a reply to: CraftBuilder
A. It's a combination of maximized production capacity of Chinese factories and extremely low wages to its workers.
On the first point of maximized production capacity: In cost accounting, the goal is to maximize to the full operational capacity of a factory in
order to maximize the profitability of that factory. For example, if a factory was capable of making 70,000 pens but was only going to sell 50,000
pens, that factory would still make those 70,000 pens. The remaining pens might get sold at a discount or put to other uses and anything over that
50k pens that gets sold is yet more profit. It's actually a pretty complex calculation and this is a simplified explanation but the gist is
simple--manufacture to the maximum capacity.
In China, the factories aren't run by brands but basically companies whose sole purpose is to manufacture for others. If you walked into a shoe
factory in Japan, what you would most likely see would be that NIke shoes were being built next to Adidas and New Balance. In other words, they're
running at maximum but with the buyer (the brand itself) has already ordered X number of shoes to be built. So maximized production and profitability
for every shoe built. As in the pen example, the factory would be making 70,000+ pens for multiple companies and offloading all 70,000+ pens in
purchasing agreements at the agreed upon price.
Couple that with low wages (partly due to low cost of living) and well, the costs to produce any product is going to be substantially reduced in
comparison. Now before anybody starts screaming that we should do what China does here, I'd like to point out that many of the factories in China
double as living residences for the workers. Foxconn is not just a factory but also a residence and every aspect of the workers life tends to be in
that factory. Be careful what you wish for.
B: Mark-up. The price of that knob is including the overhead to operate the retail establishment (and trust me, just the electricity bills in such a
store can be huge). Utilities, maintenance of the facilities, workers' pay, management pay and etc all get tucked into the cost of every product
sold on the floor. Plus they have to make a profit otherwise, what's the point? However, that's just the last point of mark up because the
manufacturing company that sold to the retail unit most likely marked up the cost of the product themselves as they needed to make a profit, too. So
mark up at the vendor level, mark up at the retail level, and ta da!--you have a $20 knob.
If you think that $20 knob is bad, I believe it costs about $13-14 to make a pair of Nike's that may sell for $150 or more and that's a shoe that is
being built right alongside cheaper variants of sneakers. Yet, people still buy Nike because of the swoosh and designs. Nike is associated with a
certain level of luxury and clout so people pay more for that swoosh on their foot. It says something about them.
It's just that what it says about them is going to be different depending on who you are. Most people would think "awesome". I see "sucker".