7 Mistakes that Startups Often Make Regarding Manufacturing in China

Mistake #1 – A perfect manufacturing contract is all I need

 

Just because they’re called “contract” manufacturers doesn’t mean that contracts will ensure 100% the final results. Relationships and partnerships with the people inside the contract manufacturers are much more important than that piece of paper – or pdf file with digital signatures whatsoever. It’s better to control the front end – are you working with good contact manufacturers that are able to manufacturer your products at the quality you want – than imagining that if something goes wrong, the backend legal lawsuits could help you.

 

 

Mistake #2 – I have a $1M Kickstarter campaign so manufacturers will fight for my business

 

No they won’t. A $1M Kickstarter campaign could be considered a successful crowdfunding campaign – in the Hardware Club we have 8 startups who achieved that – but it’s far from a sexy business opportunity for even a small professional manufacturer. For example, the smallest full-service contract manufacturer that’s working with our startups has an annual revenue of about $15M. A $1M campaign might be a $200k-300k business for them, which doesn’t sound too bad. However, if all extra efforts – engineering hours, delays, opportunity costs, machine re-priming costs, etc – are factored in, it’s really not anyone’s business to do. For the reputable manufacturers to work with startups, the most proper way is by aligning long-term interest. All other motivations would arrive at suboptimal results for all parties.

 

Mistake #3 – I have a teammate that speaks Mandarin, so it will be a piece of cake for me

 

That’s equivalent to saying that I am based in Silicon Valley so my startup will become a unicorn!

 

Mistake #4 – I don’t want to do manufacturing in China coz’ they will copy me

 

Today, with almost all startups – hardware or not – one has to assume that it will be copied at some point to some extent. Defensibility should come from many other aspects: scrambled firmware ROM codes, software applications, user experiences, switching costs and ultimately, the network effect. On the other hand, if your business will be impacted significantly just by the fact that it’s copied, you might not be a true venture startup. Just check out GoPro: Samsung copied it and failed. Xiaomi copied it and couldn’t put a dent on its shield. Copycats, whoever they are, should not be the reason why you don’t want to manufacture in China.

 

Mistake #5 – China labor cost is rising and industrial robots are coming so maybe I should do manufacturing in US or Europe

 

There’s some truth in this argument but it will take a couple of years, if not more than a decade, for the overall manufacturing cost of an automatic factory in USA to be able to compete with a factory in China. More importantly, China currently has the most complete and flexible supply chain. Even if the automatic factories can be built in the desert of Arizona, most of the components will still have to be sourced from China, Taiwan or other Asian countries nearby. Unless manufacturing of all those components also repatriate back to USA or Europe, that is one advantage of manufacturing in China that one should not give up easily.

 

Mistake #6 – China is such a foreign country to me. I prefer to consign manufacturing to a 3rd-party full service company based in US or Europe

 

This would depend on your product. Some of the products could achieve quite some success without the startups really having much of the engineering and manufacturing effort in-house. However, I don’t see unicorns born out of this type of strategy. Hardware startups become unicorns when they are selling $100M worth of hardware products. I don’t believe any 3rd party full-service firms can (and are motivated to) handle that kind of manufacturing volume in a way that’s in the best interest of the startup. In other words, a startup aspiring to become a unicorn will have to play the Chinese game sooner or later. If that’s the case, why not get the hands dirty now?

 

Mistake #7 – There’s an exact answer to any question I ask regarding manufacturing in China

 

Startups often ask me questions such as “How many days will it take from RFQ to contract signed?”, “How many months do I need to estimate from contract signed to product shipped?” “How many factories should I contact to get a best quote?”

Like most of the questions in life that your children ask you, there’s no standard answers, especially for a startup that’s not experienced in working with contract manufacturers to do mass production. This is because like most things in life, it always comes down to the people: the people inside the startup, the people inside the manufacturers and to some extent the people inside the investors. The combination of people would change all these number crunching dramatically. It’s dangerous to assume that there’s a numeric answer to a question and act on it. A startup needs to understand the soft part of the whole process and continue to learn and evolve.

Defensibility

Capital inefficiency in hardware startups is a myth, period