Quora Question: Can China Manufacture Quality Products?

Workers on a production line at the Huajian shoe factory in Dongguan, Guangdong province, China, on September 14. Greg Baker/AFP/Getty

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Answer from Cameron Purdy, CEO of xqiz.it:

"Why doesn't China have the ability to manufacture high quality products?"

Arguably, in the world today, China has the greatest ability to manufacture high quality products.

This question contains an assumption, and the assumption is wrong. Your assumption is that China manufactures poor-quality products because China cannot manufacture high-quality products. The reality is that China manufactures poor-quality products because they are paid to do exactly that. In other words, the buyers in companies in the USA (for example) are explicitly asking their contract manufactures in China to cut corners that they know will make the products lower quality, so that the profit margins are higher.

To understand this phenomenon, the first thing that you need to appreciate is how much excess manufacturing capacity exists in China. The Chinese government hides (or at least obfuscates) this information, but for many types of manufacturing we know that the output could be dramatically higher than it is, if for no other reason than that it was recently much higher than it is today! Steel is a great example.

Second, most of the manufacturing that you see coming from China is called contract manufacturing. This happens when a company wants something built to some specification, and they get a number of Chinese manufacturers to bid on that work. The company then chooses one (or more) of those bids, and the manufacturers produce the desired product, and they get paid for that work.

Third, the price that you pay for the product has no relationship to the cost of its manufacture. That $20 item you purchase in the USA? The company that sold it to you probably spent less than $1 on that item for its manufacturing. (In other words, the manufacturer bid less than $1 to produce the item, and in that "less than $1" amount there was enough room that the manufacturer probably realized a profit. Even something super-complex and expensive to build, like an iPhone, costs less than $100 to manufacture — parts and all!)

Fourth, the executives of the U.S. company are measured (by their board and shareholders) on margin growth. They respond by asking each group within the company to cut costs and/or increase revenues. One of those groups is called purchasing, and they are the ones selecting bids from Chinese manufacturers. When they get a list of bids, and none of those bids is lower than what they paid last year, what do they do?

This creates the ideal environment for what is referred to as "the race to the bottom." You go to the store and expect a product for $20, but if a competitor has something similar for $18, you buy it instead. Since the companies selling those two products are only paying about $1 for the item, they need to get every sale, or their revenue goes down. Remember, to increase the amount of pay that the executives of the US company can take — and this is the only thing that drives large company behavior! — the sales have to go up and/or the costs have to go down. Thus the buyers ("purchasing" department) are told to cut what they're spending from $.93 to no more than $.89. At the same time, the manufacturers are saying that they want $.95 instead of last year's $.93. Something has to give.

And those manufacturers are smart. Very smart. They know this game better than anyone, because their survival depends on it. The first of those manufacturers to come back to the buyer and give them a cheaper option wins, so they are all looking for areas to cut corners in. In other words, they are creatively finding ways to change the specification in a way that won't get the purchaser in big trouble, but can get the price down to what the purchaser needs.

So the good news is that China is more than capable of producing excellent quality items. The bad news is that the reason that China produces poor quality items is a combination of (1) you wanting the cheapest possible item and (2) an economic model driven by executives of the U.S. company willing to do literally anything to get a few million extra dollars in bonus a year, quality be damned.

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