Manufacturing Contract

A manufacturing contract occurs when a business hires an external company to produce goods on its behalf. When a business needs to outsource production, they use a contract manufacturer.

With low labor, production, and raw materials costs, it’s natural that western companies turn to China to take care of production for them. Products made in China cost about 5% less than those produced in the USA and 10 – 20% less than Europe-produced goods.

America benefits from the absence of value-added tax on its products. That reduces import expenses and accounts for the low production cost to the USA from China. While China’s currency is low-value, it benefits from stability lacking in US and European currencies, benefiting businesses who buy from China.

In this article, we cover contract manufacturing so that you can make the right choice on contract manufacturer China for yourself.

What is Contract Manufacturing?

To answer the question: what is contract manufacturing? We’ll first look at a general definition. If a business wants to outsource production, a company initiates a manufacturing contract with the manufacturer nominated to handle the production of goods. 

Typically, this is made by small businesses that can’t produce the goods or wish to cut production costs by outsourcing. However, large companies such as Apple and Hewlett-Packard now use contract manufacturers for goods manufacturing.

A contract manufacturer should have a company that fits the following criteria. They should have:

  • A financially sound business
  • Certification to ISO (International Organization For Standardization) standard
  • A well-managed and clean production facility
  • The ability to handle production efficiently

What is Contract Manufacturing in Relation to China?

When considering the question, what is contract manufacturing? We’ll focus on the process concerning Chinese companies. Your first step is to find a company to manufacture products for you. See this guide on how to find a China manufacturer if you need further advice.

Smaller companies need to proceed with caution with a contract manufacturer China. Once you take on a contract manufacturer, you will have to use them as long as you are contractually obligated. 

Small companies don’t have the leverage of larger companies. You may be handicapped by manufacturing in China rather than your home country.

Supply chain agreements should also be in place, as well as Chinese experts in product design and development — this is essential with more complex products that require special attention to their manufacturing processes. Supply chain agreements give western companies greater clarity when dealing with Chinese companies.

The main reasons companies organize a manufacturing contract in China are that a company

  • Wants to make improved-quality products and lack the resources to create them
  • Lacks the know-how to manufacture the products
  • Needs time to focus on other areas of the business rather than manufacturing
  • Wants a way to scale the business fast
  • Wants an improved supply chain

If the above bullet points describe your business, a manufacturing contract with a Chinese manufacturer could be the way forward for you.

Types of Chinese Manufacturers

When looking for a Chinese manufacturer that is appropriate for your needs, it’s best to find a manufacturer with low minimum order quantities and efficient scalability. 

Before starting work with any manufacturer, ensure you know the limits of their manufacturing capabilities. Manufacturing processes are not always as straightforward as they initially seem.

It may initially seem like they can solely handle product creation, but usually, other manufacturers are involved in the order creation process.

Here are the main choices of manufacturers:

Raw Material Producers

These manufacturers produce the raw materials that you need for product creation. Then the raw materials are then transported to one of the following factories.

Component Producers

These factories make parts for assembling in your final product. Frequently these factories include the raw material output.

Assembling Factories

The assembly factory takes all components and materials from the other two factories to create the finished products. After completion, your products are ready to sell.

For more information on the different types of Chinese suppliers, visit this link.

Manufacturer warehouse

Find the Contract Manufacturer that Will Suit your Business

Use your manufacturing needs to decide on the type of contract manufacturer you want to partner with and the type of agreement you want to put in place.

Need help finding a contract manufacturer?

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Do your Due Diligence Before Setting Up a Manufacturing Agreement

Find previous companies who have worked with the manufacturer and find out how the experience of working with the company was for them. If the manufacturers are honest, they will have no problem with you doing that.

Ask for the manufacturer’s operational and legal details. Again, if the manufacturer is honest, they will not object to you asking for these details.

Search for any other online references to the manufacturer.

Consider visiting the company, as there is no substitute for direct contact with a Chinese manufacturer. For further information on what you need to know before agreeing to work with a Chinese supplier see this article.

Request A Sample

To accurately measure the quality of the manufacturer’s work, ask for a sample of their work before agreeing to work with them. Most manufacturers are keen to share product samples. The product samples should reflect every stage of manufacturing. For this reason, you may need product samples from different factories according to the various manufacturing processes.

Advantages of Using a Contract Manufacturer

A business uses a contact manufacturer usually because the manufacturer makes it easier and low-cost to release new products to market and distribute them.

The main advantage of a manufacturing contract is that you won’t need your staff and production set up. The manufacturer’s location may also mean that the company saves on energy consumption. Raw materials will be cheaper in China, and US companies will make particularly good tax savings.

A Contract Manufacturer Frees Up your Staff

Contract manufacturing will enable you and your staff to focus on other crucial aspects of running a business. Also, a knowledgeable manufacturer should be able to utilize fewer employees to operate manufacturing tasks than you might have anticipated.

The manufacturers may be able to introduce your products in China if appropriate, which could then lead to entry into other countries in the East for your company.

Disadvantages of Using a Contract Manufacturer

The main disadvantage of using a contract manufacturer is a lack of control over the manufacturing process and the end product. Your company will have no direct control as the work progresses, and the result may not align with what the company wants.

You will probably not be the sole company the manufacturer is working with, and they may not give your work the priority you’d like.

The language and cultural differences in working with a Chinese manufacturer may also cause problems for companies that become involved in a manufacturing contract without establishing clear communication with the manufacturer.

Is a Chinese Manufacturing Agreement Still an Affordable Option?

Labor costs are increasing in China. Companies are moving their manufacturing to other parts of Asia, including Vietnam and Cambodia. 

There’s a notable difference in labor cost depending on whereabouts manufacturers are based in China. For instance, Guangxi Province is cheaper than Guangdong province. It is not easy for manufacturers to relocate as costs begin to bite.

When possible, relocation can have considerable benefits for manufacturers. In poorer areas of China, living costs tend to be low, which means lower wages.

The workers in lower-cost areas of China are more likely to be locals rather than migrants. The migrants may need to sleep and live in dormitories — another expense for a manufacturer.

Another advantage for manufacturers is that local workers tend to stay with the same manufacturer. In contrast, migrants are often transient; they will not work for long periods with the manufacturers. Because migrants tend to be short-term workers, the manufacturers require new workers to be trained, incurring additional expenses and taking more time.

Because of the differences in location concerning the labor force, western companies seeking to find a manufacturer in China should consider the importance of location for manufacturers.

Manufacturing agreement

Conclusion

If a manufacturing contract sounds complex and problematic you may be discouraged from trading with China altogether. But there is an alternative.

Rather than searching online for a Chinese manufacturer, you can approach a China sourcing agent.

Use a sourcing agent who will match you with a suitable contract manufacturer. The screening system that a good sourcing agent uses will cover all aspects of manufacturing, including company history, local reputation, and legal contracts. The sourcing agent will meet, analyze, and onboard a suitable manufacturer for you.

The risks you face by going it alone or giving tasks to separate companies minimize when you work with a reliable sourcing agent. You’ll be left to concentrate on building your own business in your home country.

Here at Easy Imex, we pride ourselves on our reputation as the best sourcing agent in China. We will be pleased to ensure that your business has long-term success when you partner with a Chinese manufacturer; leave all the heavy lifting to us.

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