Calculating the Cost to Manufacture a Product in China



If you’re looking to offshore production to China, an idea of the real cost of making and shipping products is important. This understanding will allow you to estimate costs realistically. Thinking things through will also help you identify the potential for cost savings during product design. In this post, we bring you the data points and tips that can help you make educated cost estimations and control costs at your end.

Material costs

The cost of the material used to make the product factor into the total cost of manufacturing in China. It will be based on the type and amount of material used. Chinese factories keep costs down by ordering large volumes of material.

Over the years, the prices for material in the country’s various industries have risen. Expenditure for materials has fluctuated. However, the government has stepped in to stabilize high raw material prices and moderate factory inflation.

Labour costs

China has an obvious labour cost advantage over western countries even as wages in the manufacturing industry have risen steadily over the years. Average hourly wages are $4, compared to $13.84 per hour for American factory workers.

Labour rates for Mainland China vary quite a bit between urban and rural workers. Factory workers in rural areas may earn only a fraction of the hourly wage received by their urban comrades.

Labour costs can be as low as 20% of the total cost. The extent to which labour costs impact the overall cost to manufacture a product in China depends on the type of product and labour content that goes into making it.

Say you’re using a Chinese factory to make stuffed toys for kids. The factory will procure stuffing material and exterior fabric. The materials must be cut and sewn. The factory will likely use machines to cut the textile and stuff the toy but sewing its eyes, nose and mouth, as well as sewing the openings shut will be done by hand. Due to the high labour content, labour will account for a higher percentage of total cost, about 60-70%.

If you’re making plastic spoons, then the factory will use plastic injection moulding to make the moulded part and pop out several spoons through a machine with little or no monitoring by a worker. The plastic spoons would involve a low labour content, and make up 20-30% of the total cost.

The cost of making the mould, known as tooling, will be a part of the total cost. The cost of tooling is added to the cost of each part or product manufactured. The higher the volume of production, the lower the amount added to the cost of each part or product.

Controlling costs during the design stage

There is potential for reducing material cost and manufacturing cost during the entire process. Whether you’re designing a new product or a regular commodity, consider these points to keep costs more easily manageable for your start-up.

Simplify the design: A complex design has more parts and sub-assemblies. Simplifying the design, such as by reducing the number of parts, can help keep costs of procurement and storage down. A simpler design also reduces chances of errors during manufacturing.

Minimize flexible parts: It helps to think twice about parts that are flexible and can come off or break easily. Reducing flimsy parts is another way to drive down costs and increase the perceived quality of the product.

Consider architecture: Making a product easy to fabricate helps reduce errors during manufacturing. Mistake-proofing is one method to eliminate the possibility of error or to make an error obvious immediately after it has been made.

If you’re manufacturing an electronic product like pedometer, you can consider an architecture that integrates many functions in a single chip. Very large scale integration, for example, creates an integrated circuit (IC) by combining millions of MOS transistors onto a single chip.

Standardize and use common parts: Using an existing design and common parts minimizes the costs associated with approving a new design. It cuts down on the costs of sourcing and stocking parts.

When manufacturing electronics, standardizing connectors, switches, controls and other items can reduce inventory. Stocking common off-the-shelf parts in large quantities also ensures a lower cost per item.


Cost of sample

Chinese suppliers won’t give samples for free. But getting a sample that matches your specifications perfectly is a good start. You’ll be paying a one-time cost and the sample will be the basis for the products made to your order quantities.

Cost of packaging

Packaging costs represent a very small fraction of the overall price of the product. Regular packaging can be expected to be cheap, but the cost can run high for luxury packaging and factors like packaging material, volume (number of boxes ordered) and printing process.

Shipping costs

Another cost in outsourcing to China is shipping from the country to your destination. According to studies, shipping and logistics add 17% to the product cost. 

Most products are shipped by sea and remain at sea for about three weeks before arriving at the port. A cost-saving measure is to pack the container to the maximum so as to reduce the cost per unit for shipping. Smaller, lightweight items can be cost-effectively transported by air.

When determining the cost to manufacture a product in China, buyers tend to overlook the cost of land transport from the factory to the port, or from the port in the buyer's home country to customers or distributors. In some cases, the land transport cost may be equal to the shipping cost.

Shipping times and costs

The shipping times for air freight and ocean shipping are as follows:

By Air: Air freight from China to the US can take two weeks with normal air freight and 1-5 days with Express shipping.

By Sea: Typically, ocean freight shipments take 15-30 days to travel from China to the US. Shipping times are shorter for the west coast and longer for the east coast.

Average costs for air freight range from $4 to $8 per kilo, increasing to $5 to $9 per kilo for Express air freight. Sea freight from China to the US ranges from $3000-$3900 per container.

Options to manage your freight and shipping rates

There are three options to consider: managing your own freight, working with a freight forwarder in your home country, or using a Chinese freight forwarder.

Take complete control of your freight

This is when you ask the supplier to Deliver-At-Place (DAP) or use Cost, Insurance, Freight (CIF) terms in which you’re responsible for transport up to the port of destination. Choosing to manage your own freight puts you in control of freight management. But you may end up paying more than necessary and miss out on other cost- and time-saving options.

Use a freight forwarder in your home country

This is a good option when you consider ease of communication and convenience in planning your freight. But do check if the company has a China office. If not, they will be working with local agents in China, which can add to their fee. So, while home-based freight forwarders offer peace of mind, choosing this option can also increase the freight charge.

Work with a Chinese freight forwarder

The benefits of using a Chinese company is their proximity to your supplier, which allows them to respond to any problems reactively and quickly. You’re also likely to receive cheaper rates from a Chinese freight forwarder. On the other hand, communicating your needs and ensuring full transparency may be a bit of a problem when working with an overseas forwarding agent.

Other shipping costs

The total cost to transport your shipment from China to your home country includes the following:

· Freight (already discussed above)

· Freight insurance (a tiny percentage of the freight cost)

· Import duties, which depend on the type of product and customs value (explained below)

· Value added tax (explained below)

What is customs value?

Customs value is the total value of all the items in your shipment and determines the import duty you need to pay. In the United States, Australia and Canada, the customs value is based on the Free on Board (FOB) value, which does not include the freight cost. In the European Union, customs value is based on CIF. It includes the following costs:

Product price + injection moulds + logistics and shipping costs + insurance + product sample cost

For example, if you’re shipping 50 stuffed toys of $10 each, then you would include $500 in your calculation for the customs value.

The customs value does not include the fee for sourcing agents, port fee and customs clearance fee in the port of destination, and transportation from the port to the final delivery destination.

How is VAT calculated?

VAT includes the customs value and customs duty. It is applicable to buyers in the European Union only. Currently, the minimum standard VAT rate in the EU is 17%, while the VAT rate on goods and services in the UK is 20%.

Different taxes apply in other countries. The US, for example, has the merchandise processing fee (MPF), which is based on the value of imported goods. The MPF is charged at 0.3464% of the entered value on the invoice, with the minimum amount of fee per entry at $27.23 and a maximum of $528.33 per entry.

US customs also charges a harbor maintenance fee (HMF) for imports shipped via ocean freight. It is charged at 0.125% of the value of cargo arriving through identified ports. 


Quality inspections

In order to achieve success in business, you must assure the quality of your products. Minor quality issues don’t affect your business. But serious defects must be resolved quickly. There is not much you can do when you discover defective or damaged pieces after your shipment has been delivered. By catching defects early on, the problematic products can be sent back to the assembly line for correction or work can begin quickly on replacing the defective pieces.

For this reason, quality inspections are a part and parcel of China manufacturing. When you manufacture a product in China, you need to hire a quality inspection agency that will inspect products prior to shipment.

The cost of quality inspections is a small portion of the overall price of your product. You’re charged per quality inspection, and the fee can range from as low as $180 to $300. The fee depends on certain factors, including:

Distance of factory from agency: The fee is usually higher for factories located at a further distance from the QC agency.

Expertise: An experienced QC agency with a high level of expertise is in a position to command a higher fee.

Quality checklist: Costs will vary depending on the services offered. You can expect to pay less for a random pre-shipment inspection and more for site audits, certifications and in-process checks (during production).

When you manufacture a product in China, make sure you’re aware of the quality and safety regulations in your home country that the product must meet. Third-party laboratory testing is mandatory for certain products like children’s toys and medical devices. Lab testing fees depend on the type of product and applicable standards. Understand your obligations, costs involved and whether the QC agency provides laboratory testing and certifications.

Legal costs

It is important to structure your manufacturing agreement correctly. The agreement should be legally enforceable and convey your rights in the event of a dispute with your supplier. So, consider the costs of seeking legal help to draft your manufacturing agreement. This is a one-time cost and worth the money for the legal protection you get throughout your relationship with the supplier.

Keep costs low with Maple Sourcing

We can help you manufacture a product in China cost-effectively by understanding your requirements, helping you find the right supplier for your product and integrating quality inspection, order monitoring and delivery into a single package.

Managing the process yourself rather than hiring a sourcing agent can be complex. Talk to us to learn more about how we can convert your concept to reality at a quality and price you’re sure to appreciate.

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