Attack of the $2 Jinhao

I’m not an economist by any means (luckily there is a blog specifically about the economics of fountain pens). But pricing is an endlessly fascinating topic to me.

I’ve ordered several Pilot pens direct from the Japanese domestic market, and paid half what I’d have paid from a UK retailer. Why?

There are many reasons why the exact same product retails at a completely different price point. Customs charges and taxes. Overhead from an extra link or two in the supply chain. Currency exchanges. Market price sensitivity. Local competitive pressures.

But when you see complete fountain pens, with converters and international shipping included, retailing for $2… well, that’s a completely different economic kettle of fish.

This has been on my mind recently since seeing various threads on FPN and having the Jinhao 992 recommended to me by several friends in the community. It’s widely available at around $2 and is generally well reviewed. (Note: there are plenty of other similar Chinese pens on eBay).

I normally buy pens averaging about £50, and it’s quite common for pen enthusiasts to spend £500 or more. If the Jinhao is £1.50, that’s a hell of a price differential. Imagine if the Jinhao was a £5,000 Dacia car, the cheapest car on UK retail. The perfectly common £50 pen would be equivalent to a £160,000 Ferrari or Aston, and the £500 pen would equate to a car priced at £1.6 million. There are cars like that around, but certainly not many. Or work it out the other way. If the 50 quid pen is the equivalent of a 20 grand Ford Focus, that means the Jinhao car would retail for 600 pounds. A hell of a bargain.

With $2 pens available, does that mean we’re fools to spend ten times as much on the “usual” entry-level pen like a Lamy Safari? Or should we be resisting these cut-price pens for undermining manufacturers that keep jobs in Europe (or wherever) and that meet higher standards of responsibility, manufacturing quality, and innovation?

Perhaps more interesting is the simplest question: how on earth can Jinhao put a pen in my hand halfway around the world for less than a cup of coffee?

Different target market

I guess the first thing to realise is that Jinhao isn’t making pens for us and our wallets: it’s making pens for Chinese domestic buyers. The 2016 average wage in China was CNY 67500. In the UK, it was around £26,600 — which converts to CNY 234,000. Three times higher.

With lower local wages in China, cost of living has to be lower too. The price of nearly everything is lower than it would be in the UK, from rent to food. Even today, it’s much, much cheaper to live in a midtier Chinese city than your typical European city. Put simply, $2 is “worth” a lot more in China than here. It equates to a larger share of the average monthly income, and will buy you more products in the supermarket than here.

So that $2 Jinhao doesn’t look like pocket change to a domestic Chinese purchaser — just in terms of wages, it would be equivalent to $6.

Of course, that explains the price but it doesn’t explain how Jinhao can sell it at a profit. That requires other explanations…

Saving on materials and manufacturing steps (AKA, different product)

The cost of raw materials is reportedly significantly lower in China, and there’s huge manufacturing capacity available at very low cost. That will account for a lot of the necessary reductions in direct cost of manufacture.

But more importantly, the product itself will be different. Slight changes in specification and manufacturing processes can make a dramatic difference to end cost. Bevelling, polishing, tumbling, sealing… all steps that add complexity and cost. Skipping some of these steps can result in an inferior product, but a much cheaper price.

More simply, Jinhaos have simple steel nibs and they don’t even come in a box. Every little helps.

Leveraging economies of scale

It would be interesting to know how many units each year Jinhao manufactures, versus a company like Lamy. It would be really, really interesting to find out the materials cost per unit and the overall cost of manufacture per unit too, but I’m sure those are closely guarded secrets! Regardless, compare the volumes of a company like Pelikan, Montblanc or other high-end manufacturer versus one that cranks out millions of units per year and you’ll see significant shift in economies of scale.

Minimising research and development

Chinese manufacturing has a bad (but improving) reputation for ripping off original designs from other countries, reverse engineering, and replicating for the lowest possible cost. This means they can avoid all the expense and risk associated with developing designs and intellectual property, as well as the legal and security costs associated with protecting it.

Certainly, looking at the Jinhao there is nothing innovative about the design that would have created R&D overheads.

Benefiting from low cost of operations

This is the biggie, and potentially a can of worms. If Lamy (or Kaweco, or any other major manufacturer of entry-level pens) maintains offices in EU countries, you can guarantee that their wage bill is higher than Jinhao’s. Office space costs more. They probably pay more for parts and utilities. Access to services like insurance, warehousing, shipping is all more expensive. Taxes are higher.

EU manufacturers may, and I repeat may, also bear the cost burden of environmentally sustainable operations and corporate social responsibility, including labour relations, which Chinese manufacturers may not.

Unknown brand

People pay a premium for brand. They’re buying into a heritage, an experience, exclusivity, and other real or illusory factors built up over years of the company’s operations, and millions of dollars in marketing spend.

Companies like Jinhao don’t pay to advertise in the West (at least, not that I’ve seen), and nobody is going to pay a premium for one of their pens. Not yet, at least. Look at how Japanese and Korean brands have ascended over the past 60 years.

Skipping quality control

Manual quality checks, particularly in a country with high labour costs, are hideously expensive. Rejecting batches of product due to uneven colour, poor nib finishing, brittle material or whatever is also costly.

Some low-cost manufacturers may skip these steps, either trusting that their goods will be of sufficient quality (in other words, crossing their fingers), relying on the consumer to check and return defective units, or more likely, the consumer swallowing the tiny cost and chalking it up to experience. After all, it’s $2, right?

Then again, I’ve had plenty of nibs from reputable manufacturers arrive with problems that should have been caught in QC.

So what?

Like I said, I’m not an economist. I don’t have insider access to Jinhao’s financials, I haven’t toured its factories. This is all guesswork. And guesswork and generalisation are dangerous when you’re talking about something as complex, mysterious and fast-changing as Chinese manufacturing and global economics.

But when a product appears that redefines the price of your hobby so fundamentally, it’s worth thinking about it: how is that possible? What are the implications? I for one don’t want EU manufacturers to go bust. And I don’t actually need any more pens cluttering up my house, no matter how cheap. But I don’t want to be paying a premium unnecessarily for an identical product.

All that said, I’m going to order one of the Jinhaos to see what it’s like. After all, it’s less than the cost of a cup of coffee, right?