Checklist: Outsourcing in China

Finding a company to outsource with in China is an important undertaking. Our expert offers this checklist of the key factors you need to consider when selecting a partner.

By David Dan, D Square Transformation Consulting -- Electronic Business, 5/29/2007

China is a hot choice for hardware outsourcing, as we've seen three major industrial clusters build a sufficient supply of engineering talent and labor capacity, which are required for the growth of this industry.

Although we have seen more labor-intensive projects move to western provinces, in general China is still quite competitive in this market segment.

Below I have highlighted some of the factors you need to consider when going through the process of evaluating whether or not you should establish an outsourcing program in China.

1. What are your business objectives?

When you are evaluating an outsourcing project, you have to clearly define what your business objectives are. Is this going to be 100% exported from China, or 100% domestic sales inside China? Perhaps your objectives are a mixture of the two. Your objectives matter when you select service providers.

2. What is the service capability you are looking for from your service providers?

Are you looking for a decrease in manufacturing costs, or do you expect your outsourcing service provider to provide more value-add to improve your competitiveness in the marketplace? Consider the following:

• They may be able to provide ODM design for your none-core or entry-level product-line design.
• They will be able to work with your engineers to review the BOM (bill of materials) and replace with locally sourced parts at lower material and supply-chain costs under your agreement and approval.
• They will be able to provide "lean manufacturing capability" to improve productivity.
• VMI (vendor managed inventory) is another key area of cost saving and improves flexibility.

You do have choices based on the model of cooperation you expect and how far you like to "instruct" instead of "cooperate" with your new outsourcing partners and take advantage of their capabilities.

3. What are the categories of companies in China?

There are several categories of companies you can choose from in China:

• WOFE (Whole owned by foreign enterprise): These are primarily for export. The majority of CMs (contract manufacturers) or ESMs (electronic service manufacturer) fall into this category.
• Taiwan/Hong Kong/Singapore companies: This category of company has engineering capabilities (ODM) plus CM (contract manufacturing) capabilities. Again, they are primarily export-oriented.
• Registered local Chinese companies targeting domestic-market sales (includes joint ventures).

4. Other factors to consider

Size or scale of the company: The right size match is critical for outsourcing success. You should never deal with a company that is so big that you end up with no attention from its executives. On the other hand, you don't want to partner with a company that is too small for you to grow. Flexibility and growth potential should be among your outsourcing objectives beyond cost.

Culture and management fit: You may not like to deal with a very traditional and non-Western management. I have seen US companies engage with a Chinese company where there aren't any English-speaking employees and they count on interpreters to communicate. This may not be the best situation for you to get involved with.

Compatibility, both technically and with experience levels:Make sure the partner can understand what you communicate and can do a good job of implementing your instructions before asking for innovation on technology and process.

Location:This is becoming even more critical for business dynamics and flexibility. There are three major clusters in China with focused industries, and your outsourcing providers should be located in the right cluster to take the advantage of logistics and supply-chain effectiveness. You will find many VMI hubs near these clusters.

Referral, record, and resume: Check with your candidates' existing customers and review the candidate's engineering and project manager's capabilities before you dive into any audit process. Due diligence in this situation is critical and is a key component of your future outsourcing success, especially in China.