Which Chinese Manufacturing Business Model Is Best For You? [Podcast]

In this episode…

Sofeast’s CEO Renaud recently wrote this guest post on Harris Bricken’s China Law Blog about which Chinese manufacturing business model importers will come across when sourcing a Chinese manufacturing partner. Today he goes deeper, joined by Adrian from the Sofeast team, and explains what the two models are in detail, why expectations about how most Chinese manufacturers will behave need to change, and their pros & cons to you if you’re searching for a manufacturer right now. You’ll learn how to structure your relationship with a Chinese manufacturer, how to protect IP effectively, and much more…

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🎧 Chinese Or Western Model Manufacturer. Which To Use In China? 🎧

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Who does the product engineering design work?

We’re talking about new more complex electro-mechanical products with some custom parts that require tooling – these products require more development and engineering, and this is where the model of the manufacturer you choose really influences how the project and relationship will go (as opposed to a simple product that’s, perhaps, coming off the shelf).

In most cases, businesses or entrepreneurs with a new product idea need assistance to help design and develop it and there are 2 ways to achieve this:

You bring in your own design staff in your country or outsource to a design house or contractors on platforms like Upwork to help with product design, firmware development, app design, etc. You pay for this work and have an agreement to own the IP (hopefully).
You rely on a manufacturer to help with development, prototyping and then making the products. This isn’t so simple, as there are 2 models of manufacturers out there in China (Western & Chinese manufacturing business model) who, while both ultimately achieving the goal to get your products manufactured, go about it in quite different ways. It’s these 2 models that we’re exploring here…

The ‘Western manufacturing business model’ and its pros & cons

This is not the dominant model in China.

This model suits the company whose product idea it and who wants transparency and control over everything. They pay contractors for the design and development work and own ALL deliverables (Technical side: CAD drawings, schematics, source code, design files, prototypes, etc / Supply chain side: sourcing work, sub-supplier info, BOM, etc) in order to give you the ability to go to a new manufacturer at any time if you wish. A number of contract manufacturers work like this. You pay for each activity and get results as and when they’re ready. A product development agreement should be used to demonstrate who owns the IP and deliverables.

Pros

You know what is happening at every stage and learn about the development and production process.
You are in total control of the project and deliverables. If you want to walk away, you’re free to at any time.
The manufacturer is likely to reduce your risks of bringing a defective, unsafe, or unreliable product to market as they are fully prepared to follow a thorough NPI process, property test and validate the product, and perform pilot runs before manufacturing as they have no incentive to rush as they’re being paid anyway.

Cons

Your budget is uncertain, as it’s hard to plan ahead before any feasibility study has been performed to uncover challenges with the product idea that are, as yet, unknown.
You have to pay for everything, so the initial investment required to work with a manufacturer like this can be higher.

The ‘Chinese manufacturing business model’ and its pros & cons

In this model, you probably won’t have a lot of control and visibility over your supply chain and product IP. Most Chinese manufacturers follow the model where they keep certain things from the customer, such as their supply chain information (indeed, their subcontractors may not be providing information to them in the same way either). Instead of paying them for each and every activity along the road to getting your new product developed and produced, they do a lot of the engineering and sourcing work ‘for free’ and enter into a kind of partnership with you. There is a tacit assumption on their part that they will own some/all of the deliverables and IP that they invested their time and money into producing unless your product development and manufacturing agreements with them very specifically state otherwise.

Pros

Investment to get started is lower to work with these manufacturers as they’re prepared to shoulder some of the costs themselves. For SMEs and entrepreneurs on a tight budget, this can be good news.
You will have more time and budget to spend on growing your business, sales and marketing, etc, as the manufacturer will handle a lot of the work without you needing to be involved.
You partner with a manufacturer who already has experience in developing and producing products like yours, meaning that you can harness their expertise to fill gaps in your own knowledge which can be helpful for SMEs and entrepreneurs who are new to manufacturing.
The whole process will probably go faster than working with a ‘Western-style’ Contract Manufacturer due to their motivation to get into mass production quickly (this can be a double-edged sword).

Cons

Their incentive is to get into mass production quickly and ship in order to get paid and recoup the money they spent during development, this can lead to them glossing over or skipping proper supplier qualification, design reviews, reliability testing, etc. Unless you specify that certain deliverables are necessary, they may not do that work.
If not governed by a robust product development agreement, the manufacturer could be motivated by the ability to ‘absorb’ your great product idea which they can then sell off to other customers who might say, place a larger order than you. They might also be unwilling to sign one at all for this reason.
If you don’t have engineering files, BOM, etc, you will be locked in and can’t easily move to a new manufacturer unless you redo all of the work, so you’re at the mercy of them raising prices, etc.
They can tend to lose motivation and focus on more immediately lucrative projects after 2-3 months if not much progress has been made on your product, but for innovative and complex products there can be many technical challenges and progress could be slow. In this case, you’re left high and dry without a manufacturer.

How do you select which model is better for your needs?

The Western model is preferable for high-risk products like medical devices, OEM auto parts, aeronautical parts, etc. If you have a fairly complex electro-mechanical product where you expect high sales and have the funding, this model is also suitable as the increased initial costs will be more affordable and you have the benefit of more control over the project.

For importers who are new to manufacturing, have uncertainty over the product design and production volumes, and don’t have the financing behind them for a lot of early expense, finding a good Chinese ‘partner’ to buy into your project could be very helpful. You need to keep them motivated and have an appropriate agreement/s to protect your IP, though.

Another point is your product development needs. If you need to develop a pretty unique product from scratch the Western model will be better, whereas if you can take an existing product type and modify it, then a Chinese manufacturing business model could work well.

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