Chinese Contract Manufacturing

It’s 2015 and a good time to take a fresh view of your contract manufacturers (CMs) in China. Business conditions have changed. Labor rates in China continue to rise. Logistics costs fluctuate with the price of oil. Data collection about forecasts, and operations continues to improve. Companies are considering Reshoring. All of these things will affect your relationship and operations at contract manufacturers.

Contract manufacturers provide engineering and manufacturing services to companies and brands that do not want to own and operate their own factories. Chinese contract manufacturers range in size from the giant Foxconn to small sewing shops in rural areas. CMs are typically experts in manufacturing and can quickly adopt your products into their manufacturing lines and schedules. These companies are excellent at assembly and repeatable production and are the kinds of factories you often see in photographs where hundreds of young Chinese women are bent over assembly tables.

With changes in the business environment this is a good time to reconsider your CM business. The first step is to review and reconfirm your business goals for contract manufacturing in China. Assemble a cross-functional team of the stakeholders in your company and spend some time reviewing the current state of the business as well as your expectations for the coming year or two.

Next, consider changes in the Chinese business environment. For example, as of January 1, 2015, a whole host of new environmental laws have taken effect in China. The Chinese government is putting muscle into its efforts to clean up the environment and is starting to get tough with polluters. Foreign corporations operating in China are receiving the brunt of regulatory oversight, but every foreign company using contract manufacturers is likely to get attention from the government and an environmental review. Be sure to review your contract manufacturing sites regularly for safety and environmental compliance.

Consider your company’s strategy regarding Reshoring. Reshoring is one of the hottest trends in US business. According to a recent study, 54% of manufacturers over $1 billion in revenues are considering or have started a Reshoring project. If your company has started to think about Reshoring, you will need to consider the impact such a strategy will have on your China operations and CMs. Make sure you plan for the return of any tools, dies and molds that may have been transferred to China.

If you have employment contracts with your CMs and their employees, you need to understand the cost to buy out these contracts. If volumes coming from China change, will this effect logistics contracts? Work with your legal department on these matters.

Use the information you have collected about logistics costs over time to chart the changes and analyze volatility. Ask your freight forwarders and transportation carriers what they expect to happen in the future in terms of price changes. With oil prices fluctuating, logistics costs from China will surely change.

Use the data you collect on CM operations including volumes and quality statistics, together with customer buying trends to determine what changes need to be made in your strategic plan. Don’t be complacent about managing your China CMs. Go to China every quarter for a business review with your CMs. Now is a perfect time to plan for Q1.

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