Businesses around the world today see outsourcing to China as an easy way to limit costs and increase profits. Instead of looking at it on a product-by-product basis, however, outsourcing has become a strategic position that companies are taking for all aspects of business. From marketing work to virtual teams and everything in-between, China has become a go-to solution for many industries to improve their bottom line. The pros and cons of outsourcing to China must be carefully evaluated before a final decision is made. Here are some of the key points that should be considered.
The Pros of Outsourcing to China
1. Labor costs are greatly reduced, yet still competitive within the local market.
The costs of labor in China may be up to 80% lower when compared to a company’s home market. Because labor is one of the biggest expenses a business faces for any product or service, this means a dramatic change in profitability can be created with the decision to begin outsourcing. Products that are labor intensive tend to experience the biggest gains.
2. It is an easy way to access the world’s largest economy.
More people live in China than anywhere else in the world. This economy has been consistently growing over the last three decades to the point that growth limitations by the government have been put into place. Accessing China as a market can be difficult, but when there is an outsourcing agreement in place, that difficulty is reduced. China is very passionate about brands that do come, which means relationships in the local market can produce a lifetime of results for some agencies.
3. Many agencies are allowed to offer benefits for outsourcing.
Although most businesses have tight oversight by the Chinese government, officials have recognized the benefits of having foreign companies come to them to outsource. Because of this, many organizations are offered initial incentives to come to China that can be quite lucrative. By taking advantage of the economies of scale that can be provided, a business can quickly grow with this one decision.
4. It places many organizations within reach of their downstream distributors.
Many downstream distributors have found themselves placing a base of operations in China because it is more effective for their bottom line as well. By having an outsourcing arrangement in China, this can create a close proximity to those intermediate goods that might be needed and that can lower overall capital costs by a large amount.
5. It can be easier to introduce products to Asia and even Europe.
If you have a base of operations in China, then you have easy access to the Asian market. For some companies, it also means there is better access to the European markets as well. This creates the possibility of being able to expand to different home markets using proven targeted demographics so that the business can grow. Even these expansion efforts can be outsourced through China for greater ease, especially if there is no one locally who is experienced with these markets.
6. It allows a business to align their costs with supplier costs.
The final price of an item is often the primary consideration that people have when shopping. If your product is essentially the same as your competitor’s product, but your product is just 5% more expensive because you’re not outsourcing to China, then there’s a good chance that a majority of your targeted demographic is going to ignore you. Outsourcing allows you to have a certain level of market discipline that doesn’t exist otherwise.
The Cons of Outsourcing to China
1. The final quality of the product may not always meet local standards.
When toy cars were recalled because of inferior paint that could harm children, the manufacturing process in China was immediately questioned. What is considered safe in China as a standard for products is not always considered safe in the local market. Without strong oversight, this issue can bring large amounts of trouble to a company, especially if product quality is variable.
2. There can be a language and/or cultural barrier.
Getting a specific message across can sometimes be lost in translation because of the language barrier. Many Chinese organizations are bring officials in that are fluent in the world’s common languages, but that may not be good enough for some agencies. Even if the language differences can be overcome, the cultural differences that may exist can be difficult to overcome. Having a child work in a factory to produce products may be legal in China, but a customer turnoff in your local market.
3. Copyright respect may not exist at all.
An excellent example of this is the Apple iPhone. Replicas of the iPhone began hitting the Chinese market before the real phone was introduced. There is a generalized lack of respect for international copyrights and designs in the Chinese market that could harm the bottom line of a business. If you’ve got a great idea, there’s a good chance that someone is going to rip it off.
4. It can take a long time to become operational.
There are long supply chains involved in a decision to outsource to China. Starting up the manufacturing process can also be a lengthy procedure. Ongoing issues can also be problematic, including energy shortages, staff strikes against management, and other operational issues that might not exist in a home market. Longer lead times are common and outsourcing generally involves constantly training new managers in China because of their high turnover rates.
5. Labor costs are rapidly increasing.
This is especially true for outsourcing that occurs in the urban areas of China. Labor costs have tripled within the last decade in certain industries that are based in Shanghai. Chinese companies have recognized their advantage and have begun to exploit it to increase their standard of living. For some companies, if there isn’t a local customer base, then outsourcing to China might not be the best decision to make.
6. There is not always control over additional outsourcing.
It is entirely possible for a Chinese agency to outsource your project to someone else and act as the middle agency between the two. There may be no way to control these subcontracting efforts, which means an agency loses some control over the outcome of the project. When this is combined with the potential local job losses that can occur when outsourcing to China, the end result can be a logistics and PR nightmare.
The pros and cons of outsourcing to China cannot be based on labor alone any longer. There are certain financial advantages that can still be obtained, but additional benefits need to be in place for outsourcing to be a future benefit. By evaluating these specific key points, hopefully the decision you are facing can become more clear.