Manufacture setup in China: A short list of typical associated cost

china-running-factory-cost

Thinking about opening a manufacturing or a production line on your own in China instead of sub-contracting to someone already established locally ? Here is a short list of all the expenses you will have to deal with and a few stuffs you will need to take in consideration when doing so.

This article relate to what I have experienced and saw here in China when setting up and performing manufacturing and production management.

# Facilities cost

If you plan to manufacture then you will need space for your production line, for your warehouse, for your workers. You have to know that in China, most of the time, leasing contracts are usually established for 3 years, require a deposit refundable only if you respect your lease terms. Sometimes, the lendlord will not have setup electricity line and socket in the space you want to rent (sometimes the previous tenant would have removed them voluntarily to save penny!), so you will need to pay for this setup yourself. Unbelievable right ? Sometimes you will need to rework the floor (potentially dirty), walls or windows (as most of time building isolation in China is not of very high quality, if they don't close well, you better fix them to avoid spending too much on air con or heater if you set up one on the long term).

Rarely and not easily you will find manufacturing surface below 500 or 1000 sqm. Rent per sqm highly depends on the area where your spacing is located of course. Most of time if you are located in the downtown you will have to pay a very high price per sqm (take note than in Shenzhen the city doesn’t allow so much anymore manufacturing activity in the downtown area for city planning reason).

Of course when selecting the area where you plan to setup your activity, you have to take in consideration a certain number of aspects which might not be a problem or a constraint in the west. Just think about power supply for example: power shut off in summer when an all an area is pulling on air con heavily may bring some power cut off. This will affect your production efficiency because a power cut off will make your manufacturing line not running for several hours if not days the time that power come back to normal.

Think about internet connection quality too.Unusual things in the west, but in China, most of time your landlord will rent you an amount of X square mater but you have to expect to pay for 1.3 times this X value if not 1.4 times as they most of time consider the common parts such as public corridor, toilet or even lift space to be included in the rent and shared by all tenant on a single floor of a manufacturing plant. This  also apply for bills related to electricity and management fees of the building.

Hence, it is important to choose properly and carefully the location where you set up your production line. And believe me, but finding the right place can take ages. Here the market for those kind of facilities is extremly dynamic. Typically you visit a place at the morning, and you have to give your decision extremly quickly as the afternoon the same day someone may have taken your space.  

Too close to the city and the price for the rent will be very expensive. Too far from the city, you will have difficulties to find or retain some qualified workers and you may even need to supply them a dormitory room which would inflate your cost. Power cut and internet issue are also more frequent far from the cities in rural area.

When considering the space you need, you will have to evaluate properly the surface you need. Too small and you can not operate properly, too much space and you will waste money paying for unused space. Try to use the less space possible while being capable to perform your activity,  and try to stay lean as much as possible during your manufacturing activity. I quite often visit manufacturers who rent much more space than what they need because just they are not properly organized. Taking too much space can actually bring your company to a dirty financial situation quickly particularly if you are just starting.

Of course you need to be careful to have enough space to manipulate, store and perform all the operations and processes needed for manufacturing your product.

To optimize this point, the production line organization should be highly considered before renting. Not only do you need to consider your process and it required space, but you also have to consider the building room layout and make sure your line could accomodate properly in it configuration. Sometimes, it present some constraints such as width limitation, a column in the middle of a room or any other type of constraints such as reserved air extraction area. Yet, there are two advantages you can think of: in China you can easily make some changes in your room at relatively low cost.

What i usually do is to establish a production line simulation by drawing layout, local inventory store, space for workers, part spacing before to make sure enough space are available. I also use lean manufacturing toolset as it can help to decide how to organize a production line at best . U shape or any other configuration based on the floor space availability and configuration). 

# Human Ressources cost

Of course, if you have a manufacturing line, then you also need people. Living cost in China increased a lot in the last 10 years and particularly in those big cities like Shenzhen, so salaries have also increased a lot (but the skills didn’t increase at all). A basic worker cost easily minimum 4000 CNY per month, a basic QC easily 7000 CNY, a production manager easily 10000-12000 CNY. You have to provide them with job safety, sometimes even an accommodation, and of course pay their social insurance. This doesn’t include the cost of your time to recruit them, handle with administrative tasks such as pay roll handling.

If you take young people, you will probably face a potential instability (they jump very easily from companies to companies) without respecting their contract prior notice agreement, and you still have to pay them in this case as the law protect them more than it protects the employer. So, recruiting older workers will probably be better as they are more stable, but usually also slower to work. Recruiting and retaining good people in China while paying fairly but not overpriced is the biggest challenge in China. This is true for workers but also for other type of job. I regularly see some chinese engineer requesting very high salary not because their skills but because their age and the time they have worked in X positions. Sometimes, the salary they require versus the performance they supply make that you could hire a foreigner for cheaper (at equal productivity comparison).

The best technic is to test, test, and re-test people before recruitment and during probatory period, then to establish a clear career plan with some milestones they will have to reach to increase they salary. This technic is well adapted for engineer for example, but less for workers. I know most of them will consider "I have X years experience in A so my salary should be Y », but for me the salary increase should rather be indexed on their skills and result first, not based on a timeline. For workers, the best is to add a bonus on performance. Please note, I don’t say paying them per piece. I never pay workers per piece because it push them to go faster and faster usually leading to more problem such as more defects. It is better to pay worker per month, per day or per hour.

Install and use the lean manufacturing mindset to keep moral good among workers. 

Keep in mind that recruiting someone cost a lot of money via the time of ressource which is allocated for this process. It always cost less to retain someone than constantly recruiting and firing (still sometimes firing is necessary particularly for workers who are stubborn and don’t listen assignement). To retain people, try to install a good climate of camaraderie and friendliness.

# Equipment cost

If you manufacture some product you will need some items to help you with manufacturing.Those items can be machines, fixtures or tools. Those items add up to the bill and should be considered carefully. Sometimes it worth to sub contract some process requiring some expensive equipment rather than buying them.

# Utilities cost

Your production line will not run without electricity for sure and if you are in summer in the south of China, there is a high chance you may need air con potentially. Contrary to what people think, electricity in China is not that cheap. It worth mentionning that electricity cost for office and manufacturing place is twice the cost of housing electricity. Your people consume electricity via air con or fan, your machines consume electricity, your computer too. All add up very quickly.

You may also need water, this is usually cheap in China

You will probably need the Internet. Surprisingly, Internet is not cheap in China. It is even more expensive than in Europe with a quality of not so good. The infrastructure for it here are not of high quality. Strangely, you will notice that the Internet usually slow down when it is raining ! You may ask your self why. Well if you see how they set up telephone line here and how the cables are going into the sewage, you may imagine that rain may fill sewage and make a few stuff not working properly in the DSLAM area...

# Taxes

Yes, there are taxes to pay in China. First there are your human ressources which you have to pay their social insurance. This add up to the bill. Sometimes, depending on where you are located and what you are producing, you might need to pay some taxes on pollution (yes you have read well). There are taxes on companies for income.

Finally, a taxes which is not a real taxes but which can become one if you don’t pay attention to it is the VAT you pay when you usually export some goods. If you don’t get it back by claiming for taxes rebate due to the goods you export, then you might waste a lot of money. If you are in Shenzhen, the case is slightly different, but if you are in another city like Shanghai the custom authorities are very strict and any mistake you make on export claim will make you get a refusal and you will have to pay full VAT on export whereas you could have paid only a few of it.

# Safety compliance cost

If you have people in your manufacture, then safety compliance will be a concern. Think about fire extinguisher request by local fireman, special sign for exit, alarm etc… Sometimes the fire bureau will come to your place and will ask you to set up this and that threatening you to give you a fine if you don’t do it. Sometimes, they just say you don’t have it and claim for a fine straight away without warning. In some case they will find anything they can to give you a fine or claim for a bribe. The bribe issue is a common stuff in some area. Like anything it may represent a budget. I particularly made the choice to never enter into the bribe game otherwise it is just endless.

Sometimes, for safety compliance, you may need to set up some special machinery, such as air extractions. This is particularly the case for heavy soldering with lead and for painting. If you are in a special area, the local authority may require an environmental audit before you start your activity.

All those stuff add up on the bill and they have to be considered before taking the decision to set up a production line in China.

# Inventory costs

Depending on your manufacturing style and product type, you may need to store inventory. Inventory usually depreciate and fast speed. There is a risk of getting your inventory being damaged, stolen or lost. 

This inventory may then involved to contract an insurance to cover risks such as fire, flooding or thieves. 

On the top of making some cash flow being used to manage inventory, assurance cost will add up to the bill.

# Non quality cost

As you manufacture, your yield is usually not 100% so you have a bit some defectives (or sometimes a lot depending on how you manage your production process). Reworking part or product has a cost (Non Quality Cost). This cost, the manufacturer handle it, whereas usually the importer don’t directly. No quality cost not only affect physical items but also consume time of worker, consume time of managers, consume electricity due to machine runing again.

When you are on the manufacturing side servicing importer, the sight is totally different. I have been in both position, I now understand better what a manufacturer live. 

# Administrative cost

If you set up your own manufacturing, then you will need to register a company. Not only you may need to deposit a capital upfront to register the company but you will also need to pay some administrative and government fees (those vary from cities to cities), to pay an accountant monthly to handle your book keeping, and to pay an auditor to audit your accounting every year. 

# Your time cost

Yes, your time has a cost. How much does it cost ? You should know it yourself. To manage all those stuff, you will need to have an eye on everything almost all the time. You rill mostly need to be present on site all the time, at least at the beginning to set up the organization. 

With all those points, I am sure you understand it is worth to think twice before considering setting up your own manufacturing line versus sub-contracting it to someone locally based. 

Did I forget everything ? Feel free to comment.

About Christopher Oliva 65 Articles
Christopher Oliva is an Engineer based in Shenzhen since 2008 involved in Product Development, Supply Chain, Sourcing, Quality Management and Manufacturing activities. With a Msc Electrical Engineering and a Business Administration background, an ISO 9001 Lead Auditor Certification, a Six Sigma Certification and a Quality Engineering Certification, he works as a consultant on mission and contract oriented to Product Development, Manufacturing Management, Quality Assurance & Quality Management System setup. He works in the product development and engineering field, and as well as an advisor and quality consultant for several quality control and quality assurance companies.