How to Outsource Your Manufacturing to China

When it comes to manufacturing, few regions can compete with China’s labor costs. Companies that rely on outsourced products, however, have lots of new hurdles to clear — just ask the firms that wound up selling lead-laced toys made in China. So, is setting up shop in China still worth the risk? Our sources say yes: Companies can maintain product quality and safety while reducing costs. Here’s what you’ll need to manage the process and keep your brand — and your customers — safe.

• Be prepared to pay obligatory legal fees and agent commissions, which can range from a few hundred dollars to tens of thousands, depending on the type of business you’re setting up.
• At least three months to set up a pilot program. After you’ve tested the results and confirmed the product is up to snuff, a project typically can move forward very quickly, perhaps within a matter of weeks.
• A Local Rep: You’ll need a person who lives and works in your targeted region to act as your negotiator and translator as you meet with Chinese executives and regulators.
• A Product-Testing Service: Every product shipment must be independently tested to ensure that it complies with your requirements. Failure to test each batch is asking for substandard products or an expensive recall.
• Cultural Flexibility: You can’t get along in China if you’re convinced that the way business is done in the West is the “right” way.

Understand That Traditional Rules of Business Don’t Apply

Goal: Eliminate dangerous misconceptions about doing business in China

When confronted with the skyscrapers of Shanghai, it’s easy to assume that doing business in China will be similar to doing business in New York City or London. Nothing could be further from the truth, according to Usha Haley, author of the best-selling book “The Chinese Tao of Business: the Logic of Successful Business Strategy” (Wiley, 2004). “Professionals from the U.S. think they’re dealing with a modern society, when in fact they’re dealing with a business culture with roots that are centuries deep,” Haley explains.

For example, because the Chinese have a cultural preference for family-run businesses, 90 percent of all privately owned firms in China employ fewer than eight people. As a result, the supply chain — even for a simple product like a child’s toy engine — can involve dozens of interlocking firms and a network of formal and informal relationships that would boggle the mind of the typical western executive.

Then there’s the omnipresent Chinese government. “The Communist Party is more powerful than it’s ever been, which has an enormous impact on everything, even the kind of information that you can gather while researching a potential partner,” Haley says. Sometimes that’s good — like when you’re trying to get China to enforce its copyright laws — but there are downsides, too. China’s government is full of locally and regionally deployed bureaucrats, many of whom may need to be convinced, cajoled, or bribed. “There are entire consultancies whose sole purpose is to help other companies avoid compliance with government regulation,” Haley warns. Because of this, it’s hard to know whether your business partners are operating legally or just getting around the regulations, so you'll need to independently test products to ensure that they meet specifications.

In order to outsource to China without running into product safety or quality problems, you’ll need to scrap your preconceptions of how business should be conducted. The rules are different, and you’re not going to understand the full range of those differences until you’ve been deployed in Chinese firms for years, maybe decades. “It can take a lot of time for western executives to learn how to work effectively in China, but the benefits are worth the extra effort,” says Frank Liang, general manager in Asia for the Greater China branch of semiconductor manufacturer Broadcom. For example, chip-design engineers who earn six-figure starting salaries in the United States earn less than a tenth that in China — a cost-savings that an electronics firm can pass along to price-conscious consumers.

From: http://www.bnet.com/article/how-to-outsource-your-manufacturing-to-china/204805