International Manufacturing Contract lawyers

Let me tell you about a European friend of mine in China. Well, he’s not really in China. Right now he’s in Thailand. Like many an expat, he went there for a quick holiday before the border closed and has been stuck for months because of virus travel restrictions.  My friend desires anonymity. We’ll just call him Peter.

Peter has been operating his own factory here in China for the past decade or so. He started up in Jiading, which happens to be where the Tesla factory is now located, just outside of Shanghai. The local government kicked him out of there — on short notice, without cause, and without compensation, he says — and the land on which the factory stood was developed. So now, at considerable expense, Peter has re-located his factory to Wuxi, in Jiangsu Province, where he currently has about 60 workers. He rents the factory space, and hires the workers, through his WFOE.

In the early stages of the US-China trade war, Peter’s company decided to open another factory in California. The American factory was not intended to replace the Chinese one. They are operating in tandem. Peter isn’t giving up on China just yet. One of Peter’s biggest customers just happened to ask him to open his factory in America.  This particular customer now requires half of its products be made in the US, and they wanted to give Peter orders they would not otherwise send him in China. Peter’s American factory employs around 12, with plans to hire more as production increases.

Peter’s factories are both original equipment manufacturers, or OEMs. They produce goods according to their customers’ proprietary requirements, and they typically don’t hold any of the intellectual property rights in the specifications, processes, or finished items. I won’t say precisely what they make, but the finished items are comprised of upholstery, metalwork, woodwork and plastics. They are supplied to, and sold under, major international brands. The American factory serves customers in the US, and the Chinese factory serves customers worldwide.

I asked Peter how the American factory compares to the Chinese one and what tips he has for foreign companies that have their products made in a Chinese factory.

 

China is still better — for now

A major advantage of the American factory was that it would allow shorter lead-times on US orders. Another plus was that customers could apply a label saying “Made in USA with global materials”. These labels are required by many of the government departments that take the goods from Peter’s customers at the very end of the supply chain. Just like in the documentary American Factory, the main challenge has been to get the American factory to reach the same performance benchmarks as the Chinese factory. From his experience in China, he knows precisely how many seconds or minutes each stage of production should take and he expects to achieve this in California, although not overnight.

Even with tariffs of 25% on imports to the US, Peter has found he can still produce and export many components of his products more cheaply and efficiently in China than anywhere else. For Peter, China is still a great place to make complex products. It’s hard to beat the vast infrastructure and supply chain. Power and coiled steel are still cheaper here in China, and his Chinese employees work very hard. Even so, it’s hard for a foreign factory to compete with local Chinese factories on price. Foreigners are under greater scrutiny and they just can’t game the system to achieve a lower cost base like the locals. So, Peter’s competitive advantage is quality — the quality of his products and the quality of his service.

Overall, though, Peter feels that the advantages of China manufacturing are easier to see only if products are being made for the Chinese domestic market, or for markets in nearby Asian countries. China, Peter says, is offering fewer and fewer advantages when products are being made for export to the US or Europe.

And Peter’s tips for foreigners still having their products made in a Chinese factory?

 

Never have a local sourcing team

Peter says the smartest foreign companies have no salaried sourcing employees and no overhead in China. One company he knows, — that just “got smart” — decided to fire its entire local sourcing team. Why? Because the local teams tend to cut themselves into the sourcing deals and thereby create costs that need to be hidden or added on. They partner with the very factories they are supposed to supervise. They often can’t help it. There is simply an expectation that a person placed in a position of power in China should use that power for their own advantage.

 

Never have a local QC team

The local QC has the power to decide whether your products leave the factory. The local QC will ask the factory manager if they want the products approved or not. Everyone knows what that means. Peter goes so far as to say it’s safest to regard local QCs as saboteurs. He wishes he had a dollar for every foreigner who has told him, “We know there are some sharp business practices in China, but our guy is different …” Our China lawyers wish the same thing. As we’ve said before, the leading consultants in this space are usually foreigners fluent in Chinese. For more on this point, see How to manage a Chinese factory.

 

Go for QA, not just QC

Quality control is all very well but it tends to focus on the very end of the production process, by which time it can be too late to change anything or impossible to detect every problem. Proper quality assurance is very different. In Peter’s production lines, there are typically more than 20 quality control points for each product. For complex products, quality needs to be assured at each step, not just controlled at the end. The only way to do this is to focus on QA as an ongoing process.

 

Just because everyone’s out to get you doesn’t make you paranoid

Peter says business practices in China manufacturing are not as bad as you imagine — they’re far worse. The way business is done here is not going to change. It’s not bad or good. It’s just the way it is. So be paranoid. If you’re hyper-vigilant you stand a chance of achieving efficiency.

 

And, no; Peter is not a China-hater. He’s made China his home and he has raised his kids here. He just wishes sometimes that foreigners would take the time to understand the prevailing business culture and work with it properly.