Made in China: The Case for and Against

Manufacturing is risky for a startup. Tying all your resources up in product can be dangerous if your product isn’t manufactured right, or if it costs too much to manufacture. Managing risk is the most important part and the hidden costs of manufacturing overseas can completely eliminate the savings on paper. U.S. manufacturers can help reduce a lot of the risk for a startup, and offer experience and expertise that an offshore company cannot, saving money and producing a higher quality product.

For three months in 2012 I lived in Shenzhen, China, participating in a hardware startup accelerator HAXLR8R and trying to get my company Portable Scores off the ground. I kept a blog while I was there. The goal was to learn about manufacturing in China, pick out some factories, source our components, and get everything ready for when we lined up funding. What I learned during those three months was not just how to do it, but that there are times when you just shouldn’t do it, and for a startup, it’s not just about money, it’s about managing risk. Our plan right now is “Assembled in USA.”

Why you should manufacture in China

• Components and labor are cheaper 

This is absolutely true. Components can be a fraction of the price, tooling for injection molds is significantly less expensive, and labor for manning the assembly line is not unionized and easily replaced, making it very affordable.

• Chinese infrastructure

China has been the place where everything has been made for decades. They’ve gotten really good at it. Their supply lines for plastics, electronics, transportation logistics, those are all pretty well nailed down. They’re better at making injection molds than we are in the U.S., and when a big enough client gets interested, their government can literally move mountains (I saw this), to make it happen. They have been doing it for a while and they can be really good at it. The best subway I’ve ever been in, by far, was in Shenzhen. They dug up the entire city in under two years and established a subway network that was efficient and easy to use.

• Everything happens faster

Because they’ve nailed down their supply lines, and everybody works 10 hour days 6 days a week, and everybody knows somebody, things can happen very fast. Prototyping can take place quickly, products can blink into and out of existance, whole companies can spring up underneath your feet before you notice them (we saw a store close, get sold, remodel, and reopen as a completely different restaurant in under a week).

Why you shouldn’t manufacture in China

• All the hidden expenses, and the real cost of cheapness

The things listed above are true, but they’re not the full story. Yes, the components are cheap, but they can be too cheap. Fake parts are common. The cost savings is a gamble; will you get a legitimate part that will pass your quality control and survive in your users hands long enough to get past the warranty date, and if not, is the failure rate low enough that the savings make up for it? Probably not.

But you have other costs, too. It is highly likely you will have to make at least two trips to China; one to find a factory and one to manage it when the assembly line is being set up and production starts. Those trips will cost a few thousand dollars each, which eats into your margin.

• China’s sketchy infrastructure

It’s growing fast and getting better, but power outages are common, internet speeds are slow, phone calls break up and are hard to understand, water quality standards and pollution standards are not well enforced. Humidity is a problem, too, meaning things warp, corrode, and fall apart much faster.

I should mention that it is improving. The Chinese are recognizing this and are changing so that they are much more Western in how they do business and create relationships of trust, but it’s taking time. Ironically, American made products are highly valued in China because their quality is perceived to be much higher; they KNOW the reputation about the quality of “Made In China” is to some extent true.

• Delays and transportation time

For all the speed of things in China, brick walls can pop up from nowhere and stop you dead in your tracks. For example, if you’re in the United States having your injection mold made in China, they will have to send you parts to review. This takes time and adds delays, and then you have to send photos and diagrams to indicate revisions, which can be misunderstood. The alternative is to be there physically. If you’re manufacturing in February, you’ll have problems with Chinese New Year, during which the entire manufacturing industry shuts down completely, and most workers use the opportunity to change jobs.

But the biggest delay to consider is shipping time. It takes 18-27 days to get from Hong Kong to L.A. by cargo container. Then, if it doesn’t get hung up in customs (and as a new company importing it most likely will), then it’ll take a few more days to get to you by truck or train. During this month of transportation, your product may still be manufactured, so when you open up your boxes and discover that they’re all assembled wrong or have some fatal flaw, you’re now out at least 2 months worth of product. Of course, you could ship by air instead, but that costs many times the boat rate and cancels out your margins.

The U.S. manufacturing experience

Finding our local manufacturing company was an adventure in itself and has progressed the company significantly. We started out by getting names of local PCB assembly factories from our mentor at Design-Concepts. We toured a few and talked to them about our project and their capabilities. Points of discussion include:

• Transparency of cost: When every penny matters to a startup, seeing where you are being charged helps you make decisions about what to do.
• Availability of equipment: If they are at 150 percent capacity you may end up delayed.
• Fit: Do they work on similar sized companies, on similar products, in similar volumes, with capabilities to do all the processes you need? Do they need your business or are you a nuisance client?
• Security: Can you ask them a question they refuse to answer because it would give away another company’s secrets?
• Process: Do they keep clients separate, leaded lines separate from RoHS lines, and have detailed documentation on all customer interactions and how the product is assembled?
• Employees: Do they work in good conditions, and do they have appropriate tools, and can they make recommendations for improvement up the ladder?

One of our favorites was Universal Electronics. They are a big company, but their owner met with me personally and liked the project enough to extend favorable payment terms because they believed in it. Universal Electronics was also interested in Sector67, and they took a trip to visit us and see our space, give us some sample development kits they had lying around, and tell us about their separate manufacturing facility specifically for small businesses. Then they got to work introducing us to Avnet, a component distributor. Avnet met with me and understood the product, identified alternative parts, sent me samples of them, and got me in touch with their engineer who specifically focuses on lighting solutions.

Meanwhile Universal Electronics built a quote, sourced components to see if they could get them cheaper, and even sent my component list to some other experts who tried to find cheaper alternatives. Then they put me in touch with some professional wireless guys to help me with the remote control and Bluetooth Low Energy. Peak Gain Wireless looked at my design and had some suggestions for me.

A common theme was openness and transparency. There is no concern about NDAs; they’ll sign them, but they know if they share their customer’s secrets their reputations will be lost and they will lose business. They accounted for all startup costs and labor, parts and assembly/testing steps. And they’re only an hour away, and have an open door policy so I can drop in to check on my assembly and participate however much I want.

Another common theme was understanding the product. Not only did they instantly get it, but they also had kids who would use it, and understood what was important and what wasn’t, and could see ways of improving, or why certain design decisions were made. This is important because the people manufacturing the product should be able to understand what it is supposed to do and make suggestions to improve the product or the assembly of it without compromising the quality or the end goal.

How all this translates to Portable Scores

We’re a small company, and like all small companies, we’re limited in all critical resources; namely manpower, time, and money. If we had lots of manpower, we could have someone dedicated in China to oversee operations and eliminate risk. If we were working in large enough quantities where the overhead costs of having people in China were made up for by the profits of the large volumes, then it would make more sense. If we had enough money so that a failure of an entire batch was not a company-ending event, then it would make sense. But none of those are true. So here’s what we’ve decided to get the greatest cost savings, mitigate risk, and manufacture locally:

• Injection molding tooling will be done in China by a company owned locally in the U.S. called Jade Molds. The owner has a house in a nearby town and lives in China. They make molds to one of two standards: American standards or Chinese standards. Their American molds are made in China and then shipped to the United States so they can be used in the very fast and high quality and highly automated injection molds. These are the BMWs of molds, and they are expected to last for hundreds of thousands of parts and are extremely accurate and filled with features like cooling lines. The Chinese standards are still good, but the molds often fit into a common mold base size, don’t always have cooling lines, and are meant to have someone standing at the mold to remove it from the machine. By getting a mold produced by these people, we’ll have a high quality mold that’s significantly cheaper. Tooling costs in the U.S. would have been over $100k. From Jade Molds, it’s $30-$40k. Even though we’ll pay for an employee to stand by the mold, we could do that for two years of parts and still come out ahead, plus if we don’t produce the part for two years, then we won’t have sunk that enormous cost.

• PCBs will be manufactured in China. We looked for a long time for a high quality PCB manufacturer, and were able to get a price of $12 per board from a company in Canada, but our current supplier is $8 per board. I’ve toured this factory before, and used them for a prototype batch, and they are a very high quality established manufacturer that caters to a lot of American clients and does good work. They also have higher standards for pollution as well.

• SOME components will be sourced from China. There are some parts for which quality isn’t critical, the savings are enormous, and the risk is low. These will be sourced from outside the U.S.
• SOME assembly will take place in China. The circuit board for the switches on top of the scoreboard and the circuit board for the remote control are both small and simple, do not have a lot of parts, have very large tolerances for error, and are much cheaper than assembling in the United States (By a factor of 10. We have quotes to prove it). For these components I’ve chosen a partner with whom I’ve worked before and tested; a company called NOA Labs headed by a German with high standards.
• The scoreboard circuit board will be assembled in the United States by Universal Electronics less than an hour away. This is the critical component, which must be gorgeous, have very tight tolerances, contains all our intellectual property, and costs the most. This is the part that cannot fail, must not have rejects, and cannot be stolen.

• Final testing and assembly will happen in the United States. And for the first batch, it will be done by us. Not because we haven’t found a good supplier, not because we want to save money, but because we want to be the ones who put it together and are ultimately responsible for the quality, and because we want to find the flaws in the design that make assembly harder. We want to be able to find the little things that would make it easier to assemble, like alignment pins, direction indicators, and symmetrical parts. Eventually we will have it assembled by a company in the U.S., but only when we scale to a size where that is economical. We like it when we can show our product to people and they understand what it is, what it is used for, and have a kid who plays a sport and needs this. The love that gets put into the product makes it that much better.

One final note. In the beginning I said we were trying for “Assembled In USA”. The “Made In USA” label has very strict requirements and its application is actually regulated. By definition at least 90 percent of the critical components must be sourced in the USA and an effort must be made to ensure that those sources also comply. It is extremely difficult to satisfy this definition and keep costs low and in consumer electronics it’s even harder.

We are trying to support our local economy to the extent possible and especially in the areas that are critical for the product. As we grow we will be able to add jobs, hiring people to do the final assembly, moving other production steps local, reducing our risk and outside exposure.

Bob Baddeley grew up in Montana and earned an honors bachelor degree in computer engineering from Oregon State University in 2004. He then started working at Pacific Northwest National Laboratory in Washington state for the next seven years, doing cutting edge research for the government. He left the lab in 2011 to follow his passion with Portable Scores. Tired of forgetting the score, turn, and time, he built something that helps with all his sports. Bob lives in Madison, WI. He is an active member at the hackerspace Sector67, where he cuts food with lasers and loses high altitude balloons.