By Michael Desnoyers, President and CEO, Etratech Inc., originally published in Electronics Sourcing.
A well-known North American white goods company makes the decision to work with a Chinese manufacturing partner. It is a carefully researched and planned business decision, and everything goes smoothly – until the final product is delivered. While everything looks fine, there is nearly a 25 percent technology failure rate. Why? Because a critical component had been substituted with a cheaper, look-alike part at the China facility.
While many companies have opted to have their products built in China, cautionary tales like this are heard more and more frequently, to the extent of nearly outnumbering the positive stories. The myths about “cheaper, faster and better” seem to be, in many cases, just that: myths.
That’s not always the case, of course. Outsourcing manufacturing to Asia may be the right option for many businesses, but decision-makers must know what to look for – and what to look out for.
So let’s explore a few myths and get to the truth in each of them:
Myth #1: Manufacturing costs are lower in China – This is the most prevalent myth about manufacturing in the Far East, but is it true? Despite reports that manufacturing costs in China will match those in the US by 2015 (Alix Partners), the truth is that the cost of manufacturing depends entirely on the design and quality of the materials used. To keep costs (and bids) down, and Asian partner may opt for lower-cost inferior materials although, as noted in the example above, this can dramatically impact quality – which will of course impact costs in the long term. That’s why business leaders need to be extremely detailed and specific regarding the materials required for each project.
Myth #2: Labor is Cheaper in Asia – While this myth is largely true, the fact is that the gap is narrowing quickly, particularly compared to North America. This isn’t because costs in the US and Canada are lower, but because costs in Asia are going up. In addition to increasing labor costs (on average 15 percent every year) the combined costs of infrastructure, logistics, inflation, duties and other expenses may make the cost of offshoring nearly equal to keeping the work on home soil. The total cost of procurement may only be slightly higher in North America due to higher efficiencies and advanced automation, both resulting in greatly reduced lead times.
Myth #3: Intellectual Property (IP) Theft is a huge concern in China – This is unfortunately true. The Financial Post cites a report issued by the US government estimating that “China is behind 50 percent to 80 percent of IP theft cases globally, costing the U.S. and N.A. economy $300 billion every year and millions of jobs.” The Canadian government is suggesting that e business leaders approach deals in China with a “healthy degree of vigilance.”
While outsourcing manufacturing projects to China and other Asian countries may be the right choice for many businesses, there are many potential pitfalls to avoid. Your road to success relies on finding a trusted partner with total control over purchasing and quality systems. Identifying and securing a China-based partner with an equal understanding of both Asian cultures and business practices and your own, will place you on the right path.