Many importers want to have their own (customized) products made in China. One common mistake they make is forgetting to calculate the entire project costs. In particular, they forget about Non-Recurring Engineering (NRE) costs — many companies call this R&D.
Some Chinese suppliers make it all look so easy at the beginning when manufacturing new products… To avoid this trap, you should understand what NRE includes.
What is Non-Recurring Engineering?
Non-Recurring Engineering (NRE) is a general term associated with up front one-time payment costs on your new product development project. It is the cost of getting a product into production and does not count when it comes to product unit cost during mass production.
NRE costs generally includes wages for the development staff, supplies including prototypes and testing (for performance, but also for certification to certain standards) and any other development activity that costs money. These are all pre-production costs. In this post, however, we will be looking at the more tangible items such as tooling and other pre-production hardware.
NRE can refer to different activities depending on the type of products to make. We will discuss the NRE costs for projects that involve injection molding, casting, printed circuit board assemblies, and apparel production.
Products that have plastic components
Plastic parts are generally produced by injecting polymer into a steel mold that has the shape of the product cut into it. Once the polymer has cooled, the plastic part takes on the permanent shape of the mold. These steel mold tools would be your NRE costs for this part of the project.
The costs would normally be spread over a period of time while the tools are being manufactured, generally, the payment structure would be first payment with a purchase order, then a second payment when the tool is ready for initial trials and a final payment when you sign off the tool fit for production.
Cost of tooling: $50,000, to be paid as per below schedule.
- Initial payment 30%: $15,000
- Second payment 50%: $25,000
- Final payment 20%: $10,000
Note: percentages may differ between suppliers; always check the payment terms with your supplier before you start working with them!
Die Casting projects
Casting is the process of pouring molten metal into a mold to produce a finished metal product. Similar to injection molding, casting requires a steel mold tool. However, there are different methods used for casting, some of which use sand as the mold (in that case there would be a wooden or metal pattern in the shape of the final product).
You would also require a clipping tool that is dedicated to your product as it would be manufactured to your product profile. The clipping tool removes any flash, feed and vent system from the casting as cleanly as possible.
NRE Items for casting:
- If die casting: steel die tools + clipping tools
- If sand casting: pattern + clipping tools
PCB Assembly projects
When it comes to the production of PCB assemblies, NRE is generally split into two distinct areas: hardware tooling and machine programming.
Because every new design of PCB is unique, a new set of tools is required for each PCB. That is also true when it comes to programming all the production line equipment such as pick-and-place machines and oven profiles. Below is a list of NRE activities generally associated with printed circuit board projects.
PCB Tooling NRE includes:
- Stencils
- Artwork
- Mylar films
- Outline die
- Jigs & fixtures
- Press-fits
- Functional test rig
PCB Programming NRE includes:
- Drill profile
- Pick and place
- Vision inspection
- Flying probe inspection
- Selective soldering
- Reflow over profile
- Routing machine
- Function test rig
Apparel Production NRE
The apparel industry is just like any other when it comes to NRE costs. There are set-up costs for every product before it reaches mass production.
Some of the NRE associated with apparel production are:
- Sample fabric and accessories
- Preparation of patterns (either drawn by hand on paper, or on specialized software such as Lectra or Gerber) by a modelist
- Sample production of one size for approval
- Sample production of full size set for approval
- Die cutting set-up (if applicable)
Summary
Some of the NRE costs may be higher than the value of the first order. However, you should remember that these are one-time only costs to get your product into production.
Tooling can be used to produce hundreds of thousands, if not millions, of products once you start mass production. Therefore, the initial investment into NRE is money well spent if the quantity to be produced over the coming years is high.
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Thanks Brad. Fully agree — except that I saw the cost of tooling being significantly marked up a few times. It is usually below cost when they really want to “hook” a customer, and above cost when they don’t much care about the customer (or they assume the customer has no other choice).
Informative post. Yes, under US accounting customs, the development costs are often absorbed into overhead rather than charged directly to a product. This can lead to bad management decisions, as the management doesn’t always take the differences into account. This doesn’t really matter for your profitability on existing products (the money is already spent!) but it can lead to mistakes on new items– investing in items that appear to have high gross margins but also have high development costs.
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:
1. The supplier quotes tooling costs separately, and the customer pays them in full, usually once the first fully compliant sample is provided.
2. The supplier usually puts little or no markup on the tooling.
3. 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.
4. 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.)
5. 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.
1. 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.
2. 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.
3. 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.)
4. 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.
5. 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.
best………………..Brad