Understanding the True Cost of Injection Moulding in China: Hidden Fees to Watch For

Well, just to be honest. When that RFQ is returned by a prospective supplier in China, and the price of that piece-part is a fraction of what you were quoted here at home, it is a certain thrill. It is like a victory. Your CFO thinks he can find a direct route to healthier margins and as an operations manager, you think you can achieve your cost-down targets. On paper it is a slam dunk.

We both know that the figures in a spreadsheet do not always give the full picture. The first price offered on injection molding in China is usually only the first bid in a protracted and painful negotiation. It is the banner price which is aimed at getting you through the door. The actual expenses, the ones capable of silently destroying a budget and making a tremendous amount a logistical nightmare, are virtually never on that initial piece of paper.

This is not finger pointing. It is all a matter of going in with your eyes open. This is a kind of field guide to the actual financial situation of offshore manufacturing. We will draw the veil over the concealed charges and the forgotten costs that distinguish a successful sourcing strategy and an expensive lesson learned.

That First Quote? It is Just the Start

The art of quoting is an art. Suppliers are also very good at putting a figure that is very hard to resist. It is a strong psychological anchor. When you have seen that low price, all the other quotations suddenly appear to be overpriced and your staff becomes emotionally committed to getting that figure to work.

It is a slight case of purchasing a ticket in a super-low-cost airline. The basic price is incredible, then you get charged your carry-on, your seat selection, the printing of your boarding pass. Now, the overall price does not sound as appealing. Chinese injection molding can be such a feeling. The plan is straightforward: get the business because of a low piece-part price and recoup the margin at the back end with a dozen minor, less-noticeable charges.

Where then are these gremlins lurking? They usually begin with the most important thing in the whole process which is the mold itself.

Tooling

The only largest capital cost in any injection molding project is the mold, or tool. You are paying to get a huge, machined block of steel. However, that is very different when you have to pay the price and possess it, which is even worse when you are thousands of miles away.

Among the first questions you must put are these: Who is really the owner of this mold? It is a horrifying yet typical situation; a company will spend tens of thousands of dollars on tooling to find out that they had basically been paying to have production capacity. The factory takes the mold as theirs. When you have a quality problem, you want to increase your production at a rate they cannot keep up with, or you just want to change suppliers, you are stuck. Your multi-thousands of dollar asset is held at ransom. You cannot move it, and you have to either accept the conditions of this supplier or lose another colossal amount of money and spend months of time on a new tool.

And of course the shell game with the steel itself. You could expect that your quote is of a durable, durable production tool. However, the kind of steel used is a world of difference. Are they running on hardened H13 steel, which is capable of running a million cycles without sweating? Or are they made of softer, cheaper P20 steel, or even aluminum, which will begin to wear, flash, and need serious maintenance after only 50,000 shots? A cheap tool may be okay to make a prototype run but when you are considering a high-volume production, a cheap mold will cost you a fortune in downtimes, repair costs, and eventually, a replacement that you did not plan to spend.

You must go into detail. Write and request the steel type. Insist on a definite number of shots. And negotiate a clear-cut contract that puts you in the position of sole ownership and that you can pull your tool at any time. In the absence of that, you do not have an asset, you have a liability.

Material Maze

After the tool has been sorted, the next area that costs can creep in is in the plastic resin itself. The quality of raw material is the only thing that determines the integrity of your product. However, you have no transparency when your supplier is halfway around the world and you can only know what is actually being poured into the hopper.

The standard cost-reduction trick is to replace virgin resin with a so-called regrind, or recycled plastic of earlier production runs or scrap pieces. Some non-critical applications allow a small proportion of regrind, but an unscrupulous supplier could use a far higher proportion to inflate their profit levels. It can be disastrous. The regrind may affect the structure, color uniformity as well as surface finish of your parts. The result is a failure rate higher than it should be resulting in warranty claims, and a bad reputation of your brand. You are saving a few cents on each part, but it costs you exponentially higher in the long-term.

The other pitfall is the equivalent material. You ordered a specific grade of resin of a worldwide brand such as SABIC or DuPont since you are aware of its characteristics, its melt flow, its shrink rate and its impact resistance. Your vendor may tell you, “We can make you a saving by applying a local substitute.” This is a big red flag. As much as some local alternatives are quite acceptable, others are… not. A material that is even a little bit different will result in parts that will warp, fail to hold critical dimensions or break during stress. The resulting troubleshooting, rework, and possible recalls headaches will eat any material savings right up.

The solution? Insist on a Certificate of Conformity (CoC) with each and every consignment of raw material. Put it into your quality agreement as a non-negotiable item.

Shipment

All right, you have excellent pieces of the proper material in a tool which you have actually purchased. The work is now done, all you need to do is to transport them to your warehouse. Easy, right? Not so quick.

The logistics is a mine of secret expenses. Most of the quotations are quoted as EXW (Ex Works), i.e. the price quoted is of the parts at the loading dock of the factory. That’s it. The rest is your responsibility: trucking it to the port, Chinese custom clearance, ocean freight, insurance, U.S custom clearance, port fees and final trucking to your facility. A FOB (Free on Board) quote is more preferable because the supplier will take care of its transportation to the Chinese port. However, at that point, you are liable to the remainder of the trip. Such expenses are high and very fluctuating. An increase in fuel costs, or a shortage of containers, can put your logistics budget to the wind.

And not to mention the elephant in the room; tariffs. Geopolitical situation is not stable at all. A product which was subjected to 10 percent tariff last year may be subjected to 25 percent tariff this year. It is an enormous, uncontrollable factor that is going directly to your bottom line. You need to consider the tariff rates at present, and a prudent CFO will even include an allowance in case of a future hike. It is financial malpractice to disregard this.

Lastly, there is time cost. There is no possibility of delays in international logistics, it is a given. It could be a hold-up in production, a typhoon in the South China Sea, a backlog in the Port of Long Beach or just a random customs inspection, and your lead time can easily add weeks, or even months. How much is a stock-out? How much does delayed product launch cost? These are actual, hurtful costs which never show up on a supplier bill but come down on your revenue report like a sledgehammer.

Quality and Communication

The final and, perhaps, the most treacherous, secret cost is the lack of communication and the varying understanding of quality. Your critical functional tolerance is what your supplier may view as a suggestion. The thing that you think is unacceptable cosmetic imperfection, they may think that it is within normal limits.

This is not always evil. It is usually a difference of culture and experience. Nevertheless, the outcome is the same: you get a shipment of parts that you cannot use. The price of separating the wheat and the chaff, the air freight of spares, and the management time spent at late hours on the phone, trying to settle the argument, is enormous. It is imperative to have crystal-clear, graphically-documented quality standards by the time the first part can be molded. Leave nothing to the interpretation.

It is only complicated by the language barrier and the 12-hour time difference. The simplest question may become a 48-hour correspondence in mails. A complicated engineering modification can become hopelessly lost in translation, costing thousands of dollars of scrap and weeks of lost time. It is difficult to measure the price of this friction but it is enormous. It saps the morale of your staff and stagnates the whole of your operation.

True Cost of Ownership

What then can you do to protect yourself? You need to stop thinking of the piece-part price and begin to compute the Total Cost of Ownership. Your new best friend is TCO. It makes you dig deeper than the quote and put into consideration all the variables.

Before you enter into any contract, construct a TCO model that entails:

• Piece-Part Price: That which is on the quote.
• Tooling Cost: Inclusion of written guarantees on ownership, type of steel and shot life.
• Shipping & Logistics: Obtain a fixed price on your desired shipping terms (such as DDP-Delivered Duty Paid, in the case that you can secure it) or create an elaborate estimate of all legs of the transport.
• Tariffs & Duties: Take present rates and apply a contingency allowance.
• On-Hand Inventory: Consider the cost of maintaining a larger amount of inventory as a cushion against long lead times and delays.
• Quality & Inspection: How much does it cost you to inspect your incoming QC? How much do you anticipate your scrap rate to be?
• Travel & Management: You should not forget to send your engineers or quality team to China to vet suppliers and solve problems. It is an investment that is needed.

Once you factor in all the extras, that very low piece-part price is not so low at all. It may be that a domestic supplier who is 30 percent more expensive on the piece-part price may be 10 percent cheaper in Total Cost of Ownership, never mind the risk, not to mention the amount of hassle.

This does not imply that sourcing in China is a bad idea at all times. It can be a great competitive advantage with the right product and with the right partner. But it is a choice that has to be made with an eye to the whole picture. The lowest possible price tag chasing is an amateur strategy. The actual aim is to develop a strong, dependable and cheaper supply chain. And that is to look beyond the quote and know what your parts will cost in the end when they are in the hands of your customer. Is the saving actually worth the risk to your budget, your schedule and your brand? It is the question any smart leader should address.