Check whether the supplier can produce according to your requirements. Make sure that they will be able to supply products if you decide to scale up.
  • Cross-check the information they provide. An easy way to do this is by checking their website.
  • Ask for their business license, international trade certificate, customs registration certificate, and VAT invoices. Ensure these documents are genuine by consulting a reliable source.
  • Confirm the supplier’s name is the same across all the documents. 
  • If possible, visit the factory or office before you finalize everything. You could also ask a representative to make the visits on your behalf. 

3. Draft Agreements Carefully

Outsourcing agreements must define the specifics of the arrangement precisely. 

For example, if you’re outsourcing production, the agreement should cover aspects like the price per product, volume, mode, etc. 

Similarly, you need to mention minimum productivity, working hours, KPIs (Key Performance Indicator), and more, when you’re going over your service outsourcing process. 

And irrespective of the nature of outsourced tasks, the agreement must specify ways to resolve disputes, agreement dissolution, and other legal matters. More importantly, ensure that the meaning of the agreement doesn’t change when translated to Mandarin or English.

4. Clearly Define Product/Service Specifications

To avoid issues in the future, you’ll need to explain what you expect from your outsourcing partner clearly. This includes your product’s specifications.

You should list down and explain even the minute details, like raw material or service quality. You should also conduct regular inspections to check whether all manufacturing processes or service updates are implemented correctly.

5. Gain Support From Your Internal Team

Once your company decides to outsource to a Chinese firm, you need to inform your internal team about it. 

To do this, you’ll need to explain why you’ve decided to outsource to China and how each department will benefit from it. You should also clarify the roles and responsibilities of each team member so that they know how to go about their outsourcing tasks. 

Without a clear understanding of their duties, they may get confused and feel disengaged.

6. Use Performance Monitoring Software

Monitoring your outsourcing partner’s employees can be challenging, especially when you’re in a different country. 

To control absenteeism, distractions and ensure that they work productively, you need to use a performance monitoring tool like Time Doctor.

What’s Time Doctor?

Time Doctor is a powerful employee performance and productivity management tool used by small companies like Thrive Market, as well as large firms like Ericsson. This tool helps companies track and record the activities of their employees when they work.

With Time Doctor, you can:

Additionally, you can keep track of billable hours and use Time Doctor’s payroll feature to pay your outsourced team through Wise, PayPay, or Gusto.

Wrapping Up

Outsourcing to China is a cost-saving strategy that can be a turning point in your business. You can use the exposure you get in the country to grow your business across the globe. 

But to do this, you have to do your research, choose the right outsourcing partner, and put the right processes in place. 

To ensure that you meet a positive turning point, consider the pros, cons, and tips mentioned in this article before making a decision.

 
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