I often blame the attitude of factory bosses for the quality issues experienced by importers in China. But the problems really come from the business environment. Few manufacturers (in proportion) truly commit to maintaining a quality standard and investing for the long term.

This is exposed very clearly in The China Price, by Alexandra Harney. I am always surprised when a journalist takes the pain to study a subject in depth and uncover insights that are not obvious. This is certainly the case with this book.

Harney explains how Chinese products are so cheap and reports on the consequences on China’s population and environment. I would suggest to read Managing the Dragon (or my review: Why is the “China price” so low?) for a good complement.

Here are a few excerpts about the pressure on prices and the short-sightedness of large buyers:

In the pie of profits made by selling things to people, the manufacturer often gets the smallest slice. Depending on the product, manufacturers can make as little as a few percent or even less.

[Big-box retailers] base their business model on providing goods at affordable prices. Shoppers expect continual price declines, so the retailers, and the middlemen that supply them, demand continual price declines from their suppliers. If one factory can’t provide that, they find another that can.

Despite these pressures, there is no shortage of people in China willing to sign up for a contract to produce for big international brands. The promise of the annual volume of shipment involved […] provides a powerful incentive to entrepreneurs.

[Factory] managers, many of whom have little of no management training and sometimes no more than a high school education, often accept orders without considering whether they have the capacity to fulfill them.

Here is what a factory owner had to do to get orders from Wal-Mart (and to offer low prices, fast delivery requirements, and a limit on working hours):

“The basic trouble is the workers want to earn more in a short time”, Chan told me. “If any factory has overtime in some area, all the workers will go to it. Workers like overtime. They tell me, ‘I haven’t come here for a holiday. I’m here to earn money.’ If you don’t want to have overtime, they will leave.”

“All Chinese people want more money because it’s the culture… the workers like to work and earn money because they don’t want to stay here very long. After a few years, they’d like to go home and have a very small business”.

Chan asked for help from friends who ran their own factories. They explained how they coped with the divergent demands of their workers and customers: They made one set of time cards for Wal-Mart and kept the real ones elsewhere. They coached their workers to give Wal-Mart the answers it wanted to hear. And they set up factories on the side, factories Wal-Mart never saw but that made its products anyway. In essence, they subcontracted.

Harney goes on to explain that these “shadow factories” usually hire workers who want to work long hours without social security to earn a bit more. Sometimes these workshops are not even declared to the government, to avoid taxes and labor inspections. I wrote before how this type of system is an insult to proper quality management: see How Chinese factory owners treat their workers.

The China Price also describes in great details the factory audits regarding social compliance, and their limits. I couldn’t agree more. Great book.