Understanding Chinese Factories: the 4 Types

Factory Overview
In China it is possible to lump most factories in one of four categories:

  • Level 1: the recently-created and unstructured workshop;
  • Level 2: the semi-organized factory that got out of level 1 but that is still struggling to keep quality & timing under control;
  • Level 3: the factory that made big efforts to get organized, with the objective of pleasing large customers;
  • Level 4: that rare bird that applies lean manufacturing, and that avoids level 3’s rigidity.

In this article I am excluding Chinese state-owned enterprises, which are a breed on their own.

 

Level 1: the unstructured workshop

Typical profile:

  • 0-200 workers, engaged in simple processing (often assembly);
  • Managed by the owner and his family;
  • No quality system, no quality control staff;
  • No ability or time to work on complex prototypes before production starts;
  • Focused only on “making production” fast and on the cheap;
  • Can accept small orders, as long as purchasing components in small quantity is possible;
  • Seldom works directly for export customers;
  • Count on other manufacturers or trading companies to get business.

Result: very low costs and low MOQs, but needs to be followed very closely by customers.

Level 2: the semi-organized manufacturer

This category is a mixed bag. Some export 100% of their output and are very familiar with their market’s quality & safety standards. Others focus more on the domestic market or the most price-sensitive countries (Middle East, India…), and should be avoided by importers from North America and Europe.

Still, it is possible to draw a somewhat typical profile:

  • 200-800 workers
  • Has grown out of the “disorganized workshop” stage
  • Has had to hire a few professional managers because of the growing complexity of operations
  • Has had to hire a few QC employees, to avoid big disasters
  • But still, low concern for quality among staff and managers (in most cases)
  • May have English-speaking salespeople if direct relationships with foreign customers is a goal
  • May still get orders mostly from trading companies and other factories

Result: costs are relatively low, and quality & timing are relatively unstable. The owner’s motivation for your orders still determines their reliability.

Level 3: the organized manufacturer

Typical profile:?800+ workers, owner is often from Taiwan or Hong Kong.

They have tried hard to comply with demanding buyers’ requirements:

  • Every aspect of production is specified in detail;
  • Production is checked thoroughly by QC department;
  • Hopefully, strong staff discipline to follow the system;
  • Customers’ IP rights are more strictly respected.

I described this type of company in more details here.

Result: few quality issues, but high indirect labor costs (QC, middle management) and low flexibility.

Level 4: the continuously improving manufacturer

Typical profiles:

  • Part of a large multinational group, or
  • Midsize factory with a process-oriented general manager.

They follow the lean model:

  • Regular improvements to material flow and to each processes;
  • Errors are prevented or corrected at the source;
  • Staff is trained and supports the philosophy.

Result: high customer satisfaction (close to zero defects; production cycle below 5 days) and relatively low cost (high productivity of operators, limited QC staff and rework).

Unfortunately, these companies are a very small minority. They usually don’t advertise themselves on B2B directories. They are very hard to find.

What kind of Chinese factories should you work with?

First, a couple of rules to keep in mind:

  • If you work with a supplier that is too large relative to your orders (e.g. you would occupy 1% of their annual capacity), you will be quoted high prices and given poor service.
  • If you work with a small supplier that cannot produce the quantities you order, they will be forced to subcontract production and you will probably be in for a disaster.

General advice would be as follows:

  • If your orders are very small, you might need to work with a trading company that will place your orders in a level 1 factory and follow production.
  • If your orders are large enough to work directly with a manufacturer, but not big enough to be interesting to big factories, go for level 2.
  • If your order are considered large and even big companies actively fight for your business, go for level 3.
  • If you are in a very quality-sensitive industry and you cannot afford even 1% of defects, spend ?time and search for level 4 (but you might not find any in your vertical).