Creating a factory in China to replace your suppliers

Supplier ManagementOne of my clients has had trouble getting good products from China for many years. He is the perfect example of what I call the “small buyer’s dilemma“.

He recently asked me what I thought about his opening a small factory in Guangdong province, to control fully the level of quality he needs to receive. He also wondered about the need to get a local partner.

Here is my response:

I think it would create a huge amount of work for you… And a lot of risks.

Of course it is possible, if you create the right legal structure, you rent a factory building, you hire a manager and then a whole workforce.

You can do it on your own — no need for a local partner. But there are two problems:

1. The amount to invest in a manufacturing WFOE (wholly Foreign Owned Enterprise) is in the millions of RMB. And you can’t get that money out of China easily.

2. Simply due to the fact that your small factory is a foreign-investment company, costs will be 20% higher. There are many things that local bosses can get away with, and that you can’t. (Of course, if a smart engineer sets up production lines in a very efficient manner, you might be able to get your costs in line with those of the local competition.)

I would say, by all means avoid Chinese partners. In most cases they just suck the profit out of the joint venture in a way the foreign partner cannot find.

I don’t remember seeing any importer set up a 50-people production workshop in China for their own needs.

Have you?