Overcoming quality issues in outsourcing to China

Quality issues in outsourcing to China: Is it still a
sustainable competitive advantage?
Ruta Armalyte a
, Nachiappan Subramanian a,
*,
Angappa Gunasekaran b
a
Nottingham University Business School China, The University of Nottingham Ningbo China, 199 Taikang
East Road, Ningbo 315 100, China
b
Department of Decision and Information Sciences, Charlton College of Business, University of Massachusetts
– Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747-2300, USA
Introduction
In the recent years, outsourcing to China has become an important business strategy. Firms achieve
competitive advantage by producing or sourcing products and services more effectively from a low
cost country. Other than cost reductions, firms gain competitive advantage through premium quality,
improved flexibility and dependability according to changing business environment and market
demand (Kakabadse and Kakabadse, 2000; Jennings, 2002; Lynch, 2004; Fallah and Lechler, 2008).
Therefore, outsourcing is one of the ways created by the globalisation as a fashionable strategy. China
presents enormous business opportunities for the Western countries, not only as a low-cost labour
country for cheap production, but also as a growing giant for potential market and high profits. Today
J. Eng. Technol. Manage. xxx (2013) xxx–xxx
A R T I C L E I N F O
Keywords:
Outsourcing
Sustainable competitive advantage
Quality issues
A B S T R A C T
Globalisation has made outsourcing to low-cost countries fashion-
able but firms face several challenges that fade outsourcing fashion.
To survive in this outsourcing wave adopting proper sustainable
strategy is needed. Using four case studies and four competitive
strategies (‘‘Generic Strategies’’, ‘‘Sandcone’’, ‘‘Core Competences’’
and ‘‘Value-Chain Analysis’’), this paper proposes sustainable
competitive advantage framework to overcome quality issues in
outsourcing to China.
ß 2013 Elsevier B.V.Elsevier B.V. All rights reserved.
* Corresponding author. Tel.: +86 574 8818 0197.
E-mail addresses: zx09969@nottingham.edu.cn (R. Armalyte), nachiappan.subramanian@nottingham.edu.cn,
sp_nachi@yahoo.com (N. Subramanian), agunasekaran@umassd.edu (A. Gunasekaran).
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ENGTEC-1382; No. of Pages 19
Please cite this article in press as: Armalyte, R., et al., Quality issues in outsourcing to China: Is it still
a sustainable competitive advantage?. J. Eng. Technol. Manage. (2013), http://dx.doi.org/10.1016/
j.jengtecman.2013.07.003
Contents lists available at ScienceDirect
Journal of Engineering and
Technology Management
journal homepage: www.elsevier.com/locate/jengtecman
0923-4748/$ – see front matter ß 2013 Elsevier B.V.Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.jengtecman.2013.07.003

China is the fastest growing market in the world and until now it is regarded as ‘‘the world’s factory
floor’’ (The Economist, 2005).
However, outsourcing can also lead to loss of competitive advantage. Ting (2004) reported that
‘‘Outsourcing to China helped many firms to save money, but it would be frustrating if not done
right’’. China is classified as a risky and demands a tight control over poor intellectual property
protection, fading quality of production and high level of corruption by many firms (The
Economist, 2005). Due to increased global competition and the need for cost reductions, many
international companies outsourced or established their production to China, however not all of
them managed to achieve success, resulting in many issues, such as quality fade and loss of
competitive advantage.
Plethora of studies have been carried out to understand the motivation and benefits associated
with outsourcing to China in different industries starting from manufacturing to information
technology and financial industries (Bon and Hughes, 2009; Chadee and Raman, 2009; Contractor
et al., 2010; Andersen, 2008). In addition to this, few studies reported major hiccups to the firms that
outsourced to China (Kakabadse and Kakabadse, 2000; Kliem, 1999). Furthermore, few researchers
specifically stated the management control and quality issues as dominant issues in manufacturing
industry (Freytag et al., 2012; Fleisher et al., 2010). Even though there were many media reports about
quality issues in manufacturing industries in the recent years, however, there was no adequate study
which discusses on how to overcome quality issues within the specific manufacturing sector of the
Chinese operations.
Furthermore, enormous efforts have been made by researchers to understand why companies
should backshore its production from China (Kinkel and Maloca, 2009). However not much was done
to identify how to survive in China without quality and financial losses and to maintain its
competitive and sustainable strategy. Hence, this paper aims to answer the following research
questions.
How a firm within a specific industry transforms Chinese operations (fashionable outsourcing) into
competitive and sustainable strategy?
How to overcome the quality issues with the Chinese operations?
The major contributions of this study are twofold: theoretically this is a contextual perspective
study to suggest guidelines to succeed and to develop a sustainable competitive advantage
framework. Practically this study serves as a guide to those companies on how to survive in the
Chinese market. Furthermore, this research also can help new entrants on how to deal with quality
issues if they prefer to source or operate in China.
The reminder of the paper is structured as follows. The background for the research is presented
next, followed by competitive advantage theoretical perspective and research methodology. Results,
discussion and managerial implications are then presented respectively.
Background for the research
A large number of studies have analysed the issues associated with Chinese outsourcing through
theoretical and empirical perspective (Deloitte, 2005; Freytag et al., 2012; Chou and Chou, 2011;
Harland et al., 2005). Outsourcing or operations in low cost country would lead to increased
competition and loss of innovation due to gained knowledge by its contractors (Hoecht and Trott,
2006). Power et al. (2007) claimed that many organisations and its subcontractors failed to provide full
commitment, loyalty and discipline, in order to gain from outsourcing. It leads to the
misunderstanding of the employees, processes and methods of outsourcing. Jennings (2002) in his
findings states that outsourcing can lead to leakage of critical knowledge, which would then increase
the competition. Furthermore, Domberger (1998) concluded that the loss of cross-functional skills or
development of wrong skills and the loss of the control of the suppliers are the main concerns of
outsourcing.
Beaumont and Sohal (2004) state that outsourcing can lead to decreased flexibility by the company,
due to its contractual agreement, which in case of the business environment or demand change cannot
R. Armalyte et al. / Journal of Engineering and Technology Management xxx (2013) xxx–xxx2
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be adjusted as quickly as it could have been by the managerial fiat. According to Dankbaar (2007),
outsourcing can damage industrialisation and innovation capability of the firm. Furthermore,
Plambeck and Taylor (2005) claims that although contract manufacturing can lead to lower costs, it
can result in quality fade and weaken the incentives for innovation, by shifting the focus from
innovation to costs.
Kakabadse and Kakabadse (2000) in their study signalled that the companies must understand
their own business processes and problems associated with it when souring or operating in different
locations. In addition to this, the supplier also needs a greater understanding of its client’s service.
Otherwise outsourcing to third party can lead to increased costs and unfilled service quality
expectations. This was further discussed and proved by Kliem (1999) that a firm’s dependency of the
outside supplier can lead to hidden costs such as managing failing relationships and other critical
success factors of the company. Another study related to information systems outsourcing stated that
outsourcing can have hidden costs associated with hiring, training and transferring staff, searching
and contracting the vendor or cost of switching vendors (Gonzalez et al., 2005). In addition to this,
Barthe´lemy (2003) states that outsourcing can encounter additional costs when managing the transfer
of products, knowledge and equipment to the outsourcing partner.
In manufacturing industry, McIvor and Humphreys (2000) through cost and benefit analysis found
that increased outsourcing of components which were previously made in-house can result in
increase of unexpected costs due to company’s operations becoming more dependent on much wider
range of suppliers. This is due to the fact that many companies have inadequate costing systems, such
as direct labour hours being used for allocating overheads, even though the production process is
highly automated. This incorrect costing system leads to overpricing profitable products and
expanding unprofitable production lines (Lutz and Ritter, 2009).
Other problems, such as difficulties in coordination of global supply chains and the loss of
intellectual property rights due to legal and political issues in China, need to be taken into
consideration when choosing outsourcing location (Meixell and Gargeya, 2005; Lutz and Ritter, 2009).
Finally, issues associated with communication challenges and misunderstandings, due to cultural
differences, were also discussed in the literature (Campbell, 1995). Lutz and Ritter (2009) through
empirical evidence showed that lack of communication and cultural understanding between
international companies and the Chinese suppliers leads to incorrect orders, loss of flexibility,
increased costs and loss of competitive advantage (Domberger, 1998; McCarthy and Anagnostou,
2004).
Our study views the causes of quality issues using Gordon et al. (2009) six main categories
classification. Six major causes are human default, machinery failure, poor quality of raw materials,
management and control issues, legal issues and communication problems.
Human resource failure
Most of the quality issues are associated with human resource failure. This is primarily due to lack
of motivation and interest, shortage of skilled people, lack of skills and training needed to process the
tasks (Campbell, 1995). Most common human resource failure occurs due to human ‘cut-corners’
philosophy. Chinese suppliers in general to increase their profits in short period cut quality and do not
see beyond the next order. Furthermore, evidence of ‘product fade’ is a common issue of human error,
where the owner of the factory ensures that the first few orders meet the required standards and in the
following orders the quality of the goods decreases as material inputs are replaced with cheaper ones
in order to cut costs (The Economist, 2007).
Machinery failure
Machinery failure is another important reason why quality of the goods does not reach their
standards. Problems associated with machinery are lack of maintenance, lack of new technology
needed to produce the goods or improper setup. Furthermore, most industrial centres lack capital,
which is needed for updated technology in order to meet the product requirements (Gordon et al.,
2009).
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Material inadequacy
30% of defaults occur due to wrong or default raw materials being bought from suppliers (UNIDO,
2006). Furthermore, manufacturers often subcontract to other companies for supply of raw materials;
hence the quality of it may vary depending on the supplier (Forward Forever, 2011).
Management and control issues
It is important for the companies to understand that only reliance of Chinese manufacturers are
not enough to ensure good product quality. Importing companies should take careful steps when
contracting a Chinese supplier; understand the quality control and safety testing procedures of the
manufacturers (Waldmeir, 2007). Furthermore, increased on-site monitoring should be used by
international companies who want to establish a long term presence in China. Furthermore, if foreign
companies do not focus on establishing long-term relationships and implementing quality
processes, but only concentrate on cost savings, suppliers will continue cut-corners in quality,
resulting in some very unpleasant import quality issues (Industry Week, 2008). Management and
control are essential factors for quality assurance, hence additional supervision such as detail reports
about the product design, its production process, representations and warranties regarding the
product quality as well as specifications of product design, its prototypes and samples need to be
established (Fremlin, 2008).
Legal issues
China is still in its early age of development and product-liability or product-recall systems
are not fully established in China. This leads manufacturers abuse the system and not be
punished for it (Reisman, 2006; Wharton, 2012). According to USA trade statistics, in 2009 the US
copyright and software industry lost $48 billion due to intellectual property rights (IPR)
infringement in China. Furthermore, this is not a problem only for international, but also
for domestic companies in China. An official study in Beijing states that pirated software cost
$20.9 billion for domestic companies in 2010 (Tandon, 2011). It is generally reported that greedy
and cut-throat owners of the manufactures take advantage of the weak legal enforcement and
even encourage cheating as a business culture, where corruption and bribery are flourishing
(Barboza, 2007).
Communication issues
An essential part of any business is to clarify the requirements and manufacturing processes
that depends on the quality and production of the final goods. To achieve this, close relationship
between manufacturing and management has to be established and constant communication is
required. However, when companies produces from China, the time difference, distance and
language barriers become the biggest issues to communicate (Blackerby, 2003). As a result,
communication becomes an issue and can result in a quality fade, if the supplier does not speak
international language or does not fully understand the requirements (Campbell, 1995).
Furthermore, some issues cannot be solved by communicating through phone or email and
hence it has to be solved on site, however due to the distance this option becomes limited and can
lead to further complications. Due to reliance on communication through phone or email may
result in lower productivity, choice of poor raw material quality or incorrect manufacturing
processes (Wharton, 2007) (Table 1).
Competitive advantage theoretical perspective
Our study considers four different competitive strategies that indicate four different ways of how
a company can achieve and maintain its sustainable competitive advantage when outsourcing to
China.
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Focus on single objective–‘‘Generic Strategies’’
Porter (1980) believed that in order to be competitive in the market, companies should achieve
sustainable competitive advantage through differentiation theory, proposed in 1980. Porter (1980)
named three generic strategies for firms to be successful: cost leadership, differentiation or focus. Cost
leadership attempts the firm to be the lowest-costs producers of goods and services in the industry.
The firm with the lowest costs would achieve the highest profits and outperform its competitors
(Devaraj et al., 2004). Differentiation strategy occurs when a firm offers unique products and hence, it
can often charge a premium price for it in the market. Furthermore, a focus strategy occurs when a firm
concentrate on specific niche in the market and produce specialised goods for this niche market.
Competitive advantage can be achieved through focusing on the differentiation or leadership
approach with regard to the focus strategy (Eonsoo et al., 2004).
It is important to note that Porter (1980) warns the firms not to be stuck between two chairs. By
this phrase Porter (1980) refers to differentiation and cost leadership strategies, which cannot be
achieved simultaneously and therefore a company should decide whether they want to be the
‘cheapest’ or the ‘best’ in the market. There is an argument that if the firm adopts both differentiation
and cost leadership strategies do not have a competitive advantage and therefore has a poor financial
performance. However, Dess (1984) has proved that even if companies combine the generic strategies,
they can still be successful and profitable.
Few firms use Porter’s generic strategies to gain advantage such as differentiation or cost reduction
by sourcing part of their business (Eonsoo et al., 2004). According to McIvor (2005) outsourcing,
manufacturing or administrative parts of the business leads to the cost structure of the business. On
the other hand, outsourcing creative part of the business such as design is done to gain differentiation
purposes (Eonsoo et al., 2004). It is claimed that regardless the reason for outsourcing, it has to be
aligned with the overall strategy of the business (McIvor, 2005).
Table 1
Issues and consequences of outsourcing to China.
Issues Consequences Source
Human Resource Failure Quality loss UNIDO (2006), Wharton (2007), Freytag et al.
(2012), Campbell (1995)Delays in shipment
Failure to realise the
cost of outsourcing
Machinery Failure Loss of profit Beaumont and Sohal (2004), Gordon et al. (2009),
Lynch (2007)Loss of flexibility
Material Inadequacy Hidden costs Kakabadse and Kakabadse (2000)
Failure to realise the cost
of outsourcing
Kliem (1999), Gonzalez et al. (2005), Harland
et al. (2005), McIvor and Humphreys (2000),
McCarthy and Anagnostou (2004)Increased operating costs
Loss of Management
and Control
Quality fade Hoecht and Trott (2006), Power et al. (2007),
Jennings (2002), Domberger (1998), Dankbaar
(2007), Plambeck and Taylor (2005), Freytag et al.
(2012), Fremlin (2008), Yamashita (2010),
Dabhilkar et al. (2009)
Inaccurate work
Loss of core competences
Increased competition
Leak of knowledge
Risk of losing customers
Loss of innovation
Loss of competitive advantage
Legal Issues Loss of competitive advantage Meixell and Gargeya (2005), McCarthy and
Anagnostou (2004), Gordon et al. (2009), Tandon
(2011), Barboza (2007)
Loss of core competences
Loss of intellectual property
Loss of Communication Incorrect execution of processes Blackerby (2003), Wharton (2007), McCarthy and
Anagnostou (2004), Lutz and Ritter (2009),
Campbell (1995)
Improper material usage
Delays in shipment
Loss in efficiency
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Satisfy all five dimensions – ‘‘Sandcone’’
Ferdows and De Meyer (1990) suggest that there is a specific order for the competitive measures
and if the company follows it, the competitive measures will reinforce each other rather than replacing
each other as suggested by Skinner (1974). It claims that quality in regards to customer’s expectations
associated with the brand is the crucial and most important factor in order to be competitive, and then
comes dependability, flexibility, cost and innovation. Ferdows and De Meyer (1990) claim that until the
solid ground for quality expected from consumers is not implemented then there is no use to reduce
costs and increase flexibility. Furthermore, Ferdows and De Meyer (1990) identified that for the
companies who competeonthehighquality, premium costdisadvantageisonlyanillusion. Ferdowsand
De Meyer (1990) argued that before the technological boom, trade-off between cost and flexibly might
be an issue, but due to current innovation and high technology era, any kind of mix in the production is
possible. It is obvious that increased dependability can eventually lead to higher flexibility. This is due to
the reason that when a company has all its processes under control (wholly owned subsidiary), it might
then find it much easier to meet sudden change in the order rather than request this from an outside
supplier who might have already problems delivering the regular order on time.
‘‘Sandcone’’ model states that companies can and must compete on several dimensions
simultaneously. Combining ‘‘Sandcone’’ and Hill (1988) suggestions, a company to achieve
competitive advantage has to compete on several dimensions such as quality and dependability
has to be maintained within the customers expected standards.
Concentrate on core competences – ‘‘Core Competences’’
Prahalad and Hamel (1990) suggest that core competences are the wellspring of the new business
strategy and are achieved through collective learning in cooperation, paying special attention on how
to coordinate diverse production abilities and integrate compound stream technologies. They argue
that only if the company is considered as a hierarchy of core competences, core products and market
focused business units then it will be ready to fight and succeed.
Outsource non-value adding activities ‘‘Value-Chain Analysis’’
According to Porter (1985) value chain analysis will enable the organisations to improve overall
performance and increase their profit margin of the company, by performing activities efficiently, so
that the value the customer will be willing to pay exceeds the cost of the activities in the value chain.
Value chain analysis distinguishes core activities of the firm (value added activities that provide
competitive advantage over its competitors) from the secondary activities (necessary for the
organisations presence) which do not add-value to the company. Those activities might be costly for
the company and thus company might want to reduce the fixed costs by outsourcing them to the third
party.
A company can then create a cost advantage over its competitors by evaluating cost of each activity
in the value chain. The efficiency can be achieved through reducing costs of individual value chain
activities or by reconfiguring the value chain (outsourcing some parts of it). A firm may specialise in
one or more value chain activities and outsource the rest, depending on the strengths and weaknesses
in each activity in terms of cost and differentiation. Understanding the linkages between the
individual activities can help the managers to make a better make-or-buy decision that can result in
cost reduction or differentiation advantage (Chang and Hwang, 2002).
Research methodology
Research design and setting
The purpose of this study is to develop a new theoretical framework based on the research and
existing literature on quality issues when outsourcing to China. Due to the nature of the research topic,
case studies were appropriate for the theory building, because it allowed us to answer ‘how’ questions
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about the contemporary set of events in which we are and ‘why’ questions in order to understand the
scope of the problem.
As a result, we conducted in-depth case studies with interviews in order to explore and interpret
the phenomena from real world experience and try to answer the question of why companies still
keeps its production in China, when the quality of the production affected them negatively.
We conducted an in-depth case study of four companies which are in automotive and toy
industries which are important and more sensitive to human being if there are quality issues.
Company A is most recognised for its quality and design brand toys in the world. Furthermore,
amongst the toys collectors it is best known for its pricey and highly collectible teddy bears. Company
B on the other hand is now known as the biggest designer and manufacturer of broad variety of toys. It
produces all the toys overseas with many wholly owned manufacturing facilities in China, Malaysia,
Indonesia, Mexico and Italy.
Other two companies were chosen from the automotive industry. Company C is a world’s leading
automotive manufacturer and supplier for driveline and chassis technology and Company D is a
diversified global provider of power tools and accessories, hardware and home improvement products
as well as technology based fastening systems.
Table 2 provides an overview of the respondent profiles and their experiences. Furthermore,
additional four Chinese manufacturing companies were interviewed and the feedback was
incorporated in this study to get a more profound general idea about the causes of quality fail in
China. From Table 2 it can be concluded that all the respondents had experience with at least 4 years in
the company and somehow related to the quality issues of outsourcing. It is important to note that
some of the respondents were unwilling to disclose information about their firms. Therefore some
interpretation was made in regards to their answers. Finally, none of the interviewees wanted their
names or their work positions to be disclosed for sensitivity of the research topic and confidentiality
reasons, therefore no names will be mentioned in the analysis.
Data collection and analysis
The choices of four case studies were based on Eisenhardt (1989) argument that multiple cases are
better to extend external validity and give a more objective assessment of the phenomena. In
particular 4–10 case studies are likely to create more robust and testable theory.
The four companies were collected in a way to have different scenarios of outsourcing success or
failure. This helps to compare and contrast the broader spectrum of the issue considered for the study.
First of all, all four companies selected for this research produce consumer durables. In addition to this,
the studied activities had to cover the definition of outsourcing identified in the research, which stated
that all companies should have been outsourced at least part of its production process to a foreign
Table 2
Respondents and the industry details.
Company Respondent position Industry/main products
Company A Reporter
Supervisor in supply chain
Toys industry: stuffed animals, especially teddy
bears
Company B Supervisor
Branch Manager
Toys industry: games for children, collection toys,
toys from famous children TV programmes and
movies
Company C Manager
Supervisor
Automotive industry: parts for cars
Company D Branch Manager
Manager of Quality Assurance
Manager of Engineering Department
Power tools and accessories: drills, home
durables
Chinese Manufacturer 1 Manager Petrochemicals
Chinese Manufacturer 2 Director Cement industries, construction materials
Chinese Manufacturer 3 Director Medicine and medical products
Chinese Manufacturer 4 Manager Industrial. IT and home technology (printers,
scanners, industrial paper machines)
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country (our case China), by contracting its portion of activities to the third party or creating a wholly
owned subsidiary, in order to analyse the quality issues of manufacturing processes. In addition to
this, the critical events of outsourcing have already taken place and the chosen cases should have
different outcomes of it (Gadde and Ha˚ kansson, 2001). Therefore, two companies were chosen to
represent the negative outcome of outsourcing whereas other two companies were selected to
represent successful outsourcing to the Chinese situation. This selection of the companies enabled to
identify different causes of quality issues and diverse competitive strategies.
The data on the four case studies were collected through primary and secondary data sources,
because evidence from multiple sources is considered to be more appealing and robust (Yin, 1994).
Secondary data included academic journals and books, corporate reports of the case companies and
media publications. In addition to that primary data incorporated semi-structured interviews per
telephone, email and face-to-face consultations. Furthermore, open discussion questions were
preferred in order to understand the issues from different angles and follow the theoretical literature
used for this paper. The explanatory interviews comprised two to three respondents from different
departments within the case companies, who had direct or indirect involvement in the problematic or
successful outsourcing strategy, in order to gain different opinions about the quality issues and
companies’ failure or success. In addition to this, we attempted to verify individual reports by asking
similar questions to multiple informants such as Chinese directors and managers from different
manufacturing companies (international companies and Chinese suppliers for international
companies). However, it has to be noted that some linguistic problems was encountered, therefore
translation from English to Chinese had to be done simultaneously, in order to process the interview.
The responses were then transcribed and incorporated in the analysis, which gave valuable input to
further evaluation of quality fade phenomena when outsourcing to China in the future.
All the primary and secondary data collected were used to analyse the quality issues and the effect
on case company’s competitive advantage and its success/failure in China. Finally, the findings from
the case studies and interviews were then synthesised together to develop a sustainable competitive
advantage theoretical framework. The compare and contrast method was also applied in order to
relate the findings of the case studies and interviews to identify patterns and to provide suggestions
about outsourcing phenomena in China.
Results
Observations in case Company A
Due to very competitive business environment, in 2004 company’s management decided to move
some of its production to China in order to reduce costs. This was done through a Chinese contractor.
However it experienced quality issues and transportation delays like every other company that
outsourced to China. Furthermore, the biggest issue was the nature of the product itself. It was not just
about making a high quality teddy bear; it was about being very precise. Furthermore, the long
distance offshore production plant became biggest disadvantage when some of its production reached
the retail stores 3 months after the initial deadline and there were drop in sales. In order to get a better
understanding of the quality failure, the main points from the interviews are summarised in Table 3.
According to the reporter, who was directly involved in case Company A noted that Company A
encountered quality failures, because the pattern sheets were too complicated for the Chinese sewers
and could not accomplish specified quality as in home country. Furthermore, the training of how to
sew using this specific pattern took too long time to make them learn. In addition to this, the accuracy
was especially important in this manual work, because very small errors in knitting resulted in teddy
bear eyes being misapplied, hence making the bears look to sinister for the western customers. The
reporter also mentioned that there was no guarantee or restriction to keep the workers after they have
been trained to do the work, when there is a better opportunity the workers moved to high payers
without any notice. This led to further problems such as delays in production shipments.
With respect to management and control issue, both the reporter and the ex-worker in supply
chain agreed that lack of control over the production process due to the ownership structure and
management communication issues led to many products being produced incorrectly. The quality
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problem could only be detected once the products reach Europe, hence increasing company’s overall
costs, because the teddy bears could not be sold in the market.
From the interviews it can be concluded that tight control over the quality and production of the
teddy bears was crucial for company’s success. Furthermore, manual work requires special skills and
experience which can be obtained with continuous training, however it takes long time to achieve,
therefore outsourcing may not always be the most feasible option.
Overall we can see that Company A outsourcing strategy in terms of quality did sacrifice to an
extent that it led the company to move back its production to Europe. However it is important to note
that different from other companies, by outsourcing to China, Company A did not aim to enter Chinese
market. Several theories suggest that competitive advantage can be achieved only by being close to its
target market (KPMG, 2012). Furthermore, by having the production close to its market, quality
assurance is easier to achieve. Company A’s primary markets are Europe and USA, when it moved its
certain operations to non-marketing destination lead to loss of control on management and hence it
encountered issues in production quality. However, it is arguable and more study is needed to
understand how far quality loss could have been offset by gaining the entrance to a huge potential
Asian market with increased profits, which Company A did not considered to do.
Observation in case Company B
According to the worker in Company B, the main issue with quality errors is the human resource
problem, because some Chinese suppliers try to ‘cut corners’ by providing lower quality materials and
resulting in poor quality production of toys.
However, there is no doubt that Company B will stay in China and even though the recent quality
issues brought a lot of damage to the company’s reputation and hurt its sales, Asia market accounts a
large part of sales. According to the worker, China is a huge market for enormous profits in the next
decade; therefore Company B plans to expand its international footprint in Asian markets by building
new franchises and entertainment partnerships in order to achieve sustainable growth. Even if the
quality reduces and more attention has to be paid to the supervision and management of the
production, there is no doubt that this sacrifices will only be a smaller concern with the development
of Chinese economy and increase in the consumption of goods.
On the other hand, the worker argued that Company B outsourced to China due to low cost
production and the reason why Company B still keeps its production in China is also due to its lower
labour costs (Table 4).
With the raising demand for toys, the ability to create the toys and meet the demand became the
biggest concern for Company B. Toys business is lucrative whereas it depends on how firms are going
Table 3
Quality issues reported by Company A.
Cause of
quality
issues
Human
resource
Machinery Raw
materials
Management
and control
Communication Legal
Reporter Employees were
not trained enough.
Complicated
knitting
techniques, to slow
in learning
N/A N/A No control over
production due to
loss of ownership
Not
understanding
the need for
accuracy
No guaranties or
restrictions to keep
the workers after
they have been
trained
Ex worker
in supply
chain
Employees did not
have the skills
N/A N/A There was no
control over
production, not
enough
instructions and
training due to
change in
employees
Not being able
to explain the
accuracy need
N/A
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to handle inconsistency in production volumes, seasonality and market life of less than a year. These
non-core production toys were a huge pool for high profits, however dependability was crucial to its
success. Due to these high demand fluctuations, non-core toy production was outsourced to China.
Company B operated through network of approx. 35 vendors that were contracted to manufacture
Company B’s production. The manager in China selected the vendors very carefully depending on the
expected time to market, political expertise and price. During that time, this was a very successful
strategy for Company B, due to its low investment costs (no capital needed for wholly owned
manufacturing) and increased flexibility due to demand variability. The relationship between the
manager and the vendors was of the crucial importance for the quality reliability, due to its complexity
and high volume production where a lot of the emphasis was put on the price but not quality.
In 2007 Company B recalled 1.5 million toys which contained lead-paint and were produced in
China. Several weeks later, Company B had to make another announcement and recall 9 million more
China-made toys. The problem arose when the subcontractor of Company B outsourced the work of
painting parts of the toys to an outside vendor, who in order to save costs acquired the paint from a
non-authorised supplier. It is important to note that the third party supplier had close relationships
with subcontractor, hence it was believed by subcontractor to be a trustworthy supplier. It led to the
production of final goods which contained ‘‘impermissible levels of lead’’. These recalls lead not only to
a drastic reduction in Company B sales, but also it damaged Company B reputation and
trustworthiness. Even though Company B understood the importance of quality control in its
outsourcing strategy, due to its cost leadership strategy they did not put enough emphasis on quality.
Hence the product recalls showed that the quality issues outperformed cost leadership advantage.
According to the report made by Xinhua, who was the spokesman of China’s general administration of
quality supervision and inspection, Company B did not establish tight quality supervision over its
production in China and the manufacturers were doing what the importers requested. Regardless of all
the quality issues and production recalls, Company B keeps its outsourcing option in China and does
not consider any other relocation of manufacturing plant in the near future. To improve the quality
Company B has to follow ‘‘Sandcone’’ model instead of cost leadership strategy to satisfy the order
winning criteria.
Observations in case Company C
Company C entered Chinese market in early 1980s by engaging in sales and service licence
agreements with two Chinese manufacturers of clutch and shock absorber. Later Company C opened
its representative office in Shanghai through joint venture and carried out its look-and-see strategy in
order to understand Chinese market and risks associated with it. The company’s strategy towards
Chinese operations is not a short-term cut-cost option rather than it is a long-term strategy with full
commitment to Chinese market in terms of RD, manufacturing and sales.
In 1998 Chinese Government relaxed its regulations and allowed ownership of foreign affiliates in
the automotive industry. During that time Company C quickly took advantage and successfully
Table 4
Quality issues reported by Company B.
Cause of
quality
issues
Human
resource
Machinery Raw
materials
Management
and control
Communication Legal
Subcontractor
in China
N/A N/A Due to cost
savings poor
quality
materials can be
chosen
Lack of
instructions and
control
Lack of
communication
between the
management
and supplier
N/A
Worker Do not pay
attention to
details. Trying
to ‘cut corners’
N/A N/A N/A N/A N/A
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established a fully owned production plant which was crucial for its later development. ‘‘Customer-
oriented’’ focus with customised production and research and development is considered to be the
successful strategy for Company C.
Today Company C is a leader in chassis and powertrain business and continues its growth with
astonishing results. Furthermore, engineering departments being located in China, many new
innovative applications are developed and distributed to other countries. Company C values more the
quality of its products and process efficiency. Dependability and top quality are the ultimate criteria
and it is achieved through standardisation.
In order to ensure high quality, Company C’s production group has a highly qualified team with a
superb command of material and processes. Furthermore the whole value chain activities such as
manufacturing, engineering, logistics and quality assurance are integrated into the processes from
very beginning. Moreover, high automation ensures highest level of efficiency and dependability.
Cutting-edge technology is used for production and quality assurance which is integrated into the
production process. Furthermore, quality circle teams are essential part of quality control and
improvement. The highest efforts are put into ensuring error free production.
According to the supervisor of quality assurance department, the main reason that causes quality
issues are lack of understanding of design and manufacturing requirements. However they avoided
quality issues through high manufacturing process automation. Furthermore, full control to the
ownership structure helped them to keep all the processes under strict quality checks in every part of
the production process.
The manager of the Chinese operations agreed that management and control skills are the key
factors to overcome quality issues. Chinese operations started incorporating quality into company’s
strategy. Furthermore, the manager believes that China has the ability to compete in the world for
quality production through tight quality control. In conclusion, the manager argues that cost
advantage in China is diminishing, therefore for Company C China is an important market for the sales
of their production, that is why they believe most of the companies still prefer to stay in China
(Table 5).
Company C experiences reveal that China is a huge pool of opportunities and development.
Implementation of quality assurance in every step of the process lead Company C to be the leaders and
experts in its production all over the world.
Observation in case Company D
In the past decade Company D’s strongest competitors are able to produce at lower cost due to their
location strategy and supply standardised products worldwide. Therefore, Company D continuously
started losing its market share and had to react to increasing production costs as soon as possible in
order to sustain its competitive advantage. Therefore, Company D decided to adopt global cost
leadership strategy and as a consequence in 2002 they shifted some of its production and operations to
China by subcontracting and also establishing a wholly owned subsidiary. Due to its standardised
production restructuring with high automation, new products are produced quicker which ultimately
Table 5
Quality issues reported by Company C.
Cause of
quality
issues
Human
resource
Machinery Raw
materials
Management
and control
Communication Legal
Subcontractor
in China
N/A For high
standardised
products it is
important
N/A Could cause if
management
and control is
not good
N/A N/A
Supervisor in
quality safety
N/A N/A N/A N/A Not being able to explain
the instructions face to
face, misunderstanding
occurs
N/A
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increases company’s ﬂexibility. Functional managers were further given coordination responsibility
with country’s management. Furthermore, Company D implemented new point of sales software
application system with strict supply and demand control for all the products manufactured in China.
With its new software system, Company D managed to capture demand changes on time and respond
to it quickly (Table 6).
Based on the interview and the data collected through questionnaire, it can be concluded that
Company D does not encounter any huge quality issues due to strict quality control and inspection, not
only in production process, but also when the goods are shipped to Europe and America. Furthermore,
some respondents agreed that minor quality issues occur due to human resource failure, more
precisely due to lack of responsibility in fulﬁlling all the requirements by the Chinese workers.
Therefore, according to the respondent from quality assurance department, a lot of additional
investment in training has to be devoted in order to maintain approximately the same quality
standards as in other manufacturing locations. Furthermore, incentives such as quality bonuses for the
managers are the encouraging ways to ensure that there will be no leak in quality of the production. In
addition to this, quality production double check, plant audits and on site quality inspectors are
needed to ensure error free production: ‘‘The quality is maintained especially with additional resources
for quality inspections’’. On the other hand, standardised and highly automated production of goods
Table 6
Quality issues reported by Company D.
Cause of
quality
issues
Human
resource
Machinery Raw
materials
Management
and control
Communication Legal
Branch
Manager
Some issues
occur due to
unskilled
workers who
sometimes do
not pay enough
attention to
details
N/A N/A No control over
third party supply
sometimes cause
minor quality
errors
Due to German–
English–
Chinese
language mix
some important
issues are not
understood
N/A
Manager Never admitted
to having made
a mistake
N/A N/A Important to keep
very high control
and give incentives
for good work such
as quality bonuses.
Important to keep
responsible QS
managers on the
site.
Very important
to communicate
regularly in
order to
monitor actions
to eliminate the
root of failure.
If some
problems
occurred
Chinese
manufacturers
did not take any
responsibility
for it, nor did
they put effort
to help
Manager of
Quality
Assurance
Department
It has to be put a
lot of additional
training for
human resource
in order to
overcome
quality issues
N/A N/A The quality was not
hurt mainly due to
additional
resources which
were allocated for
quality inspection
N/A N/A
Manager of
Engineering
Department
Some minor
quality errors
occur because
workers
sometimes do
not follow the
strict
instructions in
production
process
No quality
issues because
products are
standardised
and very little
human interface
is needed in the
production
process. High
automation
N/A Some quality issues
can occur due to
inability for the
engineers to be on
site all the time.
However it does
not happen very
often, but
additional
resources for
inspection is crucial
N/A N/A
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leads Company D to minimize human interface and to ensure quality. Since the early 90s Company D
has never encountered any big quality issues.
Overall it can be concluded that Company D case study show some evidence when compared to all
the above mentioned competitive advantage theories. However, it is important to note that in a
dynamic environment focusing only on one competence is not enough to be competitive. The
company has to focus all the five factors (quality, cost, flexibility, dependability and innovation)
through strict implementation of control and management.
Sustainable competitive advantage framework
Overall insights to deal with quality issues
Based on the case studies observations it is obvious that outsourcing to China does not have any
negative effect on production quality. Most of the respondents agreed that quality fade can be avoided
with strict controls and checks. On the other hand, Chinese manufacturer 3 agreed that outsourcing to
China does have a negative effect on quality because some Chinese suppliers put ‘‘cost control’’ on
their orders and to gain margins they find ways to reduce quality in order to minimise costs.
Furthermore, from Company’s A and B responses, it can be determined that outsourcing to China can
have radical consequences.
From the consolidated observations summary shown in Table 7, it can be emphasised that common
cause of quality issues in China are due to the unskilled or unspecialised workers (human resource)
with lack of accuracy and responsibility in their work. It is to be noted that management and control
(Lack of coordination and regulation) is also the major significant factor that causes quality issues in the
production. Few respondents highlighted, if production is not automated then additional control and
guidance is needed to meet the requirements. However this is not always possible to achieve due to
distance, language barriers or prohibition of control over the processes and ownership structures.
Other problems such as machinery and legal disputes play only minor roles with respect to quality
issues in China.
Most of the respondents agreed that cheap labour costs are still a significant motivation for
international companies to have their presence in China regardless of quality issues associated with it.
However, some respondents argued that rapidly increasing labour costs and continuously appearing
quality issues make China as a less attractive destination. However, many companies prefer to keep its
operation in China to capture the bug Asian market which is a significant profit pool for international
companies. Company D followed a step by step approach, at the very beginning the company
outsourced some of its production to China because of the cost reasons and subsequently established a
wholly owned subsidiary based on the market potential and it started sales to the Asia market.
Overall it can be said that both international and Chinese manufacturers believe that quality issues
with respect to human failures can be dealt with strict quality check systems in the production
process. Furthermore, it is essential to train specialised workforce for manual manufacturing
processes and naturally with more time and effort. Finally, Chinese manufacturers emphasised that
quality does play a crucial role in company’s competitive advantage and only by achieving the quality
standards the firms can be successful in the developing markets. A respondent highlighted that on
supply side Chinese market is saturated with cheap low quality production whereas the fast growing
economy makes the demand side more attractive with high affordability of Chinese customers for
good quality products. In addition to this, a report prepared by chief executive of Bangkok bank stated
that Chinese customers have the capability and are also willing to pay higher price for the quality
goods, therefore companies which are entering into the Chinese market should ensure good quality to
sustain and outperform the competitors (Songwanich, 2009).
Overall insights based on competitive strategies
Table 8 shows that Company A encountered huge quality issues when outsourcing to China,
because it followed Generic strategies. Before the outsourcing Company A competed based on quality.
However, by outsourcing to China, they gave up quality priority and tried to compete on cost factor.
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Table 7
Case companies responses.
Company Does outsourcing to
China compromise
product quality?
To what extent?
Causes of quality
issues in China?
Reasons of having
presence in China even
though it has quality
issues and generate
huge losses to them?
Additional comments
A Yes, had to move back
to Europe
Human resource,
Management and
Control,
Communication, Legal
Moved back to Europe.
Company A did not sell
its production to
Chinese market
The stuffed teddy
bears could not be
made accurate enough.
For manual production
China is not the best
option
B Yes, many recalled
toys, damaged
reputation
Human resource,
unsuitable Raw
Material Management
and Control,
Communication
Low labour cost, access
to certain materials
new sales market
‘Made in China’ is
moving towards high
end of the market
C No, because of
implemented quality
checks
Poor quality control
and management,
communication
Entry to huge potential
market, because cost
advantage in China is
diminishing
Quality in China is
improving due to
continuous training
provided by Company
C. China still needs to
learn a lot from
western companies.
Only products with
good quality can
survive in the market
competition
D Not necessary, if the
quality control is
reliable and strict big
quality issues can be
overcome. However,
additional resources
have to be allocated to
it. Incentives for
quality such as quality
bonuses work well
Do not encounter
quality issues due to
quality control
technologies. However
minor errors occur due
to Human Resource of
the third party
suppliers. Lack of legal
agreements between
parties may give
incentives to cheat on
quality standards
At the moment still for
lower cost reasons
Quality is an issue due
to the Chinese mind-
set of ‘cut corners’ and
achieve short term
proﬁts. The quality
was kept
approximately the
same due to additional
resources to quality
inspection
Chinese
manufacturer 1
Not necessarily. China
has capability to
produce low quality
and high quality goods
Communication and
management issues
New market China has the ability to
produce low and high
quality goods. The
quality is improving
Chinese
manufacturer 2
No. Quality has been
improving in China
Keeping up with new
technology in
machinery,
communication
Enter the market Quality in China is
improving
Chinese
manufacturer 3
Yes, it has got worse
due to increased
labour and material
costs
Lack of quality control Cheap labour is a big
attraction
Some products
improve in quality, but
many are even less
trustworthy due to
‘cost control’
Chinese
manufacturer 4
No, very high quality
control checks ensure
the highest quality.
China has the
technology to make
good quality goods
Under capacity of
specialised workers
Still for cost reduction The products we
produce are perfect
substitute of imported
products from the
perspective of
technology, quality
and customer
recognition
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This led to a huge failure, because consumers’ expectation of the product quality was not only not
maintained, but deteriorated due to lack of specialised workers and absence of quality control when
outsourcing to China.
From the Company B point of view, it attempted to embrace ‘‘Generic Strategies’’, ‘‘Core
Competences’’ and ‘‘Value Chain’’ competitive strategies. Still it encountered quality issues because of
lack of implementation of quality control standards. Even though Company B’s focus is towards cost
leadership it compromised quality standards which are the basic in Sandcone Model. It can be
concluded that if Company B followed ‘‘Sandcone’’ Model, the quality issues may not have occurred
and outsourcing to China would have been successful.
Company C followed quality differentiation strategy and sustained with it to be successful in the
Chinese outsourcing. Company C reveals that ‘‘Sandcone’’ Model in a dynamic business
environment is crucial to maintain its competitive advantage and firms should concentrate on
several dimensions in order to succeed. Furthermore, it supports the theory that quality assurance
does not always require higher costs, because Company C managed to achieve cost reduction
without hurting quality. Company D also supports ‘‘Sandcone’’ Model and revealed that even
though quality is not a prime factor they have to maintain (qualifying aspect) it to a desired level to
gain competitive advantage.
Overall it can be concluded that ‘‘Sandcone’’ Model shows the highest importance when
outsourcing to China. Through the observations from literature and case studies it is obvious that
concentrating on one factor (Generic Strategies) or focus on ‘‘Core Competences’’ keeping its value
adding activities in-house might still lead to quality issues in China. This then can not only damage
company’s reputation, but also reduce its profits and decrease or even diminish its competitive
advantage in the global world.
Table 8
Competitive strategies pattern in the case companies.
Competitive
advantage strategy
Case Company A Case Company B Case Company C Case Company D Importance
of the model
in terms of
quality
when
outsourcing
‘Generic Strategies’
Model by Porter
(1980)
Did not follow
after
outsourcing
Followed by
choosing cost
leadership
strategy
Followed by
choosing to
compete on Quality
Followed by
choosing cost
leadership
strategy
Moderate
importance
‘Sandcome’ by
Ferdows and
De Meyer (1990)
Did not follow
because quality
standards was
not safeguarded
Did not follow,
by not
maintaining
quality
expectation
standards
Followed by
ensuring quality
standards before
flexibility and
competitive costs
was achieved
Followed by
maintaining
expected quality
as the basement
High
importance
‘Core Competences’
by Prahalad and
Hamel (1990)
Did not follow Followed by
keeping
concentrating
on its core
competences
Did not follow by
outsourcing its core
competences (RD,
engineering
manufacturing) to
China
Followed by
keeping its core
competences
(engineering,
RD)
Moderate/
low
importance
‘Value Chain’ by
Porter (1985)
Did not follow Followed by
keeping its
value adding
activities in-
house
Did not follow
because most
value-adding
activities was
outsourced to
China
Followed by
keeping its most
value added
activities (RD,
engineering,
design) in house
Moderate/
low
importance
Overall result Failed in terms
of quality
outsourcing to
China
Failed in terms
of quality when
outsourcing to
China
Succeed in terms of
quality when
outsourcing to
China
Succeed in terms
of quality when
outsourcing to
China
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Based on the above discussions we have highlighted the survival aspects to encounter quality
issues while outsourcing to China and the corresponding survival approach (see Table 9). Based on the
findings of this study, the following propositions are made:
Proposition 1To be successful in the Chinese operations companies should compete on several
dimensions simultaneously and maintain quality standards.
Proposition 2Outsourcing to China because of cost savings has no negative effect on quality.
Proposition 3The entry into new potential market through Chinese operations is the main determining
factor for the multinational companies regardless of quality issues and raising labour costs.
Managerial implications and limitations
Study findings reveal that manufacturing companies have to manage their Chinese operations
efficiently to avoid potential loss due to quality issues and to enter into the largest market. This is a
way in which a huge pool of new sales can be generated and potential loss in quality may be offset by
the profits (Deloitte, 2012). Furthermore, managers should realise that by producing abroad, a more
sophisticated management needs to be established, since the manufacturing and delivery of the goods
beyond international boarders require advanced knowledge and precise planning. Furthermore, as we
can see from Company A that long distance supply chains are much more vulnerable and exact
schedule of the delivery is not always possible to set. This has to be taken into consideration especially
for those companies, which production is very seasonal. Being close to company’s market add
additional advantage. Furthermore, It has to be well accounted with the costs advantage considering
the risk of missing the time line when the sales has to be done.
Another important implication for those managers’ aims to achieve competitive advantage
through quality differentiation strategy has to produce with high automated technology and use
standardised approach. However, if they prefer to produce goods manually then they have to provide
intensive customised training. Other factors such as absence of employer protection, ‘cut-corner’
concept, corruption and communication problems have to be taken into consideration when
outsourcing or keeping production in China. Managers should expect the staff to leave the job without
notice and as result raise additional costs for the company in terms of hiring and training new staff. On
top of that, as Company B case study shows, even long-term relationships can be abused due to
Chinese strategy of ‘cutting-corners’ in order to offset the constantly raising raw material and labour
costs. Finally, due to the political system and high corruption, it is very hard to find the ‘ends’ when
something goes wrong. Besides quality criticism, most of the firms outsourced to China or has its
presence in China are successful.
Table 9
Sustainable competitive advantage framework.
Survival aspects Survival approach
Competitive strategy
Sand-cone theory:
focus on five
dimensions
Quality, dependability, flexibility, cost and innovation
Better quality
Human resources Focus more on selection of skilled workers, contextualised training and reduce attrition rate
through protecting employees
Machinery Continuous improvement approaches and automation if possible
Raw material Good governing policy to avoid cut-corners, integrate value chain activities such as
manufacturing, engineering, logistics and quality assurance
Management and
control
Well defined ownership structure, transparent supplier evaluation policies, good
understanding of quality control and testing procedure
Communication Good relationship between manufacturing and top management to overcome time
difference, distance and language barriers
Legal Educate employees about IPR threat, product liability and product recall system. Not to take
advantage of non-existent of well-developed legal system
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Qualitative research has some limitations and they are personal disposition of researcher, his
beliefs, reactions, cultural and religious background will, indeed, effect the interpretation and
investigation of the data (Russell, 2005). Furthermore, verbal and linguistic discrepancies can affect
the study since qualitative research is collected through one-to-one interviews rather than
standardised questionnaires (Miles and Huberman, 1994). Few limitations of the study are as follows.
This study focused only on international companies which outsourced their production to China or
have their presence in China. Other issues and benefits regarding financial performance, research and
development, information technology and other influencing factors were not taken into consideration
when analysing company’s success and competitive advantage. Furthermore, in this study the quality
issues are analysed at an organisational level, i.e. risks were tied to the organisation. The focus was on
both European/American companies who had outsourced at least part of their production to China
either by contracting or by establishing subsidiaries (FDI).
In qualitative method there are subjective and perceptive interpretations of the information. They
are mainly from few interviews and public available sources such as academic literature and media
reports. Since the population interviewed for each case study is rather low, these results cannot be
representative for the whole population. Furthermore, the interviewees might have had only limited
amount of information and they might not disclosed some particular issues regarding their production
quality or did interpreted the issues in their own understanding, thus, the trustworthiness of the
empirical data should not be interpreted as exact and thus, is expected to be different if the
interviewees were asked the same questions after 1 year time frame.
Furthermore, due to limited amount of case studies the findings give only a broad picture of the
problem, however, in order to prove or reject the quality issues detailed survey based study needs to
be undertaken with bigger sample size.
Concluding remarks
This study proposed a sustainable competitive advantage framework for multinational firms to
adapt and prosper in China. The study listed the major causes of quality and how to overcome them in
order to prosper. Four competitive strategy theories (‘‘Generic Strategies’’, ‘‘Sandcone’’, ‘‘Core
Competences’’ and ‘‘Value-Chain Analysis’’) were used to interpret the Chinese operations and to
develop a sustainable competitive framework. As per the proposed framework, to gain competence
firms have to focus on five dimensions viz. quality, cost, dependability, flexibility and innovation. The
dominant quality issues that need attention are human resource, management and control and legal
aspects.
Furthermore, it is very hard to make a judgement of the cause of the quality issues on such broad-
spectrum of business operations. This is due to the fact that each industry within manufacturing sector
has unique issues which can cause quality fade and cannot be combined and generalised for overall
manufacturing industry. Therefore, detailed empirical survey based study is essential to verify the
proposed propositions in different manufacturing sectors. It is also suggested to extend the study to
service industries which gains prominence in China. It would also be interesting to carry out further
research on what causes the quality issues, when European companies outsource their production to
East or Middle East Europe. Then it would be interesting to compare and see how the quality issues
affect company’s competitive advantage.
Acknowledgements
The authors wish to thank the three anonymous reviewers for their excellent and insightful
comments. We are sure that the readability of our paper has improved considerably after carrying out
these modifications. We thank the special issue editors for their encouragement.
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