The gigantic electronics hall at Huaqiangbei in Shenzhen

How do Chinese factory bosses think?

Tony Brooks

Very differently to western factory bosses. China is a country of 1.3 billion people, and competition in all (non-protected) industries is extremely fierce. Just to prove this point, if you look at any online Chinese sales portal, such as or Alibaba, for almost every kind of product imaginable, there are dozens of pages of listings, sometimes hundreds. Additionally, most Chinese consumers are extremely cost conscious, regardless of how much they earn, so all Chinese companies are forced to focus on price.

These two factors together (lots of competition and keen focus on pricing) means that all shops, online sellers and factory bosses have to keep their prices as low as possible. No surprise there, of course, but in China this is often taken to extremes. “Everyone” tries to undercut “everyone” which often leads to a race to the bottom. If you can undercut your competitors by $1 USD in order to win more sales, then in China you almost certainly will. Let’s look at some examples:

  • I chatted to an engineer for a well-known domestic manufacturer of mini-vans based near Changsha in Central China. He told me that his factory makes around 200 RMB, or 30 USD profit per van. I thought he was joking. However, the basic model of the van only costs 20,000 RMB or about 3000 USD. Most vehicle manufacturers in China are state owned and have access to cheap finance, low rental premises and other benefits. This ought to be a plus, but because almost every province churns out its own state owned version of a mini-van, reasonable profit margins have evaporated and “no-one”is making any money by selling them.
  • Chinese manufacturers of quality Chinese porcelain based in northern Jiangxi Province (left a bit from Shanghai) sell their wares at factory prices and online, making a reasonable profit. Along comes a new manufacturer making identical bowls, plates etc and undercuts everyone by 1 yuan (15 US cents) a plate. In response, the Jiangxi manufacturers match their prices, so the newbie undercuts them again, until this particular style of porcelain becomes a so-called “zombie”product, i.e. lots of people sell it, no-one makes any money from it. The idea here, repeated across countless industries, is to hold prices low enough (making a loss if need be), such that “everyone” else stops selling your product, so you then have a monopoly on the market and can raise prices again!
  • Factory A makes industrial shelving, where the shelves are made of steel sheet boards 5mm thick. Because these shelves are made with relatively thick steel, they last well and do not bend or warp when heavy items are placed on them. However, factory B realises that he can make the same shelving with boards 4mm thick and “no-one”will notice, thereby saving 20% of his input cost. Factory A, who is a local competitor to factory B, is forced to make his shelves 3mm thick, in order to undercut B and win back his business. The end result is “everyone” manufactures progressively thinner and thinner boards, which ultimately will not support the loads placed on them. No-one makes any profit from manufacturing this model of shelving. No-one wants to buy them either, as the thin shelving boards will not support heavy loads any more. 

In such a cut-throat environment, how do factory bosses keep their costs down? There are several tried and tested ways:

  • There is a preference to use lower rather than higher quality materials. Many factories have two production lines, one producing for the domestic market (often cheaper, more cost-conscious products), and then another one for export, using higher quality materials.
  • Reduced quality control. In practice, this means that the customer checks the items for defects (even if it is an order for, say, 20,000 bras) rather than the manufacturer, thus saving on time and manpower involved in quality control. The onus is also on the customer to complain or request returns/refunds rather than the manufacturer checking stock before it reaches the factory gate.
  • Managers tend to “throw”a lot of products at the market and see what sells. In order to bulk out their catalogues, some/most manufacturers will include products not made by them. So even if a product is marketed as being designed and manufactured by X, it might be made by Y down the road. Some smaller manufacturers will actually make less than 1% of the products they claim to make in their online catalogues, or on show at trade fair stalls.
  • The lifespan of Chinese manufactured products is generally short and getting shorter. Three years in many industries is now considered an eternity for a product lifespan. Lets say someone prints a series of 10 school textbooks, but one of those 10 textbooks does not sell well. When the next print run begins, the poorly selling book will not be printed (as it does not make any money), even if it is needed by students to complete a course of instruction.
  • Many factories have a low or even a zero budget for R&D. This means that imitation is rife (because it is the only way to come up with new products if you have no R&D), and companies that do their own design work are loathe to place their products online. Some of the biggest manufacturers in China have no online presence at all, they look for customers at trade fairs instead.
  • China is becoming a more and more expensive place in which to manufacture products. A shoe manufacturer I spoke to recently (2017) in Guangdong said that he has 60 employees in his factory. In 2010 he used to make 10 RMB profit a pair on shoes which sell retail for 100 RMB (15 USD) a pair. However, constant rises in rent, social insurance (mandatory pension, health insurance contributions, etc) and wages are rapidly rising, thereby eroding his profit margin. He thinks he will go bust in the next 2-3 years. 

Successful Chinese manufacturers have had to slug it out against cut-throat competition. The survivors from this contest are extremely nimble, agile, often family run firms. When they start marketing their products and services in western countries, local European and American firms will be forced to adapt to their presence quickly, or go out of business. This has already happened in Africa and is starting to happen in SE Asia too.