The True Cost of Doing Business in China

by Kym Conis

Industry   Fall  2007

Open a newspaper or magazine, turn to the business section, and it’s no surprise that one of the most reported topics of the day continues to focus on the influx of Western companies into China and the proliferation of product going overseas. As the race to produce more for less continues to drive competition across a myriad of industries, China, Mexico, and other low-cost competitors such as Vietnam and India continue to attract business as the boundaries for a ‘better deal’ expand.

However, along with this rapid surge of commerce in China has come many obstacles as well – obstacles such as sub-standard quality, communication barriers, and inadequate enforcement of intellectual property rights. Mattel Inc.’s recent wave of toy recalls not only has elicited an onslaught of commentary and trade speculation across a variety of markets but also, has triggered heightened suspicion and a general lack of trust amongst American consumers.

That being said, many experts and consultants are predicting little, if any, decline in China’s position as the leading manufacturer of toys. Why so little impact? One reason given is because China has a stronger, more complex infrastructure in place (compared to other low-cost, off-shore alternatives) to produce low-cost, high volume work. Deeply embedded in the world’s supply chain, China may be the only viable option for many companies trying to compete on price. That is, if considering price alone makes smart business sense.

As many U.S. plastics processors have come to realize, a lower price per unit does not always equate to a lower overall cost when considering other intangibles such as management resources and time-consumption, the sum of which comprises the true cost of doing business in China. While some processors have achieved great success at keeping business in the United States by targeting niche markets not suited for overseas production, others have found doing business in China, albeit difficult at first, to be a very successful business venture.

Plastics Business spoke with a few U.S. plastics processors regarding their business dealings and supplier relationships with China and asked them to share their experiences (what has worked and what has not), their insights, and their overall strategies on how best to work with, or without, the China factor.

Managing Risk
Today, doing business in China is a risk that needs to be carefully planned, clearly defined, and strategically managed from design through to production – a task not easily accomplished yet not altogether impossible.

Only a few short years ago, Metro Plastics Technologies, Inc., a contract molder located in Noblesville, Indiana, was able to manage tooling for its customers through U.S. mold suppliers – efficiently, precisely, and cost-effectively. However, as China continued to get more proficient in its mold making capabilities and thereby set the market value, Metro found that it could no longer compete as it was losing jobs based on the molds going overseas. According to Metro Plastics Owner and President Lindsey Hahn, “Domestic sources for molds are still competitive in some environments. But we needed to find a way to successfully manage our risk and open up our mold making options in China, without all the time and money wasted going back and forth in the tool design and sampling process.”

Metro’s solution? Hire a full-time Chinese engineer to be onsite during all phases of the mold making, sampling, and even production processes (when need be). “The Chinese are very capable, but very literal,” explained Hahn. “They tend to do exactly what is on paper so if you don’t provide them with a clear definition and set of standards, you’re bound to come away with something very different.” In the U.S., mold makers have a set of standards – an exact way of doing things. That is not so in China. Consequently, Chinese tooling prices are all over the board, as is the level of quality and accuracy. This is where Metro’s onsite, company-designated engineer comes into play.

According to Hahn, it all comes down to defining what you expect and then inspecting what you get. “We didn’t have 100 percent success right out of the box. You have to very clearly define your expectations and set out a list of standards, otherwise they (the Chinese) will take liberties with the design – not because it’s intentional or malicious but because they oftentimes don’t think it’s important,” stated Hahn. “It’s our job to be clear, define expectations, and oversee the job.”

To this end, Metro has devised a precise set of mold standards including specs on variables such as the tool, the type of steel, English versus metrics, parting-line locks, wear plates, etc. “Every facet of the job is specified and put in writing on the blue print so when they’re quoting a mold, they know exactly what our expectations are and they give us a price based on those expectations,” explained Hahn. “We send the design and specs and they do the drawing. This may take two or three iterations, but once it’s complete and on paper, the job has started and we don’t change the specs.”

With Metro’s onsite engineer, the company now has ‘eyes on the ground in China’ – a good translator and an effective means by which to resolve any issues that may arise, thereby reducing the time it takes to get a good sample. Having an engineer onsite also forces the Chinese tool shop to have a lot more accountability. “We don’t use brokers as many companies do. We go direct so we don’t have to go through an intermediary who is not entirely committed to us,” stated Hahn. “If I don’t make a good tool, I can’t make a good part over time. It’s up to me to make that happen – to provide value for my customers. They don’t care about the tool; they care about the part, the quality, and the cost of that part. It’s my responsibility to make sure I provide what my customers need.”

Price is More than a Five-letter Word
Just as some plastics processors have found an effective means by which to navigate global trade with China (and the risk associated with that trade), other companies, such as Thogus Products Company in Avon Lake, Ohio, have discovered lucrative, niche markets in the plastics industry – markets out of the grasp of foreign competition and its many pitfalls.

Less than ten years ago, as work in three of Thogus Products’ largest business segments (automotive, electronics, and food and beverage) began to go overseas, the company turned to untapped markets and methodically developed a stronghold in areas such as metal-to-plastics conversions and low volume work utilizing specialty resins – runs that are not a fit for overseas production.

As a ‘boutique molder’, Thogus Products comes in contact with some extraordinary jobs often requiring expensive molds of very complex designs. In such cases, unfortunately, it is far too easy to make a decision based on price instead of looking at the entire value proposition. Matt Hlavin, vice president of sales and marketing for Thogus Products, can site numerous examples where customers have made the choice to have a mold made in China based solely on cost, only to pay much more than the quoted price in the end.

Recently, Thogus Products was ready to kick-off a job requiring a high-end mold made of expensive materials and an extremely complex design. “This mold not only had to be exact, but it also had to withstand a very large run entailing millions and millions of parts,” explained Hlavin. “In fact, the mold was so complex that only one mold maker here (in the states) was capable of producing it.” Three days before the job was to begin, the customer announced that she had decided to go with a Chinese-made tool for one-fifth the price. “I explained to her that her short-term gain might turn out to be her long-term cost,” stated Hlavin, “that she needed a guarantee – a contract of intellectual property rights – stating that she would own the tool, the design, and the technology. She needed a guarantee that her part would not be made for someone else.” Unfortunately, there was no such commitment and the product, to Hlavin’s knowledge, still is not to market.

In Thogus Products’ experience, molds made in China start out 20 to 30 percent lower (on average) than ones made in the states but after all is said and done, end up costing every bit of that savings (and more) by the time sampling, redesigning, test runs, etc., are completed. “If the tool is made incorrectly, the customer may be faced with higher fall-outs, increased inspection costs, continual maintenance costs, and so much more,” Hlavin stated. “We try to explain this to customers – that there is much more to a mold than the actual price.” For example, Thogus Products guarantees its molds for the life of the program (or at least for one million shots). “If the mold is not right, it’s our dime to fix it and make it right,” stated Hlavin. “We have dealt with several molds made in China and not one was right out of the cage!” All elements considered, the price of the tool may be lower but certainly not the overall cost.

Another pitfall with doing business with China is the issue of maintaining intellectual property rights and the inadequate enforcement thereof. Although China’s National Copyright Administration has reported improvement in this area, statistics on the amount of pirated goods seized at U.S. borders coming out of China prove otherwise. Glo Bees, LLC, is a prime example of such occurrences.

As a small, start-up company specializing in creative window covering products, Glo Bees founder Barbara Weidenbach was enticed by China’s low prices – an advantage she thought would afford her the ability to get her fledgling business off the ground. Instead, the company experienced issues relating to breech of contract, product duplication, and repayment of monies – issues still under resolve three years (and thousands of dollars) later. “Even with a letter of intent in place, they are somehow making and selling my product on mainland China,” stated Weidenbach. “And I thought I was working with reputable companies – companies that are listed with Dun & Bradstreet.” Today, despite Glo Bees’ initial set backs, the company finally has taken off with its products – Made in America.

Coming Full Cycle
Recent reports suggest that in some instances, the industry is seeing a cycle of items that have gone to China and are now coming back. “Highly decorative components are starting to come full circle because of supply chain issues and quality issues,” stated Scott Walton of The Net Results Group of Kentucky, LLC (NRGK), a process-focused, business excellence consulting firm based in Louisville, Kentucky. NRGK provides services internationally to a broad range of private and public sector organizations and industries. “If you have one issue across the pond, you can lose all your savings, very quickly.”

With an extensive background in consumer and automotive products, Walton admits that China has its place, particularly with components requiring very steep launch cycles and intensive labor, such as with the cell phone market – an area that is booming in China. “You can’t really resist change; you have to go with it and right now, for some markets, it’s China.”

However, Walton cautioned that when doing business in China, an understanding of the quality specs, what to do with those quality specs, and how to inspect for them must be established at the onset of a project. “You have to know up front how much money you are willing to put into inspection. That number may be as much as 100 percent,” stated Walton. “Tolerances always start out tight and then tend to loosen up. But it’s not much different than what you do to prevent risk here in the states except that you have to contend with the distance factor and the language barrier.”

In the end, equating the true cost of doing business in China is not a definite answer but instead, is one based on the company, its customer-base, and its resources. However, considering the current landscape and the risk involved in conducting global trade overseas, the overall consensus would be to proceed with extreme caution; set out exact specifications and requirements, and be ready to inspect what you get. While it’s true that some business is starting to come full cycle back to the U.S. – great news for the plastics industry – still other business awaits on the horizon, ready to go to China or the next low-cost alternative. One of the most important things to remember is to continually watch market trends, know where your company stands in the value stream, and be ready to seize an opportunity when it comes your way.