The costs of Chinese goods are increasing, but so also are quality and the expertise of manufacturers. By Peter A. Buxbaum, AJOT Sourcing products from China used to be motivated by a singular consideration: lower costs. That motivation is still present, despite competition form still lower-cost manufacturing venues like Vietnam, Indonesia, and Thailand. But China is increasingly manufacturing higher value-added products and its manufacturing companies are developing expertise in product development, design, engineering and marketing that may be of use to U.S. companies. China’s reputation for quality has suffered several blows in recent years, after the discovery of tainted products that had been exported tot he United States, everything from pharmaceuticals to children’s toys to pet food additives. China’s response to these incidents, in the form of more stringent regulatory controls, say experts, is a testament to the value China’s leaders place on their brand. The incidents of tainted exports “definitely have not played favorably for Chinese companies,” said Francesco Duina, director for North America of JLJ Group, a China-based consultancy that helps companies do business with and in China. “At the same time, these situations have acted as a deterrent, and has meant that companies in and outside of China are much more concerned with ensuring quality standards.” “It is hard to tell at this point if there is any long term impact” to the tainted products incidents, said Z. John Zhang, a professor of marketing at the University of Pennsylvania’s Wharton School. “They are, by and large, isolated events, which do not suggest a systematic failure in Chinese export control.” The fact that the Chinese take these incidents seriously is marked by the measures they have taken to counter them, including regulatory changes and public relations campaigns. “The Chinese government has every incentive to protect the Made in China brand to keep its growth engine humming and big importers and outsourcers have every incentive to put safety before profits,” said Zhang. But, he added, there are always exceptions to that rule, so a company sourcing products “can never take a hands-off approach anywhere and certainly not in China.” Duina noted that the Chinese government is about to launch in new regulatory scheme for chemicals safety which is based on, and more stringent than, those which prevail in the European Union. There are several methods for sourcing product form China, each with its pros and cons. Several factors determine the approach taken by an individual company. “Many factors would determine whether you would take a more direct versus an indirect approach in outsourcing such as order size and profit margin,” said Zhang. “Most importantly, if you need to control and monitor the production process and quality, you need to take a more direct approach. If you want to prevent any mishaps that might taint your reputation, you need to be on the location overseeing the whole production process.” Developing a relationship with a China-based sourcing agent is perhaps the easiest way to get started sourcing. But such an approach does not provide the full benefit of cost savings and yields little in the way of knowledge and know-how about China to the sourcing company. Companies that take the next step by sourcing products through a representative office in China provides the benefits of a hands-on approach and the development of local expertise but also increases management demands and costs. Setting up a joint venture or wholly foreign-owned subsidiary allows a U.S. company to be better positioned to capitalize on China’s growing manufacturing strengths and requires a large fixed investment. Creating a full manufacturing, distribution, and sales network in China is a reasonable approach for larger companies for which China is a major growth market, but a decision to implement such a strategy must be taken at the highest levels of a company and requires long-t