Part 2 | Risks of choosing a low investment plant in the Engineered Stone business
Eng. Giancarlo Crestani, Engineered Stone Sales Director at Breton, explains why it is a big mistake to say that it pays to invest in low-cost industrial plants.
In the previous publication, I explained that any Engineered Stone certification does not grant product quality.
Now we are going through another interesting topic:
the determination of the costs of production and selling prices.
In Engineered Stone, less is more?
The article states that the prices of Chinese slabs are lower than the prices of slabs produced by Breton plants. Also, it explained that the reason for the price difference is that the Breton plant's investment is much higher than a Chinese plant, and the costs and then the price of slabs manufactured with the Breton plant shall be higher.
It is well-known that the depreciation cost of a plant investment is calculated by assuming the time on which the investor wants to pay back the investment and considering the number of slabs that the plant could sell during such a period.
To this depreciation cost, it’ll be added also the other production costs for the slabs manufacturing, and then, to calculate the selling price, it will also add a margin to get, at the end, some profit for being able to research and invest more in the future.
Answer is in numbers
Source: Breton Estimation
A detailed analysis
Let’s assume that a Chinese plant could require, as stated by that article, an investment of about 1 million €. This Chinese plant can manufacture not more than 50 slabs/day, and just 30-35 of these slabs are at the end sellable. Therefore, this plant will be able to sell approximately 10.000 slabs/year (assuming to produce 300 days/year).
A Breton plant requires, as per that article, an investment of approximately 20 million, and it can manufacture approx 500 slabs/day (95% of them of first quality). Therefore, this plant will be able to sell approx 450 slabs/day, which means 135.000 slabs/year; it means 13,5 times the volumes of this Chinese plant.
Therefore, assuming a depreciation period for the investment of 5 years (even if it should be seven years for a normal feasibility study, but Chinese plants normally do not last so much), it means that the depreciation cost will be equal to 20,0 €/slab for the Chinese plant and approx 30,0 €/slabs for Breton plant.
Now, let’s check some other production costs, assuming that the two plants are installed in the same region with similar costs of raw materials, consumables, manpower, and energy.
With the Breton plant, due to the rubber mold technology, the rough slab thickness will be at least 3,0 mm less than the same slabs manufactured with the Chinese plant, where paper or plastic are used to mold the slabs.
It means that with the Chinese plant there will be an additional cost (by the raw materials and diamond tools consumption) of approximately 17,5 €/slab.
The rubber molds used in Breton plants caused, compared with the paper used in the Chinese plants, an additional cost of approximately 9 €/slab.
Breton plants are much more automatic. Then, they require much less manpower which impacts approximately 3,0 €/slabs of lower costs for Breton plants.
Then we’ve also to consider the additional quantity of resin that is necessary to well compact the slabs with the Chinese plant compared with the Breton plant; we could state that there is at least 5% more resin quantity in the case of Chinese plants. It means that Chinese plants need, assuming to manufacture 50% of 2 cm slabs and 50% of 3 cm slabs, approximately 75.000 kg of resin in addition per year, which means approximately 15,0 €/slab of additional costs.
Overall, a slab produced by any Chinese plant costs the manufacturer approximately 17,0 € more than a slab manufactured with a Breton plant.
Simply a wrong assumption
Therefore, the idea that a slab manufactured with a cheap Chinese plant has a lower production cost and a lower price is wrong.
The truth is that investors who are installing a Chinese plant will have, just in case they should sell at the same price as Breton producers, a lower margin than those who will install a Breton plant. If they sell at lower prices, it means their margins will be even much lower.
I think who purchase a Chinese plant are attracted by the smaller investment necessary to enter into this E-Stone business, but it is not the investment amount that grants the success of a business.
Only the volume of margins and profits and brand reputation are granting success, as is possible to achieve with Chinese plants. And with low margins and little production capacity, it’ll be very difficult to succeed.The only additional possibility to explain the lower selling prices is that those who produce with Chinese plants employ raw materials of modest quality (quartz, resin, additives, and pigments) that can be purchased at a lower price, significantly compromising the quality of their finished products.
Is this the reason why their plant's output quality and performance are that low? In this sense, I recall that low product quality compromises the brand's reputation because of the issues potentially found in it and these issues could emerge even after the installation of the slab.
Stay tuned and do not miss Part 3!
The last publication will delve into another relevant topic:
Why BretonStone technology enables Engineered Stone entrepreneurs to establish leading brands worldwide?
We will find out through some interesting considerations by Engineer Crestani.