Without trying to be overly hyperbolic, or political, the recent (and on-going) trade war between the China and the US has been particularly challenging for many of us in the product development industry in 2019. Import tariffs of 10-25% on goods ranging from industrial machinery, to raw material (steel, plastics), to electronic components suddenly caused the effective cost of prototyping and production to increase significantly.
Before we delve too far into this subject matter, let me just clarify that I am not a political scientist, economist, or manufacturer. The only stake we have in this game is to help our clients through this sticky process, to find the best manufacturing solutions for their product. The following points are based on our experiences and interactions with manufacturers, sourcing companies, and clients. Let’s look at some considerations when deciding if overseas manufacturing is a viable option:
- Wages, property prices and the general rising cost of doing business in China (in addition to the tariffs) means that certain manufacturing sectors are less competitive than they used to be.
- Tariffs are paid directly from the importing company (i.e. our clients) to US Government
- However, given all the considerations, manufacturing overseas could still be the most cost effective way to produce goods.
- Many Chinese manufacturers are feeling the squeeze of the tariffs, as US-based customers look for other options/countries to produce their goods. This could now put clients in better bargaining positions than prior to the tariffs.
- The old refrain of ‘manufacture in the US until you get volumes large enough to go overseas’ doesn’t really apply anymore. Sure, any manufacturer would prefer a 1M+ unit order but it’s not uncommon to see orders in the low 1000’s of units to start. The price per unit may not be as cost effective, compared to a 50K unit order, but it does mean you could scale your product sales without changing manufacturers.
- We have seen substantial improvement in overseas manufacturing quality over the past 15 years. Competition is strong between factories and emerging manufacturing countries like Vietnam, Malaysia and Indonesia, so vendors know that sub-par quality will not cut it anymore.
- It is still up to the customers, and their development partners, to drive the quality standard expected from the manufacturing partner. This can be a delicate balance of quality vs cost, but by establishing a quality standard early in the engagement, we can avoid any confusion down the line.
- This cannot be overstated enough: IP theft can be a real concern when manufacturing in China (or anywhere overseas really).
- It’s easy to paint with a broad brush that everything produced in China will be knocked off or copied (Google ‘Landwind X7’ if you want a great example), but if that was the case, would companies like Google, Apple, Amazon and Samsung still make their cutting edge tech products in China? You’ll find the answer is not always black or white.
- Reputable overseas manufacturers know that the minimum criteria for doing business with US customers is stringent IP protection so they are very careful about what they disclose, and who they disclose it to. We’ve seen firsthand how someone inadvertently took a photo of an EDM machine that was cutting a mold for a sensitive client and was told politely, but firmly, to delete the photo. Okay fine, that was me….
Shipping & Customs
- Shipping logistics and Customs are some of the biggest hurdles to clear when deciding if overseas manufacturing is the right move.
- Typical manufacturing quotes will be FOB (Free On Board) or FCA (Free Carrier) to Hong Kong, Shenzhen, or whichever nearby port. It is the customer’s responsibility to arrange for freight from these ports to the final destination in the US.
- Palletized/container freight may be on a ship for 6-8 weeks and will then have to clear US Customs. This could be a deal breaker for many of our clients who are trying to fulfill orders by a certain date.
- We hear this a lot: ‘There’s a language barrier when working with China’, which I find to be slightly ignorant, and possibly racist. We’ve found that it’s only a barrier if you let it.
- We work with numerous companies that have staff who speak and communicate in English perfectly well. International sales teams for these companies will hire staff who have formal training in English/German/French/Japanese/Klingon. I cannot comment on the veracity of that last language….
- And worse case scenario, Google Translate is a perfectly handy tool….
- We realize that not every client or product will be suited to manufacturing in China, for cost/IP/lead-time/quantity reasons.
- Obviously, manufacturing domestically is still a very viable option. There are also numerous countries who are poised to take advantage of the current US-China tensions such as Mexico, Malaysia, and Vietnam. Products made in these countries are not subject to the tariffs and may present a low(er)-cost alternative.
- We are building our network of manufacturers in other countries to provide our clients with a better range of options.
Before you get your keyboards out, please know that this is not a pro-China manufacturing article, or an anti-domestic manufacturing article. There are an equal number of positives for manufacturing in the US and we have often recommended that our client manufacture their product, or do final assembly, in the US. This is probably worthy of its own article in the near future.
I’ve tried to layout a summary of considerations when deciding if manufacturing in China is still a viable option for 2020, and beyond. The tariffs are obviously playing into that conversation and while that could change soon, or not change at all, it’s up to development firms like ours to understand what might be the best option for our clients.
Production can be a daunting undertaking, whether it’s overseas or domestically, but please don’t hesitate to reach out ([email protected]) so we can find the right answers for you!