Applying European/American Standards to Chinese Suppliers

A few days ago I published What Needs to Be Done Before Production Starts. I was careful to mention what is commonly done, not very common, or very seldom seen in Chinese factories.

I guess most importers of consumer goods thought “we don’t do any of this and there is no way we can push our suppliers to work on it”.

Applying Western standards in Chinese factories

Overall, Chinese manufacturers are very pragmatic and flexible.

When it is a must to get some interesting new business, it gets done. That’s that reason why average quality of made-in-China products has increased so much in some categories.

This is what Mr. Pinney, from BCG’s Shanghai office, wrote in wrote a few years ago:

A direct correlation seems to exist between Chinese suppliers’ adherence to quality specifications and the degree to which their industry is regulated in the West. For instance, pharmaceuticals and foods tend to be more advanced in quality control “largely because of the pressures and incentives at the client end,” Pinney says. Similarly, Pinney sees significant quality improvements in the automobile and white-goods industries.

Now, does a Chinese manufacturer comply with requests from a customer if the business at stake is not substantial? Usually not, but it can often be negotiated through higher prices.

For example, a European electronic brand wanted a special QC process on the rubber pads that were under its product’s casing. They wanted the factory to check the dimensions of all 12 pads that were coming out of the 12-cavity mold.

The Chinese engineers thought it was nonsense. The tolerance on a rubber pad is usually not very tight, since their whole reason for being made of rubber is that they “compensate” for the imperfections of the table. In the end they agreed to do it, even though the volumes of business were not high. Needless to say, the European brand was charged slightly more.

What about industries that have stringent requirements and very high volumes, such as car parts that are shipped to OEM car assembly plants?

The manufacturer accepts to do the engineering preparation work, but it typically doesn’t get done properly. An engineer focuses on producing good-looking paperwork, with the help from a consultant if needed.

In other words, the key word here is COMPLIANCE. If buyers set rules and there is no way around them, they will be addressed. It is purely reactive.

In contrast, one can think of companies that go beyond compliance. For example Honda and its CVCC engine, the first engine to respect the U.S. Clean Air Act standard with a catalytic converter. At the time, virtually all other automakers selling on the American market were lobbying against that act instead of working on technical solutions. In the same vein and the same industry, Tesla has set itself goals that are much, much more ambitious than pure compliance. I can’t think of any Chinese manufacturer adopting such an attitude…

When standards remain very “local Chinese”

Why hasn’t quality improved in many categories? Because most buyers place more emphasis on price than on quality. Think Christmas balls, shoes, promo items such as USB drives, hand gardening tools, bags, etc.

They switch to lower-grade suppliers when their regular suppliers announce a price increase. And there is no shortage of cheaper competitors in China. Your Dongguan factory is getting too expensive? You will find 20 cheaper ones in Yiwu or Wenzhou!

This is what Jack Perkowski described it in Managing The Dragon:

Where do these Chinese competitors come from? New entrants sometimes seem to appear out of thin air, but they actually emerge from a purely local market—a market that’s beneath the radar of most foreign observers, and in most cases is much larger than Western competitors would ever expect.

The China market is actually two distinct markets. For virtually every product, there is a ‘foreign/local’ market, characterized by higher technology and higher price, and a second purely ‘local’ market, which is characterized by lower technology and lower price.

Due to vast income disparities, the total China market tolerates all levels of technology and quality. (Average incomes in cities like Beijing and Shanghai are $2,500 per year, while average incomes in the countryside, where 750 million people live, are approximately $500.) Any company, no matter how low its quality and level of technology, will find a market for its products in China—if its price is cheap enough.

Applying standards that are common for Chinese suppliers outside of China

Now let’s look at the converse… Surely European and American manufacturers are comfortable with any requirements that are commonplace in China?

A few years ago a client was telling me that most wood mills in Europe would never accept to sell, say, pallets with clear specifications and tolerances, if they knew they’d be subject to a quality inspection with an AQL of 2.5%.

Similarly, a friend told me that big retailers were starting to purchase certain product categories outside of Asia. They keep requiring the same compliance certificates they have been requiring for 10-20 years. But their new suppliers (in Poland, Turkey, Portugal, Brazil…) have a hard time understanding why they should pay for testing in external laboratories — this is quite new to them.

So my conclusion is simple… Chinese suppliers are sometimes stubborn, but in the mid-to-long term they follow what their customers require (if it’s a MUST to get the business). In the end, the responsibility for absence of standards lies on the shoulders of importers.