Contract Manufacturing in China - Risks and Benefits
Contract Manufacturing in China - Outsourcing to China comes with several benefits but you have to manage risks carefully.
Editorial Team
February 13, 2023
Whether you are an entrepreneur or an established company, contract manufacturing in China comes with its benefits and risks. In this blog, we address the pros and cons of outsourcing to China.
Benefits
Your products get to the market fast: Setting up a factory or expanding production capacity takes time. If you are an entrepreneur with a new product in mind and you know there is a demand for it thanks to market research, manufacturing your product in China will allow you to take it to the market quickly before anyone else has the same idea as you.
Similarly, if you are a large company looking to enter new markets with a hugely successful product, contract manufacturing in China is ideal for you. It will allow you to introduce your product to new markets before anyone else can and you’ll be able to do this without disrupting your existing (possibly in-house) manufacturing that caters to your current customers.
Cost-effective: Contract manufacturing is cost-effective, which is why it has caught on across the world over the last 15-20 years. When you outsource to China, you are saved the expense of setting up your own factory or expanding existing manufacturing facilities. Despite the margin pocketed by your supplier, this still works out to be cost effective as you are saved the expense of setting up a factory, hiring workers, buying machinery and raw material and paying for overheads.
Flexibility: When you have your own manufacturing facility, your workers or machines lie idle or perform below capacity in months when demand is low, but you will still be paying rent, salaries and overheads. In contract manufacturing, however, you can plan for low demand periods, and reduce your order accordingly. Your factory will handle it because you will usually not be their only customer. Similarly, if you need to increase orders suddenly, your Chinese supplier should be able to handle it too if you have picked a factory whose production capacity is higher than your average order (which is advisable).
Quantity is not an issue: One of the limitations of countries like Vietnam and India that are China’s rivals in manufacturing is their inability to manufacture to the scale several Chinese factories can. So, no matter how large your order, you are more likely to find a factory that can handle your order in China than in any other developing country. This is why you must also choose your supplier keeping future orders in mind. If your supplier’s production capacity is higher than your average order, you will be able to increase your order without any trouble once sales pick up.
You focus on growth: If your contract manufacturer has taken over the responsibility of hiring workers, buying raw material and the other nitty-gritties of manufacturing, you can focus on marketing your product and growing your business. You can then invest your profits into expanding production.
Risks
Lack of control over quality: Outsourcing to China means you do not have direct control over manufacturing, which could lead to quality taking a hit because you aren’t there to ensure that every step of production is done exactly how you want it done. Quality may also not be consistent across batches. Having said that, regular in-process quality control inspections are quite sufficient to maintain quality as long as these inspections are done by someone reliable such as you or your representatives in China such as a China sourcing agent or third-party quality inspection companies. But do remember, your factory must have an in-house quality control department too.
Lack of control over timelines: When you manufacture in another factory, unless that factory is exclusively manufacturing for you (which is highly unlikely), your product is not given priority even if you need it in a hurry. The factory will be bound to commitments given to customers who signed up before you and will only start on your order after pending orders are completed. This isn’t the case if you own the factory. But you can offset this disadvantage by planning your orders meticulously and sending in orders on time keeping production timelines in mind.
IP rights at risk: If the IP rights of your product are vital to your business, you open yourself up to the risk of compromising your IP rights by outsourcing to China. This is why one of the first things you must do when you start looking for manufacturers in China is to register your IP rights such as trademarks, design patents and copyrights. This is because in China, the first company to register a trademark or patent is the first company to be awarded it. It doesn’t matter if those rights are owned by you in the US or Europe. Thus, if a Chinese company has registered your trademark in China because you have neglected to do so, your products can be prevented from being exported because according to Chinese law you have infringed upon the IP rights of the Chinese company.
