Why cheap Chinese suppliers are usually too risky

So you’ve been offered temptingly low prices from cheap Chinese suppliers?

Wait a moment, there are many risks here because you might end up with a very different deal than expected or be stuck with an unsuitable supplier. We explain why here…

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Should we be wary of choosing cheap Chinese suppliers?

We see problems commonly occur when an importer selects cheap Chinese suppliers offering the lowest prices because they feel it will allow them to make the most profit margin. Our regular warning is to be very careful, as it’s often pointed to as the key cause of problems after the fact by our clients who went on to have trouble. (00:00)

Warning signs from cheap Chinese suppliers.

If a supplier offers a surprisingly low price they’re very motivated to win your business, some may even say ‘desperate.’ You need to question, if they’re 20-30% cheaper than other similar manufacturers, for example, how they can arrive at this figure for you? It may be that they are even losing money and can’t purchase components and materials that reach your standards, and we can guess that this isn’t sustainable for you.

When probing further with these (often smaller) factories, we often find that their claims can’t be confirmed. For instance, they claim to have done work for large brands, but can’t give any reference customers because it was done through ‘intermediaries.’ Even if this were true, there is no way to check this claim, so it’s worthless.

A similar issue occurs when your product is in a regulated industry. These kinds of suppliers often claim that they can produce your products in compliance with your industry and market’s regulations because ‘they have done it before with other products.’ But it turns out that they simply assembled the product and had nothing to do with developing it to be compliant, therefore, they do not actually understand the standards involved and what testing, etc, is required and are just taking some credit to win your business.

Taking a cheap Chinese supplier’s claims at face value, especially those offering the lowest prices, is risky. (05:35)

Do lowest prices = a stable relationship for the mid to long-term?

If you somehow end up working with a supplier who offers you prices 20/30% lower than competitors and provides you with products that you can sell without problems for the long term, congratulations, you probably got yourself an excellent deal.

But in the main, it’s very likely that these cheap Chinese suppliers will notice that their costs are higher than what they quoted you and they will do one of two things:

Cheapen the product to claw back some costs by using cheaper materials and components, altering the design to use fewer materials, using sub-standard solder paste that might contain lead, etc. The worst case scenario here is that market surveillance authorities test the product, find it in breach of safety regulations, and you’re hit with a heavy fine as well as having to withdraw the products from the market which could lose you customers.
Push the costs up rapidly by a large margin year after year. This leaves you either on the hook to pay them the inflated prices because you need continuity of supply, or, maybe having to source another manufacturer from scratch and hope that the current supplier will release, say, your tooling to them. Also, if you’ve used the low price to quite your cost price to customers, you’re in the unenviable position of needing to go to them with a large cost rise yourself or swallowing the costs yourself if you can. (09:54)

Does a manufacturing contract protect you from the supplier making changes due to not being able to afford to honor low prices?

Let’s say you’ve signed a manufacturing contract with your supplier ‘locking in’ a very cheap price for some time, and then they cheapen the product because materials/labor/etc are increasing in price and they simply cannot honor the originally quoted figures and produce at the same level of quality, you’re protected and can sue them for breach of contract, right?

It’s possibly not that simple. A Chinese judge will often interpret the situation and apply a ‘fair’ result. If the supplier can show that their costs are such that it’s not possible to provide the goods at the original quality level the judge may rule in their favor because the thinking may be that ‘of course, cheaper prices will equal lower quality products.’ (15:18)

What type of factory are you even dealing with?

The cheap Chinese suppliers with the lowest prices tend to be those at the bottom rung of the ladder for manufacturers, with the top being highly skilled and professional manufacturers that supply companies like Apple. The cheapest are often unstructured little workshops run by a family that are still learning many skills, don’t have professional staff, and are maybe just picking up bits and pieces of business from other manufacturers, trading companies, and so on. They don’t have process engineers, quality staff, etc, they simply put products together and ship them out. As they grow a little they might exhibit at trade fairs, have an Alibaba profile, and pick up some regular customers, but they’re still likely to aggressively overpromise to win business at all costs.

During sourcing, you need to do due diligence on your shortlist of factories and those that have come in with very low prices to try to tempt you are a risk rather than being seen as a positive by less experienced buyers. If you do decide to work with one, it’s going to require more hands-on attention from you on the ground in China because without you taking to time to be there with you applying your own structure and process to the project, it’s less likely that you’ll get a satisfactory outcome as they are not very professional and do not work in a structured way.

As you move up the ladder the suppliers become more structured, have more experienced staff and more capabilities in the factory and, in turn, will cost more. But with the higher costs comes an easier ride for you, the buyer, as the supplier will have a greater understanding of how to reach your expectations. Some time in the factory with them to hammer out your needs and make sure they understand would probably still be beneficial in many cases, though.

The top manufacturers are professional and structured, have top-class equipment and staff, and are focused on serving large businesses and brands placing large orders.

In summary, if you want the best price you will be drawn to the smaller factories, but it’s important to visit them and not only rely on an initial factory audit, as then you will get a feel for how their boss behaves, who their key people are and what they do, their experience, customer profiles, and so on. Being there in person will also let you press the supplier for information on just why they are able to provide such low pricing…you’ll be able to see if the math adds up or if they’re just being speculative to win business. (17:55)

An example quote for very low-cost plastic injection mold tooling and the problems you might face in future if you accept.

The tooling for your plastic injection molded parts is a large investment. If a supplier is offering you a surprisingly low price it may sound like a great way to save money, but risks lie in wait. You should find out what’s behind the quote they’re providing or if they’re just guessing, for instance, have they done initial drawings, DFM analysis, consumption per part and how they were calculated, and do they understand which polymer to use, etc. If they just quote lower than other factories to win your business, don’t be surprised if they come back and tell you that the final cost of the tooling is substantially more, or that the cost per piece must increase. Maybe they will swallow the cost but amortise it in your production costs or claim ownership of the mold which they have had to pay more for, thereby controlling your important product IP. Either way, this is an example of a problem that occurs when suppliers overpromise in terms of costs. (24:36)

Avoiding the cheapest options and doing due diligence is a must for certain product types.

For highly regulated products like automotive, medical devices, children’s products, electrical products that use mains electricity, and others that are safety-critical, you can’t afford to take risks as people may be killed or injured by defective products. Selecting the cheap Chinese suppliers for these products is a mistake as it is simply too risky.

For simple consumer products that are not for children and have little effect on safety, think of simple promotional giveaway items, selecting the cheapest may be OK as price is a driving factor. (27:23)

What can go wrong when you DO decide to work with a cheap/bad supplier?

There are 6 common issues that occur when working with a cheap (often also a bad) supplier:

Price increases after you have transferred a deposit payment – after the non-refundable deposit/advance payment is sent they then come up with reasons to push the price upwards, such as materials costs increasing, which you’re forced to pay because you’re on the hook with them now.
Price increases from one order to the next – the supplier comes out with excuses like there was more scrap so we had to add more inspectors and that increases the costs…it’s hard to argue with this unless you’re in the factory.
The supplier is unreliable: Ships late, doesn’t communicate, etc.
They’re unable or unwilling to meet your required quality standard – regarding quality, they may cheapen the product or increase your costs to cover a low initial price they’ve committed to providing (as covered earlier). A good quote: “The sweet taste of a low price is nothing compared to the bitter taste of poor quality” as you may end up paying a low cost for products you can’t even sell.
Your Product IP rights may be at risk – if a smaller, cheaper supplier is prepared to lie to you about their capabilities, etc, in order to win your business, can you trust them not to sell your product behind your back to make back the money they lose on your low price?
They lack transparency into who they work with and how, so you’re unlucky to be given sub-supplier information and get an idea of who is in your supply chain (which may have compliance repercussions for some importers). (29:21)

Is it really impossible to get a small factory to do a good job?

It is somewhat improbable, but not impossible. There are examples of buyers starting out and working with small, cheap suppliers, and growing together, but in these successful cases, the buyer has to be very hands-on and spends a lot of time on the ground with them in China teaching them new techniques, transferring technologies, guiding them to set up processes the right way, and nurturing the relationship. A smart supplier in this position will work with the buyer enthusiastically as this is an opportunity for them to become a better-skilled manufacturer with a long-term win-win relationship and all the benefits that brings (of course, there are cases where some suppliers have also taken all of the buyer’s training and technology and then stabbed them in the back, too). (33:47)

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