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Calculating profit margins directly on a unit price is not a wise decision. When importing from China, there are many costs to take into consideration, and I’m not only referring to shipping and import duties. Buying products from Chinese manufacturers is much like flying with a budget airline. No extras included.
You get what you pay for.
They provide machinery, labor and (hopefully) manufacturing expertise. You provide the rest, including things that a buyer would normally take for granted.
Need a customized component or material substance analysis? That’s on you, not the supplier. Businesses importing from China must manage, or pay someone to manage, critical parts of the supply chain, including product development, quality inspections, tooling and laboratory testing. In this article we explain what costs you need to keep track of, when buying from Chinese suppliers.
#1: Tooling costs
Injection molds are used when manufacturing a wide range of consumer and industrial products. Chinese suppliers do keep molds in storage, often financed by previous buyers. When buying factory designed products, the buyer is usually not expected to pay for the injection mold. However, when manufacturing customized products, the buyer is expected to pay for the necessary tooling.
In many countries, the tooling cost is also part of the customs value, thus resulting in increased import duties and other taxes (e.g. VAT if you’re based in the European Union). If you’re on a small budget, stick to factory components whenever possible.
Buying wholesale products in China is rarely an option, especially for importers base in the United States, Canada, Europe and Australia. Instead, product samples serve as demonstrators of suppliers’ manufacturing capabilities. Many suppliers hand out factory samples for free, but custom designed and branded samples almost always comes at a cost.
But that’s not all. Different suppliers manufacture products of different quality standards, using different materials and components. At a minimum, you need to draft a product specification. If you plan to have a custom designed product manufactured, you need to create even more material, such as design drafts and prototypes. Never rely on a supplier to take care of product development for you.
What I just described was only for starters. After drafting a product specification and researching legal product requirements, you need to find reliable suppliers capable of manufacturing a product according to these. Keep in mind that the vast majority of manufacturers in China are NOT able to comply with foreign standards. That’s why many importing businesses choose to hire sourcing agents, rather than making a supplier selection on their own.
Nothing of this is free. The costs depend entirely on the complexity of your product, and how much of the procurement and product development process you are able, and have time, to manage on your own.
Child Labor and horrible working conditions went out of fashion about a hundred years ago. In this time and age, consumers do care about social compliance. However, so far, social compliance is not part of any legal directive, such as CE or RoHS.
That being said, small businesses can improve their image and brand by showing that their suppliers are able to pass a social compliance audit. Retailers (potential buyers) care too, considering they are put under more media scrutiny than smaller businesses. What’s more, a social compliance audit is not expensive these days. The price is about the same as an iPad. It’s a very cost efficient brand investment, and I’ll think we’ll see more small to medium sized businesses using such services in the near future.
Cost: Starting from US$609 at Asiainspection.com
#5: Quality Inspections
By the time your cargo is shipped from China, you really need to be sure that the items are compliant with your product specifications and quality requirements. The only way to do that is by inspecting the items prior to the shipment. You can either do it yourself, or hire a quality inspector based in China. What you shouldn’t do, however, is to schedule quality inspections until after delivery. By then it’s already too late to send defective units back to the assembly lines.
A quality inspection is well worth the investment. Manufacturing is not a science. It’s not a matter of whether or not there will be defective and damaged units – that is certain. The question is how big a percentage, and how severe the defects will be. You can live with 1.8% of the units coming out of the assembly lines with minor cosmetic defects, but your business will go under if you receive a batch made of cheap, substandard and potentially toxic materials.
It happens. Sometimes quality issues occur due to misunderstandings between the buyer and supplier. Sometimes because the supplier decided to use cheap and substandard materials, without telling the buyer. A quality inspection is the only way to uncover noncompliance while there’s still time to do something about it.
Cost: Starting from US$299 at Sofeast.com
#6: Laboratory testing
While a quality inspector can test functions, check weight, dimensions other physical properties, he or she cannot analyze product chemical and substance content, while in the supplier’s factory (however, thanks to this recent development, substance analysis on the site is soon to become reality). In order to verify that your product is compliant with legal acts and directives regulating substances, such as REACH, RoHS and FHSA, a sample must be sent to a laboratory. In fact, third party testing is sometimes mandatory, especially when importing toys and other children’s products.
Cost: Starting from US$10 per component to several thousands of dollars, for more complex testing procedures. The laboratory fees are based on the number of different products and standards, each item is required to be in compliance with.
#7: Shipping costs
Getting your products from the factory floor to your warehouse involves a myriad of costs. Below follows a short list of shipping costs:
Delivery to port of loading (in China)
Freight charges (port to port)
Document delivery (Bill of lading, packing list and commercial invoice)
Local charges in port of destination (unloading and administration)
Shipping costs are based on Incoterms. This means that a supplier can quote a product, including freight to the port of loading in China, to the port of destination in your home country (with or without local port charges) or including delivery to a specific location in your country – for example your front door. Click here to read more about Incoterms when shipping from China.
Cost: Based on the cargo volume when shipping by sea, and both the weight and volume when delivered by air.
#8: Import Duties and Other Taxes
Imports from China are in most cases subject to import duties. Tariffs vary between different products and markets. So does also the customs value, of which customs duties and other taxes are calculated.
Making a Product Import Budget Calculation is the first step before investing in a new venture, or product. However, it’s far from as easy as simple as counting a profit directly on a quoted FOB price. In this article, we show you what an Import Budget Calculation might actually look like. As costs vary depending on a several factors, such as product, imported quantity, destination and mode of transportation – we have made the following assumptions:
Third party service provider assistance: Essential services only
Destination: United Kingdom
Targeted procurement price: $30
Estimated retail price: $220
1. Cost Overview
a. Product Costs
The unit price makes up a majority share of the total procurement budget. In order to obtain a unit price, you must first draft a product specification, which is the basis for your price research. For more guidance on how to manage price research in China, read this article. In this Case Study, we set the unit price at $19.6.
Product Packaging is another cost to take into consideration, when making calculations for an import budget. The product packaging cost varies, depending on the materials and the quantity. However, in this Case Study, we assume a cost of $1.85.
Pre-Production Samples / Tooling Costs
While a product sample, or prototype, is a non-recurring charge, it can still add on significantly to the startup cost of launching a new product. However, as this Case Study is based on Wristwatches, we can assume a relatively low pre-production sample and tooling cost, of $640.
b. Third Party Service Costs
Supplier Sourcing & Due Diligence
Manufacturers in China are not created equal. They all have different track records, qualifications and technical expertise. As explained in this article, there are various ways to assess suppliers in China. You may of course do it yourself, or you may hire an agent or service provider to do so for you. If you choose the latter, there is essentially no maximum amount of money that you can spend on conducting due diligence.
Hence, this may cost you anything from $200, to $2 million – depending on how “sure” you must be. However, in this article, we assume that you’ll be buying a Chinaimportal.com Industry Report, for a total cost of $349.
Buying from Chinese manufacturers is a bit like flying with a low cost airline. No extras are included. While many Chinese manufacturers indeed have their own, internal, quality management procedures – you must still pay a third party for an independent quality check on the goods. If you order a Quality Inspection from Sofeast.com, it’ll cost you $299. That also includes travel expenses.
If you are based in the United States, the European Union or any other developed market, your product may be regulated by one or more product safety standards. Third party laboratory testing may, or may not, be mandatory. Regardless, non-compliance is by definition illegal, so you are strongly recommended to submit a pre-production sample for compliance testing. As this shipment is heading to the United Kingdom, we assume the following tests as necessary:
c. Shipping, Duties and Other Taxes
For the sake of simplicity, we decided to assume that the shipment will be delivered by air freight. The cost of Airfreight is based on the following two factors:
Volumetric Weight (Cubic meters)
Assuming a weight of 369 kgs, and a price per kilogram set at $5, we can add a cost of $1845, to our import budget.
The freight insurance cost usually as low as 0.5% of the freight cost. In this Case Study, that’s not more than $9.5. However, it is of some significance when calculating the Customs duties. As such, we decided it’s worth mentioning.
Customs duties vary depending on the product, and are calculated based on the Customs value – which in turn is based on the total value of Unit price, freight and insurance. This is what’s sometimes referred to as the CIF (Cost Freight Insurance) Price, a commonly used Incoterm. However, the method for calculating the customs value differs, but now the assumed destination is the United Kingdom, which applies the same customs value as the European Union as a whole. As such, we can now calculate the Customs Value as follows:
Unit Price (Including Packaging): $21.45
Freight (Per Unit): $0.615
Freight Insurance (Per Unit): $0.0036
Total Customs Value: $22.07
The duty rate in the UK, for watches, is currently 4.5%. Hence, we can now calculate an import duty of $0.993. Let’s just say $1, to keep things simple.
Note: The the value of the pre-production sample and/or tooling, may be included in the first shipment, or divided on later shipments. However, to not further complicate the calculation, we don’t add this cost.
Note: Importers in the United States and Australia, must only declare a customs value based on the FOB (Free on Board) value, which does not include the freight cost.
Note: The calculated procurement price, per unit, is below our target price. Hence, we can motivate the necessary investment.
This Procurement budget calculation only considers the most essential costs. That said, there is no universal method for outsourcing production to China, and, as such – the costs vary from case to case. Below follows an overview of additional costs, that you may need to take into consideration, when making calculations for your own import budget:
Business travel expenses
Social compliance audits
Design and engineering services
Licenses and permits
How to Keep Product Costs Down As a Startup
Going from idea to packaged and delivered product is often a lot more complex and costly than one might first thing. There are plenty of failed Kickstarter funders that can testify to that.
As a Startup, with limited resources, time and money are working against you. In order to succeed, you must go the most out of the small funds you have.
2. Keep your design and feature requirements simple
It’s typical that Startups, be in software or e-commerce, run out of money as they try to perfect their product into infinity. As you launch a product, you cannot afford to get hung up on features that don’t really matter.
I’ve seen time and time again, how importers set design and functional requirements, that are either very expensive to reach – or even impossible.
In most cases, this is due to a lack of experience. There are physical limits to what can be done in manufacturing.
Also, too many design details or functions increase the risk of severe delays, or even failure to produce a single product sample.
Indeed, you should not compromise on design requirements and functions that are core to your business model. That said, keep things as lean as possible – and further develop your product once it’s proven on the market.
3. Don’t spend too much on new tooling
Every custom designed piece of metal or plastic requires an injection mold. The more custom designed pieces of metal and plastic needed to assemble your product, the more money you’ll end up spending on tooling.
You need to consider IP protection, product certification and testing, labelling requirements, quality control and social compliance audits.
There’s no single person, or even company, that can cover every single part of the process. If you come short of anything below three or four million dollars, you don’t have enough to simply outsource all this.
You will need to learn how these things work. Nobody will start a business for you, and especially not your supplier.
It’s not their job to know which standards apply in your market, or how a product shall be labelled. Neither is it their job to patent your designs or design your packaging.
There are no shortcuts. Those who expect an easy ride, and others to do the job for them, should not even consider getting into hardware.
But for the gritty Startup founder, opportunities in the e-commerce space (and not only on Amazon) are plentiful.
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Co-founder of Asiaimportal (HK) Limited and based in Hong Kong. He has been quoted in and contributed to Bloomberg, SCMP, Alibaba Insights, Globalsources.com, China Chief Executive, Quartz Magazine and more.
Hey there, I’m Fredrik!
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