The phenomenon of Chinese manufacturing is well known worldwide - outsourcing and relocating of companies to China have increased so rapidly that almost all types of goods consumed throughout the world are made there.
Even many typical "local" goods, such as traditional Indonesian candy Ting-Ting, are now manufactured in China. Favorable Chinese economic factors, such as low wages and the exchange rate, are generally credited for attracting importers to China. Yet, the low quality or deleterious outcomes of Chinese manufacturing, such as the production of toys made with lead and baby milk containing toxic elements, have not seemed to deter outsourcing.
Paul Midler's Poorly Made in China explores this puzzle. Drawing on his extensive experience as a liaison between importers and manufacturers in China, Midler provides an on-the-ground view of how the Chinese manufacturing industry works and an insight into why goods produced in China tend to be of lower quality.
Although Midler's book focuses mainly on his work as a representative for a US-based importer of health products, his experience in various other industries such as home furnishings, construction and waste paper recycling also provides the reader with a broader understanding of how international manufacturing in China works.
Midler believes that doing business in China generates benefits far beyond the low wage rate generally credited with driving the industry. He begins by demonstrating how China has provided a supportive environment for foreign investors: "China was on a national mission to build its economy and it was tacitly understood that foreigners were to be treated in a manner that would encourage their return and further investment."
He also shows how easy it is for foreigners to form an exporting business in China, with local factory owners, keen for entrepreneurs to choose them, more than happy to assist with the necessary paperwork, freight forwarding and other technical issues. The downside, he reveals, is factory owners deliberately misleading foreign investors in order to secure a manufacturing order. The author witnessed this practice firsthand during a survey of a factory for a hygiene products company. To feign productivity, the factory owner had her workers pretend to be fulfilling a large order, although, as Midler finally discovered, there was in fact no work to be done. Furthermore, before inspecting the production process Midler was asked to abide by certain procedures such as hand washing and wearing sterilized clothes. However, this practice was as much of a show as the rush in work; after the manufacturing deal was closed, the sterilizing procedure was never used again.
The book also illustrates how Chinese manufacturers' remarkable imitation skills attract foreign businesses: A foreign company only needs to bring a sample of its product for a factory to reproduce it. Unlike in other parts of the world, in China this skill is appreciated and socially acceptable. Midler gets to the root of this practice by taking the reader on a brief journey through China's history to the Qing dynasty, when Emperor Qianlong was impressed by the skill of an artist creating a fake Ming style jade cup.
Further pitfalls await investors, Midler shows. For example, once a contract is signed, the manufacturer might tamper with the agreed contract to gain extra modest profits. Midler encountered several classic maneuvers during his dealings with Chinese manufacturers, such as switching to cheaper ingredients, fiddling with product specifications, increasing price at short notice and using the metric system conversion to their advantage (for example, assuming 10 feet is equal to 3 meters): "Chinese factories often engaged in this sort of quality fade - the incremental degradation of a product over time," he writes.
Although Midler presents these manufacturers as being somewhat shortsighted, he also demonstrates how they are able to think two steps ahead of the foreign investor. Although dealings may result in goods that do not meet the importer's standards, it is uncommon for foreign businesses to take legal action. Midler claims this is because importers would lose more from halting production and suing the manufacturer than would be gained from trying to fix the poor-quality goods and meeting the demand from the retailers back home: "manufacturing problems tended to be small relative to the size of the overall business, and factory owners actually took this into account when they considered whether or not to manipulate quality levels."
Thus, as Chinese manufacturers know they are unlikely to face legal action and with large domestic retailers looking for ways to cut costs by taking the importer out of the distribution chain, factory owners can pressure importers little by little to gain marginal profits. With minimum legal support for contract enforcement and the ease with which the Chinese can repetitively set up a manufacturing company after each failure, low-quality goods are almost inherent in this type of manufacturing and import relationship.
Another way Chinese manufacturers seek extra profits is by producing more than the agreed quota and selling the extra stock to secondary markets, where buyers are willing to pay a high price for low quantities of the good. Midler also shows how Chinese manufacturers tend to sell imitations of products protected by copyright to developing economies. Some companies outsource the manufacturing of their patented products to China mainly because they are offered a very low production cost. Chinese manufacturers are shown to be willing to produce these goods at no profit in order to sell the imitation with a high markup to other markets where intellectual property laws are not enacted or enforced.
Another problem investors face is price discrimination. In economic theory, price discrimination refers to the vendor's ability to sell each product at the price at which the buyer values the good. This allows the company to make maximum profit by applying a different price for each buyer according to their willingness to pay.
As depicted in Midler's book, Guangzhou city holds an export manufacturing exhibition twice a year called the Canton fair. Most of the visitors to the fair are relatively new small to middle-sized importers from across the world looking for goods to import at a profit - and they all have an idea of how much their goods are worth in different markets.
"Customers who came from France did not get quoted the same price as those from Russia," Midler writes. "This business about *what's your market' incensed many importers who suspected that they might not be getting the absolute lowest price available." This approach is possible, however, because it is difficult to find reliable information on the manufacturers. Importers, especially new ones, are forced to choose their manufacturer by trial and error.
Because of Midler's focus on all the extra costs incurred by the foreign investor, it remains unclear how the benefits from choosing to locate in China outweigh these negatives. If the costs are indeed larger than the benefits, then either foreign investors are learning nothing, or they are playing a one-shot game. In fact, Midler writes that Walmart switches manufacturers as soon as a contract expires or the manufacturer starts to seek a higher price. This lack of long-term relationships between foreign investors and Chinese manufacturers should lead the reader to question why investors are not learning anything, or why there exists such a large business migration to China instead of a mass emigration from China. This leads the reader to conclude that either these costs are not as great as Midler contends, or the prospect of facing low entry and fixed costs at the moment of business creation and low wage costs throughout the business relationship are enough to tempt foreign investors into suboptimal contracting.
Overall, Poorly Made in China provides an in-depth look into how China's manufacturing industry conducts business with foreign investors. Midler's narrative skills bring out the insights gained from his experience in an entertaining way. Yet, given the narrative nature of the book, readers who are expecting a rigorous approach to this topic may not be completely satisfied or convinced by his conclusions. The author's reliance on anecdotal evidence casts doubt on his attempt to generalize his observations. However, the book is a captivating read with compelling illustrations of what really lies behind the "made in China" label.
Poorly Made in China
Paul Midler
John Wiley & Sons, 2009, 241 pp
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