Economy

Think China is Cheaper? Think Again

5 solid signs you shouldn't source from the low-cost powerhouse

Written by Charlie Reid

North American manufacturers have been facing competition in China for some time, and mostly losing. When the total cost of made-in-China products often comes in below North American material costs, it seems to me that the playing field is tilted in favour of the Chinese.

Let’s not forget that manufacturers bear some of the culpability. We want the cheap components that come from China—but not the ones that compete with our products.

Oh well. We are where we are.

Sourcing from China is a reality, and most manufacturers need to at least consider it as a means of securing low-cost components. I have worked with a number of reputable Chinese suppliers and trading companies, and still do today for a number of my clients. And there are many instances in which it makes a lot of sense to do so, such as if you need a high volume of product (read: more than 100,000 pieces), or if you’re sourcing tooling of significant mass or size.

But in most cases, the benefits of Chinese sourcing don’t apply to small- to mid-sized enterprises (SMEs). In fact, if your requirements are those of most smaller manufacturers—medium-to-low volumes, very specialized materials, little secondary processing—you’ll likely see little, if any, advantage sourcing anything other than standard off-the-shelf hardware from China.

I am currently in the process of repatriating production for a couple of SMEs, and am finding that my clients are actually getting things made more cheaply here in Canada—and at significantly less risk. I’ve come to recognize five key signs that offshoring production to China will end in disaster. If any of the following conditions apply to you, think long and hard before taking that low-cost bait:

1. Your IP is priceless

The stark truth is that anything you have made in China stands some risk of being shamelessly and identically knocked off. I’ve had clients who have found exact replicas of their made-in-China products—right down to labeling and branding—sold by unauthorized distributors. While there’s no proof, it seems likely that the supplier simply decided to sell off overproduction to a third party.

Related: How to protect your IP

Ethical? No. Does it happen? All the time. Don’t forget that China, like many offshore manufacturing hubs, does not have the same intellectual property laws as we do in Canada. That’s why you should never, never, never outsource production of your “secret sauce” to low cost jurisdictions—unless you’re prepared for IP leakage.

2. You want guidance

The only thing I know for sure about any initial design drawing is that it’s wrong—it will need revision to get it where you want it to be. One thing you typically won’t get from Chinese vendors is value-added engineering ideas. If I ask for quotes to a Canadian supplier and a Chinese supplier, I will often get a quote back from China within 48 hours—but rarely do these quotes contain a single question.

My Canadian suppliers, by contrast, usually respond with list of queries and suggestions. “Do you really want this done like that?” they’ll ask. Or: “What are you trying to achieve?” Or: “You know, if you employed this engineering tactic, it would reduce part complexity and increase the ease of assembly.” And so on.

Good advice has value—especially if you’re an SME with limited engineering and/or design resources.

3. You want to revise your concept

If you’re preparing to create a new product (or to modify an existing one), the design process is almost always iterative, often involving several engineering change notices (ECNs). In this regard, the language, distance and time barriers of sourcing from China can create major headaches. By the time you’ve determined how to precisely share your requirements (in a way that can’t be misinterpreted), revised those requirements and waited to review sample parts, it’s almost always easier, faster and cheaper (often by orders of magnitude) to deal with a Canadian supplier. I find it much more effective to simply pop into my trusted local injection-moulding supplier than to deal with someone halfway around the world whom I’ve likely never met.

(Maybe you have met your Chinese supplier. If so, how much did you spend on the trips abroad? If your part volumes are low to medium, such visits—which are often a necessary part of Chinese business etiquette—can in themselves nullify any cost savings.)

Related: How to Negotiate in China

4. You can’t afford delays

When you’re sourcing product from halfway around the world, you have to embrace long—and, often, unpredictable—lead times. I recently had a client face a two-week production delay because a duly papered container shipment failed a routine air quality test by Canada customs at the Port of Vancouver and couldn’t be safely opened. The container had to be ventilated, tested again, fumigated, then tested yet again. The shipment was eventually released—after several weeks on the dock.

While this specific type of delay is rare, bottlenecks are all too common in international supply chains. Natural disasters, piracy, labour unrest and bureaucratic snafus can all bring shipments to a screeching halt. Can your business bear such interruptions?

Related: What are your supply chain risks?

There are ways to mitigate these risks, but they usually involve maintaining higher inventory levels at home—which, of course, carries significant cash flow repercussions, and also includes the risk of high scrap costs in the event defects are found.

5. You aren’t armed to do battle about quality

Finally, with respect to the defect comment above, it has been my experience that handling quality problems with overseas vendors is problematic for SMEs. Let’s face it €“ if you’re an SME, you have very little leverage.

I had one client with a legitimate and obvious quality complaint about a batch of parts it had ordered from China. The Chinese vendor claimed it could not fix the problem, even though it had produced quality parts before. Moreover, the Chinese manufacturer unilaterally held its next shipment until the client agreed to drop the matter. No room for negotiation. No recourse for the Canadian buyer.

By the way, this product will soon be produced in Canada by a local supplier for less.

Under a narrow set of circumstances, it makes sense for smaller Canadian manufacturers to source from China. But in my opinion, for the most part, the cons outweigh the pros by a large margin.

Charlie Reid is the president of Charlie Reid & Associates, a Kingston, Ont.-based consultancy specializing in strategic manufacturing advice.

Originally appeared on PROFITguide.com