How To Manufacture A Product In China (without losing your shirt)?

Introduction to new product manufacturing

How to manufacture a product in China? Unless you have done this professionally for years, it might be a very painful experience resulting in you ‘losing your shirt!’

I have been working with companies in your situation for over 10 years, and this guide is just for you. It won’t give you a precise map, as there is no such thing. What it will give you is a warning about the 3 major pitfalls you need to avoid, and a series of ‘best practices’ the best companies follow.

Everything in this guide is written from the point of view of a startup or SME launching a new electromechanical product. Nothing here is outside of your reach (or ‘just for big companies’).

But wait… isn’t everybody leaving China and manufacturing somewhere else these days?

Large companies that sell a lot in the USA are moving some of their mature productions to Vietnam, India, Malaysia, Thailand, and so on. That’s correct.

However, if you want to develop a new mechanical and/or electronic product fast and without unnecessary hurdles, you will very probably need to do the manufacturing in China for several reasons:

• You will be close to a wide range of component suppliers, surface treatment facilities, and so on,
• Tooling can be made fast and (relatively) inexpensively,
• Human resources, and in particular expertise in different technologies & processes, seem unlimited,
• China’s infrastructure, and its network of service providers, is unparalleled in Asia.

Keep reading the guide or jump to the section you prefer directly by using the links in the table of contents below:

• Introduction to how to manufacture a product in China
• Table of contents
• Vetting the right supplier
• The 3 deadly mistakes that will hurt your ability to manufacture a new product in China effectively
• Deadly mistake 1: Failing to define an appropriate strategy & plan
• Deadly mistake 2: No proper agreement signed at the start of the relationship
• Deadly mistake 3: Excessive reliance on the chosen supplier
• Are YOU ‘China-ready’?
• Element of solution 1: define an informed strategy and a realistic plan
• Element of solution 2: structure your supply chain on a solid foundation
• Element of solution 3: set the right expectations from the start
• Element of solution 4: get the design and engineering right
• Conclusion
• Further reading

The 3 deadly mistakes that will hurt your ability to manufacture a new product in China effectively

This section could have been entitled “The Domino Effect of China Manufacturing”. Making 2 or 3 critical mistakes at the start of a new product development project will usually trigger a sequence of other serious problems.

I looked at the many millions of dollars wasted on the Coolest Cooler (a Kickstarter project that failed miserably) recently, and I discussed this topic with a few people who confirmed my observations:

Deadly mistake 1:

No appropriate strategy & plan

This often leads companies into the hands of the wrong type of supplier. Here are a few examples:

• Working with an ODM manufacturer because they already have relatively similar products… with the risk of being their source of ideas for their own new products
• Working with a trading company that might not have much control over what happens at the factory
• Working with a large organization that will never put their best resources on your (tiny) project
• Working with a manufacturer that doesn’t even have the right engineering competencies

Many companies have come to us after getting frustrated by a bad-fit supplier. And we noticed that this original error was usually at the source of many other problems:

• Excessive confidence in one supplier, and lack of a backup supplier, which becomes a huge problem when the current relationship needs to be ended (as I will cover later). For anything but a small project, cultivating a backup is important. Even if you don’t get 100% production-ready, they should be at least halfway there.
• Ignorance of the wide gap between R&D (a few prototypes of the product made with components from random suppliers) and NPI (a certified product, ready tooling, ready production processes, ready testing stations, qualified suppliers, and the ability to transition from product development to mass production smoothly). Since it is ignored, it is overlooked… even though bridging this gap might take 6 months of hard work!!
• Since the buyer has no realistic vision of what it will take to get to a successful (i.e. mostly problem-free) mass production run, they make three serious mistakes:
  • Trusting the supplier’s rosy projections (which often turn out to be massively over-enthusiastic) without requesting a specific plan and challenging it. Yes, sure, it can ship out in 4 months…
  • Promising a go-to-market at an unrealistic date to eager retailers and/or crowdfunding backers, and delivering 6-18 months late!
  • Promising a certain product to the market and to investors, before the product design is really mature. What if finally, you need to change a material to make it manufacturable at scale? Or a part of the software, to pass a certification?

• Another common trap for first-time buyers is their impression that a ‘sourcing agent’ will make the whole process easier. This is fine if the agent is paid for their work and they follow a certain process. This becomes a huge problem in these cases:
  • The “agent” handles everything and blocks communication between the buyer and the manufacturer. This is a huge no-no. The buyer needs to learn from the process and see everything first-hand.
  • The “agent” is paid a percentage of the number of orders. This incentivizes them to act as the supplier’s sales agent, rather than watching out for your interest. Why? Because they will have to keep the relationship going (even if the factory misbehaves badly) and get the orders shipped out (even if there are quality issues), in order to get paid.

Deadly mistake 2:

No proper agreement was signed at the start of the relationship

There’s so much to do when working out how to manufacture a product in China that a proper agreement is often set aside and forgotten… until the buyer starts to have doubts (or clear signs of misconduct). Make no mistake, though, it’s essential! Here are a few key benefits it would provide:

• Get the supplier to commit to keeping the bill of materials (i.e. the list of all components, with their sources and prices) open to you. If you request this from the beginning, some manufacturers will accept.
• Get the supplier to recognize that all intellectual property developed is yours. Yes, it should be “normal”, but in China, it is not…
• Have leverage in case the supplier misbehaves. This will apply if you make the agreement enforceable in the country of the supplier. I’ll suggest you read the beginning of this article on the China Law blog, as it points to many good resources on this topic. Many elements go into a good agreement.

The most important is to do this at the very start.

Once you have started working with a Chinese supplier, you have invested some time, and they have made some progress, they know you won’t switch away from them. Good luck to get them to sign your agreement at that stage… it is often too late.

What happens in this case? It doesn’t always happen, but the supplier might raise prices. Or they might deliver poor quality. Or they will take your tooling and/or products hostage when you start to threaten them with penalties.

These situations have killed thousands of new product manufacturing projects. Don’t be one of these casualties. The solution is well-known and applicable to your situation with a bit of adjustment.

Deadly mistake 3:

Excessive reliance on the chosen supplier

Since you tend to fall in love with a manufacturer and entrust your entire project to them, you fail to take any precautions.

(This is in addition to the absence of a proper agreement, and it compounds the effects I mentioned above.)

The most common symptoms of this mistake are as follows:

• The buyer has no knowledge of the critical component suppliers (or the factories doing critical surface treatment such as plating, painting, and so on). This makes switching to a new supplier even harder, as everything has to be started over from scratch.
• No (micro)management of the engineering work. The buyer doesn’t have the drawings, the schematics, and other non-recurring engineering deliverables. Again, moving away from the current supplier means starting over from scratch!

This is at the heart of what our company does, and many importers come to us for that kind of work. Unfortunately, when they realize how little information they have in their hands, and how bad their alternatives look, they sometimes decide that their only viable solution is trying to salvage their current supplier relationship…

This decision drives them to get even deeper into their hole. Sometimes they find a way to get some products to market and get some oxygen. Often, though, they are digging their own project’s grave. When they have run out of funds and there is no clear path ahead, it is often wiser to admit defeat.

Are YOU ‘China-ready’?

A friend told me once that many companies coming to Shenzhen or Shanghai to buy products are not “China-ready”.

Thousands of companies are formed every year to develop and make new products, they are not “China-ready”, and they have the confidence to go at it without proper advice and support.

This is like attempting to learn how to make a parachute after jumping from a plane. Buying off-the-shelf products can already be challenging. Developing a new product from scratch is orders of magnitude harder and riskier. Doing it without first spending time to understand the playbook about how to manufacture a product in China is really brave…

What are some signs that you may not be “China-ready”?

• You meet with a potential supplier and they go out of their way to make you feel welcome. The boss takes you out to a gorgeous dinner. You are impressed. However, all this is simply the standard way of making a sale in China. It does not mean they will treat you as a VIP customer all throughout the relationship.
• You feel confident about the factory. “They work for Microsoft” sounds good, but it means nothing until you have tangible proof of it. “They are on the Apple supplier list” is better and can be verified, but it won’t guarantee anything. I know this first-hand — we have seen a large and famous group working for Apple cheating small importers repeatedly.
• You make all sorts of assumptions that are very, very dangerous. I wrote a list of 21 common assumptions before, and here are a few examples:
  • You think an NDA is an NDA, and you can use the template you have been using in your home country. Actually, it will be useless in China.
  • You find Alibaba.com. You believe all the information you read there is truthful. You feel a “Gold Supplier” badge means they are safer than the others. All wrong.
  • The manufacturer says they will make the tooling. You assume that tooling fabrication (and all the sensitive intellectual property that goes with it) will be done within their four walls. You assume it will be yours. You assume they will give it back to you if you ever request it. You assume they won’t use it for other customers. Think again!
  • The supplier tells you they are moving their factory to a new location. You think it is like moving an office to a new building. At best, it is a serious disruption, causing their production to slow down significantly for 1 or 2 months (and that’s really optimistic). At worst, the factory is closing and they are subcontracting your production to a 10-person workshop in a garage, with no follow-up of quality.

Note that one should not generalize these observations.

Not all China-based manufacturers are unethical and incompetent — though many certainly are. Some are very good… and very busy, which means they are less likely to be interested in a small project requiring a lot of engineering work.

If you assume there is a high chance that a random supplier you meet is risky, you will take more precautions. That’s the right state of mind when operating in China.
And, to reduce this type of risk, the first step is to identify the type of “ideal supplier” you need to find. This brings me to the next point.

Element of solution 1:

Define an informed strategy and a realistic plan

Importers who are learning how to manufacture a product in China excitedly start devising their new product concept in a hurry to see it become reality, and at the same time they’re afraid of competitors getting to market before them. Is this you?

Beware of the ‘entrepreneur in a hurry’ syndrome. As I wrote above, you are about to explore quasi-uncharted territory. You need to gather some information first about what is expecting you. Don’t rush and find yourself in trouble you could (should) have avoided.

Think about all aspects and implications of your product design

What causes the most delays? Fixing issues too late in the process. Issues are 10 times more expensive in both money and time if you catch them in the middle of prototyping rather than in initial design, or in production rather than in prototyping.

Here are a few examples of important considerations that are often skipped early on, at great cost:

• Do you require a level of finishing similar to Apple’s products? Don’t pick a manufacturer that works mostly for Walmart.
• Will retail packages be stacked up? It means packaging needs to be strong enough.
• Will users expect the batteries to recharge fully in under 1 hour? This will have implications on the charger, the type of battery, etc.
• Will users expect to be able to replace parts? You need to make this operation easy and think of potential safety issues.

Spend some time planning your next steps

Keep Dwight Eisenhower’s famous quote ‘plans are useless, but planning is ‘indispensable’ in mind.

Have you been thinking of the different steps of your project, all the way to “the first batch has been manufactured and shipped out of China”?

People with no prior experience in product development systematically underestimate the time and effort needed. Here are two examples:

1. Electronic design experts will tell you that at least 3 prototypes (for both the enclosure and electronics) will be needed. And each iteration takes time.
2. If it is important that your product does not fail too early in the hands of its users, you will need to run highly accelerated lifetime testing (HALT). It is an extra cost, and you may need to wait for the results before confirming the product design.

This is why, last year, we suggested a roadmap for complex hardware products that are developed and made in China. It is not exactly optimistic, but it will get you thinking about what you might do right or wrong (and that’s the whole point). Work with people who have done it before, in order to adapt this plan to your specific situation.

Any milestones?

In your plan for how to manufacture a product in China, you will probably want to include milestones, and ideally a stage-gate approval process (to do a review before moving on to the next phase).

Note: this is common in established organizations and in certain startups that need to convince investors; it is usually not handled this formally in most newly-formed companies.

Here are examples of classic milestones:

• Confirm the industrial design (i.e. outside appearance of the product) is appealing to typical consumers (and/or retailers), before working on detailed 3D
• CAD drawings
• Confirm a look-alike prototype is appealing to typical consumers (and/or retailers)
• Confirm a ‘proof of concept’ prototype successfully performs 2 core functions
• Confirm a work-alike prototype meets desired specifications
• Get a third-party product certification to establish compliance with relevant regulations