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The Beijing Axis on China Sourcing for CHaINA '14 Live - June 2014

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An update on the shifts in China’s relative competitiveness and the implications for procurement executives from a practical point of view and The Beijing Axis experience

An update on the shifts in China’s relative competitiveness and the implications for procurement executives from a practical point of view and The Beijing Axis experience


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  • 1. China/Asia Sourcing Landscape and Implications for Global Supply Chains For CHaINA’14 Live International Advisory and Procurement www.thebeijingaxis.com 11 June 2014 Javier Cuñat Associate Director, The Beijing Axis javiercunat@thebeijingaxis.com The Beijing Axis 1 The Beijing Axis (TBA) is an international advisory and procurement firm • Established in 2002, The Beijing Axis: o Supports our clients’ international initiatives with cross-border advisory and procurement solutions o Thrives in dynamic and challenging emerging and frontier markets o Emphasizes strategy implementation, focused on ‘actions and transactions’ o Collaborates with clients and provides integrated solutions across their value chain • The Beijing Axis has formed a strategic partnership with Imperial Logistics, which creates an end-to-end, integrated supply chain from Asia to Africa and vice versa • The Beijing Axis Africa has been integrated within Resolve, an Imperial Logistics company. Resolve is a newly formed venture that merges Imperial Group companies Volition, e-Logics and associated Consulting, Technology and Managed Services businesses within the group Strategy and Management Consulting 1 • Research and analytics • Strategy formulation • Strategy implementation • Sales activation Procurement Services 2 • Procurement advisory • Strategic sourcing • Transactional procurement • Outsourced and managed procurement Commodity Trading 3 • Sales and marketing • Procurement • Financial structuring and transaction assistance • Intelligence Capital Advisory 4 • Origination • Financial advisory • Due diligence • Transaction project management The Beijing Axis 2 Full press release can be found at www.thebeijingaxis.com. For more information, please contact: barbieco@thebeijingaxis.com The Beijing Axis 3 • Potential still exists to reduce procurement costs when sourcing from China • Potential for cost savings must drive sourcing decisions • Design, quality and on-time delivery in China often meet international standards but need to be managed pro- actively • Chinese suppliers struggle with project integration - project management, on-site supervision, project coordination, logistics coordination, sub-supplier supervision are key • Various procurement challenges and risks exist when sourcing from China/Asia - these require awareness and action • Finding the ‘right’ supplier and managing the supplier appropriately are key • Supply chain managers able to anticipate market shifts, and adapt quickly will create a unique competitive advantage – a strategic approach to sourcing is essential • International companies are using various ‘models and sourcing structures’ for China procurement • Various emerging manufacturing clusters in Asia will continue to redefine ‘what to source’ and ‘where to source’ • China’s manufacturing export structure has shifted from labour-intensive goods to high- value manufactured goods – such supply chain shifts are still evolving • China/Asia stand out as a key sourcing destination for both upstream and downstream oil & gas equipment • China’s capabilities in quality and price enable it to provide substantial cost savings – CAPEX, MRO, consumables At the highest level Source: The Beijing Axis Analysis Shifts in China’s Relative Competitiveness and New Supply Markets That Matter Products, Categories and Packages That Make Sense Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes Selected Cases Studies • Developing economies in Asia, are transforming the global manufacturing landscape • China is the world’s largest exporter and a global manufacturing powerhouse • The era of cheap labour in China is over, but key manufacturing advantages remain intact • Various factors will reshape China’s position in the global manufacturing landscape • India, Indonesia, Vietnam, etc. will emerge as leaders of low- value manufacturing during the same time SummaryOverview
  • 2. The Beijing Axis 4 Agenda 1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter 2. Products, Categories and Packages That Make Sense 3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes 4. Selected Case Studies 5. Final Word Why and Where? What? How? Are we really sure? The Beijing Axis 5 Rank 1980 1990 2000 2013 Gross Value Add (USD bn) 2030F* 1 United States United States United States China 2980 China 2 Germany Japan Japan United States 2168 United States 3 Japan Germany Germany Japan 913 Japan 4 UK Italy China Germany 814 Brazil 5 France UK UK South Korea 379 India 6 Italy France Italy Italy 324 South Korea 7 China China France Russia 322 Germany 8 Brazil Brazil South Korea Brazil 297 Indonesia 9 Spain Spain Canada France 273 Russia 10 Canada Canada Mexico India 263 Mexico 11 Mexico South Korea Spain UK 255 Italy 12 Australia Mexico Brazil Mexico 219 France 13 Netherlands Turkey Taiwan Canada 218 UK 14 Argentina India India Indonesia 208 Canada 15 India Taiwan Turkey Spain 181 Thailand Global Manufacturing by Gross Value Added (USD bn, 2013) Top Manufacturers by Nominal Manufacturing Gross Value Added (1980-2030F) Note*: 2030 rankings are based on The Beijing Axis forecasts Source: World Bank; IMF; CIA Factbook; The Beijing Axis Analysis Developing economies led by China, India and Indonesia are transforming the global manufacturing landscape - expect the trend to continue World China US Japan Germany Others (Developed) Others (Developing) TotalManufacturingValueAdded(USDbn,2012) 17% X% represents manufacturing value added as a % of GDP 32% 22%13% 19% 12546 2980 2168 913 814 3469 2202 Share of world 14% 15% 24% 17% 7% 6% 28% 18% 100% In the last decade, manufacturing output grew by 2.6% annually in developed economies and 7.8% annually in developing economies Why and where? The Beijing Axis 6 China’s importance to the global economy is illustrated by its position as the world’s largest exporter – driven by its manufacturing sector, it has rapidly outstripped developed markets World’s Major Exporters (2013) Source: World Bank; IMF; UN Comtrade; The Beijing Axis Analysis 0 400 800 1,200 1,600 2,000 2,400 2,800 0 10 20 30 40 50 60 70 80 90 Exports (USD bn) Exports/GDP (%) Bubble Size: GDP = USD 1,000 bn China Developing Asia Developed Asia Others China’s Exports (USD bn) 2003 485 2008 1,582 2013 2,225 CAGR (2003-2013) 16% Malaysia Netherlands Thailand S. Korea Germany China US Japan Brazil India Australia Switzerland Mexico China in 2003 Russia Canada Spain France UK China overtook Germany to become the world’s largest exporter in 2010 A large economy, large exports and high exports to GDP ratio – however, its future growth model will not depend on exports Why and where? The Beijing Axis 7 80 120 160 200 04 06 08 10 12 China’s manufacturing competitiveness among developed markets remain intact despite a narrowing gap in labour costs, increased industrial land costs and rising electricity costs Cost Input Comparison Between China and Developed Markets1 Note 1: Value of first utilised year for a country is assigned a base value of 100 for indices Note 2: Wholesale Price Index for China is based on TBA computation Source: Various; The Beijing Axis Analysis 60 120 180 240 300 00 02 04 06 08 10 12 60 140 220 300 380 01 03 05 07 09 80 130 180 230 280 01 03 05 07 09 70 85 100 115 130 02 04 06 08 10 12 90 110 130 150 02 04 06 08 10 12 Wholesale Price Index2 Diesel Price Index Real Effective Exch. Rate 80 160 240 320 400 02 04 06 08 10 12 Hourly Labour Rate Index Labour Productivity Index Electricity Price Index Rental Cost Index China Japan US Germany ? Rental cost reflects China’s overheating commercial real estate market Exponential rise in labour costs Upward sloping curve indicates increased competitiveness Why and where?
  • 3. The Beijing Axis 8 China’s manufacturing competitiveness has begun to partially erode recently due to increasing labour costs, real estate costs, and rising inflation - is there a next China in Asia? Cost Input Comparison Between China and Other Asian LCC Markets1 Note 1: Value of first utilised year for a country is assigned a base value of 100 for indices Note 2: Wholesale Price Index for China is based on TBA computation Source: Various; The Beijing Axis Analysis 40 190 340 490 640 790 940 00 04 08 12 80 160 240 320 400 01 03 05 07 09 80 130 180 230 280 01 03 05 07 09 40 60 80 100 120 02 04 06 08 10 12 90 140 190 240 290 02 04 06 08 10 12 90 165 240 315 390 02 04 06 08 10 12 90 130 170 210 04 06 08 10 12 Compared to other LCCs in Asia, China has seen greater increases in both hourly labour rates and labour productivity ? Wholesale Price Index2 Real Effective Exch. RateHourly Labour Rate Index Rental Cost Index Diesel Price IndexLabour Productivity Index Electricity Price Index China Vietnam India Indonesia Upward sloping curve indicates increased competitiveness Why and where? The Beijing Axis 9 China’s manufacturing competitiveness has begun to partially erode recently due to increasing labour costs, real estate costs, and rising inflation - is there a next China elsewhere? Cost Input Comparison Between China and Other Non-Asian LCC Markets1 Note 1: Value of first utilised year for a country is assigned a base value of 100 for indices Note 2: Wholesale Price Index for China is based on TBA computation Source: Various; The Beijing Axis Analysis 60 140 220 300 380 00 02 04 06 08 10 12 60 135 210 285 360 01 03 05 07 09 80 120 160 200 240 280 01 03 05 07 09 40 60 80 100 120 02 04 06 08 10 12 80 140 200 260 320 380 02 04 06 08 10 12 90 140 190 240 290 340 390 02 04 06 08 10 12 90 130 170 210 04 06 08 10 12 Increases in cost inputs for manufacturing is a global phenomenon and can be seen in other LCCs worldwide ? Diesel Price IndexLabour Productivity Index Electricity Price Index Wholesale Price Index2 Real Effective Exch. RateHourly Labour Rate Index Rental Cost Index China Turkey Poland Mexico Upward sloping curve indicates increased competitiveness Why and where? The Beijing Axis 10 0 6 12 18 24 30 Vietnam Indonesia Philippines India China Mexico Poland USA Japan Germany 2001 2013 0 5 10 15 20 25 Vietnam Indonesia Philippines India China Mexico Poland USA Japan Germany 2007 2012 Average Hourly Manufacturing Wage Comparison in Selected Economies (USD, 2002 vs. 2013)* Note*: Hourly manufacturing wage is computed using total manufacturing compensation, which includes compensation elated to all employees in the manufacturing sector and includes (1) direct pay and (2) employer social insurance expenditures and labour-related taxes Source: Bureau of Labour Statistics; National Bureau of Statistics; CBRE; The Beijing Axis Analysis Average Industrial Rentals in Selected Economies (USD/sq. ft./annum, 2008 vs. 2013) Although manufacturing input prices have increased in China, they are still low in absolute terms when compared to other manufacturing powerhouses 7 CAGR (%) 11 8 8 9 16 2 9 3 3 Chinese government‘s 12- year plan calls for a minimum 13% wage increase every year over the next five years Developed markets Non-Asian LCCs Other Asian LCCs China's wage increase is partly driven by rising inflation and the government's drive to reduce income inequality 1 5 3 6 11 9 3 -1 -4 1Developed markets Non-Asian LCCs Other Asian LCCs CAGR (%) Tight supply and sustained demand have led to a robust increase in industrial rentals n China Why and where? The Beijing Axis 11 1% 1% 11% 8% 1% 0% 6% 6% 4% 4% 4% 3% Labour Productivity Comparison Across Selected Economies (USD, 2003-2013)* Note*: GDP per person employed in 1990 USD is used as a measure of labour productivity Source: The Conference Board; The Beijing Axis Analysis China’s labour productivity has improved significantly over the past decade but it is still far lower than that of developed economies - this presents both opportunities and challenges China's GDP per person employed is only 23% of USA’s X% Represents CAGR Represents a GDP per person employed of USD 20,000 Year USA China Mexico India Indonesia Vietnam 2003 61,783 6,517 18,931 5,491 8,208 4,328 2008 65,495 10,990 19,996 7,289 9,832 5,309 2013 70,242 16,470 20,289 9,639 11,880 6,210 Why and where?
  • 4. The Beijing Axis 12 2.0 2.5 3.0 3.5 4.0 4.5 5.0 30 35 40 45 50 55 60 65 Comparison of Sourcing Capabilities of Selected Economies (2013) Note*: Technology Index based on WIPO’s Global Innovation Index (out of 100) and Infrastructure Index based on World Bank’s Logistics Performance Index (out of 5) Source: World Intellectual Property Organisation; World Bank; UN; The Beijing Axis Analysis China will continue to hold certain key advantages compared to its manufacturing competitors i.e. robust infrastructure, advanced technology/R&D and a skilled labour force Infrastructure Index* Technology Index* A bubble of this size represents 50% of the population aged 25 and older with a college degree US Germany Japan Czech Republic Malaysia China Brazil India Vietnam Mexico Indonesia Developed markets - high technology capability, robust infrastructure and highly skilled labour force Emerging LCCs still have a long way to go before catching up with China in terms of technology, infrastructure and skilled labour pool Poland Why and where? The Beijing Axis 13 Various positive and negative factors will reshape China’s position in the global manufacturing landscape over the short, medium and long term – the implications are clear Positive/Negative Factors that will Affect China’s Competitiveness in the Short, Medium and Long Term Source: The Beijing Axis Analysis Robust Infrastructure to Support Manufacturing Robust Infrastructure to Support Manufacturing Large Skilled Labour PoolLarge Skilled Labour Pool Integrated Supply Chain and Diversified Supply Bases Integrated Supply Chain and Diversified Supply Bases Increasing Focus on High-end Value Products and R&D/Technology/Innovation Increasing Focus on High-end Value Products and R&D/Technology/Innovation Product Integration Capability and Established Industrial Clusters Product Integration Capability and Established Industrial Clusters Increasing Environmental Costs and Stringent HSE Regulations Increasing Environmental Costs and Stringent HSE Regulations Increasing Wage InflationIncreasing Wage Inflation Increasing Competition from Other LCCs Increasing Competition from Other LCCs ‘Made in China’ Brand/Quality Risk‘Made in China’ Brand/Quality Risk Strengthening Currency (RMB)Strengthening Currency (RMB) Ageing PopulationAgeing Population Positive Factors Negative Factors 1 2 3 4 5 1 2 3 4 5 6 Factors that will persist in the short-term Factors that will persist in the medium-term Factors that will persist in the long-term China’s Manufacturing Competitiveness Factors arranged in the order of importance Numerous National and Local Government Incentives Numerous National and Local Government Incentives 6 Factors arranged in the order of importance Why and where? The Beijing Axis 14 China’s alternatives in LCC sourcing continue to attract global attention Selected Recent Quotes on China and Emerging LCC Alternatives Source: Various; The Beijing Axis Analysis “The days of ultra-cheap labor and little regulation are gone. As manufacturers' costs climb, export prices will follow." — Businessweek “A majority of buyers report paying higher prices for products sourced in China, and China’s exporters are becoming less competitive with other low-cost countries such as Vietnam, particularly in the market of low-end products.” — AmCham Vietnam “Over the years [sourcing from India] has been increasing year on year by around 100%. Of course, it's on a small base. China is big for us from a market perspective. From a sourcing perspective, India is ahead of China." — James Chelliah, CFO, AstraZeneca India “After China, Thailand is the second best place for investment for emerging markets. Ford recently started its production of their all new Ford Focus in Raygong. If you’re looking for a new place to set up your manufacturing, Thailand is one place you should consider.” — Bloomberg “We still have a lot of sourcing from China. We have a Far East office and we have marginally increased the amount we take out of China in the last year and some of the locations have changed. Costs have increased marginally but we are sticking with China.” — CEO, Prominent high street chain “The challenge for rival destinations such as Vietnam is that China still offers great value and other countries will be hard pushed to take pole position.”— Richard Lowe, Head of Retail and Wholesale, Barclays Corporate “All the responding Indian companies say they already collaborate with customers at the R&D level. This could reflect the historical lack of manufacturing in India, and a strong national desire to catch up” — Cap Gemini-IDG Research “International companies sourcing from Thailand should raise concerns with the government that using criminal charges to silence rights critics could adversely affect the overall reputation of Thailand’s major export sectors.”— Brad Anamy, Business Watch Why and where? The Beijing Axis 15 Agenda 1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter 2. Products, Categories and Packages That Make Sense 3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes 4. Selected Case Studies 5. Final Word Why and Where? What? How? Are we really sure?
  • 5. The Beijing Axis 16 Various emerging manufacturing/industrial clusters in Asia will continue to redefine ‘what to source’ and ‘where to source’ Source: Various; The Beijing Axis Analysis China • Medical and technical equipment • Electrical transformers • Data processing machines • Mining equipment • Drilling platforms • Electronic integrated circuits • Displays, monitors and projectors • Furniture • Electronic products • Plastic products • Textiles and garments • Footwear India • Pharmaceuticals • Drilling platforms • Gems and precious stones • Vehicles • Electrical filaments • Fertilisers and other organic chemicals • Textiles and garments • Footwear Indonesia • Motor vehicles • Tires and other rubber products • Furniture and other wood products • Textiles and garments • Footwear • Paper products Malaysia • Semiconductors • Office equipment • Displays, monitors and projectors • Rubber products • Furniture and other wood products South Korea • Data processing machines • Electronic integrated circuits • Drilling platforms • Vehicles • Semiconductors • Displays, monitors and projectors • Optical fibers • Storage batteries Japan • Mining equipment • Electronic integrated circuits • Vehicles • Semiconductors • Office equipment • Displays, monitors and projectors • Vacuum pumps • Electric capacitors • Pneumatic tires Thailand • Data processing machines • Electronic integrated circuits • Vehicles • Air conditioners • Rubber products Vietnam • Furniture • Metallic wires • Textiles and garments • Footwear High-value products highlighted in red Low-value products highlighted in black What? The Beijing Axis 17 0 500 1,000 1,500 2,000 2001 2013 Machinery and Electrical Equipment Foodstuffs Miscellaneous Manufactured Articles Products Classified by Material Mineral Items Chemical Products Others Composition of China’s Exports* (USD bn; 2001, 2013) CAGR Represents CAGR for the period 2001-2013 Note*: SITIC Classification System Source: China Customs; The Beijing Axis Analysis Over the last decade, China’s manufacturing export structure has shifted from labour-intensive goods to high-value manufactured goods such as machinery - such supply chain shifts are still evolving Increasing exports share 22.1% 13.1% 17.1% 19.2% 12.3% 20.1% 10.7% 36% 47% X% 33% 26% China’s Exports as a Share of Global Exports for Selected High-Value Items (%, 2002 vs. 2012) 0 10 20 30 40 50 Centrifuges Transmission Shafts/Cranks Construction and Mining Parts Silicon Wafers Optical Fibres Refrigerators, Freezers Cruise/Cargo Ships, Barges Derricks and Cranes Motorcycles 2002 2012 15 22 CAGR (%) 12 13 15 14 13 22 22 China’s global exports presence in mid- and high-value products is considerably larger today than it was a decade ago Machinery: 22.1 % Textiles and garments exports grew from 46.1 bn to 256 bn, representing a CAGR of 15.3% 19.3% What? The Beijing Axis 18 Several industries have historically focused on China's coastal regions but the trend is clear – as wage inflation continues to rise in coastal regions, manufacturers are moving to emerging inland clusters China’s Manufacturing Clusters (2012) Note: The dots on the map represent key industrial cities in each cluster Source: The Economist; China Statistical Bureau; The Beijing Axis Analysis Bohai Bay Economic Rim Industry Clusters: Automobiles, Aeronautics, Consumer Electronics, Textiles, Industrial Machinery, Electrical Equipment, Chemicals Important Cities: Beijing, Tianjin, Dalian, Shenyang Total Exports (2011): USD 164 bn South-West Industry Clusters: Automotive, Industrial Machinery, Pharmaceuticals, Medical Products, Chemicals Important Cities: Chongqing, Chengdu Total Exports (2011): USD 22 bn Pearl River Delta Industry Clusters: Textiles, Automobiles, Apparel, Foodstuff, Consumer Electronics, Petrochemicals, Industrial Equipment, Electrical Equipment Important Cities: Shenzhen, Zhuhai, Jiangmen, Foshan, Dongguan, Guangzhou Total Exports (2011): USD 438 bn Yangtze River Delta Industry Clusters: Automobiles, Shipping, Aeronautics, Consumer Electronics, Textiles, Pharmaceuticals, Chemicals, Industrial Machinery, Electrical Equipment Important Cities: Shanghai, Nanjing, Yangzhou, Suzhou, Hangzhou, Ningbo, Shaoxing, Wenzhou Total Exports (2011): USD 590 bn Central Industry Clusters: Automotive, Industrial Machinery, Textiles, Electronics, Chemicals Important Cities: Changsha, Wuhan, Zhengzhou Total Exports (2011): USD 37 bn What? The Beijing Axis 19 The Indonesian textile industry is highly concentrated on the island of Java, particularly in West Java. For the garment industry, clusters can be found in West Java, Jakarta and Batam Island Source: Various; The Beijing Axis Analysis Bandung, West Java: Footwear Wonosobo, Central Java: Flax fiber Almost 90% of textile exports come from Java, with more than 50% of exports originating in West Java alone Batam: Denim, Dyed twills, Swim wear Tangrang: Footwear West Kalimantuan: Woven clothes Within the garment industry, a high concentration can be found in West Java, Jakarta and Batam Island, the latter being a free trade zone Jakarta, Central Java: Domestic buying hub Semarang, Central Java: Denim product Bekasi, Central Java: T-shirts, Sweaters, Jackets, Sports wear Sumedang Utara, Central Java: Knitted fabrics, Acrylic fabric, socks Select Apparel Industrial Clusters in Indonesia Select Industrial Clusters What?
  • 6. The Beijing Axis 20 Digging down to the product level, China exports a wide variety of product categories – supply chain partner to the world List of Selected Key Export Product Categories from China (USD bn, 2012) Source: UN Comtrade; The Beijing Axis Analysis Machinery (USD 375.9 bn) Taps, Cocks, Valves for Pipes, Tanks, Motors 13.1 bn Air Pumps and Compressors 10.3 bn Liquid Pumps and Elevators 5.8 bn Derricks and Cranes 3 bn Outboard Motors 2.1 bn Electrical and Electronic Equipment (USD 487.3 bn) Electric Transformers and Static Converters 23.7 bn Electrical Motors and Generators 9.2 bn Storage Batteries 4.1 bn Electromagnets 3 bn Drills 2 bn Ships (USD 38.8 bn) Passenger and Goods Transport Ships 31.8 bn Special Purpose Ships and Vessels 4.6 bn Tankers 3.8 bn Drilling Platforms 2.5 bn Tugs and Pusher Crafts 1.1 bn Other Equipment Cargo Containers 8.4 bn Screws, Nuts and Bolts 4.5 bn Casing 1.6 bn Tubing and Drill Pipes 1 bn Gas Filters and Purifiers 0.9 bn What? The Beijing Axis 21 As an example, China stands out with the largest number of mining procurement packages in the region. For other Asian countries, the sourcing potential is limited to a few select packages Source: The Beijing Axis Analysis Japan Upstream Downstream • Engines • Cranes • Drilling Machines • Pumps • Valves • Filtration Devices • Generators • Rubber Pipes • Steel Pipes • Tankers • Motors • Mixers South Korea Upstream Downstream • Engines • Cranes • Floating Docks • Valves • Wellheads • Generators • Steel Pipes • Tankers • Motors • Vapour Recovery Units Malaysia Upstream Downstream • Cranes • Floating Docks • Filtration Devices • Rubber Pipes • Mixers Indonesia Upstream Downstream • Dredgers • Pumps • Filtration Devices • Steel Pipes • Motors • Mixers China Upstream Downstream • Engines • Cranes • Floating Docks • Rigs • Drilling Machines • Dredgers • Pumps • Valves • Filtration Devices • Wellheads • Generators • Rubber Pipes • Steel Pipes • Tugs and Barges • Tankers • Mixers • Vapour Recovery Units • Motors India Upstream Downstream • Cranes • Floating Docks • Dredgers • Valves • Filtration Devices • Wellheads • Generators • Steel Pipes • Tugs and Barges • Mixers • Vapour Recovery Units Thailand Upstream Downstream • Floating Docks • Rigs • Pumps • Valves • Rubber Pipes • Tugs and Barges • Motors What? The Beijing Axis 22 0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% 60% Analysis of China’s Exports of Top Oil & Gas Equipment* (2012) Note*: The top 5 oil & gas-related equipment in each product category based on total global traded value were selected for comparison Source: UN Comtrade; The Beijing Axis Analysis Over the last decade, China’s exports of major oil & gas equipment has grown rapidly as the country transitions towards manufacturing high-value goods Export CAGR for the period 2001-2012 (%) Fixed Plant & Equipment Mobile Equipment Production Consumables MRO Consumables Global Market Share (%) Bulk Bags Pneumatics Drilling Machines Labels and Metallised Logos Light Mobile Equipment Packaging Steel and Structural Products Floating Drillers Tugs and Barges Engines and Generators Iron and Steel Pipe Fittings HVAC Parts Tankers Dredgers Steel Shot and Steel Balls Screws, Nuts and Bolts Floating Docks Instrumentation and Automation Cranes and Spares Paints/Marine Coatings A bubble of this size represents total export value of USD 5 bn What? The Beijing Axis 23 0% 10% 20% 30% 40% 50% 60% 0% 10% 20% 30% 40% 50% 60% Analysis of Developing Asia’s1 Exports of Top Oil & Gas Equipment2 (2012) Note: (1) ‘Developing Asia’ includes both developing and emerging Asian economies as per the economic classification (2) The top 5 oil & gas-related equipment in each product category based on total global traded value were selected for comparison Source: UN Comtrade; The Beijing Axis Analysis Developing Asia’s global exports of major oil & gas equipment has also grown rapidly – China leads, but alternatives are rising Global Market Share (%) A bubble of this size represents total export value of USD 5 bn Fixed Plant & Equipment Mobile Equipment Production Consumables MRO Consumables Represents considerable shift towards the right Bulk Bags Pneumatics Drilling Machines Labels and Metallised Logos Light Mobile Equipment Packaging Steel and Structural Products Floating Drillers Tugs and Barges Engines and Generators Iron and Steel Pipe Fittings HVAC PartsTankers Dredgers Steel Shot and Steel Balls Screws, Nuts and Bolts Floating Docks Instrumentation and Automation Cranes and Spares Paints/Marine Coatings Export CAGR for the period 2001-2012 (%) Dev. Asia has a market share of 78% in bulk bags What?
  • 7. The Beijing Axis 24 Agenda 1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter 2. Products, Categories and Packages That Make Sense 3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes 4. Selected Case Studies 5. Final Word Why and Where? What? How? Are we really sure? The Beijing Axis 25 What are the key procurement challenges in China/Asia? Key Procurement Challenges in China/Asia Source: The Beijing Axis Analysis Supplier Selection Information Availability/ Reliability Supplier Attitude/ Professionalis- m Contract Documentation Quality of RFx Submission Technical/ Standards Supplier Social/HSE Audit Supplier Management Quality Management Expediting Communication and Coordination Schedule Delays Documentation Management Packaging How? • Supplier benchmarking • Lack of transparency • Unwillingness to tender • Language • Sub-contract management • Insufficient after-sales service • Supplier non-performance • Language The Beijing Axis 26 How to overcome these challenges – supplier selection Source: The Beijing Axis Analysis Supplier Selection Information Availability/ Reliability Supplier Attitude/ Professionalism Contract Documentation Quality of RFx Submission Technical/ Standards Supplier Social/HSE Audit a. Conduct thorough background checks b. Challenge information submitted c. Probe inconsistencies a. Pro-active engagements b. On-going clarification c. Challenge submission a. Clarify detailed standards b. Accommodate/adjust c. Adapt a. Verify procedure b. Ensure implementation matches procedure c. Educate suppliers a. Simplify documents b. Find common ground c. Compromise d. Negotiate/spend time How? The Beijing Axis 27 How to overcome these challenges – supplier management Source: The Beijing Axis Analysis Supplier Management Quality Management Expediting Communication and Coordination Schedule Delays Documentation Management Packaging a. ‘Right’ supplier selection b. On-site inspection c. Good supplier management a. Understand manufacturing processes b. Coordinate across supplier’s various departments (engineering, production, quality, etc.) c. Proactively monitor and probe progress a. Involve suppliers during planning b. Avoid/minimise design change c. Implement necessary checkpoints d. Manage sub-suppliers a. Clarify document requirements b. Ensure accurate documentation c. Ensure document quality meets requirements a. Specify detailed packaging requirements b. Ensure accurate numbering system in place c. Ensure packaging meets safety and environmental requirements How?
  • 8. The Beijing Axis 28 Towards a strategic procurement approach and process Strategic Procurement Process – Planning and Execution ‘Right’ supplier through in-depth, and rigorous engagement Optimal shortlist of potential suppliers based on ‘pre- qualification’ filters Products delivered on time with required specifications/quality • Procurement industry search • Supplier identification and universe list compilation • Supplier evaluation and long list • RFI, pre-qualification and supplier shortlist • (RFQ, RFP and/or RFT) process • Supplier site visit and plant audit • Post-trip commercial and technical evaluation • Commercial negotiation • Contracting • Supplier contract administration • Quality management (QA/QC) and on-site manufacturing supervision • Expediting • Logistics coordination • Supplier installation and commissioning support • After sales service support Supplier Identification Supplier Engagement Transaction Management Procurement Planning OutcomeProcurementProcess Purchase Order (PO) 1 2 3 How? Source: The Beijing Axis Analysis The Beijing Axis 29 International companies are using various ‘models and sourcing structures’ for China procurement Various Sourcing Models in China Note: (1) Also use EPCMs for projects (2) FIFO: Fly-in-fly out Source: Various; The Beijing Axis Analysis No China SourcingNo China Sourcing Sourcing via AgentSourcing via Agent Fly-in-fly out (FIFO) Fly-in-fly out (FIFO) via a Procurement Service Provider (PSP)1 via a Procurement Service Provider (PSP)1 • No agents • High use of agents • Medium use of agents • Light use of agents • Very light use of agents • No fly-in-fly out (FIFO) • Light FIFO2 • High FIFO • Medium FIFO • Medium FIFO • No PSPs • Light use of PSPs • Medium use of PSPs • High use of PSPs • High use of PSPs • No Office • No Office • No Office • No Office • Small Office • Examples: Gold Fields, Harmony (2) Lonmin (2) Impala • Examples : Xstrata Ferroalloys, ENRC, Hulamin, DCD, Lonmin, Trident, Robor, Crosslands, CBH, Lihir Gold (Newcrest) • Examples: Newmont, Exxaro(2), Peabody (2), Bateman Eng.(2), Xstrata Coal, Anglo Gold (2), Votorantim (2), Aditya Birla, Barick FMG (2) • Very light use of agents • Light FIFO • Medium use of PSPs • Medium Office • Examples: Anglo PLC, BHPBilliton, Jindal Steel • Very light use of agents • Light FIFO • Light use of PSPs • Large Office • Examples: Rio Tinto, Vale, Essar Office in China Small Medium Large Office in China Small Medium Large Level of Engagement and Commitment • Examples: Newcrest Kinross (2) PrimaryandSecondaryChannels How? The Beijing Axis 30 What does it mean for procurement and supply chain managers? Source: The Beijing Axis Analysis • Advanced analytics, i.e. benchmarking, becomes a value driver • Supplier relationship management becomes key • Supplier performance management becomes more complex • Supplier development becomes challenging • Category knowledge and management necessary • Global supply chain portfolio management becomes essential • Total cost of ownership has become more complex • Contract management a differentiator • Risk management becomes key • Need wider board room involvement – more complex, more strategic • New skills become necessary – i.e. languages, cultural astuteness and international business experience How? The Beijing Axis 31 Agenda 1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter 2. Products, Categories and Packages That Make Sense 3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes 4. Selected Case Studies 5. Final Word Why and Where? What? How? Are we really sure?
  • 9. The Beijing Axis 32 What can we learn from complex case studies? Source: The Beijing Axis Analysis Project Type Product Categories LearningsClient Case Study 3 • Establishment of quality risk control strategy for major capital procurement project, compilation of QCP and final quality documentation pack, and risk-management of manufacturing process on site • Electric rope shovels • Hydraulic shovels • Large regional coal company • Quality documentation • QCP compilation • Project coordination • On-site risk management • On-site expediting 3 Case Study 2 • A multi-year service agreement whereas TBA acts as client’s procurement office in China, providing procurement management, strategic sourcing and market monitoring services to the client • Magnesium ingots • Hardeners - silicon, FeAl, CrAl, MnAl • Casting equipment • Wire belt • Generator sets • Supplier vetting • QC inspections • Logistics coordination • Post-delivery support to client • Large listed international aluminum company 2 Case Study 1 • Vendor identification, tender management, order placement and comprehensive management for heavy equipment and structural steel for plant expansion project • Kilns • Mills • Structural steel • Platework • Transformers • RFQ adaptation to China • Coordination of design changes • QA plan implementation • On-site expediting • Leading global ferroalloy producer 1 The Beijing Axis 33 Case studies key takeaways Source: The Beijing Axis Analysis Plant Equipment Mining and Plant Equipment Rope Shovels  Supplier involvement in early stage planning and design  Permanent on-site supervision of suppliers  Chinese suppliers struggling with project integration  Dedicated project management team with complementary skills  Client's technical support is crucial  Initial category feasibility assessment for China sourcing  Periodic analysis of China supply and feasibility review  Hands-on quality assurance including selective inspection  Client's technical support is crucial  Engage supplier during design phase to benefit from innovation  Both clients and suppliers require assistance for QCP and documentation  On-site management key in mitigating risks associated with complexity  Quality control is essential – inspections enable control over defects and repairs  Management of component sub-suppliers also required  Highly competitive suppliers exist in China, but may be small in number Shift of China’s competitiveness – from single components to large pieces of equipment Shift of QA/QC model – from full-time to part time inspection CSF: Supplier selection, supplier relationship management The Beijing Axis 34 Agenda 1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter 2. Products, Categories and Packages That Make Sense 3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes 4. Selected Case Studies 5. Final Word Why and Where? What? How? Are we really sure? The Beijing Axis 35 • Potential still exists to reduce procurement costs when sourcing from China • Potential for cost savings must drive sourcing decisions • Design, quality and on-time delivery in China often meet international standards but need to be managed pro- actively • Chinese suppliers struggle with project integration - project management, on-site supervision, project coordination, logistics coordination, sub-supplier supervision are key • Various procurement challenges and risks exist when sourcing from China/Asia - these require awareness and action • Finding the ‘right’ supplier and managing the supplier appropriately are key • Supply chain managers able to anticipate market shifts, and adapt quickly will create a unique competitive advantage – a strategic approach to sourcing is essential • International companies are using various ‘models and sourcing structures’ for China procurement • Various emerging manufacturing clusters in Asia will continue to redefine ‘what to source’ and ‘where to source’ • China’s manufacturing export structure has shifted from labour-intensive goods to high- value manufactured goods – such supply chain shifts are still evolving • China/Asia stand out as a key sourcing destination for both upstream and downstream oil & gas equipment • China’s capabilities in quality and price enable it to provide substantial cost savings – CAPEX, MRO, consumables At the highest level Source: The Beijing Axis Analysis Shifts in China’s Relative Competitiveness and New Supply Markets That Matter Products, Categories and Packages That Make Sense Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes Selected Cases Studies • Developing economies in Asia, are transforming the global manufacturing landscape • China is the world’s largest exporter and a global manufacturing powerhouse • The era of cheap labour in China is over, but key manufacturing advantages remain intact • Various factors will reshape China’s position in the global manufacturing landscape • India, Indonesia, Vietnam, etc. will emerge as leaders of low- value manufacturing during the same time SummaryOverview
  • 10. The Beijing Axis 36 Final word • The global manufacturing landscape is changing and China/Asia is now at the forefront of it • China’s competitive strengths and weaknesses will continue to evolve – realities, myths, threats and opportunities will differ • Understand the China/Asian System – market dynamics, language, culture, business practices • Very complicated - many risks i.e. quality/safety, counterparty risk, financing, complexity, contracts, language, trade protectionism, etc. – Watch out! • Finding the ‘right’ supplier and managing supplier appropriately are key! • Communicate well and often; manage engagements – Both with HQ at home and with Chinese counterparties • Four key questions - Why? Where? What? How? • Learn from others! www.thebeijingaxis.com COPYRIGHT© The Beijing Axis Ltd. 2014. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of The Beijing Axis. International Advisory and Procurement Beijing The Beijing Axis Phoenix Place Tower A, Unit 2306-2307, 5A Shuguang Xili, Chaoyang, Beijing 100028, China Tel: +86 10 6440 2106 china@thebeijingaxis.com Singapore The Beijing Axis Group Level 42, Suntec Tower 3, 8 Temasek Boulevard, 038988 Singapore Tel: +65 6829 2189 singapore@thebeijingaxis.com Perth The Beijing Axis Level 11 Brookfield Place, 125 St Georges Terrace, Perth, Western Australia 6000, Australia Tel: +61 8 6189 8637 australia@thebeijingaxis.com Mumbai The India Axis (a member company) Level 7, Vibgyor Towers, Bandra Kurla Complex, Bandra (East), Mumbai 400072, India Tel: +91 88 0063 9399 india@thebeijingaxis.com Johannesburg The Beijing Axis Africa Gijima Office Park, Jupiter Building, 47 Landmarks Avenue, Kosmosdal, Samrand, South Africa Tel: + 27 (0) 12 492 1001 southafrica@thebeijingaxis.com Thank You! Javier Cuñat Associate Director javiercunat@thebeijingaxis.com