Many companies made a decision to source product/production in China based on a “myth.” For some of these companies, China turned out to be the right choice, even if the decision-making process was flawed. For others, they now have to spend money and time finding, vetting, educating, and transferring products to new geographies.
What are these myths?
Myth #1: It’s cheaper in China
Although it is true that the labor rate in China is far lower than in the USA, their productivity (the value of the work they do per hour) more than compensates for their lower wage. Productivity is a fancy way of saying how much work can be done in an hour. Price is what you pay, and value is what you receive.
This whole productivity discussion is complex — but what it boils down to is that if the task to be performed is simple and requires simple tools, supply chains, processes, and leadership, China will be cheaper. The more complex the task, the more likely the US, or some other country, will be cheaper.
This complexity leads to an interesting dynamic when it comes to the design of a product. If the product will be produced in low-productivity geography, then the design must be simple. If the product will be produced in high-productivity geography, the design can take advantage of complexity: robotics, advanced processes and supply chains, etc.
If you simply take a product designed for a low-productivity geography and ask a US manufacturer how much it will cost to make, it will always be more. If you take that same product and change the design to take advantage of US productivity, it may be cheaper.
Two important takeaways:
Myth #2: China will steal all my IP
Another common myth is that China will steal all my IP. First, let’s be clear, theft of IP happens in all countries — including the US. Second, if someone steals your IP, you can use the legal system to stop them — at least in the US. However, if you did not own the IP to begin with, you have no legal right to stop them.
This “China will steal my IP” myth is largely a result of not understanding what IP is, and how it is owned (disclaimer: this is not legal advice). Coming up with an idea is not sufficient proof of ownership. There are steps you must take to make a claim of ownership to an “idea.” If you do not take these steps in the right way, you may have no more claim to the IP than any other person on the planet. It is also important to understand the different types of IP: Patents/Copyrights/TM/etc., Trade Secrets and work product (drawing and instructions).
A contributing factor to the establishment of this myth is how China typically structures their contract — sometimes referred to as design-build. In the US, it is much more common to hire one company to design your product and another to manufacture this product from the drawings. The design company is “work for hire,” — meaning they make the drawings, but you own them. The manufacturer signs a contract to produce the product per the drawings and to keep your drawings “secret.”
In China, the typical agreement is that they will design and build the product per your specification. In this case, they own the design (the drawings), not you. Since they own them, they can do anything with them — including compete with you.
A classic case is when a US-based company hires a China-based Design-Build company to take their idea (the specifications) and create a product. Meanwhile, the US-based company starts to create a market for the product. Once the market has been created, the China-based design-build company raises the price for the product (sometimes to the retail value of the product) and starts selling the product through their own brand at lower prices. In this case, the China company did not steal anything — it owned the design from the start.
Some companies believe that a patent will protect them, and in some cases, this is true. However, often patents are defined very narrowly, and a slight modification is all it takes to be clear of infringement. The reality is that it is often very easy to “design around” a patent.
Myth #3: China has poor quality
You can find bad, good, and great quality in every geographical area. The reason this myth perpetuates is because China is often a source for low-cost consumer goods, and these goods do not require high quality — that is, the market will not pay for the increase in quality.
Many name-brand consumer companies with a reputation for high quality have products made in China; however, these higher-quality products are not made by the same low-quality manufacturers of low-cost consumer products.
The point is quality is agnostic when it comes to geography. To get the level of quality that is appropriate for your product, you need to know how quality systems work and how to select a vendor based on their quality system.
Myth #4: China will design the product for free
Of course, no one can stay in business if it gives its products/services away for free. “Free” should be a red flag for anyone on any level, but especially so in product development.
There are legitimate companies that will do a design-build (design for free), however, keep in mind they own the design and can decide to raise prices at any time and even compete with you.
At the very least, you pay for the “design” when you purchase the product, and you can not “leave” this vendor without incurring those costs — which may be impractical to do once sales have progressed beyond a certain level.
Finally, if it is free, could it really be all that good? If your design is inferior to your competition, will you really succeed?