I’ve been learning some expensive lessons lately – so I hope this can save you. First some background, but in the end this is about getting accurate manufacturing quotes from China.
When dealing with a Chinese manufacturer, from outside of China, it is typical to get a quote FOB in US dollars. FOB means
“Free On Board” – the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays for international shipping.
China has a relatively complex consumption tax. Typically this adds 17% to the cost of goods. For export goods there is a rebate. This is where things get tricky, what follows is my current understanding.
If a Chinese manufacturer takes $1 of raw material and turns this into a product that will be sold for $5 FOB then the Chinese government will offer a rebate to the manufacturer of 5 x 0.17 = $0.85 Lets assume the manufacturer paid $0.15 in consumption tax on the raw material. The result is that the Chinese Government is effectively giving the manufacturer 0.85 – 0.15 = $0.70 So instead of quoting the product at $5.70 they quoted at $5.
So you need to be very careful when getting quotes for product production. Because you are enquiring from overseas the natural assumption is to quote FOB in USD.
Lets assume you want to order part A from manufacturer A and part B from manufacturer B then have manufacturer C assemble all this. If Manufacturer A and B are assuming they will get a rebate then everyone is in for a surprise.
It gets worse if you are only paying manufacturer C a small part of the product cost, they can get a rebate but you will need to pay the 17% tax to Manufacturers A & B.
One way to get around this would be to create a company in China and then claim a rebate but that is well over my head. Another approach is to have manufacturer C buy the parts from manufacturer A & B. So they can get the rebate on the entire product cost. This is one advantage of using a contract manufacturer. It can be a challenge finding a contract manufacturer who wants to work with suppliers that you have chosen.
Another approach is to do the final assembly in your country. So each parts manufacturer gets their rebate.