SKD (Semi Knocked Down) means that in international trade, the exporting country does not assemble the conventional finished product, but exports it to the customer in the form of semi-finished products or parts, and the importing customer completes the assembly process of the finished product locally and sells it. This model was initially widely used in international automobile trade, where the various major component assemblies of automobiles. Engines and chassis, were basically exported in the form of semi-finished products in separate cartons, and the importers assembled them into complete automobiles locally.

First, SKD and CKD assembly

There are numerous forms of knocked down assembly in electrical consumer goods, such as colour TVs, refrigerators, VCDs, DVDs, including mobile phones and computers. There is also a common form of knocked down assembly, CKD (Complete Knocked Down).

The difference between the two is that, for example, in the case of air conditioner exports, the SKD form of export will assemble the air conditioner chassis, compressor and condenser onto the machine, making it a semi-finished product. Other components such as piping and valves are packed in separate boxes and delivered to the customer. This form of export generally saves the customer labour costs, as the customer can assemble the SKD parts locally and the labour costs are generally lower than in the exporting country.

In the case of CKD form exports, all air conditioning components are packed in individual boxes and delivered to the customer together. Such a form of export is equivalent to customers purchasing parts in the exporting country, taking advantage of the exporting country's integrated local purchasing capability and low cost of materials, which can result in greater cost savings.

Second, the advantages of SKD import

Putting aside some large or high-tech products such as automobiles and chips, based on some small furniture and electrical appliances or daily necessities, most of the customers who require SKD packaging methods at present mostly do so for three reasons: saving freight costs, reducing import tariffs and using low-cost labour.

1. Small volume, saving freight costs

Some furniture and electrical products may not be large in size, but the finished products are easily damaged in long-distance transport due to impact or bumps, then the packaging needs to be added to the internal role of some protective foam, cardboard and other auxiliary materials, which will make the finished product packaging volume larger. The final size of the outer box after stacking, may not be able to achieve maximum container utilisation. But for the use of SKD packaging, semi-finished products to packaging, although it seems that the number of boxes increased, but the size of each box volume becomes smaller. It will have more ways in the stacking yards, easier to use as much container space, so as to achieve the purpose of saving freight costs.

2. Parts customs clearance and low tariffs

In addition, the reasons that prompted importers to request the SKD import, include the difference in the amount of tariffs on product imports. Most importing countries have higher import tariffs on finished products than on components for many electronic products and products with a higher degree of processing. Therefore, many importers, based on the local tariff policy of the importing country and the characteristics of the product, require the manufacturer to package the product components separately, with the bill of lading content described in accordance with the components, and import customs clearance declared in accordance with the components as well, in order to reduce the tariffs levied.

For example, if a Malaysian importer imports extension sockets from China, the tariff rate for the imported extension sockets is VAT (6% CIF) + consumption and service tax (10% CIF) in accordance with Malaysia's import taxation requirements, whereas if the product is imported in accordance with SKD, the copper parts and plastic shell are packed separately and declared separately. The import tariff rate for the copper parts is VAT (6% CIF) and the import tariff rate for the PC shell is Consumption and Service Tax (10% CIF), assuming that the sum of the copper parts CIF (US$70) and PC shell CIF (US$30 price is equal to the finished product CIF (US$100) price. There is more than 50% duty reduction point in comparison.

3. Low cost of local labour resources

Prior to the 21st century, China was recognised as the world's most populous country with a well-developed and relatively low-cost labour force. After entering the 21st century, China put forward a policy of building a strong human resource nation to improve its international competitiveness, no longer sticking to OEM production and assembly, but investing more in independent innovation. The country's transformation has affected the loss of labour at the bottom, which has led to a rise in labour costs. And many products and factories that have not entered automated machine production, have had to raise the price of their products. For some customers in importing countries that are already price sensitive, the SKD import method may be a good solution.

For example, countries with a low level of development, such as Vietnam, Thailand, Africa and poor and backward countries, which are rich in human resources, can solve the problem of increased additional costs of imported products, due to rising labour costs in exporting countries, as long as they have the ability to assemble their own products. For the importing countries, this not only balances the price of the product, but also has the effect of promoting their own industrial development and increasing employment opportunities and occupying their own markets.

Based on the several purposes of reducing average freight costs, reducing import tariffs and developing local low-cost labour, not only customers from less developed countries themselves, but also many customers from developed countries, consider transporting semi-finished products to these backward countries, assembling them locally and then importing them twice to the destination country.

Thirdly. the disadvantages of SKD import　　

Although the SKD import method can have the effect of reducing costs, for many products, there are also many restrictions on the importing customer because the final assembly needs to be carried out in the importing country.

Take the extension socket as an example, internal copper pieces, shell, and the power cord can be separate packaging under SKD packing method. After importing SKD parts to the local countries, customers need to install the copper parts inside the shell, and fix the shell by screws after connecting the power cord. The assembly process involves wiring, electricity testing steps, which request the import customer itself has such ability of production and testing.

Secondly, as the exporting factory is unable to carry out final testing on the semi-finished products, the subsequent assembly will also affect the final quality and service life of the products. Thus, the products exported in SKD packaging have a high defective rate of finished products.

Furthermore, although the SKD packaging method omits the final assembly step, it may not conform to the usual production process of export factories. From the factory's point of view, SKD packaging requires the development of a separate assembly line and the production cycle time of the product will be longer than that of a normal finished product.

Finally, the SKD packaging method inevitably leads to an increase in the number of boxes, which inevitably increases the price quoted for the export of the product. At the same time, the reduction in import tariffs for components will also result in exporters declaring their exports as components, resulting in a reduction in export tax refunds, so the exporter's quote for components will also include this loss. The importer has to balance the increased cost of the outer box and printing costs against the savings in freight and local labour costs in accordance with the exporter's quote.

As can be seen from the above, there are relative advantages and disadvantages to SKD. Importers should assess the product characteristics, their own capabilities and the local situation when choosing this method of import. If the assembly step does not have an overwhelming impact on product quality, or if they have professional production lines and testing capabilities, and if local labour costs have a significant advantage over direct imports of finished products, then the SKD import mode can be considered. Conversely, direct importation of finished products would be the safe way to go in order to ensure product quality and import efficiency.