One of our regular readers, Brad Pritts, wrote a comment yesterday’s post about non-recurring engineering costs.
It is a great follow up. Here it is.
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One other problem/ misunderstanding that I’ve seen from lots of US customers (and had myself at the beginning of my China journey) were the differences in business practices in China vs USA regarding molds and tools.
In many industries in the USA (automotive, many household goods, toys, etc) plastic molds and steel stamping dies are considered the property of the CUSTOMER — even though the development and operation are pretty much exclusive to the supplier. In these situations, normal business practices in the USA include:
- The supplier quotes tooling costs separately, and the customer pays them in full, usually once the first fully compliant sample is provided.
- The supplier usually puts little or no markup on the tooling.
- There are fairly well understood standards for design and build of the tooling… so that in the case of problems, the tool can be moved to another molder/ stamper and used there.
- While the molder/stamper isn’t happy when the customer moves tooling, it’s generally accepted and happens without major incident. (I’ve done this personally in the USA when a supplier goes bankrupt. In those cases, the supplier people often breathe a sigh of relief when the customer takes the tooling away.)
- And, suppliers accept that the tool DESIGN belongs to the customer. They’re unlikely to try to run (and sell) parts on their own account. Not to say this never happens … but if it does it will be carefully hidden.
Contrarily, in China NONE of these customs can be assumed.
- Even if a tooling cost is quoted, it often has no resemblance to the actual cost. In my situations, it usually seems to be low, not covering the full cost.
- There aren’t clear standards for the mold construction. So, the tool life may vary; one mold might be good for 50,000 pieces while another is good for 1,000,000.
- Even when you have specified that you as customer paid for the tooling and own it, the supplier may not agree when the time comes to claim the tooling and take it away. (I’ve only been in these situations a few times, and have never succeeded in getting the tools. I’ve heard of it happening but I’ve never seen it in China.)
- Even if you get possession of the tool, the new supplier is unlikely to be willing to use it. And, from what I’ve seen of the variation in quality and design, they’re probably right! If you have had enough problems with the supplier to need to pull the tooling, the tools themselves are likely part of the root cause.
- Some suppliers — again, regardless of contracts — will run copies of the product and sell them in other markets. Or maybe even in YOUR market.
So, I warn my clients that while yes, they may need to invest in tooling… they SHOULDN’T really believe that they “own” it, regardless of what the contract says. They should make their product financial decisions assuming that the tooling will be lost if they need to move the sourcing.
A second key goal is that it’s to the customer’s benefit to carefully specify the standards for the tooling. How many pieces do you need for tool life? Ideally the customer will have an knowledgable expert review the tool design before the tool is built to ensure that it will do the job. Unfortunately, experts like this aren’t cheap, or easy to find.
I’d love to hear from anyone here in China about their experience… especially if they think that I’m wrong! There may be ways to prevent these traps that I haven’t figured out.
If you have a Chinese language contract that clearly provides that you own the tooling/molds and if that contract also clearly provides that the Chinese company shall be required to pay X dollars for every day it refuses to return the tooling/molds to you, you will virtually always get your tooling/molds back. This is because such liquidated damages allow you to go into a Chinese court and freeze the Chinese company’s assets. Chinese companies know this and so they won’t mess around. http://www.chinalawblog.com/2015/09/product-molds-and-tooling-in-china-three-things-you-must-do-to-hang-on-to-yours.html
Hi Harris
I agree with your most of your words . it seems your and your friend meet a lot of failed tooling transfer project experience . As we know here in China is big sourcing datebae and there are a lot of companies for the tooling making and mlding works . Sometime it is likely what you said you just concern the price even don’t pay or pay enough cost for the tooling , no supplier will allow or happy to let you take the business away . But if you pay the correct tooling cost and have some contract for the tooling property , it is easy to get the tooling if you have to move your business . But here I would like to emphasize your supplier should be a offcial company with good reputation . There are a lot of small and ardkminded companies in China too, They even do nothing when they get your deposite .
Hi Bratt,
While I have faced such situation, I also had some ways to manage those, please see my comments:
1) Cost structure of the molds really depends on the suppliers. Some will transfer the cost on the unit price if they believe production will happen. Many customers considering the investment cost as key decision point, they are more likely to get the business. If they believe in the production, they will charge extra margin
2) Life time: I agree, even with same material, supplier commitment is quite different. In fact it is not totally tangible and often this number can be negotiated. The key is to transfer the responsibility to your supplier if they cannot reach the agreed quantities.
3) Mold transfer: I experienced multiple successful cases, but never really smooth, often the supplier will ask for extra fees to cover various real or virtual expenses they might have. Having someone in China to negotiate is a strong plus here.
4) New suppliers: First, they will not commit on the mould life time, so generally they claim the mold is not good enough much sooner. Secondly, for various reasons (and some are valid), they might need to modify the mold to improve the product quality. This should be expected in most cases (may be 70-80% of cases). However, here, it is very important to provide as much information as possible before the mold transfer so you lower your risk.
5) Copycat: There are ways to limit such risk, experienced such situation a few times, I think it can reasonably be managed in China nowaday. As per Dan Harris comment, a good contract with Chinese version helps a lot.
Fabien
Thanks Dan for adding to the article. It is amazing how few companies resort to a lawyer’s services in such cases… Even when they invest a lot for their tooling.
Renaud,
I’m an opeartions manager for American injection molding company with our own in house toolshop here in Tianjin. We do have some stamping tooling at outside vendors, until a few years ago we were having problems trying to get tooling back or moved from one vendor to another.
This situation has improved since we started putting in liquidated damages and making sure the contract is in Chinese.
One other point I would like to bring up regarding the standards of tooling, even in house we have had issues, why? The tool steel, we had been buying tool steel from the “China’s sole authorised dealer” of high quailty tooling steel manufactured in Europe or the States by an internatioanally recognised and known Steel manufacturer originating from Germany.
Guess what, some of the steel sold to us at imported steel prices with certs from the local “sole authorised dealer” stating the lot number was manfactured in the US, was not. We had pitting and inclusions in the steel causing us to remake die tooling, and very high wear rates when molding causing higher maintenance costs, and much shorter than expected tool life.
When we shipped a sample to the US to be checked at the original manufacturer there, they told us this was dirty steel, it had none of the tracers they put into each lot of steel so that they can track each lot in the event of a customer complaint, basically it was not their steel. When informed it was sold to us by their dealer as their steel at full imported prices, we were told that we needed to take it up with the dealer…..
In the end we now import our tool steel from the US for the last two years, and only use what is left of local purchased steel for non critical tooling that does not influence the finish or life time of the tooling.
How many local tool makers would go this far? even if you stated which supplier to use, as is seen it does not guarantee the steel is correct, maybe suppliying your own imported steel is one of the few ways to help ensure the tooling is to the spec required and has the expected life time.
As I stated before heat treatment of the steel correctly is also vital, and having audited a few local tool makers, I can see this is step that does not have control locally that it should to ensure high quality tooling even if the steel is of high quality.
Peter
Many thanks Peter. This is excellent advice. It makes perfect sense to me — getting the right grade of steel and ensuring proper heat treatment is done does help a lot!