How Chinese Suppliers Calculate a Quotation

A buyer pushes hard on a $4.60 quote and wins nine cents. The same buyer, on a later project, asks what proportion of the price is material, learns it is about 62%, suggests a slightly thinner wall section, and the price drops forty cents without anyone negotiating. The first conversation was about the total. The second was about the line inside it that could actually move.

A factory price is built from components, and most of them are outside the supplier's control. Reconstructing the arithmetic tells you which parts respond to pressure, which respond to design changes, and which respond to nothing at all.

Key Takeaways

• A factory price is assembled from material, processing time, labour, scrap allowance, overhead recovery and margin.

• Material is usually the largest component on simple products and the one neither party controls.

• Machine time is priced by the hour, so cycle time rather than part size often drives the number.

• Scrap allowance inflates the material line, which is why yield improvements move price more than haggling does.

• Quantity enters the calculation through amortisation of setup, which is why the same product has several prices.

The Six Components of a Factory Price

The structure is consistent across categories even where the proportions differ enormously.

Material, Processing and Labour

Material cost is weight or area multiplied by a market price, and it moves with commodity markets rather than with negotiation. Processing is machine time: a rate per hour covering depreciation, power and maintenance, multiplied by the cycle time your part requires. Labour is minutes multiplied by a wage rate, and it dominates in assembly-heavy or hand-finished work.

That structure is not a trade secret. The WTO Customs Valuation Agreement describes a computed value method built the same way, consisting of the cost or value of materials and fabrication employed in producing the goods, an amount for profit and general expenses usual for goods of the same class, and other expenses reflecting the valuation basis chosen.

Scrap, Overhead and Margin

Scrap allowance is the quiet one. If a process yields 94% good parts, the material for the other 6% is paid for by your order, so the effective material cost is higher than a simple weight calculation suggests. Tight tolerances and difficult finishes lower yield and raise this line without changing anything you can see.

Overhead recovery covers factory costs not attributable to any single order: management, quality staff, facilities, certification maintenance. Margin sits on top, and on competitive standard products it is usually thinner than buyers assume, which is why pushing on the total rarely produces much.

Proportions differ enough between categories to change your whole approach. A simple moulded part is dominated by resin and cycle time. A hand-assembled item is dominated by labour minutes. An electronic product is dominated by a few components bought from third parties, which means the assembly factory has very little room and the conversation belongs upstream with the component choice.

Expert Tip:Ask what proportion of the price is material rather than asking for a full cost breakdown. Suppliers decline the second and answer the first, because the ratio is an ordinary production fact rather than a disclosure of their margin. A product that is 70% material has almost no room in negotiation and considerable room in specification. One that is 25% material is telling you the cost sits in processing, which is where cycle time and setup conversations pay.

How Quantity Enters the Arithmetic

The same product has several prices because several components behave differently as volume changes.

What Amortises and What Does Not

Setup time is fixed per run and divided by the quantity that follows it, so it shrinks per unit as volume rises. Tooling behaves the same way where it is amortised rather than invoiced separately. Material does not amortise at all, since twice the units consume twice the material.

This explains the shape of a quantity break table. Prices fall steeply across the early quantities where setup is being spread, then flatten once material dominates. Asking where the curve flattens tells you the point beyond which ordering more stops improving your unit cost meaningfully.

Risk pricing sits alongside the arithmetic and is rarely stated. A new customer, an unusually tight tolerance, an unfamiliar material or a quantity below a factory's comfortable range all attract a buffer, because the supplier is pricing the chance of rework and disruption. That buffer often disappears on a second order once the work has proved routine, which is one reason repeat prices improve without any negotiation.

Batch Purchasing and the Steps

Material is bought in standard batches, so quantities that consume a whole batch avoid the waste of a partial one. This produces the step pattern buyers notice: prices hold flat across a range, drop at a threshold, then hold again.

Ask for the break table rather than a single price, and ask where the next break sits. Suppliers give this readily since selling more units serves them, and buyers who order just below a threshold are in the worst position available to them.

Common Mistake to Avoid:Negotiating a lower price without asking what changes to achieve it is how buyers end up with a different product at the agreed number. A factory told to reach a price it cannot reach honestly has three options: thinner material, a cheaper component, or a lower-grade finish. Reputable suppliers refuse and explain. Others agree and adjust quietly, and the difference shows up in a production batch rather than in the sample you approved. Ask what would have to change, and treat an unexplained agreement to a hard target as a warning rather than a win.

The Assumptions Sitting Inside a Number

Every quotation embeds assumptions that will not hold indefinitely, which is why quotes carry validity periods and why they get revised.

Material Prices, Currency and Validity

Material prices move, and a quote issued today assumes today's cost. Validity periods of fifteen to thirty days exist for that reason, and requoting after a delay is ordinary rather than a tactic. Where a commodity has moved sharply, expect the requote to reflect it in both directions.

Currency is embedded too. A quotation in dollars from a factory whose costs are in yuan carries an exchange assumption, and a significant movement between quotation and production is a real cost to somebody. Ask which currency the underlying costs are in, since that tells you where the exposure actually sits.

Payment terms are priced too, whether or not anyone says so. Full payment in advance is worth more to a factory than a 30% deposit with the balance on shipment, and a quotation may assume one or the other. Ask which terms the number assumes, since a price that looked competitive can turn out to have been quoted against payment conditions you have no intention of accepting.

Freight, Terms and What the Number Covers

The trade term determines how much of the journey is inside the price, and Incoterms define those boundaries precisely. A delivered quote embeds a freight assumption made at the time of quoting, and container rates move enough that a reference such as Drewry's World Container Index is worth checking before treating a delivered price as fixed.

This is one reason experienced buyers prefer to quote goods on a port term and handle freight separately. It keeps the freight assumption visible rather than buried inside a number that will need revising when rates move.

Expert Tip:Ask what the quotation assumes about material grade and finish, in writing, before comparing anything. Two quotes on the same drawing can assume different steel, different resin or different plating thickness, and the cheaper one is frequently the one that assumed least. I ask suppliers to confirm in one line that they are quoting to the attached specification without substitutions. The suppliers who cannot confirm it usually reveal the substitution at that point, which is exactly when you want to know.

Using the Arithmetic in Practice

Understanding the build-up changes what you ask for and where you spend negotiating effort.

Negotiate Against the Right Line

Where material dominates, the productive conversations are about specification: a thinner section, a different grade, a simpler finish, a smaller part. Where processing dominates, they are about cycle time, cavity count and whether a design feature is expensive to produce.

Where neither dominates and margin is thin, the productive conversation is about terms rather than price. Free tooling, upgraded cartons, extended payment windows or spare units cost a factory less than a price cut, because a lower price resets the baseline for every order that follows.

Reading a Requote

When a price rises, ask which component moved. A material increase is verifiable against commodity markets. A labour increase is plausible over a year and implausible over a quarter. An unexplained increase across every line usually means something else changed, such as the factory losing interest in the order or having quoted optimistically to win it.

Keep your original comparison sheet for exactly this purpose. Six months later, it shows what was quoted, on what basis and at what quantity, which turns a vague conversation about rising costs into a specific one about a single line.

Expert Tip:Send a small design change to your best supplier as a test and ask for the cost impact in both directions. Ask what removing a feature saves and what adding one costs. The precision of the answer tells you whether the factory is actually calculating or estimating from a feeling, and the numbers themselves teach you where the money sits in your own product. This costs a supplier ten minutes and buys you a mental model of your own cost structure.

How the Supplier Pool Shapes the Number

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Frequently Asked Questions

What makes up the price a Chinese factory quotes?

Material, machine processing time, labour, a scrap allowance for parts that fail, overhead recovery and margin. Proportions vary enormously by category, with material dominating simple products and labour dominating assembly-heavy ones. Asking which component is largest tells you where any movement can realistically come from.

Why do two factories quote very different prices for the same drawing?

Different machine rates, different overhead structures, different material purchasing power and sometimes different assumptions about grade or finish. The last of these is the one to check first, since a quote well below the group frequently assumed a cheaper specification rather than better economics.

Is it reasonable to ask for a cost breakdown?

Asking for the material proportion is ordinary and usually answered. Asking for a full breakdown including margin is not, and no business discloses that to a customer. Frame the question around the ratio rather than the components, and you get useful information without an awkward exchange.

Why did my supplier revise a price it had already quoted?

Most commonly because the validity period expired and material costs moved, which is ordinary practice rather than a tactic. Ask which component changed and by how much. A material movement is verifiable, while an unexplained increase across every line suggests something other than cost has changed.

Does a lower price always mean lower quality?

Not necessarily, since machine rates, overhead and material purchasing power genuinely differ between factories making the same thing. What matters is whether the gap is explained by economics or by a quieter change in specification. Ask the low supplier to confirm in writing that it is quoting the attached specification without substitutions, and the answer usually settles it.

Conclusion

A quotation is arithmetic rather than an opening position. Find out which component dominates, negotiate specification where material rules and cycle time where processing does, ask for the break table rather than a single number, and treat a hard price target agreed without explanation as a signal rather than a success. Buyers who understand the build-up spend their effort where it actually changes something.For buyers who want that arithmetic run across a much wider set of factories, NewBuyingAgent handles factory selection, quality control and delivery from China.

Sources

1. World Trade Organization — Agreement on Implementation of Article VII of GATT 1994 (Customs Valuation Agreement), including the computed value method built from materials, fabrication, profit and general expenses —https://www.wto.org/english/docs_e/legal_e/20-val_01_e.htm— accessed 31 August 2026

2. International Chamber of Commerce — Incoterms rules, the international standard for allocating cost and risk between buyer and seller —https://iccwbo.org/business-solutions/incoterms-rules/— accessed 31 August 2026

3. Drewry Supply Chain Advisors — World Container Index, weekly composite spot rate per 40ft container across major east-west trade lanes —https://www.drewry.co.uk/supply-chain-advisors/supply-chain-expertise/world-container-index-assessed-by-drewry— accessed 31 August 2026