Factory due diligence in China

It’s no secret that China’s factories are going through a rough phase, especially with increasing raw material costs, supply chain bottlenecks, and challenges in getting credit. First, they were hurt by the COVID-19 coronavirus outbreak, and then by the ongoing politics and tariffs. You may probably be aware of all these.

In this post, we will make an overview of the challenges in China, along with strategies to minimize risks and maximize opportunities.

Manufacturing Challenges in China

Undoubtedly, your decision to manufacture in China is the right one, especially when it comes to cost factors. However, problems can arise when your client is in a faraway land. So, how can you reduce your risks?

Let’s see below:

If you are unsure how to find a well-reputed manufacturer, then, at the minimum, find one that actually exists. This means the company should hold a license to produce your products. You must ensure your manufacturing company meets this criterion before engaging with them.

A good contract is one that will make sure that your Chinese manufacturer knows exactly what is required of them and what will happen if they fail to meet your requirements. Statistical data shows almost half of the Chinese manufacturing contracts are useless because they were written without knowledge of manufacturing or international law, or both. In some cases, this is worse than using “no contract” at all.

Your Chinese contractor, with whom you engage in contract manufacturing, is supposed to do exactly what you require them to do. This would mean that you are responsible for clearly conveying what you want from them, which in turn means that your specifications, as well as instructions, should be in their native language and must be detailed. Remember, it’s not wrong to be overly specific.

Your company people or third-party quality control agents should visit the factory regularly. This will allow the manufacturer to understand what exactly you want from them, while also letting them know that you are quite serious about getting it right. This also helps humanize the contract by making them understand that you really care about your requirements and are not restricted to only writing them down.

You should not stop with your visits to the factory, but you must ensure you are performing regular product inspections as well. Make sure the inspections you perform are appropriate to the product your manufacturer is making.

If the product you are manufacturing is an intellectual property that is worth protecting, you must ensure that you do whatever you can within reason to protect it wherever you manufacture and/or sell it. All your trademarks, patents, as well as copyrights will fall within this zone.

What Makes a Good Manufacturing Contract?

Now that you know the major manufacturing challenges in China, you must be wondering what makes a good manufacturing contract. In order to come up with a good manufacturing contract, it is advisable to consider the following questions:

There are two alternatives to this. One, the manufacturer is obligated to produce the products under all purchase orders you submit. If they fail to produce at the agreed cost, then it would be considered a default. Alternatively, you can obligate your manufacturer to produce the product for only the purchase order they accept. This would mean that your manufacturer has the right to accept or decline purchase orders at their own discretion.

While the questions mentioned above are critical while trying to draft a good manufacturing contract, there are some more factors to be considered. See the additional considerations below:

Product Testing:

Remember, if you are planning to do your own independent product testing in China, you must pen down the testing procedure in writing.

Manufacturing Set-Up Cost Factors:

If your Chinese factory asks you to pay some of the manufacturing set-up costs in advance, you must ensure you are clear about these costs and get them in writing, although it is a normal process.

Product Pricing:

It’s always advisable to lock in your product costs, especially because your factory may want to be protected from an increase in material costs.

Product Packaging Costs:

You must make it clear in your writing who is responsible for packaging design, its production, as well as payment. You must also make clear how these packaging costs will be included in your product’s final cost. Always remember, it’s important to get these things agreed upon and penned down in writing.

Contract Duration:

You must make clear the duration of your contract.

If you do your Due Diligence, you can expect outstanding Quality

How to Protect Yourself from Scammers?

So, how can you protect yourself from scammers? At the minimum, your due diligence should include the following steps:

Finally, use your common sense if your manufacturer looks too good to be true. The possible red flags are:

We hope this article is going to help you do due diligence for your factory in China.

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