China or Bust: Recognizing the True Costs of Outsourcing

All that glitters may not be gold when it comes to outsourcing manufacturing productions to China. First, weigh the costs and learn the facts with this helpful guide.


All that glitters may not be gold when it comes to outsourcing manufacturing productions to China. First, weigh the costs and learn the facts with this helpful guide.

Are you behind the curve to source your products from China? What's taken you so long to make the move? After all, everyone is doing it. And it can save your company some serious money...right?

Well, the answer is yes and no.

There is money to be saved and quality products to be had in China. You can save up to 40 percent of your manufacturing costs, but only if you can avoid the potential margin-eating pitfalls. The caveat being that the management time and learning curve dollars are a burden that few companies want to absorb. Unless you work through experienced domestic suppliers to manage the risks for you, be ready for late nights, early mornings, frustrating phone calls, confusing e-mails, and some long and grueling trips to a part of the world that leaves you longing for a rainy weekend back in Newark.

With offshore manufacturing experience dating back to China before it was fashionable, then to Mexico with NAFTA and now back to China, I can tell you that the game is played the same, but the rules are different everywhere you go. China is a very challenging place from a logistics perspective, and its culture is very different from ours.

This article will cover:

  • The cost savings of sourcing and/or manufacturing in China

  • What manufacturing transfers cost effectively to China

  • The potential offsets to savings

What Cost Savings Can I Realize in Sourcing and/or Manufacturing in China?

Whether you partner with a domestic supplier with Chinese manufacturing experience or take the do-it-yourself approach to outsourcing, the obvious cost savings from manufacturing in China will occur in your direct labor line. An hour of fully loaded labor cost will run about $.50 an hour in China. Living and eating in dormitories on your manufacturing site, employees work 12 hours a day, six days a week. What this immediately suggests is that if you have labor-intensive manufacturing processes, outsourcing them to China may be a good option.

A less obvious saving will come in the cost of materials, such as aluminum and steel, which the Chinese government may subsidize. Moreover, common practice relationships with suppliers may allow you to avoid paying your subcontracted supplier for tooling costs on a new product/component that you may require.

Chinese manufacturing plant overhead is much lower across the board, too. The management team, quality staff, accounting department and engineers will cost a fraction of what they would cost in the United States. And electricity bills, insurance, waste disposal and real estate costs will all be much lower. Totaled, this can add up to as much as saving 70 percent of what you would pay for comparable plant overhead in the United States.

Does All Manufacturing Transfer Cost-effectively?

With all of the companies now based in China you'd think that products and parts would transfer easily to Chinese-based manufacturers. However, this is just not the case. If you choose to outsource, you will need an up-to-the-minute understanding of available manufacturing capacities. And the size, shape, complexity, interdependencies and raw materials required by your production schedule will all need to be factored into your decision to transfer the work.

Realize, too, that Chinese manufacturing is moving away from its heavy reliance on Taiwan-based companies. Many of the complex manufacturing processes that were either dealt with in Taiwan or were invented in Taiwan and transferred to China are increasingly being developed in China. This requires that you understand where the manufacturing expertise resides and make sure that it is solid.

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