Frame and Wheel was advised to get out the white board and diagram all the costs in the production chain. The exercise is very useful for identifying what the costs are and who is paying them. It also helps generate ideas on how to cut costs, rearrange costs and generate new revenue streams. The table below is a summary of the exercise. This post will discuss the factory.
Frame and Wheel estimates that it costs the factory in China about $100 per frame in materials to manufacture one carbon fiber road racing frame. The factory's fixed costs include overhead for the facilities where the frames are produced, labor expenses for the workers doing the lay up etc., and other expenses which probably include some marketing (trade shows) and testing expenses. Frame and Wheel reckons that overhead is a big expense for factories: the primary cost here would be rent as well as utilities such as electricity, which is notoriously expensive in emerging markets. Of course, labor costs are still low such that overhead and other expenses can be carried. The long operating cycle of producing a frame suggests that the factory needs to have some short term debt for working capital. Interest expense costs reflect this. Tax is probably low in China, if there is any tax paid at all. Frame and Wheel estimates that he factory sells the frame set to bike brand companies for $500 per frame. Frame and Wheel notes that a factory such as More Choice, which designs its own molds and then places them in third party factories, will have a different financial picture. The primary difference is that interest expense will be a lot higher for More Choice. Designing and building molds is capital intensive: the molds have to be precision-manufactured out of metal that can withstand repeated heating and cooling; they are big, heavy and specialized. Any company that builds a mold will likely borrow the capital needed to make it. The example above shows the traditional model, where the factory is using a mold designed and owned by the bike brand, and is just using its facilities and manufacturing expertise to produce it.
| Traditional / per frame | Factory |
| Revenue | 500 |
| Cogs | 100 |
| Gross profit | 400 |
| | |
| Operating expenses | |
| Staff | 75 |
| Overhead | 125 |
| Marketing, R&D, admin | 25 |
| Total | 225 |
| | |
| Operating income | 175 |
| Interest expense | 50 |
| Income before tax | 125 |
| Tax | 25 |
| Net profit | 100 |
| | |
| Gross income margin | 80.0% |
| Operating income margin | 35.0% |
| Income before tax margin | 25.0% |
| Net income margin | 20.0% |
| | |
| OPEX as % revenue | 45.0% |
Frame and Wheel estimates that it costs the factory in China about $100 per frame in materials to manufacture one carbon fiber road racing frame. The factory's fixed costs include overhead for the facilities where the frames are produced, labor expenses for the workers doing the lay up etc., and other expenses which probably include some marketing (trade shows) and testing expenses. Frame and Wheel reckons that overhead is a big expense for factories: the primary cost here would be rent as well as utilities such as electricity, which is notoriously expensive in emerging markets. Of course, labor costs are still low such that overhead and other expenses can be carried. The long operating cycle of producing a frame suggests that the factory needs to have some short term debt for working capital. Interest expense costs reflect this. Tax is probably low in China, if there is any tax paid at all. Frame and Wheel estimates that he factory sells the frame set to bike brand companies for $500 per frame. Frame and Wheel notes that a factory such as More Choice, which designs its own molds and then places them in third party factories, will have a different financial picture. The primary difference is that interest expense will be a lot higher for More Choice. Designing and building molds is capital intensive: the molds have to be precision-manufactured out of metal that can withstand repeated heating and cooling; they are big, heavy and specialized. Any company that builds a mold will likely borrow the capital needed to make it. The example above shows the traditional model, where the factory is using a mold designed and owned by the bike brand, and is just using its facilities and manufacturing expertise to produce it.
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