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The danger/risk of choosing a "cheap" Chinese factory

By Renaud Anjoran on September 15, 2016

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.