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Sourcing >> The
danger of choosing a "cheap" Chinese factory

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The danger of choosing a "cheap" Chinese factory

Posted: September 15, 2016

By Renaud Anjoran

One
of the biggest mistakes importers make is to work with a “cheap” factory. The
price is good, but you need to revise your expectations way, way
down.

Instead
of “cheap” or “expensive” factories, I like to talk about “high-volume,
low-complexity” vs. “low-volume, high complexity” product focus. Obviously there
are manufacturers making high volumes of high-quality products, for example in
the auto or the electronics industry, but this distinction allows for a
meaningful comparison.

When
you walk in a good factory that is used to making low-volume,
high-complexity products, you will likely see the following:

• Engineers working on
pre-production developments and setting up processes;

• Dedicated production
lines, or at least dedicated operators who get trained on each
product;

• Production operators
are used to complex projects with low productivity, and have a pay scheme that
adapts to those situations;

• Management
understands what “quality” means in their customers’ eyes;

• Relatively high
margins, and an understanding of the necessity of keeping customers on the long
term.

However,
when you walk in a ‘high-volume, low-complexity products’ factory, you
will see all the opposite:

• As little
pre-production work as they can get by with;

• No dedicated lines
as long as processes are generally similar;

• Production operators
are probably paid by the piece, and have to spend as little time as possible on
each product;

• Management thinks
price is more important than quality (that’s true for most of their
customers);

• Low margins or no
margin, short-term mindset. If they have a quality issue, they prefer to ship it
out rather than spending money re-working it, even if it means there is a 60%
chance the customer will not come back.

To
understand this type of business, the restaurant analogy is useful. (I
read about this in a few articles in the past.) If you stop in a local
restaurant on the way to a Chinese factory, here is what you might
find:

• The menu is only in
Chinese, with a few photos if you are lucky.

• You ask for a bowl
of rice and they forget to write it down, so you need to ask for it
again.

• On the best day,
they cook the food as they would for their friends and family–they don’t try to
(and probably can’t) adapt to another quality standard.

• The kitchen is messy
and dirty. Usually nobody gets sick, but is better if they stick to the few
simple dishes they regularly cook. Don’t order seafood, for example.

• If you complain
about something, they will just tell you it’s the way it’s supposed to be and
you are the one having a problem.

So,
if you are new to China, you should work with a sourcing agent and they will
help you navigate these risks, right? Unfortunately that’s not what I have
observed. And I am not the only one.

Last
week, the China Law Blog published an interesting article entitled Getting Your Product Made in China, Part 1: The
Pros and Cons of Using an Intermediary.

“It
is still possible (and not all that uncommon) for your intermediary to strike a
side deal with your China manufacturer to get a 5-40%+ secret commission on
every sale. If your intermediary does have a side deal with your manufacturer,
it also has incentive to use a too-cheap manufacturer so as to be better able to
hide its secret commission from you. Too-cheap manufacturers are more likely to
have quality control and delivery problems.

That’s
perfectly true! I wrote about hidden commissions before–it is considered
normal and to be expected.

In
addition to the hidden commission, sourcing agents generally get paid a
percentage on the total order value, contingent on the fact that the order gets
shipped and paid. It means they have an incentive to see the order go through. A
high price obviously makes it harder for the purchaser to place the order (and
it will take longer to that that order approved), therefore it is to be
avoided.

You
have to assume everybody in China is out to get your order, whether they can
fulfil it in a satisfactory manner or not. They know that, once they got you to
spend weeks or months to refine samples and once they got your deposit, it is
much harder for you to switch to another supplier.

My
point is simple. Many factors will push you in the arms of cheap suppliers, and
it might not be your best interest. Do your market research, clarify your
quality standard and your tolerance for late shipments, and audit manufacturers
before giving them an order. It is money well spent if you are planning to
develop a strong supply chain to support your business into the
future.

Want
to learn more sourcing best practices?

Join the Global
Sources Summit that combines conferences and networking, co-located with our
Hong Kong trade shows. The event will be held October 17-19, 2016, and is geared
toward online and Amazon sellers.

Renaud
Anjoran has been managing his quality assurance agency (Sofeast Ltd) since 2006.
In addition, a passion for improving the way people work has pushed him to
launch a consultancy to improve factories and a web application to manage the
purchasing process. He writes advice for importers on qualityinspection.org.

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