Do you want to outsource production to save cost? If YES, here is a complete guide on how to outsource your manufacturing process to China and how much it cost.
One of the many obstacles faced by companies today is the need to bring new products to the market as quickly and as efficiently as possible. Outsource manufacturing involves the hiring of people who are not employees of that company to assemble parts of, or build an entire product.
Without a doubt, the main reason companies choose to outsource their manufacturing is to cut costs. Labor is often among a company’s largest costs. By outsourcing part or all of its production line to a third party in a lower cost location, the company can enjoy a significant decrease in production costs.
It is more affordable to outsource production processes to companies that have a comparative advantage in that area than to produce them internally. Many times, one of the greatest advantages of outsourcing is to utilize assets (plant, property and equipment) already in place without having to make an investment in fixed costs.
Why Outsource your Manufacturing Process to China?
Without a doubt, China is one of the world topmost outsource manufacturing destinations because its markets offer the ability of manufacturing an extensive variety of products and at the lowest rates.
In the last 30 years, the Chinese economy has changed a great deal. With a Gross Domestic Product (GDP) of 5.7 trillion US dollars, China currently stands as one of the top economies in the world today. This significant growth and development of the country can be largely attributed to the contributions that were made by the manufacturing industry.
The steady growth of the manufacturing industry in China has been very remarkable. In fact, 35 percent of the global output is primarily sourced in China. To this regard, a lot of companies are showing interest in outsourcing their manufacturing to China.
The manufacturing industry serves as the main channel of employment in cities and towns in China, as well as the country’s major symbol of competitiveness. The comprehensive development and optimization of the industry has enabled it to be one of the best countries for manufacturing.
Benefits of Outsourcing Manufacturing from the United States to China
Even though manufacturing companies have a lot of reasons why they would want to outsource their manufacturing overseas, the factor the tips the scales towards outsourcing manufacturing is usually cost reduction. Businesses often outsource manufacturing processes with the aim of making a fixed cost fully variable. It makes sense to outsource those activities or processes where other suppliers have competitive advantages in place or are already performing.
If any part of the line of production, from conceptual design to finished product, can be completed faster or at a lower cost elsewhere, it is best outsourced. For example, companies that have skilled and certified employees who are familiar with specific processes means greater efficiency and increased speed without the investment of time and training.
Here are some advantages of outsourcing manufacturing to China.
- Difference in costs: One of the key benefits of outsourcing manufacturing to China is that it enables companies to cut operating costs. For instance, training costs can often cut into profits. If you choose to outsource your manufacturing process, you will be able to cut out the cost that would have been spent on training staff that are involved in the manufacturing of the product.
- Lower salaries are a part of this benefit, though the benefits go much deeper. For instance, each employee that does not work “on site” means one less computer, and no extra or costlier maintenance costs, so outsourcing may provide a better option.
- Better Service: in a lot of occasions, Chinese manufacturers are far more likely to give you better service from the outset as a small startup than domestic manufacturers. They are also more willing to work with smaller businesses than their American counterparts.
- Cheap Manual Labor: Manpower is possibly the most important resource in any company, and is also one of the largest expenses. By outsourcing to China, you can reduce costs by between 30 and 80 percent depending on the labor intensity of the product. These outstanding rates will lower your cost of production exponentially.
- Higher Output/Quicker Time: Chinese manufacturing industries are well known for their quick and aggressive turnaround times irrespective of the volume of the order. Some domestic manufacturer’s capacity are limited in capacity or time or, at the very least, not nearly as robust as Chinese factories.
- Expansion Capabilities: Outsourcing manufacturing to China of a new product can allow you to get to market sooner than if you had to build your own factory in the USA, acquire equipment and hire employees. In addition, it can bring production closer to Asian and European markets, in case you’re looking to expand your global footprint.
- Mass Market: The Asian market is growing at an incredible rate. When your manufacturing unit is in China, it becomes easier to sell into the Chinese market, which expands your global footprint and can lead to massive growth in your company.
How to Outsource Manufacturing from USA to China
Here are a few guidelines to follow if you want to outsource your manufacturing process from the United States of America to China.
1. Hire a local agent to help represent you: if you intend to conduct business in China, it is advisable that you should first have a “local intermediary”. Your local intermediary or agent will be tasked with representing your interests, providing the right introductions, and negotiating agreements
The customs, cultures and tradition of the Chinese people are very different from what is obtainable in the United States and even dialects differ from region to region in China.
Ideally, your agent should have at least 10 years of experience working in China. Excellent sources for finding an agent are the US-China Business Council (uschina.org), local trade associations, U.S.-based MBA programs, alumni organizations for Chinese Universities and even your Chinese customers.
2. Find a manufacturer for your products: you can search trade shows in China for manufactures of your product. One of the largest shows is the Canton Fair that takes place every spring and autumn in Guangzhou. There were more than 58,000 booths, including more than 24,000 exhibitors at the fall, 2011 event. Those exhibitors included companies making everything from electronics products to building materials and chemical goods.
The show is actually so large that it is held in three phases with the first phase featuring exhibitors, such as machinery, electronics and vehicle-parts makers, the second phase is for consumer goods and a third phase is for shoes, textiles and food. Also, search trade magazines like the China Economic Review (chinaeconomicreview.com), which provides information about trade shows and even manufacturers.
3. Avoid scams and scammer: just like any country in the world, there are scammers who masquerade as honest businessmen. In order to differentiate the honest business men from scammers, you should do an Internet search of any Chinese company you are planning on doing business with.
Type the name of the company into the search engine with the word “scam” or “dishonest” to get an idea of complaints against the company. Alternatively, you can contact the U.S. embassy in Beijing (beijing.usembassy-china.org.cn). Or you can use companies, such as CBI Consulting that can provide information on foreign firms.
4. Establish good business relationship: when doing business in China, establishing a good business relationship goes far beyond networking. Even though China’s economy is growing at jet speed, its cultural customs are deeply rooted in its history and building relationships and as such, even business relationships can happen at a slow pace.
For instance, a small business operation from the United States can blow a potential relationship with a Chinese manufacturer right from the get go all because he or she failed to follow specific cultural norms and customs.
For example, when you hand someone a business card – and always do this to potential manufacturers and suppliers with whom you might want to do business – use both hands to present the card. When accepting a card, examine it carefully for at least 10 seconds; lay it next to you on the table if you are seated. This is an important way to show respect in China and get a business relationship started in the right direction.
5. Be direct in stating your needs once you have chosen a manufacturer: in addition to establishing a good business relationship, Chinese customs place great value on keeping a low profile and avoiding any words or deeds that might cause embarrassment to anyone.
This however can mean that the representatives of your Chinese manufacturer will not freely speak up if they can’t make your product in the way that you request or disagree with your requirements.
If these representatives just go ahead to accept everything you say without any form of disagreement, you should be cautious. State your needs directly and specifically. For example, you might state, “My Company’s policy is to accept no more than a one percent defect rate.”
6. Examine and insist on meeting with all points in the supply chain by continuing the direct approach: you can avoid certain problems by making sure to be direct in approach. For example, you can say: “My Company can only accept products that are coated with paints that contain no lead. Can I arrange to meet the paint supplier?”
7. Audit the factory or factories and inspect the products they are making for you on a regular basis: this can be done either by you or by an agent that you trust. Don’t just limit your audit to talking to the management, try to also have a chat with random workers hand out your business card and make clear that you are available at any time for questions.
Get a feel of the working condition by going through the cafeteria and dormitories and also remember to examine samples of the product. Make these inspections regularly, throughout the manufacturing process, and also inspect supply-chain factories, such as those providing the parts to make your products or the paint to coat them.
8. Arrange for shipping of the products to your business or warehouse: this involves choosing the shipping method that best suits your products; such as air shipping for smaller packages or sea transportation for larger orders. The logistics that are involved in shipping are many and complex, so you might want to use a logistics provider.
Use the correct incoterms when having your goods shipped. These 11 codes, developed by the International Chamber of Commerce (ICC), are used in domestic and international trade. According to the ICC, incoterms “define the responsibilities of buyers and sellers for the delivery of goods under sales contracts and determine how costs and risks are allocated.” Also, ensure that the correct customs codes are affixed to the products. The codes indicate what taxes and duties must be paid if any. Listing the incorrect codes can result in a delay of shipment.
The Cost of Outsourcing Manufacturing from USA to China
Every business owner wants to be able to do business in a faster, easier, more efficient manner. Nobody wants to actively pay more for labor than they have to, which is one of the reasons why many company owners have offshored their labor needs to developing countries around the world.
The promise of cheap overseas labor has drawn many manufacturers to offshore their production to reduce their operating costs. However, what does outsourcing really cost your business? To help you decide for yourself, here are a few things that outsourcing might add to your total cost of doing business:
a. Responsiveness of Production Team: When you outsource labor to another company, the workers who are putting in the hours to make your products are not your employees. They’re the employees of the company that you contracted to handle your production for you.
This will, naturally, result in a loss of control over your production. This is because you can no longer simply walk down to the production floor and directly engage with workers who are a part of your company. Instead, you have to negotiate with the other company’s owners or customer service department to process your requests.
Not being able to simply engage with your own teams on your own schedule makes your production process less responsive to changes in your company’s situation. This, in turn, can lead to your company missing lucrative opportunities that are based on timely responses to new situations.
b. Production Errors from Miscommunication: Whenever you outsource your production to another country like China, there are additional language and cultural barriers to deal with, even when the reps at the other company are English-cognizant.
Idioms, sayings, and cultural minutiae that are second nature to a fellow American might be completely outside the frame of reference for a foreign worker who was never immersed in American culture. This leads to miscommunication that can cause errors in production. These errors can result in product rejections or recalls, meaning loss of production time and revenue for your own company.
c. Slow Shipping: While the slowness of a production team’s response to your requests might cost your business a few days or a week of production time, the slow shipping speed of ocean going cargo can cost you months. When your company’s products are finally ready for shipping, they have to wait for:
- Outgoing customs processing.
- A cargo ship heading to the right destination with available space.
- Long, slow sea voyages.
- Incoming customs processes.
- Transfer to land-based shipping and delivery.
When you factor in this additional time, you will find out that the extra processes that come with trying to ship out can add anywhere from four to six months to your company’s production timetable.
Now you will have to ask yourself “in the 4 to 6 months that you have spent trying to ship your goods from China to the United States, how much products have your competitors made and sold?” Every day that your own delivery of product is delayed is a day that your direct competitors have to leverage the advantage of being available to customers for immediate gratification.
e. Dealing with Extra Red Tape: Passing your products through customs is one of the many additional bits of red tape that manufacturers may have to deal with when outsourcing their labor. Even though your goods are made in China, there are still a lot of regulations and standards that your products have to follow if they’re to be sold in the U.S.A., and now your production process is also subject to any red tape that China might have as well.
Even more worrisome is that the companies that you deal with to handle your production tasks are not governed by the same laws and regulations that your company is.
If a contract dispute comes up, there is a very large probability that the producing company may get preferential treatment in their home courts, and U.S. court rulings will not affect them in their country of operation (although a U.S. court injunction against the company can inhibit the other company’s ability to operate in the U.S.).
So how much exactly do these cost end up costing your company? Well, the truth still remains that it is hard to calculate, as many of these costs might vary based on your products and market share.
However, as many companies discover these hidden costs of outsourcing manufacturing to China, they are beginning to move their production lines back to American shores.