Contract manufacturing is the go-to solution for brands and OEMs seeking to stay ahead of the competition. And it's no secret why: outsourcing production to low-cost destinations like China offers greater flexibility for scaling production, immense reductions in the cost of goods, and the potential for even more cost savings through low-cost engineering, a vigorous overseas component supply chain and economies of scale. The reasons behind this aren’t always as simple as cheaper labor (though that may definitely play a part), or improved operational efficiency (though that can be a factor too), but they are compelling.

There are many contract manufacturers (CMs) available, with a variety of scales, specialties, capabilities, locations, upsides, and downsides. That said, the most basic, core need can be distilled to this: a reliable contract manufacturer who has the experience and the capabilities to deliver your goods on time, with the expected quality, and within an agreed-upon budget.

Finding the best contract manufacturer can take time, and requires research and due diligence, but with so many CMs to choose from, how do you find the right one for your business? By methodically preparing a list of criteria and following the process outlined in our series, you can identify and engage with a qualified contract manufacturer at the right timeline and budget.

In the first article of our series on contract manufacturing, we’re going to explore what exactly it is and how to select the location for your contract manufacturing project. We’re clearly big on Chinese manufacturing in the right conditions, but it is highly dependent on your product and your needs.

A contract manufacturer is a company that specializes in providing outsourcing manufacturing services to other businesses, producing products based on the specifications and requirements provided by the clients. This arrangement is commonly used by companies that do not have their own production facilities or are seeking to supplement their existing production capabilities.

Contract manufacturing can often increase cost competitiveness, improve product quality, and reduce project turnaround times. A contract manufacturer takes care of the entire production process, from sourcing raw materials to delivering the final product, all while adhering to strict quality standards and the specifications of their clients. Due to their specialization in the production process, investment in capital equipment and pulling business from multiple customers, contract manufacturers will generally have significant cost, scale, and competitive advantages that translate into improved competitiveness for your business.

We’ve gone into great depth on the topic here, but just to summarize the highlights of the different types of contract manufacturers out there and the common terminology:

• Original Design Manufacturer (ODM)– the product design is owned by the supplier, and the customer may just be tweaking the design slightly, or buying straight off the shelf and labelling the product with their logo/brand. The design, tooling and other IP belongs to the supplier. For example, a company might look to buy an existing kitchen appliance from a supplier specializing in that category (e.g. kitchen blenders) and then look to customize that slightly with their own color scheme, logo or small modifications to the overall design. This would be an ODM project (“What Is an OEM, ODM, and JDM?”).

• Original Equipment Manufacturer (OEM)– a new product is developed by the factory based on a design from the buyer but using the supplier’s existing category expertise, supply chain, etc. The IP belongs to the buyer, in most of the cases, usually as long as they are paying for the development, tooling and their contracts are in order (“China Manufacturing Contracts: Not So Simple”). To continue with the example above, in case the customer wanted to create an entirely new design of kitchen blender (shape, function, technical specs), they would pay a supplier with a background in kitchen appliances with experience in manufacturing blenders, to open new tooling and develop a new model owned by themselves. This would be an OEM project (“What is an Original Equipment Manufacturer (OEM)?”).

• Contract Manufacturer (CM)– in contract manufacturing, the customer has full ownership of the design and BOM, and the manufacturer is solely responsible for manufacturing to the customer’s drawings and requirements, not for the product design or development. Pure contract manufacturers do not have their own product range or specific, narrow product specialities – rather than having their own products they market, they focus on providing a service – manufacturing, and providing products to customers in a wide range of categories. In this case, the IP clearly belongs to the customer, as they are the ones conducting product design, development, and evaluation.

As an example, here, Foxconn manufacturing phones for iPhone is acting as a contract manufacturer, as it is responsible solely for the manufacturing side of the business – design and development is coming from Apple (hence the infamous “Designed in California” label on many of Apple’s products). Foxconn is not adapting an existing smartphone design or architecture to produce these products, they are not selling Apple a product, they are providing a service – electrical manufacturing – based on their expertise in that field (“Implementing Manufacturing and Supply Chain Materials Management”).

Table 1: A comparison of ODM, OEM, and CM manufacturing models

EMS (Electronic Manufacturing Services) – a contract manufacturer in the electronics field that apart from making products for OEMs also offers support with a wide range of value-added services such as design, assembly, and logistics. The clue to their focus is in their name – their business model is primarily built around designing, manufacturing and selling PCBAs and the electronics that they come in. While some of the larger EMS companies also have impressive mechanical / enclosure manufacturing capabilities, most tend to outsource the mechanical component manufacturing to sub-suppliers and focus on PCBA production and final assembly.

CEM (Contract Electronics Manufacturing) – similar to EMS suppliers, CEMs provide partial or whole electronics manufacturing services for other companies, often for OEMs that serve industries such as communication, transportation, and medicine.

Design House - as you may guess, the prime focus of a design house is electronics design. They usually offer a full range of electronics design services for both hardware and software, across a wide range of products end markets. They have been a crucial part of the contract manufacturing process for consumer electronics, in such categories as feature phones or smartphones, though the ecosystem is in general decline due to tighter margins and the more in-house design.

Turnkey manufacturers are contract manufacturers that offer one-stop service for the full manufacturing process – from the delivery of the initial design through prototyping, pilot production, mass production, shipment, etc. The client only needs to “turn the key” and the manufacturer is handling the rest of the process.   

This means you get a fully functional and ready-to-use product with just one contract. The turnkey manufacturer takes care of the entire supply chain, up to and including product debugging and prototyping drawing generation, fabrication, assembly, testing, shipping and even installation. This eliminates the need for multiple suppliers and saves you time and effort in coordinating multiple contracts.

This kind of manufacturing service is perfect for companies looking for a hassle-free and efficient solution. They offer the convenience of having a single point of contact for all your manufacturing needs and the peace of mind that comes with knowing all aspects of the process are handled by a single, experienced provider. The ability to be able to turn to one person for the answers and have one direct contact window for all manufacturing needs can vastly simplify the amount of work needed to manage your supply chain.

Contract manufacturing in China offers much more than just production services. With their expertise in the industry, contract manufacturers provide valuable insights into cost optimization, production efficiency, and quality control. They also have established relationships with suppliers and a wealth of knowledge about the latest manufacturing technologies, making them a valuable partner for companies looking to bring their products to market quickly and efficiently.

In short, contract manufacturers (when properly selected and managed) can be the unsung heroes of the manufacturing world, bringing your vision to life while taking care of the details so you can focus on what matters: growing your business.

Advantages of contract manufacturing:

• Cost savings through outsourcing
• Access to specialized production capabilities
• Improved supply chain efficiency
• Expertise in cost optimization, production efficiency, and quality control

Disadvantages of contract manufacturing:

• Relying on the expertise and efficiency of the contract manufacturer for a successful outcome – you are placing your product in someone else’s hands
• Necessity to transfer product information and know-how to a third party – trust is key here
• Possibility of quality control issues for poorly organized suppliers

So, you've got a great product idea, and you're ready to bring it to market. But when is the ideal moment to start searching for a contract manufacturer? Typically, clients work with a design company to complete the initial design and engineering work before turning to a contract manufacturer to begin prototyping and finalizing the product design, but generally, it can pay significant dividends to engage with a contract manufacturer and begin the feedback process on product design before the product is finalized.

Fig. 1: Contract Manufacturing Process

A contract manufacturer can help act as a reality check after the initial design of your product is complete. The contract manufacturer can collaborate with you and/or your design firm to provide critical feedback on the design for manufacturing, ensuring that the product can be made to your specifications, with high quality, and at an acceptable cost. Initial cost estimates can be provided, components or concepts can be refined or discarded based on their impact on product cost or manufacturability, and a superior product-market fit developed.  This phase can clearly let you know if your product has legs, or if it is not market ready and needs to be rethought / redesigned.

Time savings is also a key point of engaging early - many design firms may suggest waiting till further on in the design process, but a finalized design which when costed out completely fails to meet the expected price or capabilities can require a costly redesign. There is also the potential that the design team (not necessarily experts in every manufacturing process involved in the product) may have made some errors in the design of the product that will require redesign, or modification. If you wait until the design is ready for tooling before starting the Design for Manufacturing (DFM) process, expect to wait weeks as drawings are redone and updated if there is a major issue. Engaging early and often with a capable contract manufacturer can save months in the development process.

Another significant saving can be cost – both in terms of the BOM cost of the product, by recommending equivalent components or alternative materials, but also by improving the manufacturability of the product, by making it simpler to assemble, increasing yield rates, or reducing expensive processing aspects like welding.

Finding a contract manufacturer can seem daunting, but there are many options available, including healthy contract manufacturing ecosystems in various countries. While contract manufacturers can be found all over the world, the World Economic Forum has designated China as the world's manufacturing superpower. It is this breadth and depth of contract manufacturers that sets China apart in the manufacturing industry and makes it a common first stop for those searching for suppliers. That said, depending on the industry in question, there are strong clusters of suppliers in Turkey, South Asia, Vietnam, Malaysia, Central & Eastern Europe, North America and elsewhere. With each region offering unique benefits and challenges, it can be difficult to choose the right fit. The key is considering several core factors that play into your optimal location.

If you're considering overseas manufacturing, there are several key factors to keep in mind when choosing a destination. These include:

Scale: Choose a contract manufacturer that can meet your production volume needs at the times and costs that are profitable for you. This can mean the very large (e.g. Foxconn), or smaller, more SME-friendly contract manufacturers. Large-scale contract manufacturers operate in a number of countries (India, Vietnam, etc.) but China is often favored by small and medium-sized enterprises for its ability to scale up production and offer favorable minimum order quantities for custom products.

Supply Chain Base: One of the most important considerations is whether or not your industry requires a complex supply chain, and if the location in question has the right depth of supply chain to support your business. If the right suppliers are not available locally, materials will need to be imported at considerable cost of time and money. A relatively simple industry such as textiles can easily import basic materials, but a more complex product with dozens of components like a computer monitor will require local supply chain support to be cost effective and have reasonable lead times.

Adequacy of infrastructure: A well-developed infrastructure can enable a contract manufacturer to offer better rates and ensure on-time delivery of goods. Consider the infrastructure available in your chosen location, including access to reliable electricity, water, transportation, and more.

Total cost: Cost comparisons should take into account not only manufacturing costs, but also the costs of bringing the manufactured products to your home market and sourcing materials and components from the overseas market.

Availability of skills: Large-scale manufacturing requires a pool of skilled and experienced workers. Consider the availability of workers in your chosen location, as this can affect production capacity and ultimately your competitiveness in the market. For example, one reason the US lost out as a manufacturing base for the iPhone was because the US simply cannot churn out the large numbers of engineers that Apple needed for production support, while China possesses large numbers of relatively qualified, relatively low-cost engineers. See: How the U.S. Lost Out on iPhone Work

The decision between domestic and overseas contract manufacturers is a crucial one for companies seeking to streamline their production processes. On one hand, domestic contract manufacturers offer the convenience of proximity to the home market and a deep understanding of local regulations and standards.

On the other hand, overseas contract manufacturers offer the potential for lower production costs and the ability to meet large-scale production needs. With both options come their own unique set of benefits and challenges, and companies must weigh their priorities and determine which option is right for them.

Table 2: Domestic vs Overseas Contract Manufacturers

China is a popular choice for contract manufacturing due to its cost savings potential. Many companies are drawn to China for its combination of scale, skills, infrastructure, and cost. The pros and cons of overseas contract manufacturing noted above apply to China as well, but there are several compelling reasons why it has become such a popular destination for companies from around the world, with its manufacturing output growing year on year.

Fig. 2: China Manufacturing Output

In China, companies have a wide range of contract manufacturing specializations to choose from across various industries, making it a great option for businesses of all sizes, from small batch manufacturing to continuous large volumes. The country's infrastructure, specialization, scale, and availability of expertise are critical success factors that make China a contract manufacturing superpower.

Probably the most overlooked factor is the flexibility that China offers for custom product development and manufacturing – with the incredibly robust supply chain, large availability of off the shelf components (thank you 1688!), and range of supplier sizes, SMEs can create custom products in China at competitive costs while purchasing in the low thousands or even hundreds. This is something that no other manufacturing location can offer at the moment.

With a wide range of industry specializations and options for small, medium, and large-scale businesses, companies have a wealth of choices for contract manufacturers in China. Whether you need small batch production or continuous large volumes, you can generally find a contract manufacturer in China to meet your needs.

Fig. 3: Share of Global Manufacturing Output

When searching for contract manufacturers in China, it's important to understand the specialized industries and geographic manufacturing clusters. These clusters are essential in determining the available types of contract manufacturing.

These clusters are generally built around certain industries, with the subsidiary raw material and component suppliers in close proximity to the final assembly plants. This creates an immense advantage for cost and time savings – when there’s an issue and the supplier is next to your factory, that issue is generally going to be solved more quickly. This also means that suppliers for a given industry are often concentrated in one or two geographic locations rather than scattered around the country. A few examples:

1. Home Appliances: Pearl River delta area (Zhongshan, Shunde, Foshan, etc.) and Zhejiang are the two largest clusters, while the vacuum industry is heavily represented in Jiangsu (Suzhou area).
2. Electronics: Shenzhen and Dongguan have the densest concentration of suppliers for electronics in the country, but Jiangsu (especially Kunshan), also has a number of optoelectronic suppliers and PCBA manufacturers
3. Metal Manufacturing – upstream raw metal manufacturing is concentrated in the north of the country (Shandong, Hebei, etc.), along with forging and other relatively “dirty” metal processes. Lighter metal processing is also heavily concentrated in the coastal provinces.
4. Watches – a high percentage of the smart and mechanical watch production is in the greater Shenzhen area, with a certain percentage in Dongguan.

The transportation equipment industry also has its own sub-specializations, with Taizhou city in Zhejiang leading the motor and bicycle sectorand Jilin, Hubei, Shanghai, Guangzhou and the Yangtze River delta driving the automobile industry (though other areas are also investing significantly with the rise of electric mobility). Pretty much no matter the industry, there is an industrial cluster (or two, or three) in China dedicated to its production.

Fig. 4: Distribution of Industries in China

When choosing a contract manufacturer, key considerations include production volume, available skills, infrastructure, and total costs. Balancing these factors while weighing the pros and cons of domestic versus overseas options is crucial to finding the best fit for your company. China excels in cost savings and large-scale production capabilities, but it's not the only option.

Domestic contract manufacturers offer proximity and familiarity with local regulations, but higher production costs and limited scalability may be a hindrance. Conversely, overseas contract manufacturers offer lower production costs and scalability, but distance, cultural barriers, and shipping and logistics issues could pose challenges.

So, take the time to evaluate all factors, conduct thorough research, and do due diligence before using contract manufacturing as a strategy. This investment in planning will pay off as you unlock your product's full potential and propel your business to the next level.

• Contract manufacturing is the process of outsourcing manufacturing services to an external vendor. It can increase cost competitiveness, improve product quality, and reduce project turnaround times.
• In many cases, clients will work with a design company to complete the initial design and engineering work before turning to a contract manufacturer to debug the product, begin prototyping and finalize the product design. In these cases, companies should still seek to engage with a contract manufacturer early in the process to help save time and money with their manufacturing plans.
• There are a number of potential locations for contract manufacturing – while China has some significant advantages, especially for SMEs, a variety of factors will need to be thought through before a location is selected.

• ODM, OEM, CM – Which type of manufacturer should you pick for your project? This article outlines the different models of outsourcing manufacturing and discusses the advantages of contract manufacturing and what you should watch for in terms of disadvantages.
• How Using a Contract Manufacturer Can Reduce Your Costs. Cost is a key element that drives companies opt to use contract manufacturing as a strategy. Find out exactly how this works and what contributes to this strategic competitive advantage.
• How to Choose a Contract Manufacturer offers you many tips during the supplier evaluation process on how to select the right manufacturing supplier for your project.
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