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The China Corporation, Ltd. San Francisco | Hong Kong | Shenzhen |
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How much will I save by manufacturing in China?
The main reason manufactured goods are less expensive in China is the low cost of Chinese labor. For example, you can hire 30 production workers in China for the cost of one in a western country. However, this oft-quoted fact can be misleading as it implies that the cost reduction is confined to the direct labor element of total production cost.
When most manufacturers think about the cost of labor in their products they think about their factory payroll bill. Factory payroll typically accounts for less than ten percent of the total cost of production, with the majority of the costs being assigned to raw materials and overhead. So even if Chinese labor were free, they assume that the most they could achieve would be a 10% savings.
However, purchased parts also have a labor component baked into their price, as do the raw materials that they are made of. When you take into account all of the labor cost added at each stage in the manufacturing process, labor usually accounts for more than 60% of total product cost.
The net result is that it is not uncommon for products to be 50% less expensive when sourced in China. As an extreme example, we recently sourced 2,000 custom-made springs in China for the cost of 50 stock-springs purchased in the US (i.e. they were 1/40th the cost or 97% less expensive). |
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FAQ |
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To know the road ahead, ask those coming back. - Chinese Proverb
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