Outsourcing Production to China : Risks and Benefits Based on Cases

Abstract: This study is intended to provide an understanding of how outsourcing production to China can benefit a company and what kinds of risks that might be involved. China is a growing developing country with huge growth and potential, and being the world’s second largest economy and the third largest exporter of goods and services it is easy to understand the recent increased interest in the country. Nowadays, more and more national and international companies establish production in China through outsourcing as companies attempt to focus on core competence, achieve cost-cutting, etc. An outsourcing venture is potentially a good measure to create value, but it is, however, not without risks. The study is a multiple case study, where the empirical data has been collected through interviews with leading representatives from six large Swedish companies that have outsourced a part of their production to China: Nefab, Autoliv, Ericsson, Sandvik, ABB, and Hemtex. The major benefits with outsourcing production to China identified in this study are lower production and labor costs, closeness to the Chinese market and Chinese customers, as well as shorter delivery times and global presence. The major risks identified are quality standard issues, difficulty to keep the Chinese staff, IPR problems, etc. Following the identification of these benefits and risks, a risk avoidance model is developed, where major risks in different stages in the outsourcing process are presented, as well as suggestions on how to systematically work to avoid them while keeping the benefits.