Contract manufacturing has been a common and effective solution to relieve the shortage of production output and decrease costs. China has undoubtedly been a major market for contract manufacturing, thanks to its manufacturing capabilities and developed supplier base.
In this article, we review contract manufacturing in China, including the benefits, risks, but also how you can find contract manufacturers.
What are the benefits of contract manufacturing in China?
Let’s start and review the benefits of contract manufacturing in China, some that you might be familiar with already.
China is estimated to be the largest consumer economy today as measured in purchasing power parity (PPP) terms. Over the next decade, it may add more consumption than any other country and is expected to generate more than 25% of all global consumption growth. Manufacturing products in China can help companies being closer to the market and reduce transportation costs, as well as to ease import procedures.
Contract manufacturing is cost-effective and the reason why it has become particularly popular in the last two decades. Outsourcing manufacturing to China can help you save the expense of setting up factories or expanding existing manufacturing facilities. Meanwhile, even if labor costs have increased much in China in previous years, China is still considered a Low-Cost Country (LCC) for manufacturing. There’s also much development room in the China Central and Western parts as most manufacturers are concentrated along the East Coast.
China has transitioned its market from low-cost supply to advanced manufacturing. The country has become a leader in the manufacturing of advanced products such as in automotive, telecom equipment, robotics, and consumer products. Compared to Vietnam, which is specialized in industries like textiles and electronics, China has an abundance of contract manufacturers and a larger industrial base. Many manufacturers in China are available for a large range of products.
Companies with own manufacturing facilities and equipment will suffer financially when workers or machines are idle or perform below capacity. At the same time, rents, salaries, and overheads still need to be paid. With contract manufacturing, however, you can plan for low-demand periods, and reduce your orders accordingly. Similarly, if you need to increase orders suddenly, your Chinese supplier should be able to manage this status too.
One of the limitations of countries like Vietnam and India, which are China’s rivals in manufacturing, is their inability to manufacture a wide range of products and in a higher scale. So, no matter how large your order is, you are more likely to find a factory that can handle your order in China than in any other developing country. That’s why you must also carefully evaluate and select suppliers, keeping future orders in mind. If your supplier’s production capacity is higher than your average order, you will be able to increase your order without any trouble once sales pick up.
What are the risks?
Naturally, there are also risks related to hiring contract manufacturers in China. Below you can find some of the most notable ones.
Lack of control over timelines
When outsourcing manufacturing, unless a factory exclusively manufactures for your company (which is highly unlikely), your products might not be given priority. The factory will be bound to commitments given to customers who put orders before you and will only start production after pending orders are completed. This isn’t the case if you own the factory. But you can offset this disadvantage by planning your orders meticulously and sending in orders on time, keeping production timelines in mind.
If the IP rights of your product are vital to your business, you open for risks of compromising your IP rights by outsourcing the production to China. Thus, one of the first things you should do is to register your IP rights such as trademarks, design patents, and copyrights. China is a so-called first-to-file country which means that the first company to register a trademark or patent is the first company to be awarded it.
It doesn’t matter if those rights are owned by you in the US or Europe. If a Chinese company has registered your trademark in China first, your products can be prevented from being exported due to Chinese laws and as you have infringed upon the IP rights of the Chinese company.
Finding contract manufacturers in China
This is the most interesting topic for many foreign companies, namely, how can one find contract manufacturers locally. Let’s review how a search can be conducted.
1. Pre-study in the market
Identify your specific sourcing strategy as well as the regulatory requirements for the targeted products. Once the preconditions are determined, careful market research should be conducted. During the research, you need insights of the overall compatibility between technology and your production requirements, price levels, competition, and industrial clusters, for example. When searching for the right contract manufacturers, the following questions can be asked:
- Where are the business facilities located?
- What are the business’s processing and analytical capabilities?
- Does the manufacturer have the required certifications and registrations in place to manufacture products for your intended market?
- What experience does the business have manufacturing your types of products?
- Is the business’s quality system ISO certified?
- How does the business demonstrate financial stability?
- What are the packaging options available for clients?
- Do the business offer warehousing, fulfillment, and logistical services?
- What is the business’s production capacity?
- What is the business’s track record considering on-time deliveries?
- How does the manufacturer manage business processes?
- What does the client onboarding process look like?
- How will the business protect your Intellectual Property?
After the pre-study, it’s time to continue with the implementation if feasible. Below you can find some of the major steps.
Contact a service provider with expertise in contract manufacturing
Establishing relationships with high-quality suppliers and compliant factories is often the biggest challenge businesses face when starting to manufacture products in China. ARC Consulting is specialized in searching for suppliers, manage suppliers, and can help you create longstanding relationships with compliant factories. We connect you with businesses and factory facilities in China or even other supply chain locations across Asia.
Preparations during pre-production
Once a business has established a working relationship, it’s time to conduct pre-production inspections. From factory audits that account for production capacities, equipment condition and the quality of management practices to other inspections of processes, these preliminary measures are crucial for maintaining the highest standards.
Following the approval of suppliers and factories, a business should arrange for in-process services. These inspections and quality control measures are essential when considering how to manufacture a product in China. The first article quality control, defect sorting services and pre-shipment checks are all helpful measures for getting the highest returns on investment.
Protecting your IP
According to the Patent Law of the People’s Republic of China, Article 19, foreigners, foreign enterprises, or other foreign organizations having no habitual residence or business office in China should entrust lawfully established patent agencies to apply for patents or settle other patent issues in China. In this context, we can help you identify the premium agencies and improve your communication with them to promote IP issues settlement quickly.
In the subsequent management, you need to stay updated of the production status. On-site visits and audits are essential under such circumstances. However, due to the differences in culture and high costs, it can be wise to involve an experienced and objective third-party, to conduct CSR audits.
To learn more about the topic, you can also read our separate article about CSR audits in China.
Contract Manufacturers in China
These days, under the background of rice in the manufacturing industry of Southeast Asia, Vietnam, Thailand, Malaysia, and Indonesia have emerged a lot of good potential contract manufacturers. However, China is still a stable country to produce relatively complex products due to its numerous efforts in manufacturing capabilities, especially when time-to-market is critical and when assembly requires a lot of labor.
China is notably big for contract manufacturing of electronic products, below are a couple of examples of large contract manufacturers being present.
Foxconn is well-known as the top electronic contract manufacturing company in China. It is an internationally renowned electronic foundry company and the world’s largest electronics industry technology manufacturing service provider. It specializes in the R&D and manufacturing of 3C products such as computers, communications, and consumer electronics. It has a wide range of digital content, A high-tech enterprise in the development and application of automotive components, channels, cloud computing services, and new energy & new materials.
BYD Electronics was established in Shenzhen China in 1995 and listed in Hong Kong in 2007. It is the world’s leading platform-based high-end contract manufacturing company in China. Focus on business areas such as smartphones and laptops, new smart products, automotive smart systems, and medical health.
China also has a large contract manufacturer base for medical device, where the two listed companies below are examples that operate in the industry.
Located in Guangdong province, Seaskymedical is one of China’s leading medical equipment manufacturers. In the medical sector, where hygiene is of the utmost importance, Seasky ensures that the items created exceed health standards. With the help of a medical device clean room, equipment is designed with utmost sanitization. Seaskymedical has a strict quality check procedure. All their products are ISO 13485:2016 certified.
Shinva is located in Shandong province and specializes in medical instruments and equipment, pharmaceutical equipment, and medical medicine services. It offers CSSD, pharmaceutical equipment, radiotherapy solutions, digital operating rooms, dental equipment, and vitro diagnostic reagents and instruments to customers, gaining a reputation in China’s high-end market.
China plays an important role in the semiconductor supply chain while many contract manufacturers are located here.
SMICS is one of the leading foundries in the world and is the front runner in manufacturing capability, manufacturing scale, and comprehensive service in the Chinese Mainland. SMIC Group provides semiconductor foundry and technology services to global customers on 0.35 micron to FinFET process node technologies. Headquartered in Shanghai, China, SMIC Group has an international manufacturing and service base, with three 8-inch wafer fabrication facilities (fabs) and three 12-inch fabs in Shanghai, Beijing, Tianjin and Shenzhen, and four 12-inch fabs under construction in Shanghai, Beijing, Shenzhen and Tianjin.
Huahong Group is an advanced manufacturer in 8+12-inch chip production. The Group’s business includes integrated circuit research, development, and manufacturing. Its factories are in Pudong Jinqiao, Zhangjiang, Kangqiao and Wuxi. Currently, it has three 8-inch wafer fabrication facilities (fabs) and three 12-inch fabs.
China has maintained its position as the world’s manufacturing hub for decades, allowing the country to build tight supply relationships with other countries. Companies can reduce production costs, gain high manufacturing capacities, and attain access to the potential China market through contract manufacturing here. Regarding the corresponding risks in finding CMs in China, effective management can spread the risks.