Three and a Half Kinds of Factories

It goes without saying that not all factories are created equal. Not all factories with international experience are equal either. Certainly there is a level that you’d prefer to work with if price was constant. But this isn’t a perfect world so we need to talk about with whom you actually choose to work.

If you’re not here on the ground every day, it’s helpful to know some generals about the differences in factories that are available here. This is certainly a sweeping generalization as there are possibly millions of factories in China. But I’ve worked with, audited and visited hundreds and hundreds of different factories here, in Thailand and Taiwan. And some generalizations are possible, I think, if for nothing other a base-point to start the discussion. So, here is my simplified overview of factory options with in China.

Purely Domestic.

Like the name implies they service the Chinese market. This nomenclature relates more to the clientele than the capabilities, but I find that they are analogous in many important aspects—quality and customer service being two of the most important ones.

These factories may have some really modern equipment and talented people. They may have a lot of investment capital and new buildings. My experience is that they are aggressive in sales and have decent facilities and equipment but don’t have the skills or experience to work immediately with international clients. They may not have the correct licenses to export product either.

There has been a rise, a fall and a new rise in these types of facilities over the last 10 years in China. Starting in the 90’s every factory that wasn’t specifically built by an MNC fit into this category. In Guangdong province the numbers started to fall off as the markets and the industrials zones matured. At the same time, in the last 10 years, a rise in these smaller domestic facilities happened in Zhejiang, Jiangsu and other coastal areas around Shanghai. In the last two years I’ve seen more and more of these faculties come on line as the domestic market builds and the export economy decreases in relative importance.

Most factories that I visit/use in this category have anywhere from 20 to 200 people. They have typically been in business for 5 years or less. One of the owners/managers knows the industry well and has worked in it for years. There are typically a few similarly experienced engineers but most employees are either relatively new and/or migrant laborers that are new and significantly less experienced.

Working with these factories can be both very rewarding and very frustrating. Usually they are excited about foreign business. They are willing to learn and they go out of their way to be good hosts. The problem is that they often don’t know what they don’t know about international standards. They think they know: “Foreign clients are going to be more strict than domestic clients.” But when it comes down to it, 9 times out of ten they either can’t or won’t meet the standards that are expected. Whether for (unexpected) cost overruns or simply the inability to achieve the necessary quality standards most orders with these guys end in disappointment. They try. They want to do it. They are the lowest price. They may have equipment every bit as good as bigger players in the industry. They are often really nice guys. But you can’t sell bad product no matter how nice the people making it are.

On a macro level to make it work out usually takes more time to finish production than foreign markets are willing to wait. And on a more personal level, it probably takes more patience and trips to China than most foreigners are willing to invest.

The odd time when it works out it’s really great—it’s like Chinese fate smiled and the stars aligned. You get good product at the lowest cost and the factory learned from the experience and can now parlay this successful experience into more international sales.

But, as in all cycles, things are out of line more than inline, and success is the exception rather than the rule. The fact is, that as long as these factories are offering the lowest prices and foreigners are doing limited DD there will be both a continuation of the 9 failures and 1 success. (That should be a CCP political slogan—maybe we can get Mr. Hu to use that one some time. Say it again, “9 failures and 1 success.” It’ll grow on you.)

Use these guys under two circumstances only: First, if you don’t really care about the quality of the product you are putting out. If you don’t care about quality, these guys will be quick, dirty and cheap—and sometimes that’s what people really do want. This isn’t a slam. Low-end product has it’s place in the market and, obviously, people continue to buy it.

Second, if you have the time, money, desire and long-term foresight to help someone to develop from the bottom up this is a fantastic opportunity to develop a loyal supplier. But in all the years that I’ve been working here I’ve only seen one company pull this off successfully—and they came here ahead of the market with the intent to do just this very thing. If you need product now and you think that you can bring someone along while you’re producing product to sell you need to either have very (very, very, very) long lead times or be willing to accept lower quality on the first few production runs.

Mostly Domestic, Partly International

The difference between these guys and the purely domestic factories is experience and clientele. They can be just as small, just as young in the industry and with equally few really talented engineers. But for whatever reason they have experience working with international clientele, usually via a Hong Kong trading company.

What does a little more experience mean to you? It’s means your costs will be a bit higher. But it also means that your higher standards will be mostly understood and expected. Most importantly, it means that the skill level necessary to achieve your quality standards should already be in place.

If you are looking for the “bargain” in China, this is it. These guys have the skill but not the market positioning. They know they can compete internationally but they don’t have the exposure and are still hungry for bigger clients and more money. Often they are tired of being limited to the clients provided by trading companies and want both the margins and the face that comes from having their “own” international clientele.

Usually these guys will have some sort of “international” sales department. This usually consists of one of the owners’ relatives that has graduated from college or a non-related English major. This is both good and bad. It’s good because (if you can’t speak Chinese) you have some one to help you out, someone to talk to inside the factory. But chances are the English major was hired specifically because they have an English degree and my not have a clue about whatever your producing or even how most of the factory works (or even be able to speak much English).

Other benefits of working with these guys include: they’ll most certainly have an export license. They should have connections with other factories that provide supplemental products (packaging, printing, etc.) that domestic only factories often do not have. Often they have available labor for finishing/packaging so you don’t have to move everything to a third party. They are usually located in more user-friendly areas of China and have Internet access too.

One of the biggest problems that I have had with factories at this level is IP violations. They are still basically working on a Chinese domestic price structure but they are doing QC at more of an international level—they’ve just not done the price analysis to understand the direct cost impacts fully. So if you have major issues or a great-selling product, these guys are the ones that are going to be willing to sell you out, literally. They see what they are missing out on with international retail pricing. They can do the market research (or at least Google searches) and get a pretty good idea of what you’re making on the product they’re manufacturing.

I work mostly with factories at this level. Why? Because I’m here and I have QC that is in the factory 4-5 days a week. We speak both Mandarin and Cantonese so we know (as much as is possible) what is going on in the factory. We do both factory audits before we start projects and unannounced QC visits during projects. We pull molds out of factories when we’re done with production. We coordinate and confirm disposal of rejected goods. We sign contracts in China, work with lawyers in China, and we expect to get the local prices and the international quality—why? Because we put a lot of value-added into the relationship.

I would NEVER work with factories at this level if I was not here or had someone here representing me. Some people do and pull it off. To them I say, “more power to you.” But I won’t take the risk. There is not enough trust or safeguards to ensure that I can get exactly what I want unless I’m here to confirm it directly.

Purely International

The last type of factory is the kind that you’ll find on the higher-end sourcing websites like Global Sources. Their business is completely export oriented. They are in full or at least half foreign owned and may have a large client with a major ownership stake. OR they are partial or fully (Chinese) state owned. And while ownership may sound insignificant if you’ve never worked in China before, those who have worked here know that this often does make a difference.

This “foreign” ownership, even if it’s other Chinese owners from Hong Kong, Taiwan, Singapore or Malaysia, is different from purely domestic ownership in a number of important respects. First, even if they don’t actually do business like you’re used to in the West they understand and have experience with international standards in the past. They will at least have had a dose of western style education to boot. Second they most likely have an overseas office and may still have a factory in another location; which means they are easier to track down if there are problems.

Interestingly most foreigners doing business here seem to support this idea—just the fact that ownership is not local means that there is a different attitude (varying degrees from factory to factory, of course) in the business relationship. Conversely most Chinese I talk with have the exact opposite sentiment. I don’t think I’ve ever heard a good word from a Mainlander about an owner or boss from Taiwan, Hong Kong or Singapore.

I’ve also worked with a couple of for-export Chinese State Owned Enterprises (SOE’s). One was a listed company on the shanghai exchange and the other one should have been listed at the local morgue. This disparity in SOE’s is common. While they are typically all relatively (to extremely) large, and have multiple “sub” companies their quality of management, level of debt/loss, professionalism, international experience and clientele couldn’t be more different.

The first SOE we worked with was in Jiangsu province. They have thousands of employees and at least a hundred (I am not exaggerating) smaller companies and factory locations under the corporate umbrella. Their admin people had worked on trade negotiations between the US and China in the late 80’s and early 90’s. Their clientele spans all of Western Europe, the US, South America, the Middle East and even some in Eastern Europe. Minimum order qtty’s are in the 100,000’s of thousands of pieces per SKU. They had their own research and development department and proudly showed off the products that they had invented themselves and sold to clients in the West. They willing worked with LC’s and expected us to do both extensive and strict QC throughout production. The had the latest equipment, western trained MBA’s and one of our clients’ mentions that their equipment was better than anything she’d ever seen in the US.

Now slow down a bit before you start thinking, “See, I knew it! If you just find the right factory you can get the same level of service and quality as you’d get in the west.” I will say that I think that once you’ve done DD on a factory of this size and reputation you may just be able to let them do their work and have relatively positive results. But just because the factory looks the same or better than your factory back home; and just because they have MBA’s working in the glass and steel office building doesn’t mean that you can email an PO and forget about it until it shows up on your warehouse doorstep.

You still need to do QC. I have some foreign associates that do electronics work for some big box stores and they have told me they have the same issues and problems we do—logos are not adhered correctly, products are dirty, upside-down or otherwise missed packaged, deadlines are missed, raw materials are late or sub standard, parts are sub’d out without letting you know about it, etc. This isn’t $100K worth of stitch bags we’re talking about either. We’re talking about scores of container loads of fridges and microwave ovens, hair dryers, TV’s and DVD players.

If you’re not going to be here to do QC, at the very least you need to confirm that what you ordered is what you’re getting and that what you’re getting is actually in the containers being shipped to you.

Limited International

There are some factories that claim to have a completely international clientele. I don’t want to call them liars, but the world is a pretty big place and while producing for Africa and the EU are both technically considered “international” I would submit that they are hardly comparable. Even producing for SEA and the Middle East are not comparable in many instances to what’s expected in the US, the EU and Japan.

I mentioned above that we worked with two SOE’s. The second one was a basket case. We worked with them only because our client didn’t want to pay for new molds and was only looking to modify a product that the SOE currently made, en mass. They had one of the best websites I’ve ever see. They also had huge (empty) buildings in multiple locations. I never saw the thousands of people they claimed to employee. They worked on a cash only basis and our QC was the only QC—we’d accept or reject product and they acted like they couldn’t care less. They had one computer, no one that could speak English and a number of old Red Flag and VW brand sedans. And they had one guy whose business card said “Sales Manager” but who seemed to run everything from Accounts Payable and QC to Sales. We did one order and one re-order with them in a period of about 6 months. The best part of the entire experience was that they were relatively close to a section of the Great Wall. I got some great pics.

The lesson here is that whatever factory you finally choose, you are responsible for the factory that you work with—you have a choice and you need to do the necessary DD, before you pay any money, to ensure that you completely understand what you are getting involved with. If you don’t find out until after you’ve already paid a deposit that your factory sucks—IT’S YOUR FAULT, NOT THEIRS!!

So how do you pick a “good one?” First, I suggest that you find through recommendations (not just a website) at least 3-5 factories that could potentially manufacture your specific product. Talk with them (on line) and get as much information as you can from them and from anyone that knows them. Then spend a few hundred dollars and get some real research done on who they are and what their history is. After you’ve cut the number down to 3 or 4 factories, visit the three that you think would be the best options. If possible, get samples from each of them. Compare prices, production times, sample quality, excuses for problems and your experience visiting the three. When you’re confident, place the order with one but let them know that if the first order doesn’t go well you’ve already got two other options ready to go on line.

Finally, remember that sometimes the “best factory” is not the best to work with. If you can get what you want from the second best factory and they are easier to communicate with, by all means work with them instead.

In my experience, the biggest killers of potentially good deals in China are insufficient QC and DD—and neither of these problems are the factory’s responsibility. Make an informed decision about with whom you are working and then participate often in the production process.

Good luck.

8 Responses to “Three and a Half Kinds of Factories”

  1. […] Three and a Half Kinds of Factories An interesting piece for those looking to get a Cliffnote version of China’s different types of factory ownership and management. It goes without saying motivations are the result of models, and that when working with the different models discussed, it is important to understand the different motivations/ pressures that managers/ owners face. I have worked with all 3.5 types, and all I can say is that I have had good relationships with all three.. and challenging relationships with all 3.5 […]

  2. […] Dayton over at Silk Road International has an excellent article detailing what he terms the “Three and a Half Kinds of Factories“. For someone new to China or a company looking to break down their search for factories into […]

  3. […] Three and a Half Kinds of Factories at Silk Road International […]

  4. […] There is a great article on the Silk Road International blog entitled “Three and a Half Kinds of Factories.” […]

  5. […] of this kind of product simply reinforces just how relevant concepts such as quality fade and supplier profiling are across the spectrum of everything and anything which comes out of […]

  6. […] we pick suppliers based on a number of different criteria including both capability but also depending on which […]

  7. […] [via Silk Road International] by David Dayton Category: Uncategorized  | Tags: china, david dayton, domestic, factories, factory, global sourcing, international, kinds, silk road international, taiwan You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. […]

  8. We have a telephone interview and then follow up with a factory visit. We don’t purchase anything of value without being right in the middle of the deal. Its the only way not to get burnt.