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The economics of importing tools from China
What kinds of molds are logical choices for production in North America vs. in Asia? It comes down to space.
Carlton Harris
January 8, 2009
7 Min Read
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What kinds of molds are logical choices for production in North America vs. in Asia? It comes down to space.
There are tens of thousands of injection molds imported into North America from China every year. The economics driving this are, of course, the low cost of Chinese labor, which is low enough to offset the higher costs of time and distance. But does it always make sense to source tooling from China? In which situations does it make sense to import tooling, and in which situations does sourcing in North America make more sense? What are the factors that influence this decision?
Let’s examine the major cost drivers of tool construction, and try to better understand these questions.Quoting a tool
Most tool quote methods consist of two inputs—materials and machine rates. The estimator first tallies up the various materials required to build a tool, and then estimates the hours required in various work centers or departments within the tool shop. Hours times rate, plus materials, equals total cost. Some shops do a pretty sophisticated job of splitting hours to various machines, all costed at different rates. Other shops prefer to use averages. The machine rate incorporates a number of elements, including shop labor, overhead (machine depreciation, indirect labor, supplies, utilities, rent), and profit margin.
The same methodology holds true in China, but the cost inputs are very different. For example, instead of machine rates of $40-$70https://www.plasticstoday.com/hr, rates may be more like $10-$30https://www.plasticstoday.com/hr. Let’s take a more in-depth look at the cost advantages and disadvantages of the Chinese tool shop.
Materials. If the Chinese toolmaker can source materials locally, it will have a cost advantage. If required to buy imported steels and components, it will buy at or above North American costs. One example is hot runner systems. A locally sourced system comes at a fraction of an imported system. If required to buy from the United States or Canada, the Chinese company will pay slightly more on a delivered basis. Also, take mold bases. The large mold base suppliers in China can provide bases with a variety of steel qualities and specs. A metric, China-spec’ed mold base will cost less than an English measure, U.S.-spec’ed mold base. Advantage (on balance): China.
Import text box
Shop labor. Toolmakers in North America cost perhaps $15-$25https://www.plasticstoday.com/hr straight time, and with benefits and 5-10 hours of overtime each week, might have a total cost ranging from $50,000-$90,000 for a 2250- to 2500-hour year. That’s $20-$36https://www.plasticstoday.com/hour fully loaded. The comparable figure in China is $1.50https://www.plasticstoday.com/hr on the low end to $5https://www.plasticstoday.com/hr on the high end. However, the average Chinese toolmaker is less well-trained and less flexible than his North American counterpart. Further, his efficiency (sales dollars generated per person) is much less. What looks like a 10:1 advantage is really only a 3 or 4:1 advantage (which, while still a lot, narrows the gap considerably). Advantage: China.
Machine depreciation. Chinese milling machines and EDMs cost a lot less than European and Japanese machines. However, the best shops with the best equipment from Europe and Japan will pay close to the same price as a North American tool shop. This wasn’t always the case. It used to be that even high-quality imported machines were cheaper in China, because manufacturers felt they had to price aggressively to build share and meet local price expectations. That is much less true today, now that China has become a large market for such machinery. However, advantage (but less so) China.
Indirect labor (IDL). Indirect labor cost varies widely from shop to shop in both North America and China. There are a couple of generalities that can be stated with confidence. First, the higher the position in a Chinese company, the less the relative labor savings of that position vs. a North American company. Top managers in China, particularly if they are great English speakers, can be as expensive as in the U.S. Second, in China, total IDL costs are fairly high for foreign-owned tool shops (Western-owned companies, or “overseas Chinese”—Hong Kong-, Taiwan-, or Singapore-owned companies), and lowest for mainland-China-owned companies. Advantage: China.
Supplies. Various supplies can be purchased more economically in China than in North America but this is a small part of the cost structure. Advantage: China.
Utilities. There is a wide range in the cost of energy in the United States, but on average (and averages are dangerous), energy costs more in China. Availability of electricity is still very much an issue in much of China, too. In Guangdong Province last year (2008), energy “holidays” were as long as three days per week in some cities, requiring tool shops either to shut down half the time or supplement with high-cost generator electricity. Advantage: North America.
Rent. Space is expensive in the cities that are the hotbeds of the tooling industry (Shenzhen, Dongguan, Ningbo, Shanghai, Suzhou, and a few others). Most U.S. and Canadian tool shops are a little further out from major cities. The cost of manufacturing space will generally be less. Advantage: North America.
At this point, we’ll provide a rash generalization: The cost of building a tool in China is, on balance, the same as in North America except for 1) shop labor in the case of foreign-owned tool shops, and 2) shop labor and indirect labor in the case of PRC-owned tool shops. The other cost inputs—materials, machine depreciation, supplies, utilities, and rent—will roughly offset each other. So it all comes down to labor, direct and indirect. This is before consideration of freight and duty—the final cost element we will examine.
Freight and duty. Taking the second cost first, duties for Chinese tools imported into the United States are 3.1% of invoice value; in Canada, the comparable figure is at least 6.5%.
The freight cost obviously will vary depending on use of air or water. Airfreight runs about $2.50https://www.plasticstoday.com/lb, all in, plus trucking from the airport to the plant, but varies with the price of oil. Ocean freight is about 20%-30% of the airfreight cost on average. In either case, the key consideration governing the economics of importation is how many labor hours one can fit into a container. (See box above for an illustration, not using tooling, to make this point in the extreme.)
Tools to build in North America
From the preceding discussion, it becomes pretty clear what kinds of tools should be built in North America, and what tools should be considered for import:
1. The higher the material content cost in the tool, the more sense it makes to build in North America. This is particularly true if exotic and expensive materials must be employed that are likely to cost more in China than in developed economies.
2. Tools that can be designed to run automatically may make more sense to build in North America. Examples include jumbo tools that can be put in a large machining center and allowed to run for days. Another example is large multicavity tools where the same cuts or burns are repeated again and again. Basically, if you can program the machine to run automatically with a minimum of operator tending, you are going to shift the economics toward North America.
3. Tools that require a high level of design sophistication to run successfully are also candidates for North America. This has less to do with the labor hours vs. freight trade-off than the state of tool design expertise in China vs. North America. Of course, the obvious solution here is to design critical components in North America and design and build the rest of the tool in China.
There is a place for tooling in North America. Key to tool shop survival in the face of low-cost (and increasingly, high-quality) competitors in China is to focus on tools where the labor dollars per cubic foot of tool steel can be minimized.Check out the online article "Sourcing injection tools in China: Dealing with 'trading companies'" for more on Asian tooling.
Carlton Harris
Author Carlton Harris ([email protected]) is president of Asia Tool Source LLC (Drexel Hill, PA; www.asiatool source.com), a U.S.-owned sourcing company with several lines of business:procurement and program management services for customers wishing to buy plastic injection, rubber, or diecast and stamped metal tools in Asia; rubber parts sourcing; and full box build and packaging services of consumer products.About the Author
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