The China Price

Business deals in low cost countries are so competitive, that a manufacturer will often quote a price below their actual production cost just to attract buyers to an irresistible deal.

This is what is commonly known as “The China Price.” Once the contract is signed, the manufacturers look for ways to reduce costs and turn a profit. Typically, this results in short-cutting processes, reducing size or volume of the product and using cheaper ingredients or materials.

Over time, Western buyers expect the learning curve to improve production quality. But this is not the way a typical Chinese manufacturer would think. Instead of continuous process improvement and learning curve efficiencies, emphasis is placed on cutting costs.

For a manufacturer in China, as soon as the contract is signed and production begins, cost reductions start. Cost reductions may include the use of cheaper materials and skipped process steps, regardless of the production specs and the contractual language. The Chinese manufacturer knows he must reduce costs because the “China Price” is below his costs.

This slow degradation of quality may not be noticed for a long time or until something breaks, someone is poisoned or someone is hurt.

Even though you have done your homework well, checked factory references, visited and audited the factory, and viewed a sample production run, you may still suffer from production quality fade. If you are sourcing from China, you must be vigilant about quality over the entire term of the relationship.

When you are negotiating the initial deal, try to verify the true cost of production, and fight the urge to force prices too low. If you want to avoid constant cost-cutting by the manufacturer, you must be willing to pay reasonable prices.

Westerners often leave production details off of the design, assuming that Chinese manufacturing engineering will complete the specifications. But it is highly unlikely that this final engineering step will take place in China. Factory management will view this lack of detail as an opportunity to substitute lower quality parts.

You must assume a supervisory quality role over the factory to guard against substitutions and short-cuts in production. You should visit (both announced and unannounced) at least once per quarter. You might consider hiring an in-country person who speaks the local dialect to sit in the factory and monitor the processes.

Fundamentally, remember that unlike the Western world, quality is the buyer’s responsibility in the Chinese manufacturing world. You must take responsibility for verifying quality and fighting quality fade.

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