In an LCB-featured guest article, the president of Portland, Oregon-based Sinotech offers his insight into how to control risks and succeed when sourcing customized components from Chinese suppliers.
By Michael Bloom
China is a valuable partner for Western businesses, but many don’t understand the nuances of outsourcing. I’ve worked with Chinese companies via my custom motor design companies – Sinotech and its predecessor, Offshore Solutions – for more than 25 years to have brushless DC motors and other custom parts built.
During this time, I’ve learned what it takes to ensure a successful outsourcing experience, from the initial stages of a project to its completion. There’s nothing more satisfying than hearing that a client’s order of custom BLDC motors arrived exactly as promised.
Before sourcing your products to China, it’s important to be aware of the risks involved so you can mitigate them. My experience working with Chinese factories through my offices in Tianjin, Shanghai and Shenzhen has taught me that the following issues pose the greatest risks to companies that source their motors and other components.
Choosing the wrong factory in China to perform work will guarantee failure. To gain new business, some factories will exaggerate the capabilities of their workers, experience and equipment. To avoid choosing the wrong factory, find an outsourcing partner that will send a representative to personally visit the facility to verify its claims before you even seek a bid.
Poor quality is the greatest risk Western companies face when they source products to China. Quality issues have the ability to shut down operations, cause revenue losses, endanger consumers and sour professional relationships. One of the best ways to mitigate quality-related risks is to work with an outsourcing partner that regularly visits the Chinese factory you selected so it can perform audits and catch problematic issues early.
General Commercial Risks
General commercial risks include changes in a factory’s management; defective products; or a lack in excess capacity and respective corrective actions. Factory visits and audits before and during production help mitigate commercial risks and ensure smoother transitions when there are any changes within a factory.
In addition to analysis and comparison shopping, successful negotiation overseas to achieve the lowest price necessitates the right interpersonal skills and cultural understanding. When seeking competitive bids from factories, it’s also important to be aware of the sacrifices that may come with seeking too low of a price.
At Sinotech, for example, our team in China is composed of local individuals who also speak English and can negotiate contracts on behalf of our clients. This provides our clients with a level playing field and prevents cultural misunderstandings so you can determine the most cost-effective degree of labor content and volume production.
Regardless of where you source your product, logistical risks are always present. The problem with sourcing abroad is that such logistical risks – delivery delays, unexpected costs or damaged products – can cost you even more. The design of your product can also pose logistical risks, especially if it isn’t mature, there’s a lack of clarity or the quality of your drawings is sub-par.
At Sinotech, we offer our clients the expertise of our engineers to help make sure there’s no way to misinterpret a custom motor design before the work begins overseas. Then, our representatives in China regularly monitor the work the factories provide so they can catch and address red flags early.
Chinese patent laws are improving but still don’t offer consumers much protection. An experienced sourcing partner can provide suggestions about the best ways to protect your great ideas.
Payment Method and Your Creditability
Not all payment methods are equal in China. If a Chinese company doesn’t have an established relationship with you, it may charge you more money or move your order to the bottom of the priority list. By using certain banking techniques and working with an outsourcing partner who has built a rapport with the factory, you can mitigate additional financial losses.
Events within the country, labor strikes and demands for higher worker wages can cause production on your products to come to a standstill – or raise the final cost of your outsourced project. The same is true for external political risks, such as the relationship between the U.S. and China; changes in the value of Chinese currency; or a cost increase in strategic resources. Being aware of such risks can help you better plan the timing and execution of your project.
How China Outsourcing has Changed over the Past 20 Years
In short, outsourcing to China has vastly improved over the past couple of decades. When I first started sourcing work overseas, the telecommunications infrastructure was primitive. It wasn’t until the mid-1990s that is became possible to communicate with my contacts via email. Now, thanks to video conferencing, my clients can see the factories at work from half a world away and have conversations that are clearer and more fulfilling.
China’s transportation infrastructure is also much better today because of the construction of more roads. It’s simpler now to get to the airport in Beijing from the highway, and ports are more developed. Consequently, larger trucks are more available; shipping is less expensive; and there are more vessels that can move shipments across the Pacific.
Factories have also seen a lot of changes over the last 25 years. In the 1980s, Chinese factories were state-owned, with state-controlled wages. This meant factory “owners” weren’t as proactive about providing quality work to Western companies. Once the central government sold the factories and they became privatized, the owners felt the pressure of market demands, prompting them to hire workers and managers who were more tech-savvy so quality could improve. The privatization of factories led to the elimination of government-sponsored benefits for employees, such as housing, medical care and education. China passed on these social costs to the factories, which is making it more expensive to hire overseas labor.
China’s currency has also undergone a notable change that has impacted outsourcing. In the past, there were two types of currency: one for Chinese residents, and one for foreigners. Foreigners could use their currency to purchase items that residents couldn’t purchase with their own currency, like luxury goods. When China joined the World Trade Organization in 2001, the country overhauled its currency system. With the value of the Chinese renminbi (RMB) going up, outsourcing goods to China is becoming a less competitive option.
Despite all the risks involved with outsourcing to China, as well as the increase in costs, companies still look to the East for their manufacturing needs, as the benefits of doing so are still plentiful. These organizations have learned that when you work with an experienced outsourcing partner who knows the terrain, you can breathe easier knowing someone is advocating for your best interests.
Michael Bloom is President of Sinotech in Portland, Oregon, which has been engineering and supplying custom mechanical and electromechanical parts to clients across the globe for over 20 years. Michael is certified by the U.S. Small Business Administration as a Global Trade Counselor and by NASBITE International as a Certified Global Business Professional (CGBP). He is the former President and current Board member of the Northwest China Council and an advisor to Portland’s Small Business Development Center. He has published more than 50 magazine articles and conference papers and has been quoted often in various media outlets on issues concerning China.