Build your own factory or work with an existing factory?

Now, this is a very pressing question. Simply put, if everything is done efficiently; the more of the supply chain you own/control, the cheaper the overall product should be to produce. Using this logic if you plan to have a long running business producing the same or similar products it should be beneficial to build your own factory. Provided you have enough funding to support this venture, the deficit from building a factory should be overcome by the extra profit over a set time period.

However! It is not quite as simple as hiring a construction team and handing over some cash. The entire process from buying a plot of land until your end mass produced product / line of products can be lengthy, costly and risky.

There are many factors to think about when choosing whether this is the right move for your company:

Choose a location with good transportation infrastructure. Remember that outside of the cityscapes, despite a good road network, it is difficult to get around this vast country.

Be close to shipping ports. A large cost in the end price of your product is transportation. The best scenario would be close to shipping ports on both China and those of your target market. Qingdao, Ningbo, etc.

Availability of factory workers. Another main concern is the recent reduction in factory labour. Many Chinese are migrating to the cities for better options and to pursue the new ‘China Dream’.

Accommodation. In undeveloped areas, the accommodation will be very different to what you are used to in the west. The thought of showering outside or lack of heating may prove difficult for yourself or if you decide to put a westerner in charge.

Quality and price of land. Is the land suitable for building on, is it affordable?

Building and construction. How easy is it to get the building materials to the building site? Is there a reliable construction company nearby?

Power, gas and utilities. Can the factory location be connected to the grid easily? Are there appropriate resources nearby?

Laws and taxation. Research, meetings with local government in order to secure correct permissions for factory. Federal laws, needs research and a lawyer.

Future developments nearby. The best recommendation here is to choose a special economic zone (SEZ). These areas offer tax breaks and other incentives for foreign investment and promise local growth and infrastructure.

Climate. China can have extreme changes in climate which need to be accounted for. Earthquakes, monsoons, heat waves (just recently the south of China saw temperatures of >40degrees)

Registering your company Register your company for tax purposes.

Sorting the appropriate Visas. Must have the correct visas for progress checks, visits to check quality control, checking progress.

So after thinking of all of these variables in a great deal you will have to weigh up whether you have the time, resources and skill to put it all together.

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The other option is to work with an existing factory. In our opinion this is the best option for SMEs. By working with an existing factory, many of the above variables can be avoided and for low value added products, the price the factory adds on for their own profit is very small as they must remain competitive. Now the main obstacle here is finding a reliable factory to form a partnership with. Most likely through your company’s lifetime, it will shift relations between different factories for better quality of products, cheaper rates and faster delivery times.

Many factories will have different processing times, minimum order quantities, product capabilities so it is important to do some heavy research. Start with small order quantities and make sure to get samples in order to check quality. Also it is important to have a representative on the ground in China in order to check the factory standards. Is the factory currently flourishing or running idle? This can be either a bargaining point or an indication to bad quality. China has many industrial clusters in which there are a great deal of factories that produce the same products at competitive rates, but don’t limit yourselves solely to these areas.

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Don’t be afraid to use a sourcing company. There are a great deal of benefits and savings in using a sourcing company. We at China Performance Group have over 20 years of experience in the sourcing industry with a sourcing office in Beijing. With a large team of bilingual staff we are able to keep regular contact with Chinese factories in order to make sure that quality is kept to a high standard, precise with the customer requirements and orders are delivered on time. Once you sit down and work out the time and admin costs saved in these processes, it is clear that an experienced local office will be beneficial to your sourcing needs.

In conclusion The process of setting up a factory in China requires a large amount of time, effort, capital and know-how. But if you make wise decisions there can be a large gain as you will be controlling a larger segment of the supply chain. We recommend that SMEs firstly source from existing factories which primarily can educate them on factory protocol in China and afterwards perhaps transition to your own factory. Especially if ordering small orders of low value-added goods, setting up your own factory will not be cost effective and thus it is more profitable to source from existing factories to save the hassle!