The China factor in the hardware factory

For many years now, a wide variety of products sold in the U.S. have been manufactured in Asian countries, especially, and perhaps most voluminously, China. The “Asian Tigers” – small but developed economic powers such as Hong Kong, Taiwan, Singapore, and South Korea – were slowly pushed out of their games of innovation and affordable mass production by the sheer size of the labor force in mainland China. With industrial and factory hubs crowding the coastal regions of Guangdong, Zhejiang, and Fujian, as well as the city of Shanghai, the People’s Republic has had a growing influence over global commerce due to the volume of products its economy can produce. Its factories churn out products manufactured from a huge range of materials, from durable goods like metals and plastics, to high-tech electronics, to porcelain and glassware. Meanwhile, its repositories of raw materials to lubricate the gears of their economy of production have swelled to so great a size that China has cornered the market on many commodities to such a point that it can, and does, control the price of goods at a whim.

China at a glance

China is a big country: the third-largest in the world by area, about 4.5% larger than the United States; and the planet’s largest by population. As of 2013, it had the world’s second largest GDP and ranked as a consensus second-place finisher in purchasing power parity. Suffice it to say: as a global player in industry and manufacturing, China has both the size and the funds to be a major power, and with a stockpile of commodities closely at hand, it has the clout to wield that power.

How the labor market affects Chinese manufacturing abilities

One thing China has a hard time controlling, however, is its labor. In 2003, according to the Chinese government, the number of its migrant laborers exceeded 98 million (source: International Journal of Social Welfare), representing more than 7.5% of its total population at that time (around 1.28 billion people). The total share of migrant workers ballooned to 158 million laborers by 2011 (source: Reuters), and as of June 2013, “migrants [made] up about one third of the total urban population” in China (source: China Labour Bulletin). However, as more jobs become available in different industries throughout China, migrant workers from the central and western parts of the country find themselves staying closer to home, rather than venturing to a factory center like Guangzhou or an export nexus such as Shenzhen. Others desire newer, more modern jobs, rather than factory work, like assembling devices, manufacturing shoes, or casting metals (source: CNN). The Chinese government concurs, preferring to shift the focus of economic production within the country out of low-cost manufacturing, which also causes extreme pollution, and into service-based industry (source: Bloomberg). In order to incent workers to continue returning to jobs that are often low-paying, dirty, or even dangerous, factories – and in turn, their ownership – are forced to offer bonuses or higher wages for those workers, and to recruit agents who will locate additional workers to man the assembly lines (source: The New York Times).

In early 2011, China set in motion a five-year economic plan, its twelfth; one of its goals is to ensure a two-fold rise in the average Chinese wage by the end of those five years (2015) by mandating a mean 15% pay increase to workers each year (source: China Daily). In Shenzhen, the minimum wage has increased from “635 renminbi a month in 2005 [about $100] to 1,500 renminbi [about $240]” as of March 2012 (Times) – a gain of 136%. The wages are alluring, even for those migrant workers who choose to stay closer to home. However, their decision to stay at home and find new industries or new sources of income has created an “acute” labor shortage “in many Chinese industrial zones” (Times). So although the wages have increased, there are less employees working at the increased wage, resulting in higher overhead costs per man-hour. This has led many factories in China to re-think their operating strategies: what will they make? What services will they cease to offer? What products can be subcontracted to another company, or to a cottage industry, still doing this type of work?

U.S. imports from China since the Great Recession

Labor rates in China made it a popular destination for outsourced American jobs. Indeed, as manufacturing jobs declined in the United States, exports from China rose quickly; data from the U.S. Census Bureau (USCB) show that for the 20-year period from 1986 through 2005, imports from the People’s Republic to the United States grew at double-digit rates, year-over-year, in every year except one (2001). During that period, U.S. imports from China increased at an average rate of over 22% per year. The United States grew increasingly dependent on the types of products that China could offer in volume, and concurrently, on the costs of labor used to keep the prices of those products down. As a comparison, in 1986, the United States imported approximately $4.7 billion of merchandise from China. By 2005, that number had grown to $243.5 billion (USCB); even when adjusted for inflation (4.7 billion 1986 dollars were worth about $8.4 billion in 2005), this equates to a 2807% increase in Chinese imports in just 20 years.

Since that time, however, the rate of increase has slowed. Many more buyers in the United States are interested in specifically “buying American”, or, more generally, avoiding the purchase of products made in China. A contributing factor to be considered is a rash of recalls of defective product from China in 2007 and 2008. Although about 40% of imported consumer goods in the U.S. came from China as of 2009, “the [Consumer Products Safety Commission] named Chinese makers in 69 percent of all recalls, of both imported and domestically produced goods” in 2007 (source: McClatchy Newspapers). Thus, in 2007, the rate of import slowed to less than 12%, and, with the exception of a leap up in 2010 (the Great Recession caused a 12.3% drop in 2009, after which imports returned almost immediately to pre-recession levels), Chinese imports have continued to slow, growing less than 10% Y/Y in 2011, less than 7% the following year, and a mere 3.5% in 2013. If the first four months of 2014 are any indication of what to expect for the remainder of the current year, Chinese imports may actually shrink substantially; through April, the total dollars project to be behind 2013 by approximately 7% (USCB).



Effect of rising Chinese labor costs within the kitchen & bath industry

Due to increasing labor costs, Chinese manufacturers, who previously kept prices as low as possible to retain their customers and keep their migrant workforce employed, have now begun to pass on the burden of higher costs to their American buyers, as well as to other markets around the world (sources: Wall Street Journal, Federal Reserve Bank of New York, and CNBC). To be sure, labor costs make up a large part of the purchasing price of any goods, whether they come from Asia, Europe, or the United States. However, labor never accounts for 100% of the price of a product. By definition, the price of any goods should include the costs of manufacturing: running the machinery necessary to create a product; the costs of labor, including payroll and benefits; and overhead and operating expenses such as utilities and building maintenance. Chinese manufacturers, though, have seen an average 15% cost of labor increase and wrongly concluded that they must raise their end prices 15%—an across-the-board increase on 100% of the price, rather than a proportional increase based on the true cost of labor.

Because of these trends, it has caused many companies in the kitchen and bath industry, especially hardware companies like Cliffside Industries, to seek out alternatives for manufacturing their products. In the garment industry, it’s not uncommon to see jobs outsourced from China to lower-cost labor areas like Bangladesh and Cambodia. The latter is also a common landing place for metals manufacturing, along with Vietnam. For those manufacturers who prefer to keep their production in Asia, receiving shipments from Phnom Penh or Haiphong may seem nearly identical to receiving them from Shenzhen or Hong Kong. Yet, there is always a cost. “No other country can replicate the massive scale of China,” says the Wall Street Journal.

One other effect of the rising labor costs is that, as consumers continue to demand affordable goods from Chinese sources, manufacturers find other ways to cut costs as labor prices increase. This almost inevitably means a decrease in quality. It becomes less profitable for companies in China to do business the right way, because they can do a job that appears similar on the surface but, in the end, is much lower quality. What the manufacturers don’t realize—and perhaps it doesn’t bother them, because it’s not their reputation that suffers—is that this damages their customers and, in turn, has the net effect of reducing their amount of business.

The search for a new home for Cliffside

All of the above issues have hit home for Cliffside in the past few years. First, we’ve received a 15% price increase from our Chinese manufacturer based on the 15% labor rate increase. We never passed that true price increase on to our customers, choosing instead to absorb the lion’s share of it in order to maintain our business. Next, we’ve seen the quality of incoming product from China suffer, which has led to more hardware being rejected, both by our in-house QC teams and by our customers. Finally, we have indeed seen a demand for a decrease in Chinese imports; more and more regularly, consumers, dealers, and manufacturers alike are now specifically requesting products that are not necessarily “made in America”, but hardware that is not manufactured in the People’s Republic.

Cliffside is happy to report that we are making that happen.

Our attempts to locate new manufacturing

In late 2012, our manufacturers in China informed us that they would no longer manufacture products made from brass. They intended to cease production immediately and gave us no advance warning. For those of you who have done business with Cliffside over the long term, you know that we have always prided ourselves on carrying top-quality solid brass cabinet hardware. This has always been our hallmark. We negotiated vehemently with the supplier, demanding that they provide us with more notice. The manufacturer agreed to extend production through the end of 2013. However, in doing so, they moved the manufacturing of our product, without informing us, to subcontractors who did not understand the quality of hardware with which we, and our customers, have been familiar for the last 27 years. They also began to require much larger minimum order quantities, ranging from 400% to 1000% higher than our prior MOQs or even greater in some cases, and discontinues a wide range of our items without notice.

Meanwhile, Cliffside undertook a massive, worldwide search for new manufacturing. We explored other sources for product in Asia, but we found the minimum order quantities to be similar with all manufacturers. We also came to understand that, no matter where we went in Asia, we would not be able to achieve the same quality, because all manufacturers in China are beset by the same problems. Moving our manufacturing to Vietnam or Cambodia was never a strong consideration; although many of our competitors have done the same, they generally manufacture their products from zinc. Although zinc requires a much higher MOQ for a lower monetary investment, it also doesn’t provide the same quality as our standard brass hardware; because it is cast from a hot liquid, it has a tendency to form bubbles which can affect the quality of the finished piece.

Next, we began to investigate the possibility of making our cabinet hardware here in the U.S. Suffice it to say, there are very few companies left in this country who “do the whole job” when it comes to making brass cabinet hardware. There are a lot of steps involved. First, there are two types of manufacturing: turning knobs and pulls from brass rods; and forging knobs, pulls, and latches from hot brass using molds.

How it’s made

When a knob is turned, it comes off the lathe close to complete. The shape is as expected and doesn’t change much before it reaches your cabinetry. Pulls are generally the same; however, turned pulls have to be bent into the traditional “D” shape before they can be installed. Most of these items appear round (e.g., the 100 knob, the 161 knob, the SP-3 pull).

When an item is forged, a rod of hot brass is pushed into a mold (sometimes referred to as a “die” or “tooling”) to form the desired shape. This allows for the creation of more complex shapes, but requires the manufacturing of a tool that is the “inverse” of the shape required. Each mold itself is two pieces; a top and a bottom. High-pressure drop forges are used to press the top piece onto the brass rod, which is forced into the bottom piece and forms the requisite shape. These molds can be expensive, ranging into the thousands of dollars for each new style of brass hardware. Zinc casting molds are even more expensive; they can cost in the tens of thousands of dollars.

Next, any hardware (knobs, pulls, cup pulls, or latches) has to be machined to accept a screw (or two); without this job, there’s no way to attach your hardware to a cabinet. After machining, the hardware has to be polished to a shine so it’s ready to accept the finishing process.

Brass finishes can vary greatly; there are many different ways to color (and discolor) metal. Finishing is hard, and it requires a lot of specialized equipment. In China, many finishes are simply lacquered on through simple processes without regard for the base metal. Unfortunately, without taking the time to make sure it’s done right and with high quality, the Chinese finishes have a tendency to look different than they actually should and can vary greatly from lot to lot. The finishing process is one of the main reasons why we decided not to continue having our product manufactured in China.

Finally, after all of the manufacturing and finishing, there’s another quality control step, and then the product has to be packaged and labeled. Cliffside takes extra time and care to have products packaged especially well. This ensures that the hardware arrives to your doorstep in good condition. Proper labeling also helps to make sure that you get the product you ordered.

Why we are not manufacturing in the United States

Suffice it to say, there are a lot of processes involved in manufacturing hardware. There are very few companies in the United States who do all of these jobs and do them well. There are many companies who claim their product is made in the United States; however, much of it is actually imported raw from other countries (mostly China) and then finished in the U.S. Is there a difference between finishes made in China and finishes made in the U.S.? Absolutely. The problem is that the cost of the raw material to manufacture the hardware continues to rise. As prices continued to rise, it became increasingly clear to us that China’s prices for fully manufactured hardware would soon be equivalent to, or greater than, our prices from alternative manufacturing sources. These alternative sources promised, and have always delivered, higher quality for the prices they commanded, and we felt that the increased quality was well worth the higher price.

Next, we investigated the possibility of doing the same as our competitors: importing raw hardware from China and then finishing it locally. However, the cost of doing so was nearly the same as our end solution, when all of the costs of logistics were tallied. We did locate very few sources in the United States who could manufacture our products from start to finish; however, due to the cost, it was prohibitively expensive for us to move all manufacturing to the States.

We also attempted to utilize resources with companies here in the U.S. who have their own factories overseas. We explored the possibility of working in a private factory in China, and also using manufacturing in Eastern Europe. Working in China, regardless of the factory, presents the same challenges as listed above, and product coming from Eastern Europe is an unknown quantity to us; we don’t know the quality, the lead time, or what the end result would be.

Finally, we considered changing our product line over to zinc and having it manufactured here in the U.S. However, the upfront cost in investment in tooling alone would have made the prices prohibitively high. Besides, our customers have known Cliffside Industries for years as a supplier of premium-grade solid brass cabinet hardware. It’s part of our mission statement to continue supplying traditional solid brass hinges, knobs, and pulls, and that is what we decided to do. Most of our competition sells zinc—why be like the rest when you can be the best?

Our solution to the China factor

After an exhaustive search of all manufacturing sources, Cliffside Industries is happy to announce that we are returning to our roots. When Cliffside was founded in 1987, our early products were sourced from Europe. After a few years, in order to keep pace with the rest of our industry on pricing, we had no choice but to make the transition to China. Now, after over 20 years in Asian markets, we are returning to European manufacturing.

Those of you who purchase our solid brass cabinet hinges know that they are of impeccable quality. Europeans are fine craftsmen with exacting attention to detail and a reputation for impeccable high-tolerance manufacturing. We’ve also been impressed with the quality of our hinge finishes that come from Europe. The reason for this is because of a difference in the finishing process: our European manufacturers use acid-dipping and electroplating to achieve their fine finishes.

Thus, we are announcing that, beginning this summer, brass hardware products arriving in our warehouse will begin to transition from Chinese manufacturing to European manufacturing. The transition will not be immediate. Because of the restrictions and limitations put on us by our former Chinese manufacturer, we have inventory in the warehouse on many items that still needs to be sold down. Eventually, however, all of our solid brass hardware items will come from one source: our high-quality European manufacturers.

We know that you will be pleased with the improvements we’ve made in our finishes. We hope that this will allow us to reduce lead times and improve our logistics by getting all of our products in from one source. Consolidating shipments will be a great time-saver for us as we continue to import our hardware. This change-over will also allow us to offer exciting new products and new finishes available as special orders. We are thrilled to be able to make this change and give our customers what they want.

For more information on our new hardware programs and product introductions, stay tuned to our blog to see new hardware suites as they become available! Cliffside Industries wants you to know that we truly appreciate your business, and we want to continue serving you as the industry’s premier top-quality cabinet hardware supplier.

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