How does China make such cheap fountain pens?

The topic of cheap Chinese fountain pens comes up regularly on reddit, as I’m sure it does at FPN/FP Geeks, blogs, and in the minds of anyone who has looked around for pens and noticed that the Chinese brands are just incredibly cheap. The discussion raised the usual questions you might have about Baoer, Hero and Jinhao: how do they make them so cheaply? Of course, the quality isn’t all that but for $2, shipped with a converter to your door, it’s a pretty amazing deal. Particularly when you look at something like a Pilot Metropolitan ($18, no converter, no shipping) or Lamy Safari ($30, no converter, no shipping). So today, I thought it might be interesting to have a look at how the Chinese manufacturers do what they do, whether its sustainable, and what that might mean for the future of the FP market.

When you look around sites like eBay, you’ll know what I’m talking about. There’s a huge range of Chinese fountain pen styles and models, from the simplest designs to ones with elaborate barrel designs and styles, and for the most part they are all phenomenally cheap. To my knowledge, they are all steel-nibbed (and a bit hit-and-miss in terms of nib quality), cartridge-converter pens. Some sell for less than US$1.50 (again, including a converter and shipping), the majority in the $3-5 range, and a few are more. These prices are, of course, shockingly low.

The conventional explanation is simply that Chinese manufacturers are producing FPs in such vast quantities that the unit costs are very low: make one pen and it might cost you $30 or $50 or something. Make 10,000 and you might get the costs down to $1 or $2 a unit.  This is known as scale economies in the econ jargon, and it’s quite common in manufacturing, particularly where you have a few large upfront costs – say, designing the pen, setting up a production run, paying workers to turn up and make the thing. When you produce a large run of pens, those upfront costs can be spread out; the more you produce, the more they get spread out and the lower your costs become. So if the Chinese manufacturers are making an enormous number of pens, it makes sense that they can get their costs pretty low.

This explanation works for a lot of people but I don’t think it’s the full story. I don’t think it’s wrong – in fact, I think it’s an important part of the story – but it’s overlooking an even more important factor, something that separates the Chinese manufacturers from most others in the world: subsidies.

A subsidy is some kind of financial support from the government for a particular business or industry. The explosive growth in Chinese manufacturing in the last few decades has been underpinned by an enormous amount of subsidies – one book from 2012 claimed that 90% of all publicly-listed Chinese companies received government support* while another from 2013 claimed that direct subsidies from 1985-2005 were worth more than US$300bn**.

Direct subsidies are the easiest to understand and generally go to upstream firms – not the pen manufacturers themselves, but the companies that provide the raw inputs like electricity or metal. When these companies are privately owned, subsidies can take the form of direct government payments; when they are owned by the government (State-Owned Enterprises, or SOEs), they often sell their products well below cost, deliberately running at a loss so that the downstream firms (such as pen manufacturers) can have lower costs. The main industries which benefit from this are the power companies, steel producers, and shipping companies. Although I’m sure the government didn’t set out to boost the Chinese FP industry, the fact that it uses each of these inputs means that it gets a big boost. The subsidies push down the cost of their inputs and make it cheaper to produce pens, meaning they can be sold at a lower price and capture more of the market. If they had to pay the real costs of production, there’s no way these pens would be as cheap as they are.

Indirect subsidies are a little more complicated but they have the same effect of lowering an FP’s production cost. The two main indirect subsidies are currency manipulation and discount loans from government-owned banks. Currency manipulation pops up in the news from time to time – the US used to routinely criticise China for deliberately undervaluing its currency (it has been quieter on that front lately). Keeping their exchange rate low meant that Chinese exports were artificially cheap – today they are perhaps 20% cheaper than they would be if the yuan was not subject to manipulation.

When you put all of this together, it means that Chinese pen manufacturers enjoy significant advantages from their government’s industrial policy that allows them to avoid paying full production cost. The loan to establish a factory is discounted, the steel for the factory is discounted, the electricity the factory uses is discounted, the metal and steel used in the pen is discounted, the shipping to buyers is discounted, and the currency exchange is discounted. Without all of these benefits, it’s hard to believe that you could pick up a new Jinhao from your letterbox for less than $2.

We don’t know the extent to which these things are subsidised but we can do some quick, basic calculations. A Jinhao 159 costs US$4 from eBay, with shipping. We know shipping is subsidised from China to the US, but the return journey would cost $9.50 (First Class International with USPS). We also know the currency is undervalued by perhaps 20%. Put these things together and the delivered price of the 159 would be around $16. Start removing other subsidies and that price is going to get even higher. It’s a surprising number at first, but less so when you think about the Pilot Metropolitan: it’s a low-cost, mass-produced pen made by one of the big and most efficient pen manufacturers in the world. It beggars belief that a Chinese manufacturer could enter the market and get their costs lower in only a few years; the true cost of production would have to be more expensive than Pilot. It’s only cheaper thanks to the subsidy program.

It’s easy to conclude that this is a good thing: jobs are being created and people are able to buy stuff cheaper than they could otherwise. It might even be creating new pen aficionados who can’t afford more expensive pens. But there are losers as well, including the brands who are trying to sell entry-level pens but don’t benefit from government support.

The biggest losers, however, are Chinese taxpayers and citizens, who are the people funding the subsidy program. Despite enormous growth, China still struggles with poverty – according to the World Bank Poverty & Equity Database (2011 figures), 6.3 million people subsist on less than US$1.25/day and more than 800 million live on less than $5/day – and yet they are funding a vast subsidy program that allows relatively wealthy Westerners to purchase very cheap fountain pens (amongst, obviously, a huge number of other goods). This is a wealth transfer from poor Chinese to rich Americans, British, Australians, Canadians, etc and is – at least in my opinion – a pretty depressing state of affairs. There are arguments about industrial development and job creation but I’m yet to see any convincing evidence that subsidies work in a modern, organised, efficient country – let alone a chaotic state marred by corruption and nepotism.

Although this subsidy program won’t survive in the long run, I’ve seen nothing to suggest that it’s going to end anytime soon. But when it does, it’s going to be hard for the pen manufacturers to keep on producing the same kinds of products: their costs will rise substantially and FP buyers will ask whether it’s worth paying Metro prices for lower quality pens. Unless Hero and Jinhao respond by offering much better products, they’re unlikely to stay in the market for the long term. The main threat that they pose is to entry-level pens, but the quality control is so poor that I don't think anybody sees them as a serious player in the market. These companies are likely just a flash in the pan: here today, but once the subsidies disappear, they will too. 

 

*Atkinson, Robert; Ezell, Stephen (2012). Innovation Economics: The race for global advantage. Yale University Press, New Haven.

**Haley, Usha; Haley, George (2013). Subsidies to Chinese Industry. Oxford University Press, Oxford.