The Future of Manufacturing in China: 2018 Edition

future of manufacturing in china

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Are Aliexpress sellers going to take over ecommerce in the whole world?

Are Chinese factories about to finally start acting like professionally managed companies?

Or, are they just about to lose out big time to suppliers in Vietnam and India?

Nobody knows for sure.

But I have a set of opinions to share, about what manufacturing in China looks like today, and what we’ll see in the years ahead.

1. Higher factory prices aren’t that much of a problem

There is no country that can match China, when it comes product availability.

That said, Chinese products are not as cheap as they used to be.

But, it’s still the only realistic manufacturing destination for many products.

Try to get a watch assembled anywhere in the world apart from Shenzhen. Well, other than Switzerland that is.

The same can be applied to electronics and many other industries.

At the same time, inflation is not unique to China.

When manufacturing prices go up here, retail prices climb overseas. Increasing prices are, for the time being, a relatively small issue.

There are still big problems in the China supply chain, but the price is not the main issue if you ask me.

2. Shenzhen is the place to be in 2018 (and next year)

Just a few years ago, many self proclaimed ‘China experts’ claimed that Shenzhen, and the rest of Guangdong province, was down for the counting – mainly as a result of rising labor costs.

They claimed that all manufacturers would pack up and move inland, to Henan, Hunan and Sichuan.

But that’s not what happened.

Instead, Shenzhen kept advancing to the point where it’s today the epicenter of manufacturing in Asia.

What makes Shenzhen so unique is the combination of a huge and highly accessible manufacturing base, and the complementary ecosystem of service providers.

You can get almost anything made in Shenzhen. That’s not the case in Shanghai, Yiwu, Xiamen or even Guangzhou.

Watches, Electronics, Sportswear.

You name it. Shenzhen has a supplier for it, or 200.

Then there are the service providers.

The quality assurance companies, including our partners Sofeast and Asiainspection, are based here.

The maker spaces are based here. The Amazon FBA logistics companies are based here.

And, it’s the only city in Mainland China that offers visa on arrival (5 days) to foreign visitors.

All of this makes Shenzhen far more accessible for foreign startups and ecommerce businesses, compared to other cities and provinces in the country.

The fact that Shenzhen is next doors to Hong Kong, and integrated with Dongguan and Guangzhou, also helps a lot.

Shenzhen can absorb price increases, because the ecosystem that exists in the city can’t just be transplanted to any other region in China, or other countries.

Shenzhen is also the place to source suppliers for our customers.

Today, I’d say that more than half of our customers that visit suppliers in China go directly to Shenzhen.

If there ever was a golden age of manufacturing in China, it’s happening right now in Shenzhen.

3. Chinese manufacturers still have a long, long way to go

Manufacturing is difficult. Yet, many Chinese suppliers have a talent for making it more difficult than it has to be.

Difficult and cheap might work.

But difficult and ‘not that cheap anymore’ will definitely not work for much longer.

This is how I think that suppliers should improve in 2018:

a. Standardize your specification sheets and materials and component options. Let your customers know what you can and can’t do.

b. Standardize the ordering process, and use sales contracts instead of Skype or WeChat conversations to keep track of specifications and order terms.

c. Start using proper collaboration tools instead of endless email exchanges (though I understand that’s hard when Google Docs and most other tools are banned in China).

d. Accept that your customers must do quality inspections and lab testing. Don’t argue against this.

e. Learn the basics of product safety standards and labeling requirements in your main markets.

f. Implement proper replacement and after sales service policies. These don’t have to be unconditional, but forcing the buyer to ‘negotiate compensation’ for every defect unit is a dead end.

From the supplier’s perspective, the buyers are still making the same mistakes as always. They don’t educate themselves about the product, or make an effort to understand the basic reality of manufacturing.

I’d even say that most of these issues are not ‘China problems’, but ‘manufacturing problems’.

But at the end of the day, Chinese manufacturers that want to become more competitive must get better at dealing with customers and processes.

4. Vietnam and India are now realistic alternatives to China. For some products.

2017 was the first year that we saw a notable number of customers that are shifting production from China, to Vietnam or India.

Some of our customers don’t even consider China, but go directly for suppliers in Vietnam or India.

There’s been a lot of talk about this, but now it seems like it’s actually happening.

These are the top reasons I keep hearing:

1. Chinese suppliers are notoriously difficult to deal with. Some buyer’s don’t care if prices are higher or lower in other countries. Based on my experience, however, Vietnamese and Indian factories are not necessarily that much easier to deal with.

2. Prices are, in some cases, lower than China.

3. It’s easier to get visas. This matters to both ‘digital nomad’ Amazon sellers and experienced buyer’s, that want to inspect goods on site, and meet new suppliers face to face.

What kind of products can you find in Vietnam and India?

Textiles, furniture, home products and construction materials (i.e., tarpaulins) seem to be the main products imported from Vietnam and India.

It’s also true that these countries cannot, even combined, match China’s industrial scale (and therefore product selection).

But, things move fast these days. Just like Shenzhen a few years ago, I don’t think Vietnam and India should be underestimated.

Saigon will not become another Shenzhen overnight, but a lot can and will happen in the next 10 years.

Chinese suppliers will need to work on everything, from their approach to customers to compliance and quality systems, to stay competitive.

Difficult and cheap might work.

Still difficult and ‘a lot more pricey than Vietnam’ won’t cut it in 2025.

5. Product safety and compliance is still a big problem

We recently executed a supplier screening on behalf a European client.

They had found a supplier based in Beijing that claimed that all their ODM products are ‘CE marked’.

After a basic audit, it turned out that the supplier did not have a single test report, and they refused to provide any of the technical documents required to legally make a product ‘CE compliant’.

In other words, the customer could not legally import their products to the European Union.

As usual, the supplier claimed that the EU don’t actually have any product safety laws (yes, seriously), and that the buyer should just ‘stop worrying and send the money’.

Case closed.

This is, unfortunately, the state of product compliance among suppliers in China.

Not that I think the is much better in Vietnam or India, but China has been a major exporter for over 30 years. It’s about time to catch up.

Factories can’t build respected brands, if their products don’t meet the basic safety standards and documentation requirements in their intended export markets.

Claiming that product safety regulations don’t matter doesn’t help either.

However, the problem is not only the supplier, but also Importers in the US and Europe that completely ignore product safety requirements.

The global trend right now is more product safety regulations, not less.

6. You can now manage the entire importing process online

Create an online purchase contract, wire the money and book quality checks from your laptop. You don’t have to ever visit factories, or even see your products.

This is where things are happening:

a. Alibaba Trade Assurance

The Alibaba Trade Assurance is the first serious attempt to make the order process truly digital. You create a digital purchase contract on Alibaba.com, covering technical specifications and order terms.

Then you wire the money to a designated bank account.

Next, it’s up to the supplier to make sure that the products comply with the written technical specifications, and the final shipment date.

If not, Alibaba.com can withhold the payment.

This creates an unprecedented layer of security for small to medium sized businesses importing from China.

In a few years, it would be amazing to the see the Trade Assurance program expanded on a global scale.

Adding trust and transparency in international trade can create far more jobs than any state banquet or free trade agreement ever could.

Trade Assurance is not perfect, but it’s a big step in the right direction.

b. Logistics

Until recently, you had to wait days to get a shipping quotation. And once you’d received it, in the form of a poorly edited excel file, you’d better have a PhD in international trade law to understand the price structure and terminology.

Thanks to companies like Freightos.com*, those days are over.

Now, you can get quotations, book, pay and track your shipment using an online dashboard.

We also see more and more customers using fulfillment centers, rather than managing the final delivery on their own.

Hence, they don’t even see their product, as they have an automated workflow from placing the order with the factory, to final delivery.

*Freightos.com is our shipping partner

c. Quality Control and Lab Testing

Booking quality checks and lab testing online is not new. Our partners Sofeast and Asiainspection launched their online booking platforms years ago.

But it’s becoming the industry standard, as basically every QC agency have online booking platforms these days.

7. Factory to Consumer (F2C) and Cross Border Ecommerce will not take over the world

Are Chinese factories going to take over ecommerce in the rest of the world too? Is this already happening?

Not really.

1. Being a factory owner is not necessarily that much of an advantage anymore. There will always be factories that are willing to make your product.

2. Products and brands are built on ideas. Tooling cannot replace ideas.

3. Going from a ‘make to order’ to ‘let’s build a brand for 3 years with no guarantees that we’ll make a profit’ mindset is a big leap. Most factory bosses are not willing to make this.

Today, many of them are more concerned with their retirement, rather than betting their savings on risky ecommerce projects.

If there is a ‘threat’, it comes from the younger group of Chinese, especially in Shenzhen, rather than old and overworked factory managers.

These people don’t necessarily have any experience with manufacturing. They are just regular people who want to try their luck in ecommerce.

Some of them will end up having pretty good product ideas that will work.

Yes, they have an advantage in being closer to suppliers, but you’re on the other hand closer to the market.

Now, what about Aliexpress and Wish?

B2C marketplaces, such as Aliexpress and Wish are huge these days, including in the West.

The number of packages delivered are counted in the hundreds of millions.

A watch for 3 dollars.

A pair of sunglasses for a euro.

An iPhone charger for less than a tenth of what you’d pay at home.

And, best of all, you don’t even need to pay import duties or other taxes. The customs authorities simply don’t have the resources to tax more than a very small share of the e-packets.

Their secret? They ship directly from China to customers all over the globe.

This makes it harder for Importers to compete. Many consumers actually believe that they are buying the same goods off these websites, as from local ecommerce sellers.

That is of course not the case, but it still results in less sales for Importers.

Well, until now. Something big just happened.

Countries in Europe are now starting to add postal fees, to cover the immense cost of managing the huge inflow of e-packets from China.

PostNord, for example, is now charging a flat rate administrative fee of 9 euros.

All of a sudden, that pair of sunglasses will cost you 10 euros, instead of just 1 euro..

Not that affordable anymore, and that 3 week delivery time doesn’t seem that appealing.

It’s already making a massive impact, as large volumes of parcels are now left unclaimed in warehouses, or shipped back to China.

This benefits Importers, while cross border sellers are not that competitive anymore.

In other words, we are not entering a world of global free cross border trade

In a utopia without import tariffs, different (and lack of) product regulations and tax systems, this model could have worked.

But we don’t live in a utopia.

It was only a matter of time until there would be a crackdown on this practice.

I believe that this is only the beginning. The European Union, the United States and China will do everything they can to keep jobs within their borders. Especially as more jobs are lost to automation.

They will make it all but impossible for the cross border ecommerce model to work.

Instead, they will force companies to first import the goods into the market, pay import duties, VAT and pass compliance checks.

They will likely also require that sales taxes are paid based on local revenue.

The borders will not be closed, but I don’t think that the drop shipping and cross border model will exist on the scale it does now. If anything, it’s a historic anomaly.

The other option is that countries integrate their tax systems with each other, in order to make sure that the responsibility of paying import taxes falls on the seller, not the customer.

This is already being tested, as the European Union now allows foreign companies to get VAT registered.

The negative aspect of this development is that ecommerce companies will need to register with the tax authorities in every single market they sell to.

But that is probably the only realistic solution to the future of cross border ecommerce.

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    7 Responses to “The Future of Manufacturing in China: 2018 Edition”

    1. Renaud June 7, 2016 at 11:06 am #

      I agree with this article! But manufacturers in general adopt new technologies very slowly, so AI and automation will take longer than most people expect to have an impact. Automation is already at work, of course, but nobody talks about the many failed automation projects — it is hard to estimate their proportion, but they are common.

      • ChinaImportal June 13, 2016 at 4:40 am #

        Hi Renaud,

        Yes, but “simple” AIs is already having an impact. We are seeing “self-learning” sales bots already, and there are ways this can be applied in manufacturing processes too.

    2. Boris June 7, 2016 at 7:38 pm #

      Nice article. When selling on “exposed” sales channels like Amazon, open for copying I think product customization also bears importance because let’s admit, scrolling through pages of same product while being limited with marketing, there is no better differentiation than customized product. It would take bigger MOQ, more patient supplier who’s willing to work on customization aspect and longer committment on importer’s part. Patents are another issue on their own if warranted but for a start bringing customized product and getting that early market share and recognition should be a start.

      On the other hand if imorter’s brand is already established with own eCommerce website I don’t see the point of choosing Amazon as your launch channel. This would prevent copying and saturation, provided manufacturer is trustworthy or one that does not even have B2B online presense. Like an untapped goldmine where you secret can be safe.

      • ChinaImportal June 13, 2016 at 4:39 am #

        Hi Boris,

        Indeed, it’s the sum of all parts that does it.

        However, you will fail even with the best product in the world, if the marketing is weak.

        I think a lot of importers fail to understand this.

    3. Fredrik Gronkvist April 27, 2018 at 8:07 am #

      For your information, I just wrote an updated version of this article (from scratch) that was published today. The previous comments relate to the older version of this post.

    4. Renaud April 27, 2018 at 10:44 am #

      Hey, people no longer talk about “Shenzhen” or “the pearl river delta”. Now it’s “the Greater Bay Area”. :-)

      I’d be surprised if Vietnam’s price is still lower than that of Guangdong in 10 years. Vietnam’s population in the age and in the disposition of working in a manufacturing operator role is much smaller than that of China.

      Another interesting trend to look at is, will all the small & inexperienced buyers in the EU and the USA be forced to follow certain rules, or will they always be working ‘free-style’ and importing all sorts of unvetted crap?

      • Fredrik Gronkvist April 29, 2018 at 11:34 am #

        Hi Renaud,

        I know.. the latest academic buzz word from the LinkedIn crowd.

        Maybe, but on the other hand, Guangdong is where it’s happening, and their population is about the same as Vietnam. I understand that Guangdong is not self sufficient, and depend on the rest of the country, but Vietnam can kick above its weight.. if they play their cards right.

        As for compliance, it is only a matter of time until compliance document submission becomes part of the importing process.

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