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The danger/risk of choosing a "cheap" Chinese factory

By Renaud Anjoran on September 15, 2016

One of the biggest mistakes importers make is to work with a “cheap” factory. The price is good, but you need to revise your expectations way, way down.

Instead of “cheap” or “expensive” factories, I like to talk about “high-volume, low-complexity” vs. “low-volume, high complexity” product focus. Obviously there are manufacturers making high volumes of high-quality products, for example in the auto or the electronics industry, but this distinction allows for a meaningful comparison.

When you walk in a good factory that is used to making low-volume, high-complexity products, you will likely see the following:

However, when you walk in a ‘high-volume, low-complexity products’ factory, you will see all the opposite:

To understand this type of business, the restaurant analogy is useful. (I read about this in a few articles in the past.) If you stop in a local restaurant on the way to a Chinese factory, here is what you might find:

So, if you are new to China, you should work with a sourcing agent and they will help you navigate these risks, right? Unfortunately that’s not what I have observed. And I am not the only one.

Last week, the China Law Blog published an interesting article entitled Getting Your Product Made in China, Part 1: The Pros and Cons of Using an Intermediary.

“It is still possible (and not all that uncommon) for your intermediary to strike a side deal with your China manufacturer to get a 5-40%+ secret commission on every sale. If your intermediary does have a side deal with your manufacturer, it also has incentive to use a too-cheap manufacturer so as to be better able to hide its secret commission from you. Too-cheap manufacturers are more likely to have quality control and delivery problems."

That’s perfectly true! I wrote about hidden commissions before–it is considered normal and to be expected.

In addition to the hidden commission, sourcing agents generally get paid a percentage on the total order value, contingent on the fact that the order gets shipped and paid. It means they have an incentive to see the order go through. A high price obviously makes it harder for the purchaser to place the order (and it will take longer to that that order approved), therefore it is to be avoided.

You have to assume everybody in China is out to get your order, whether they can fulfil it in a satisfactory manner or not. They know that, once they got you to spend weeks or months to refine samples and once they got your deposit, it is much harder for you to switch to another supplier.

My point is simple. Many factors will push you in the arms of cheap suppliers, and it might not be your best interest. Do your market research, clarify your quality standard and your tolerance for late shipments, and audit manufacturers before giving them an order. It is money well spent if you are planning to develop a strong supply chain to support your business into the future.