Contract manufacturing in China need to be done right. Read more on how to set it up and dial it in so you win every time
Has the coronavirus pandemic made it overly difficult for you to maintain your manufacturing activities? Is there a risk of bankruptcy and business closure because of massive overheads?
There is a way to save your company from such a terrible future: by offloading and outsourcing some of the production activities. Contract manufacturing is one of the most feasible manufacturing techniques available to companies today.
China is distinguished around the world for being one of the most amicable manufacturing hubs in the world. It is also one of the most cost-efficient and price-friendly countries in the world.
Chinese produced products cost 5% less than those made in the United States and a whopping 10%-20% less than those manufactured or assembled in Europe. The reason for such low prices is simple. For one, labor costs in China are significantly lower than in Western countries. An average wage comparison shows that for every USD 35.96 per hour wage in the US, Chinese workers are paid USD 11.90.
The second reason is taxation. Many countries, like the USA, don’t add the Value Added Tax (VAT) on imports (which is something that countries like China do). The absence of the VAT reduces your import expenses tremendously. This makes any products imported from China infinitely more budget-friendly.
Finally, China’s lower-value and very stable currency (compared to the USD and many European currencies) essentially gives you the added advantage of purchasing manufactured goods at a significantly lower price.
By choosing to outsource your manufacturing activities to a contract manufacturer in China, you can save a huge portion of your expenses on production which in turn allows you to spend it instead on marketing, transport and product development.
You might be choosing contract manufacturing for a number of reasons, with high production overheads being just one of them. Contract manufacturing is also a great option when:
These are your customized manufacturing needs. You should use them to determine what type of contract manufacturing partner you want to work with and what type of agreement you want to set-up.
Once you know what type of contract manufacturing partner you’re looking for, it’s time to get your search started.
Instead of just doing a Google search and landing on a random manufacturer, use supplier/manufacturing China sourcing agent. These sourcing specialists have extensive experience vetting and matching companies with their ideal contract manufacturers from China. They use a very thorough screening process that covers a wide range of aspects; from manufacturing history, to legal adherence and regional reputation. Every Chinese contract manufacturer recommended to you is filtered based on your production needs and budget. A solid China sourcing agent regularly updates their supplier/manufacturer list by meeting, evaluating and onboarding reputable companies. This way, you have a long stream of premium-quality potential partners to choose from.
When you work with a China sourcing agent as your Chinese contract manufacturing partner, you eliminate a large part of the risk that comes with choosing an unknown overseas factor.
Although a China sourcing agent does a very exhaustive reference and background check of all contract manufacturing companies in China, you may feel more at ease by doing your own due diligence.
For this, you can do one of the following:
Shortlist the businesses that match your expectations.
Once you’re satisfied that you can move forward, contact the contract manufacturing companies you have shortlisted to learn more about them directly from them. During your conversation with the contract manufacturer, remember to pose the following questions:
A sourcing company follows a similar protocol when vetting contract manufacturers and suppliers from China. Your work will be reduced tremendously by choosing to search for your prospective production partner from them.
Only when you are satisfied with the answers should you move onto the next step.
To really judge the contract manufacturer’s work, ask for a sample that matches the purchase order you intend to provide them with, should you select them. Typically, Chinese contract manufacturers are open to sharing samples not only of their completed product but also the of aspects of the manufacturing process such as raw materials, spare parts, machinery/tooling etc. They may even virtually share a sample design using CAD/CAM technology, especially if they own the IP for the product design and are allowed to make changes to it.
With these samples, you can check a variety of factors such as color, texture, quality, size, durability, functionality, ease of maintenance, adherence to specifications, and such. Most samples will reach you in 2-3 weeks time. If you’re unhappy with some aspects of the sample, you can specify the changes you want and get a new sample set to evaluate. Most Chinese contract manufacturing companies offer 2-3 different samples for evaluation.
Once you are satisfied with the quality of the samples you receive, it is recommended that you set-up an OEM contract. Such a contract is much better than a purchase order, especially if you plan to order from the Chinese contract manufacturer multiple times in the year.
When drafting the OEM contract, consider the following aspects:
The success of any contract manufacturing partnership lies in the constant collaboration between your company and the manufacturer’s. Be sure to keep track of the production schedule, the quality of each batch coming in and any other product changes that need to be met.
Before preparing the OEM agreement, visit the Chinese contract manufacturer’s factories to physically and visually evaluate if everything they have said is true. Most Chinese companies don’t resort to cheap stunts like lying because they know the value of trust in long-term contracts. But still, it does help you to physically evaluate the factory so you can know what to expect from the finished product.
Most contract manufacturers around the world don’t have any intellectual property of their own. Any design/process IP they use is borrowed from their clients. So, if you need to share your IP with the company, remember to register the IP for your design/process in China.
According to legal rules, China-registered IP ownership takes precedence against the ownership of the IP in your home country. To avoid any lawsuits about IP ownership and to retain your rights, make sure to register your IP in China before you select a contract manufacturer.
Once you’ve vetted the approved samples, keep them. Do not throw them away. This helps you cross-verify whether the contract manufacturer is adhering to the quality specifications months or even years after the OEM contract was signed. You can always go back to them for quality improvements or free replacements if the new batch fails to meet sample quality.
This is applicable if you have given your contract manufacturer partner the complete responsibility of acquiring the raw materials, components and tools for the production. A Bill of Materials, along with the listing of the agreed-upon prices for each raw material, should be submitted with each order. This will help you keep the per unit price of the order under budget. It will also help you avoid any price revisions for a few years.
Just as with the IP for the design/process, it’s necessary to clarify all details about the ownership of any tools or machinery or components that you may need to outsource to China, for the completion of the product. After your contract expires, you won’t have any trouble getting back everything you leased out to the contract manufacturer.
Setting-up an exclusivity agreement with your contract manufacturer
An exclusivity agreement between you and your Chinese contract manufacturer is one that empowers you to be the sole seller of a particular range of products in your target market. This type of agreement is really powerful and lucrative in cases where the product being manufactured is unique or has a lot of demand in a particular market.
Most contract manufacturers hesitate to sign exclusivity agreements because there is a risk that they’ll have to forego potential business opportunities because of it. Often you can convince your contract manufacturer to sign such an agreement with you usually by increasing the size of your order quantity. When you have really huge orders, your contract manufacturer partner will be eager to sign the exclusivity agreement. The exclusivity agreement ensures that your large order doesn’t go to their competitors for the entire duration of the agreement.
Before you sign the exclusivity agreement, find out if your contract manufacturer will be outsourcing to subcontractors. Extend the exclusivity agreement to them and include these terms in your agreement. Highlight the exclusivity in your OEM contract so that you are legally covered.
This is just a safety step because most Chinese manufacturers stay true to the exclusivity agreement once it is in place. But, it is your brand on the line if something does go wrong. So it’s important to remember to have all the documents ready and to get legal representation. Doing so can help you seek damages for the loss of business that you may have faced when your exclusivity agreement has been breached.
Choosing China as your contract manufacturing destination is a great idea. Not only will you save a lot of money on production, but you’ll be assured of premium-quality products that meet global quality and safety standards. Remember that utilizing a China sourcing agent while choosing your contract manufacturing partner will help ensure that everything is as it should be, and will minimize that chance of economic or IP risk.
Sourcing Allies is a team of expert China sourcing agents that has helped western customers manufacture and source products from low-cost regions since 2006.
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