AACE Presentation Steel Fabrication Costs in China 2010-06 ... Steel... · 7/6/2010 6 The Case...

7/6/2010

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Steel Fabrication Costs in ChinaSteel Fabrication Costs in China

Stephen O’NeillLimor Rozmarin

EST.17

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Steel Fabrication Costs in China

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Overview

• Introduction

• The Chinese Labor Rate Model (CLRM)

• ResultsResults

• Conclusions

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The Case Study

Steel Fabrication Costs in Chinay

• A Suspension Bridge• Two Spans 10 000 Meters Long• Two Spans, 10,000 Meters Long• Orthotropic Box Girders

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The Case Study

Steel Fabrication Costs in Chinay

• 45,000 Metric Tons of Steel • 97% to be Fabricated in• 97% to be Fabricated in

Shanghai, China

What is a reasonable cost of Chinese laborWhat is a reasonable cost of Chinese labor for steel fabrication?

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Steel Fabrication Costs in ChinaThe Myth: Chinese Labor is Cheap and Abundanty p

Average Hourly Compensation Costs of Manufacturing Workers 2002

Source: “Manufacturing Earnings and Compensation in China,” Judith Banister, Aug. 2005 (BLS)

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The Myth: Chinese Labor is Cheap and Abundant


That is 5.8% of an American worker’s pay

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Earnings versus Total Compensationg p

Company Benefits

Total CompensationTotal cost to h l

Government Benefits

the employer

Additional Earnings

TotalBasic

Earnings

TotalEarnings

Paid to the worker

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Exchange Rates


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Exchange Rates


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Source: “China: Country Commerce Report” Economist Intelligence Unit, Feb. 2009

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The Chinese Labor Rate Model (CLRM)

• Hypothesis: The 2/3 Rule

• Methodology

• The Model

• An Independent Assessment of Chinese Labor RatesChinese Labor Rates

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Hypothesis: The 2/3 Ruleyp

Source of Fabricated Steel Price Per Metric TonChina $1500China $1500U.S. $2500

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Hypothesis: The 2/3 Ruleyp

Country Hourly Shop RateU S $55 $75U.S. $55-$75China (theoretical) $36-$50

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Methodologygy

• Uses the Welder as the representative tradep

• Monte Carlo Simulation

• Results in the Expected T t l C ti H l R tTotal Compensation Hourly Rate

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The Chinese Labor Rate Model (CLRM)


( )

Inputs OutputSimulation

Basic Earnings

Total Compensation Components

The Expected Total

Compensation Hourly Rate

Weekly Work Schedule

Hourly Rate

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Model Inputs: Basic Earningsp g

Company Benefits

Government Benefits

Additional Earnings

BasicEarnings

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x (Basic Hourly Rate x Shift Multiplier x Overtime Rate)Hours Worked

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Basic Earnings: Hourly Rate


g y

• Basic Hourly Rate for a Chinese Welder (Shanghai): $6

• Minimum wage in 2008: $1.14

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Basic Earnings: Work Shifts


g

• Regular Shift: 100% of Basic Rate

• Swing/Evening Shift: 115% of Basic Rate

• Expected Shift: Regular or Swing• Expected Shift: Regular or Swing» Discrete distribution function

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Basic Earnings: Overtime Rates

Sat SunMon Tue Wed Thu FriHours

1

g

2

3

4

Sun & Holiday300%

Weekday100% of Expected Shift Rate

Sat200%

5

7

6

$18.00$20.70

$12.00$13.80

Base $6.00Swing $6.90

89 Overtime 150% ($9.00 / $10.35)

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CLRM Inputs


p


• Basic Hourly Rate• Shift Multiplier• Overtime Rates

Basic Earnings


The Expected Total



Hourly Rate

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Model Inputs: Total Compensation Componentsp p p

Company Benefits

Government Benefits

Additional Earnings

BasicEarnings

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Additional (Taxable) Earnings


( ) g

Year End Bonus

50%

Paid Vacation & Holidays

Technical Capability Subsidy

Paid Vacation & Holidays

Technical Capability Subsidy

Year End Bonus

47.4%88.4%

8.4% 8.4%

14% 30%

50%25%

Basic Earnings

Basic Earnings gg

Low High

• Expected Rate: Uniform distribution function

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Company Benefits

Government Benefits

Additional Earnings

BasicEarnings

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Government Social Welfare Benefits


Maternity 1%Housing Fund

H i F d5%

7%

Medical Insurance

Pension

Unemployment Insurance

Medical Insurance

Pension

Unemployment Insurance33%45%

6% 12%19%

22%

2%2%

Worker’s Comp

Worker’s Comp

0.5%1%

Maternity

Maternity

0.5%1%Housing Fund5%

Additional Taxable Earnings

B i

Additional Taxable Earnings

B i

Total Earnings

Total Earnings

Basic Earnings

Low High

Basic Earnings

g g


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Company Benefits

Government Benefits

Additional Earnings

BasicEarnings

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Company Benefits


p y

Ed ti

Small Tools,Consumables,

Safety EquipmentSmall Tools,

Consumables, 60%10%

10%

5%

Camp & Travel

Camp & Travel10%

20%

Accessorial Pension

Education

Government

Accessorial Pension

Education

,Safety Equipment31%

10% 20%

6%

10%5%

GovernmentGovernment Benefits

Total

Government Benefits

Total

Low High

Earnings Earnings


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Company Benefits 64%-105%

Government Benefits

64% 105%

Additional Earnings

BasicEarnings

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CLRM Inputs


p



Basic Earnings

• Additional Taxable Earnings• Government Benefits• Company Benefits


The Expected Total



Hourly Rate

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Model Inputs: The Weekly Work Schedule


p y

• Realistic work week

S t i bl th lif f th j t• Sustainable over the life of the project

• Takes into account statutory limits

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Model Inputs: The Weekly Work Schedule


p y

Description Weekly Schedule Expected Value

Minimum MaximumMinimum Hours

Maximum Hours

Regular Weekday Hours 40 40 Uniform Distribution

Overtime Weekday Hours 0 5 Uniform Distributiony

Saturday Hours 0 8 Discrete Distribution0 hours: 50% probability8 hours: 50% probabilityIf overtime weekday > 4 hrs

Sunday Hours 0 8 Discrete Distribution0 hours: 60% probability8 hours: 40% probabilityOnly if worked Saturday

Total Hours Per Week 40 61 Sum of the aboveTotal Hours Per Week 40 61 Sum of the aboveExpected Values

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CLRM Inputs


p



Basic Earnings

• Additional Taxable Earnings• Government Benefits• Company Benefits


The Expected Total


• Weekday Hours• Weekday Overtime• Weekend Work


Hourly Rate

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Weekend Work

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Monte Carlo Simulation


Basic Earnings

Inputs OutputTotal Compensation Components


• Numerous iterations• Randomly selected values

Probability distributions embedded in the input tables• Probability distributions embedded in the input tables

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Output: The Total Compensation Hourly Rate


p p y

Description Sample Output(one iteration)

CalculationWeekly

RateHourly Rate

Regular Weekday Pay $240.00 $6.00

Overtime Weekday Pay $22.50 $9.00Saturday Pay $0.00 $0.00S d P $0 00 $0 00Sunday Pay $0.00 $0.00

Basic Earnings $262.50 $6.18Additional Taxable Earnings $178.24 $4.19

Total Taxable Earnings $440.74 $10.37Total Taxable Earnings $440.74 $10.37Government Welfare Benefits $171.89 $4.04Company Benefits $200.54 $4.72

Total Compensation H l R t

$813.16 $19.13

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Hourly Rate(before markups)

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p p y


CalculationWeekly

RateHourly Rate

Regular Weekday Pay $240.00 $6.00$6/hr x 100% regular shift x100% weekday rate x40 hrs

Overtime Weekday Pay $22.50 $9.00Saturday Pay $0.00 $0.00Sunday Pay $0.00 $0.00

Basic Earnings $262.50 $6.18Additional Taxable Earnings $178 24 $4 19Additional Taxable Earnings $178.24 $4.19

Total Taxable Earnings $440.74 $10.37Government Welfare Benefits $171.89 $4.04Company Benefits $200.54 $4.72

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Total Compensation Hourly Rate(before markups)

$813.16 $19.13

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Model Inputs: Basic Earningsp g

Company Benefits

Government Benefits

Additional Earnings

BasicEarnings

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x (Basic Hourly Rate x Shift Multiplier x Overtime Rate)Hours Worked

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p p y


CalculationWeekly

RateHourly Rate

Regular Weekday Pay $240.00 $6.00$6/hr x 100% regular shift x100% weekday rate x40 hrs

Overtime Weekday Pay $22.50 $9.00Saturday Pay $0.00 $0.00Sunday Pay $0.00 $0.00



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$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate


Overtime Weekday Pay $22.50 $9.00$6/hr x 100% regular shift x150% overtime rate x2.5 hrs

Saturday Pay $0.00 $0.00Sunday Pay $0.00 $0.00



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$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate


Overtime Weekday Pay $22.50 $9.00Saturday Pay $0.00 $0.00 $6/hr x

100% regular shift x200% S t d t200% Saturday rate x0 hrs

Sunday Pay $0.00 $0.00Basic Earnings $262.50 $6.18Additional Taxable Earnings $178 24 $4 19Additional Taxable Earnings $178.24 $4.19


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$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate


Overtime Weekday Pay $22.50 $9.00Saturday Pay $0.00 $0.00S d P $0 00 $0 00 $6/hSunday Pay $0.00 $0.00 $6/hr x

100% regular shift x300% Sunday rate x0 hrs



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$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate






$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate



Basic Earnings $262.50 $6.18Additional Taxable Earnings $178.24 $4.19 Basic Earnings x

Additional Taxable Earnings Rate


T t l C ti $813 16 $19 13

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$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate






$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate




Total Taxable Earnings $440.74 $10.37Total Taxable Earnings $440.74 $10.37Government Welfare Benefits $171.89 $4.04 Total Taxable

Earnings xGovernment Benefits Rate

Company Benefits $200.54 $4.72

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$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate




Total Taxable Earnings $440.74 $10.37Total Taxable Earnings $440.74 $10.37Government Welfare Benefits $171.89 $4.04Company Benefits $200.54 $4.72 Total Taxable

Earnings xCompany Benefits Rate

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$813.16 $19.13

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p p y


CalculationWeekly

RateHourly Rate






$813.16 $19.13

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Results

Distribution of Welder Total Compensation Rate before Markup

90%

10%

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Conclusions

• The 2/3 Rule Works

• Additional International Support Costs

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The 2/3 Rule Works

Description U.S. China RatioBasic Hourly Rate $24 $6 25%yTotal Compensation Hourly Rate $33 $21 64%Overhead & Profit $41 $27 66%Total Shop Rate $74 $48 65%

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Steel Fabrication Costs in ChinaThe Myth: Chinese Labor is Cheap and Abundanty p

Average Hourly Compensation Costs of Manufacturing Workers2002

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Additional International Support Costs


pp

• Additional Quality Control

– Not familiar with U.S. standards

– Higher level of manual work

Additi l i t i d– Additional inspectors required

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pp

• Added Shipping Costs

– $0.50 to $1 per KG

– 21 - 45 days shipping time

S i l b i & dditi l i ti– Special bracings & additional inspections

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pp

• Logistics and Communications Difficulties

– Time zone differences

– Translations• Shop drawings

F b i ti• Fabrication sequence• Tolerances• Word connotation• Take time

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pp

• Limited Supply of Qualified Workers

– Expats needed

– Base cost equivalent or higher than U.S.

– Additional incentives required

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Source: “U.S. Apparel Retailers Turn Their Gaze Beyond China,” Wall Street Journal, June 16, 2010

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Coming Up


g p

• Quantification of Additional International Support Costs

• Welder Productivity Rates

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AACE Presentation Steel Fabrication Costs in China 2010-06 ... Steel... · 7/6/2010 6 The Case...

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