B2B e-Commerce in China's Automotive Market

A G X S W H I T E PA P E R B2B e-Commerce Strategies for the Chinese Automotive Market A Guide for European and North American Manufacturers

Table of Contents Section 1—China’s Opportunity for High Volume Sales and Low Cost Manufacturing ............................4 The World’s Fastest Growing Automotive Market ..............................................................................4 China’s Manufacturing Opportunity ....................................................................................................5 Section 2—Challenges of Competing in China’s Automotive Market .......................................................7 Increasing Competition.......................................................................................................................7 Variable Demand ................................................................................................................................7 Variable Supply...................................................................................................................................8 Materials Management and Logistics Challenges ..............................................................................8 Export Dynamics.................................................................................................................................9 Keys to Supply Chain Management Success....................................................................................10 Section 3—Assessing B2B e-Commerce Readiness in China..................................................................12 Four Infrastructure Requirements for B2B e-Commerce...................................................................12 Infrastructure.....................................................................................................................................13 Technical Support .............................................................................................................................14 Large Business Enterprise Application Infrastructure .......................................................................15 Small Business Application Infrastructure ........................................................................................16 Technology Focus in China ...............................................................................................................17 Section 4—Defining a B2B e-Commerce Strategy for China...................................................................19 Your Value Chain in China ................................................................................................................19 Assessing Trading Partner Readiness ...............................................................................................21 Automating B2B Business Processes...............................................................................................23 Section 5—Implementing a B2B e-Commerce Strategy in China...........................................................25 Large Customers...............................................................................................................................25 Large Suppliers.................................................................................................................................28 Small and Mid-Size Suppliers ..........................................................................................................30 Section 6—GXS, Your Trusted Partner in China......................................................................................34 Automotive Industry Domain Expertise............................................................................................34 GXS Resources in China ...................................................................................................................34 GXS Experience in China ..................................................................................................................35 GXS B2B e-Commerce Solutions ......................................................................................................36 B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 2 A GXS White Paper

List of Figures Figure 1—Annual Sales of Vehicles in China Figure 2—Keys to Supply Chain Success in China Figure 3—Assessing B2B e-Commerce Readiness in China Figure 4—Trading Partner Segmentation (Manufacturing for Sale in China) Figure 5—Trading Partner Segmentation (Manufacturing for International Export) Figure 6—Sample Trading Partner Readiness Figure 7—Pull Based Replenishment Figure 8—Recommended B2B Architecture for Demand Chain Figure 9—E-Business Document Exchange Usage Figure 10—Communications Methods Used with Suppliers Figure 11—Computer Based Customer Interactions Figure 12—Recommended B2B Architecture for Supplier Integration B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 3 A GXS White Paper

Section 1 CHINA’S OPPORTUNITY FOR HIGH VOLUME SALES AND LOW COST MANUFACTURING The World’s Fastest Growing Automotive Market The Chinese automotive market has been growing at an average of 10 percent annually, much faster than any other region in the world. It is growing much faster than other emerging markets such as India, Latin America, Central and Eastern Europe. Automotive sales have been relatively modest in the maturing markets of North America, Europe and Japan. In contrast, China’s domestic automotive market is predicted to account for 15 percent of global growth in the next five years. Figure 1—Annual Sales of Vehicles in China (1995-2010) Source: China Auto Monthly There are two main drivers behind the rapid growth of the Chinese automotive industry: • Increasingly open economic policies in China. • The rising income per capita amongst Chinese consumers. China’s Open Economic Policy The most significant changes in the economic policy are being driven by China’s accession into the World Trade Organisation (WTO). Protectionist legislation has traditionally restricted foreign participation in the market. The restrictive policies are now being abandoned in favour of more open economic policies. WTO membership has significant implications for the domestic automotive market in China. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 4 A GXS White Paper

• Tariffs and quotas—Historically, tariffs and quotas have discouraged foreign OEMs from importing vehicles for sale in China. Tariffs on foreign imports averaged 200 percent in the 1980s and 100 percent in the 1990s. With China’s WTO accession, tariffs are being dramatically reduced to levels of 25 percent as early as 2006. Quotas have historically limited vehicle imports to 30,000 vehicles a year. The quotas are also being phased out in the coming years. • Sourcing—Historically, manufacturers were required to source up to 80 percent of parts and materials locally from Chinese vendors. These local requirements are being completed phased out with the new WTO legislation. • Retail and Distribution—Foreign enterprises have historically been prohibited from owning retail distribution networks such as retail dealerships. With the WTO accession, foreign enterprises will be able to own both wholesale and retail distribution entities. • Financing—Non-Chinese banking institutions have been restricted from providing consumer loans for vehicle financing. Over the coming years de-regulation will enable foreign financial institutions to compete for a piece of the sizeable Chinese consumer loan market. Emerging Middle Class of Consumers The opening up of Chinese economy has led to surging demand for consumer products. China’s manufacturing sector has exploded in response to the dramatic increase in demand. As a result millions of Chinese have migrated from rural central and western regions to China’s eastern manufacturing centres. In search of a better life, these Chinese citizens are abandoning traditional agricultural vocations in favour of higher paying manufacturing careers. Across the eastern and southern regions of China an emerging middle class is devel- oping. The average Chinese middle class family now has an annual household income suffi- cient to enable investment in a home or an automobile. China’s Manufacturing Opportunity With a population of 1.25 billion people, China has the world’s largest labour pool. It is also one of the lowest cost labour pools. Chinese workers wages are very low compared to traditional manufacturing centres in North America, Europe and Japan. As a result, many suppliers are manufacturing labour-intensive parts and materials in China. Automotive manufacturers are adopting two main strategies for manufacturing in China: • Building Manufacturing Capacity—Many large automotive manufacturers are investing in building and operating their own plants in China. The local production capacity provides easy access to China’s domestic market. The plants can also be used to produce low-cost parts for export to western markets at a considerable cost advantage. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 5 A GXS White Paper

• Sourcing from Third Parties—Not all automotive manufacturers are building production capacity in China. Instead, some manufacturers are establishing sourcing relationships with Chinese manufacturers. Using a sourcing model reduces risk, capital investment and time to production. Automotive Manufacturers in China Three ownership structures exist in China’s automotive sector: • State Owned Enterprises—The development of China’s automotive industry was heavily influenced by the political structure that China embraced throughout most of the twentieth century. In the 1950s and 60s, China’s centrally planned government established a number of state owned automotive OEMs and suppliers. As China has migrated to a more open economic structure in the last few decades, these state owned enterprises have evolved into new structures. Many of the original state owned enterprises have become partially privatised through public offerings or direct investment. • Joint Ventures—Prior to China’s accession into the World Trade Organization, the Chinese government enforced strict ownership policies regulating ownership of domestic enterprises. Foreign corporations were prohibited from holding a control- ling interest in businesses operating in China. As a result, foreign OEMs and suppliers established joint ventures with local Chinese manufacturers. These joint ventures proved very successful by merging the local market expertise of Chinese manufacturers with the best-in-class products of American, European and Japanese industry leaders. • Wholly Foreign Owned Enterprises—As the domestic market has been de-regulat- ed, a new group of wholly foreign owned enterprises is emerging. These wholly owned enterprises are predominantly American, European and Japanese OEMs and suppliers seeking to capitalise on the promise of China’s market opportunity. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 6 A GXS White Paper

Section 2 CHALLENGES OF COMPETING IN CHINA’S AUTOMOTIVE MARKET Increasing Competition European and American OEMs such as Volkswagen and General Motors have long-established leadership positions in China. However, the competitive landscape is quickly changing. The dramatic growth of the Chinese market continues to attract record levels of foreign investment. As a result, established industry leaders have witnessed significant decreases in market share and profitability in the last 24 months. Impressive growth rates have been observed by Japanese OEMs such as Honda and Korean OEMs such as Hyundai. Domestic OEMs such as Chery who specialise in compact vehicles are grabbing market share as well. Variable Demand The Chinese automotive market has experienced consistent double digit growth year-over- year. However, there have been several periods during which growth has not met forecasted expectations. Various factors have combined to cause the fluctuating demand changes. Root causes include: • Government Policy—On several occasions during the past decade the Chinese government has intervened in the domestic automotive market. Concerned with the extraordinary growth rates, China’s leader’s enacted policy designed to “cool down” the market. Regulatory measures included raising interest rates for consumer loans and enforcing quotas on new vehicle registrations. The policies effectively curbed demand for consumer automobile purchases. • Consumer Credit and Financing—China lacks a nationwide system for assessing consumer credit worthiness. The lack of a sophisticated risk management system for consumer automobile loans has resulted in an unusually high level of defaults. The government modified banking policies in 2004 to reduce the risk of loan failures. Consumers are now required to outlay a minimum of 20 percent of the vehicle price to qualify for a loan. Term periods can only extend for a maximum of five years. Raising the qualifications for consumer loans has limited the segment of the population who can afford new vehicle purchases. • Price Wars—Increased competition in the Chinese market has resulted in price wars. Manufacturers have continually reduced prices in an attempt to increase market share. In fact, the effect was the opposite. A decrease in sales was witnessed. Many Chinese consumers are first-time car buyers. They lack experience and confidence negotiating such a major purchase. On anticipation of further price decreases, many consumers elected to “hold off” on purchasing a vehicle. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 7 A GXS White Paper

• Health Concerns—Outbreaks of SARS and the Avian flu virus have occurred in China during recent years. A broader epidemic rate could have significant repercussions for the Chinese economy. Lower consumer confidence would greatly curb new automobile purchases. Variable Supply The rapid growth of the Chinese market has led to a high degree of variability in supply. • Raw Materials Pricing—China’s explosive demand for raw materials to support local construction and manufacturing activities results in dramatic price fluctuations. Costs for raw materials such as steel can vary significantly from year to year. • Import Policy—In 2004, the Chinese government amended import legislation that governed the categories of products subject to tariffs and quotas. Cars with certain imported subassemblies may now be taxed at the same rate as fully assembled vehicles. The policy change was designed to increase the percentage of content sourced from local suppliers. As a result, many manufacturers were forced to redesign aspects of their supply network to avoid tax penalties. • Over-Capacity—The growth potential of the Chinese market has led many OEMs to invest heavily in production capacity over the past five years. Most major OEMs are planning significant investments in manufacturing plants through to the year 2010. If production capacity increases as scheduled the market will quickly reach a point at which supply exceeds demand. The imbalance will result in further price pressure and margin erosion. Materials Management and Logistics Challenges China presents a unique set of challenges for materials management and logistics: • Over-capacity—China’s logistics and distribution infrastructure has been significantly challenged to keep pace with the growing demand for transportation. The national air, marine, rail and highway infrastructure is currently underdeveloped relative to the demand for transportation. As a result, logistics costs are 40-50 percent higher than in North America or Europe. • De-centralised regulation—To further complicate matters, regulation of domestic trade is de-centralised. Provincial governments manage regulations on trade declarations, shipping documentation, and transportation duties on a regional basis. The complexity of understanding local regulations is a frequent source of shipment delays. A simple paperwork error can hold up a shipment, which could take weeks to reschedule. • Distributed Plant Locations—Manufacturing locations are not concentrated into specific geographic areas. Only five of China’s provinces can claim they are home to more B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 8 A GXS White Paper

than 10 percent of the economy’s component manufacturing plants. The remaining 50 percent of production is divided amongst 21 other provinces throughout the country. The fragmentation of manufacturing locations results in a need to transport materials much further distances to reach value chain participants. • Third Party Logistics Services—Historically, the government has encouraged domestic manufacturers to own and operate their warehouse and transportation infrastructure. Today, 70 percent of Chinese manufacturers own their vehicle fleet and 80 percent own their warehouses. A services market is beginning to emerge for domestic logistics. However, the market is highly fragmented today. Currently there are over 18,000 transportation and logistics providers in China, none of which enjoys a share of more than 2 percent of the overall market. • In-Transit Challenges—Occurrences of theft and freight damage are much higher in China than in Western nations. Additional supply chain costs are incurred to replace stolen and damaged items. However, even greater losses can be realised when materials shortages interrupt production. Export Dynamics China’s vast low-cost labour force provides an extremely competitive manufacturing cost structure. However, the extension of the supply chain to China results in significantly longer lead times for exports to North America and Europe. Lead times of 30 to 45 days are com- mon for parts traversing a supply chain from China to North America or Europe. The low- cost economics of manufacturing in China will provide significant benefits during times of steady production. However, the long lead times can be problematic when demand fluctuations are encountered or design changes are required. • Demand Fluctuations—Production in China reduces a manufacturer’s ability to respond quickly to changes in demand. Demand for automotive products can change unexpectedly as a result of competitive behaviours, energy prices or weather events. If unforeseen increases or decreases in demand occur, a manufacturer must wait at least 30-45 days for their adjusted forecasts to flow through the supply chain. The result of such latency in the supply chain can easily cause a surplus of inventory or a missed sales opportunity. • Design Change—Manufacturing in China reduces the ability to quickly implement changes to part or vehicle designs. Consider the case of a safety recall for a part manufactured in China. The OEM will need to wait 45 days or longer before they can assure the market that they have remedied the safety defect. The effects of such latency in the supply chain are compounded when one considers the on-going movement to standardise parts across models and brands. As more manufacturing is moved offshore, safety recalls and design changes to individual parts will have a broader impact on vehicle populations. As a result, recalls of parts manufactured overseas will create a dramatic impact on sales and supply. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 9 A GXS White Paper

Selecting Products to Manufacture in China China’s very attractive labour costs can be leveraged to export parts for the aftermarket or production around the world. However, China is not the only low-cost manufacturing centre. North American manufacturers have been sourcing from Mexico for several years. Western European manufacturers are beginning to source more production from Central and Eastern Europe. The costs and challenges of exporting from China should be compared to the near-shore options in Europe and North America. Ideally, parts exported from China would be those which derive the majority of their costs from labour and also lend themselves to efficient international transport. Examples of parts with lower fully landed costs include compressor valves, alternator pulleys and steering pin- ions. Bulky parts such as fuel tanks and windscreens with their associated high transportation costs should continue to be sourced closer to final assembly. Keys to Supply Chain Success There are two keys to success in competing effectively in the Chinese automotive market: • The ability to react quickly to changes in supply and demand for both domestic and international value chains. • Achieving superior operating efficiencies in functions such as demand forecasting, materials management, local logistics and cash management. A key enabler to achieving superior operating efficiencies is the ability to measure key supply chain metrics such as perfect order fulfillment, demand forecast accuracy and cash-to-cash cycle time. Supply chain metric measurements require accurate, complete, up-to-date information from all trading partners including suppliers, customers, banks and logistics providers. A real-time feed of high quality data should be delivered to Enterprise Resource Planning (ERP) or supply chain management systems. Metrics should be continuously monitored to identify opportunities for improvement. Figure 2—Key to Supply Chain Success in China B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 10 A GXS White Paper

• Shipping and Receiving Automation—Automation of logistics functions is a high priority for manufacturers seeking to minimise unexpected materials shortages. Electronic exchange of advance dispatch notifications, shipment status updates and proof of delivery can reduce the probability of documentation errors that result in unexpected delays. • International Export Visibility—Visibility to international logistics is critical for success. Minimising the financial impact of design changes and safety recalls requires being able to identify exposure through visibility to all inventory in the supply chain. Variable demand patterns arising from petroleum prices, consumer confidence or political events requires global supply chain agility. In many cases, finished goods and future production could be redirected to other regions around the world. For example, if China’s market slows, local manufacturing could be redirected towards Europe or North America. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 11 A GXS White Paper

Section 3 ASSESSING B2B E-COMMERCE READINESS IN CHINA Four Infrastructure Requirements for B2B e-Commerce Deploying technology in China presents a unique set of challenges. An understanding of these unique local challenges can help to reduce the risks of project delay through proper advance planning. For a B2B e-Commerce program to succeed, four aspects of technology infrastructure are critical to success. The four aspects are: • Infrastructure—The widespread availability and high reliability of data networks and electrical utilities within China is a critical pre-requisite to e-Commerce. • Technical Support—The availability of local resources with relevant language skills for implementation and on-going technical support will be critical to success. • Application Infrastructure – Large Businesses—B2B e-Commerce offers minimal benefits without systems to analyse the data received from trading partners. ERP systems must be deployed and utilised before B2B programs can be successful. – Small and Medium Businesses (SMBs)—For B2B e-Commerce to achieve critical levels of adoption, it is important that SMBs are only required to have a minimal level of IT infrastructure including PCs and Internet access. SMB software packages for accounting and finance can accelerate capabilities to exchange orders and invoices. In the following sections we will explore the current level of adoption in the four categories— infrastructure, technical support and application infrastructure for both large and small businesses. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 12 A GXS White Paper

Figure 3—Assessing B2B e-Commerce Readiness in China Infrastructure Compared with North America, Europe and Japan, China’s infrastructure is less mature. Transportation, power and networking systems vary based upon geographic region and suffer from poor levels of reliability. • Internet Connectivity—Most manufacturers in the automotive supply chain are connected to the Internet. However, the public Internet is not as reliable as in many western nations. Connectivity varies based upon geographic region and network carrier. Users in many regions report frequent intermittent outages. As China’s infrastructure continues to expand and modernise, the levels of availability will rise to global standards, but in the meantime it is important to plan for some interruptions to service. • Network Exchanges—A consortium is currently being organised to create a Chinese Network eXchange (CNX). The CNX will offer secure, reliable information exchange similar to the ANX, ENX and JNX exchanges. However, today most connectivity is achieved via value added networks or direct point-to-point connection. Both the Internet and private line technologies are used. • Power—Rapid development of power-intensive manufacturing plants and the emer- gence of a growing middle class have dramatically increased the demand for electricity. As a result, Chinese utility providers have not been able to keep pace. In certain regions, the electrical infrastructure has become overburdened. Unplanned blackouts can take entire manufacturing facilities off-line for several days at a time. Local utility providers are investing heavily to increase capacity with the latest energy generation techniques such as nuclear power. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 13 A GXS White Paper

Technical Support Locating the appropriate IT skills can be challenging as well. There are fewer IT professionals on the market with extensive experience in B2B e-Commerce. • Expertise/Skills—Creating a technologically advanced workforce is a key goal of the Chinese government. Numerous programs exist to encourage youths to pursue engineering and computer related degrees. Consequently, Chinese universities graduate thousands of new technical professionals each year. However, experienced personnel are in high demand throughout the region. Locating personnel with prior B2B e-Commerce or enterprise application integration experience is very challenging. Multi-national corporations often rely upon IT resources from Europe and North American for technical expertise. It is not uncommon for IT personnel from Europe and North American headquarters to be located on-site in China during major IT initiatives such as an ERP deployment. • Documentation—Documentation is not available from many vendors in Chinese. The lack of localised materials frustrates users and prolongs implementations. To many, B2B e-Commerce, supply chain management and enterprise resource planning are new technologies which introduce new terminology. These new concepts further compound the documentation challenges. • Implementation Support—Many vendors, including larger multi-national IT vendors, do not provide support directly in China. Instead, the vendors rely on a network of local consultants and value added resellers to provide implementation and technical support. The local organisations have the necessary language skills and a strong understanding of Chinese customs. However, the local consultants and VARs lack the broad experience in implementation and technical support that the global IT vendors pos- sess. Lack of experienced local support can prolong project timeframes when unforeseen challenges arise. • On-Going Technical Support—Local phone based technical support is a challenge particularly during non-business hours. Larger vendors, who deploy a 24x7 “follow the sun” strategy, route calls to Europe or North America depending on the time of day. Increasingly, English speaking regions such as India and the Philippines are staffing low-cost, 24x7 call centres. The remote call centres typically lack Mandarin and Cantonese language skills. Consequently, Chinese IT personnel who do not speak English are not able to access timely support during off-hours. The problem is exacer- bated by the increasing number of factories operating multiple shifts around the clock to maximise output. • Geographic Variances—Technology support is very challenging in the more remote Central and Western regions of China. Due to the poor transportation and communications infrastructure, these remote regions are less developed than coastal provinces. Government funding and special economic trade zones are concentrated on the B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 14 A GXS White Paper

Eastern seaboard due to its proximity to Pacific Ocean and the key intra-coastal water- ways of the Yangtze and Pearl rivers. Manufacturers locating plants in Central and Western regions may experience more challenges recruiting qualified IT professionals. Large Enterprise Application Infrastructure The success of any B2B e-Commerce initiative depends upon the maturity of the company’s internal enterprise application suite. The deployment of an Enterprise Resource Planning (ERP) application to manage warehouse, production, transportation and accounting functions is a critical pre-requisite to any e-Commerce program. ERP in the Chinese automotive community ERP adoption in China remains quite low outside of multi-national corporations. Studies from firms such as AMR Research suggest that the adoption rate is as low as 5 percent nationally. Most automotive manufacturers who are not using ERP systems have achieved some level of automation with a stand-alone accounting package, spreadsheet or other pack- aged application. Manufacturers are expecting to move quickly away from these independent methods to a more comprehensive, integrated approach. It is envisaged that ERP implementations will not necessarily be as broad in scope as in North America, Europe and Japan. Functions such as payroll, human resources, customer relationship management and sales force automation may be excluded from the early stages of implementations. Nonetheless, the trend towards automation is encouraging for B2B e-Commerce. ERP Vendors Both Oracle and SAP have a strong presence in China. These large, global ERP vendors have enjoyed particular success with China’s multi-national corporations and state-owned enterprises. SAP has approximately 500 customers in a wide range of industries including automotive, high tech, consumer goods, telecommunications and utilities. Oracle’s presence has increased with the acquisition of PeopleSoft. The merged company claims to have approximately 600 customers in the manufacturing and services sectors. QAD also has a strong base of multi-national and local customers in China. In total, QAD has approximately 500 customers concentrated in the manufacturing sectors such as automotive. In addition to the large, global ERP vendors, a number of regional software packages are popular. Vendors such as IFS, MAPICS and SoftBrands offer specific functionality for automotive manufacturers. ERP Vendors in China Digital China Oracle Epicor QAD IFS SAP Infor SoftBrands Microsoft SSA Global Source: AMR Research B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 15 A GXS White Paper

The following excerpt from the AMR Research study “Inside the Chinese ERP Market” (September 2005) provides a summary of the level of adoption of ERP in China: “The size, growth, and sheer desire to gain a competitive edge lured global Enterprise Resource Planning (ERP) vendors to China. They have opened offices, signed local partners, and translat- ed their software—but few are finding success. While the ERP terminology has become widespread in China, the adoption of the systems outside of Western multi-nationals doing business in the region remains low. Less than 5 percent of the companies in China are using an ERP system, and the percentage of satisfied users is far smaller still. Apart from Chinese users’ inadequate perception of ERP, the key reason is the products’ insufficient flexibility to meet user needs. Further hampering penetration is the assumption that a Western-style value proposition, operating model, business process design, and supply chain integration model would quickly fit an emerging market like China. Chinese companies will evolve to some standards of global business, but they will do so in a uniquely Chinese way. Most Chinese users prefer to use the system to automate current processes rather than change processes to fit in an ERP system.” Another driving force in ERP adoption will be the desire to compete in the world’s equity markets. An increasing number of Chinese companies are conducting initial public offerings to become listed on the Hong Kong, London or New York stock exchanges. The pressure to maintain growth and meet stockholder expectations will drive the need for visibility to corporate key performance indicators (KPIs). These KPIs can only be effectively meas- ured by implementing ERP systems across the company’s entire operation. Small Business Application Infrastructure Small business accounting packages have a high level of adoption throughout China. Adoption is broadly encouraged by the government, private enterprise and society. Chinese companies prefer accounting packages that are relatively inexpensive and easy to use. Small Business Accounting Applications in China Manufacturing companies were the first sector in China to adopt accounting software packages. • Over 12 million small businesses in China Today manufacturers represent the largest user group with 27 percent of the overall market. Telecommunications and financial services are also large users of accounting software packages. • By 2006, an estimated 98 percent of all businesses will use accounting software The Chinese government has a strong influence on the accounting software industry. China regularly establishes goals for its larger brands to establish international recognition • Manufacturing companies and achieve market share targets. All software accounting vendors must have their applica- represent 27 percent of all accounting users today tions certified by the Ministry of Information Industries (MII) prior to commercial availability. Each vendor must recertify on an annual basis. The Chinese accounting software market is very fragmented. Vendors focus geographically on specific sectors and regions. Each of the six different regions of China has a different vendor with the dominant market share. The table below lists a few of the best known accounting software vendors with their region of concentration. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 16 A GXS White Paper

Chinese Accounting Software Vendors Accounting Software Vendor Geographic Focus User Friend Software North Kingdee Software South Beijing Anyi North Hangzhou New Grand Southeast Langchao Guoqiang General Tianjin Tiancai North Powerise Software Central Beida Jade Bird North NeuSoft Northeast Topsoft Software West Tsinghua TongFang North Beijing Peking University Founder North Superdata Software South UFSoft General Source: Highbeam Research Technology Focus in China The readiness of the network, power, support and application infrastructure in China is a critical factor in the adoption of B2B e-Commerce technologies. Equally important, however, is the attitudes and perceptions of corporations towards technology. The attitudes and investment priorities for multi-national corporations differ in many respects from Chinese corporations. Multi-nationals headquartered in the heavily developed regions of Europe, North America and Japan face significant cost pressures. Growing labour costs in these regions have driven multi-nationals to invest significantly in computer automation. This automation reduces manufacturing costs by eliminating the need to pay high cost labour rates for routine, low skill tasks. Unlike the North American, European and Japanese markets, the driver for technology adoption in China is not cost reduction. Prevailing labour costs in China remain very low relative to western nations. As a result implementing technologies such as ERP, Supply Chain Management and e-Commerce provides relatively limited cost savings. Instead, Chinese companies view the value of deploying business applications in: • The ability to scale through periods of rapid growth. • The ability to ensure consistent manufacturing quality. • The ability to service customers according to their preferences. These factors are leading drivers for technology in China. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 17 A GXS White Paper

Drivers for E-Commerce in China versus North America, Europe, Japan North America, Europe, Japan China Reduce Costs Scale for Rapid Growth Customer Preferences Ensure Quality and Consistency Measure Supplier Performance Customer Preferences Scale—Many Chinese manufacturers are experiencing rapid growth. This guide has already mentioned the fact that the automotive market has experienced double digit growth for the past five years. The market is expected to grow faster than any other on the planet through 2010. Today many business processes are manual or heavily customised. Processes based upon spreadsheets, fax and e-mail do not scale effectively. As a result Chinese corporations are seeking automation of enterprise functions and supply chain functions through technology. The scalability provided by automation will enable Chinese manufacturers to capitalise on the vast potential of the rapidly growing domestic market. Quality—Chinese manufacturers are keen to establish themselves as high-quality providers to the global automotive market. High quality in both products and customer service are two areas in which the Chinese are still viewed as lacking. Global manufacturers comparing sourcing options between China, India and Central Europe will factor both costs and quality into their decision making processes. Electronic exchange of information can be a critical tech- nique for improving both quality and the customer experience. E-Commerce eliminates the need to re-key data into back office systems from paper, fax or email. Errors resulting from handwriting misinterpretations and typographical errors are eliminated. Improving data quality raises perfect order fill rate, reduces invoice discrepancies, and prevents unnecessary shipment delays. Improved quality metrics result in higher customer satisfaction, retention and growth rates. Customer Preferences—Tier 1, 2 and 3 suppliers are increasingly trading with wholly foreign owned enterprises or joint ventures of European, Japanese and American OEMs. As a result, Chinese suppliers need to adopt business practices that increase their attractiveness to multi-national business partners. Multi-nationals expect electronic integration for forecasting, inventory management, logistics and settlement processes. The maturity of business processes and e-Commerce capabilities are often key factors in meeting customer expectations. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 18 A GXS White Paper

Section 4 DEFINING A B2B E-COMMERCE STRATEGY FOR CHINA To define a B2B e-Commerce strategy for China, three critical questions need to be answered: • Which value chain segments will gain the most from e-Commerce? • Which trading partners will be the first to participate? • Which business processes should be automated? The Value Chain in China First, let us explore which value chain segments will benefit most from e-Commerce. Most automotive manufacturing activities in China can be classified into one of two value chain categories: • Domestic—Manufacturing of vehicles and parts for sale in China’s local market. • International—Manufacturing of vehicles and parts for sale in the rest of the world. Multi-national corporations will manage these two value chains separately. Local Chinese divisions will have responsibility for defining the manufacturing, sales and IT strategies for the domestic value chain. Corporate headquarters or the appropriate divisions in North America, Latin America, Europe, and the remainder of Asia will have responsibility for the international export value chain. Timeframes, objectives and priorities for local value chains may differ significantly from the goals of export value chains. As a result, distinct B2B e-Commerce strategies should be developed for each. Manufacturing for Sale in China The majority of production capacity in China today is focused on meeting the domestic market opportunity. Only 0.5 percent of the Chinese population owns a car today. Most of the production today is therefore focused on building new vehicles for first time buyers. As the local Chinese vehicle population continues to grow, a sizeable domestic aftermarket will begin to emerge as well. All but a negligible percentage of the vehicles sold in the Chinese market are manufactured locally. Current regulatory policy in China discourages vehicle imports through the use of tariffs and quotas although these are being reduced/phased out over the coming years. The first step in defining an e-Commerce strategy for China is to identify and segment the trading partners in your value chain. Trading Partners can be segmented into four primary categories: • Customers—For suppliers this may include OEMs, upper-tier manufacturers, or aftermarket retailers. For OEMs it may include retailers and distributors. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 19 A GXS White Paper

• Suppliers—Includes both direct materials and indirect materials suppliers. These suppliers can be located within China or importing from the rest of the world. • Financial Institutions—Facilitate payment transactions between participants in the automotive value chain. • Logistics Providers—Include marine, air, rail and ground transportation vendors as well as third party logistics providers. The diagram below provides a segmentation of trading partners relevant to the local China market. Trading partners are categorised by function in the value chain (customer, supplier, financial institution or logistics provider), location (China or international), country of origin (China or international) and size (large or small). Figure 4—Trading Partner Segmentation (Manufacturing for Sale in China) Manufacturing for Sale in Rest of World An increasing amount of production capacity is focused on exporting parts from China to the rest of the world. Most of the export-focused production is designed to manufacture parts and components rather than fully assembled vehicles. The exported components are used for new vehicle production or aftermarket sales. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 20 A GXS White Paper

Only a negligible quantity of vehicles is exported to the European or North American markets today. However, slower growth and increased competition in the local Chinese market will change this trend in the future. The first step in defining an e-Commerce strategy for export activities is to identify and segment the participants in your value chain. The diagram below provides a segmentation of participants relevant to the international export value chain. Participants are categorised by function in the value chain (aftermarket sales, production manufacturer, parts manufacturer or logistics provider), location (China or international), country of origin (China or international) and size (large or small). Figure 5—Trading Partner Segmentation (Manufacturing for International Export) Assessing Trading Partner Readiness Next, let us explore the different levels of e-Commerce capabilities amongst participants in China’s automotive supply chain. Value chain participants can be segmented by the level of e-Commerce experience. We will segment companies into three categories: B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 21 A GXS White Paper

Category B2B e-Commerce Experience Multi-National Multi-national corporations have extensive experience with ERP, EAI and B2B Corporations e-Commerce technology in other regions. The value proposition of technology is well understood. As a result, multi-nationals will be the first to deploy these technologies in China. Large Chinese Chinese corporations are new to ERP, EAI and B2B e-Commerce. However, Corporations China’s Top 100 corporations are quickly learning about the advantages of technology. As a result they are beginning to aggressively deploy B2B programs. Adoption will be slower due to the challenge of balancing the need for rapid growth with the necessity of adopting business processes for ERP. Small and Medium China’s smaller businesses lack B2B e-Commerce experience. As a result, very Chinese Businesses low levels of participation exist today amongst the SMB segment. The motiva- tion for SMBs to adopt B2B technology will be the desire to grow their business with strategic accounts. Trading partners should then be segmented based upon the volume of business transactions in the relationship. Automating information exchange between higher volume trading partners will provide the highest immediate impact. However, analysis should be performed to determine the highest volume partners. Large multi-national companies with advanced e-Commerce skills may not necessarily be the largest customers or suppliers in your value chain. When trading partners are evaluated based upon both transaction volumes and B2B capabilities the areas of highest impact become obvious. The figure below illustrates the typical trading partner segmentation for a local Chinese supply chain. Automation of trading partners in the upper right quadrant will yield the maximum immediate benefits. Figure 6—Sample Trading Partner Readiness B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 22 A GXS White Paper

Automating B2B Business Processes Finally, let us explore which business processes Chinese automotive companies are automating. Most OEMs and Tier 1 suppliers are adopting pull based replenishment models for their supply chains in China. The diagram below illustrates the electronic information flows between customers and suppliers. A customer in this context could be either an OEM or a Tier 1-N supplier. A supplier could be a manufacturer at any tier of the value chain (Tier 1, 2 or N). The most popular business processes for automation in China are planning, consumption and replenishment. E-Commerce has not yet been widely embraced for payment processes in China due to government regulation. Invoicing and payment transactions are largely manual. Figure 7—Pull Based Replenishment Model for E-Commerce Source: AIAG Pull-Based Replenishment Business Processes Production Specification and Purchasing A relationship between a customer and a supplier commences with the following processes: sales, selection and purchase order processes. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 23 A GXS White Paper

• Sales and Marketing (Supplier)—Customers define product specifications and pricing for a required part. The specifications are then delivered to a small group of suppliers who bid on the opportunity. After a thorough review of proposals a supplier is selected. • Purchase Order Management (Customer)—Terms and conditions are negotiated for a blanket purchase order between the customer and the supplier. A series of materials releases will be executed against the purchase order to fulfill on-going production needs. Planning Once a relationship has been established between a customer and supplier a regular planning cycle will be established using the following processes: • Planning Production and Schedule and Control (Customer)—The customer will send a production planning schedule or material release regularly to their suppliers. The planning schedule communicates the material requirements generated by the customer’s production control system. Requirements include the type of part, quantity needed, delivery location and forecast dates. • Order Management (Supplier)—A supplier will compare the prior planning schedules received to the latest version. Differences will be identified to assess the impact on production planning. The supplier will acknowledge the schedule to confirm acceptance of the new plan. Consumption and Replenishment As manufacturing processes occur, materials will be replenished at regular intervals using the following processes: • Consumption Process and Replenishment (Customer and Supplier)—As materials are consumed by a customer’s manufacturing process, replenishment authorisations are sent to the supplier. These authorisations are formatted into a shipping schedule which provides specific schedule and delivery information for the parts required. The shipment schedule relates directly to the planning schedule in the “Planning” phase described above. • Manufacturing Shipping (Supplier)—Suppliers send an advanced shipping notice (ASN) or dispatch advice to correspond with each physical delivery. The ship notice is typically sent as the materials leave the supplier’s loading dock. Ship notices must be submitted prior to the arrival of the materials otherwise the customer will not have the proper information to receive the goods. • Manufacturing Receiving (Customer)—If the customer identifies errors in the advanced ship notices, an application advice will be sent to the supplier. The customer may choose to correct the advanced ship notice directly or reject it completely. Suppliers are required to correct and resubmit rejected ship notices. Once the materials are delivered to the customer then additional verification will be performed. Discrepancies between the materials received and the advanced ship notice will be identified in a receiving advice returned to the supplier. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 24 A GXS White Paper

Section 5 IMPLEMENTING A B2B E-COMMERCE STRATEGY FOR CHINA The technology gap between multi-national corporations and Chinese corporations will become less significant in the next two years. For simplicity, we will consider both multi- national corporations and large Chinese corporations as one group. GXS recommends dividing your China B2B program into three segments: • Large Customers • Large Suppliers • Small and Mid-Size Suppliers The following section will explore the unique requirements of each segment. Analysis from GXS experience and a recent survey conducted by the Automotive Industry Action Group (AIAG) will form the basis for the recommendations. AIAG’s China E-Commerce Survey In September 2005, the Automotive Industry Action Group (AIAG) along with GXS and QAD sponsored a study to assess the readiness of Chinese automotive suppliers for B2B e-Commerce. The survey interviewed business decision makers in 220 Chinese automotive suppliers. Suppliers were well distributed across participants at multiple tiers of the value chain. Respondents included a mix of state-owned enterprises, private enterprises, joint ventures and wholly owned foreign enterprises. Additional information about the survey methodology and demographics can be provided by GXS, AIAG or QAD. Large Customers First, we will explore integration with large customers. Large customers can include: • Multi-national corporations and their joint ventures buying for domestic sales. • Multi-national corporations and their joint ventures buying for export sales. • Chinese state-owned and private corporations buying for domestic sales. B2B e-Commerce will enable your customers to reduce administrative costs for planning and replenishment processes. Integration also leads to higher account retention and growth by reducing the likelihood of errors to orders; simplifying everyday interactions and improving the overall customer experience. Technical Solution Requirements To integrate with Chinese and multi-national customers, four major standards components are required as shown in Figure 8 below. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 25 A GXS White Paper

Requirements for Integration with Large Customers Requirement Technology Integration with back office applications for real-time import and export Integration broker of data. Shipping and accounting information will be extracted. Production schedules, receiving and remittance data will be inserted. Mapping and translation of data into multiple document formats including Translation server XML & XML BODs, VDA, EDIFACT, and ANSI X.12 EDI. Exchange of electronic documents with customers in China using a Transaction Management— secure, high performance, reliable transaction processing network. Local to China Exchange of electronic documents with customers in Europe, Japan and Transaction Management— North America using a secure, high performance, reliable transaction pro- International cessing network. Figure 8—Recommended B2B Architecture for Demand Chain Back Office Systems VDA XML Transaction Processing Network EDIFACT Customers EDI ANSI X.12 Meet diverse Specialized network to B2B integration technology customer technology exchange messages with to interact with preferences business partners back office systems E-Commerce Document Standards No preferred document standard has been established in China. The majority of manufacturers are using an international standard. In many cases joint ventures or wholly foreign owned enterprises have adopted the prevalent standard from their country of headquarters. European OEMs and suppliers and their respective joint ventures have adopted ODETTE EDI document standards such as VDA. North American OEMs and suppliers have adopted ANSI X.12 EDI document standards. Japanese and Korean OEMs and suppliers have adopted EDIFACT standards. Many Chinese OEMs have started e-Commerce programs with a new XML based infrastructure. Other automotive manufacturers are not using an e-Commerce standard at all. Instead, these companies have created web sites or file transfer mechanisms to exchange data. The AIAG B2B e-Commerce survey reflected the diversity of document standards currently being utilised in China. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 26 A GXS White Paper

Figure 9—E-Business Document Exchange Usage Source: AIAG China B2B Survey - September 2005 The lack of a dominant standard in China will complicate B2B e-Commerce efforts. Standards organisations are beginning to discuss the need to standardise e-Commerce practices in China. However, the problem is not likely to disappear as China continues to grow its export manufacturing. International sales to foreign buyers in North America, Europe and Japan will necessitate communication in the customer’s preferred e-Commerce standard. To integrate with a diverse community of international and domestic OEMs, suppliers will need to be able to exchange information in four or more formats (XML, VDA, EDIFACT and ANSI X.12 EDI). Manufacturers that can master such complexity will be differentiated as more “customer friendly” and will realise greater participation in B2B e-Commerce programs. Case Studies in Large Customer Integration Tier 3 Raw Materials Manufacturer GXS provides B2B e-Commerce services to one of China’s largest manufacturers of raw materials. The Tier 3 supplier ranks amongst China’s 10 largest corporations and ranks globally in the Fortune 500. The manufacturer supplies materials such as steel, aluminum and iron to a diversified set of sectors including automotive, aerospace, shipping, construction and petrochemical industries. The Tier 3 supplier is organised into over 20 different business units and subsidiaries. Consistency and quality across operating units was a priority for the executive team. As a result, a special subsidiary was created to provide e-business services to its various business units. IT support for all B2B customer and supplier functions is now performed by one centralised technical support group. All customer and supplier e-Commerce transactions are managed by a central, enterprise B2B gateway. The Tier 3 supplier licensed GXS’ integration broker technology, Enterprise Gateway, which includes a robust suite of communications modules, a high performance translator and a business process management tool. A GXS professional services team customised, B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 27 A GXS White Paper

deployed and tested the Enterprise Gateway in the Tier 3’s own environment. Training services were provided to end-users to enable self-service and management of the technology. GXS is currently in the process of integrating over 2,000 trading partners through its Community LinkSM on-boarding service for this Tier 3 supplier. Global Tier 1 Automotive Supplier GXS provides B2B e-Commerce services in China to one of the world’s largest Tier 1 suppliers. The supplier operates in over 40 countries around the world supplying a diverse range of electronics, transportation components and safety systems to leading OEMs. An e-Commerce platform for domestic and international trading was required. Due to the breadth of the Tier 1’s operations around the world, a variety of electronic messaging standards were required. For its customers around the world, the Tier 1 supplier needed to support a diverse range of electronic document standards including EDIFACT, VDA, ANSI EDI and XML. Additionally, integration with the Tier 1’s ERP system, QAD, in SNF format was critical. GXS was selected due to its strong local support in China. Key selection criteria were local data centre operations; local technical support 24x7 in English, Mandarin and Cantonese. GXS is the only B2B e-Commerce provider with both a strong Chinese and global presence in Europe, North America and Japan. The technology selected was a dedicated B2B Enterprise Gateway for Chinese operations. The Tier 1 supplier chose to outsource the deployment and management of the Enterprise Gateway to GXS to reduce time to market and implementation costs. Once the B2B Enterprise Gateway was deployed, the Tier 1 supplier first pursued integration with its key customers. International customers who were accustomed to e-Commerce were integrated first. Phase two of the project connected multi-nationals and larger customers operating in the domestic Chinese market. Phase three will expand the e-Commerce program to the Tier 1’s supply chain, ramping over 60 suppliers around the world. Large Suppliers Next, we will explore the integration of large suppliers. Large suppliers may include: • Multi-national corporations importing to China • Multi-national corporations manufacturing locally in China • Chinese state-owned and private enterprises manufacturing locally in China The fastest return on investment will be achieved by integrating with larger suppliers that supply the majority of volume of direct materials. These larger suppliers often have the resources, expertise and budget to quickly deploy a complementary B2B infrastructure. Technical Solution Requirements To integrate with Chinese and multi-national suppliers, four major technology components are required. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 28 A GXS White Paper

Requirements for Integration with Large Suppliers Requirement Technology Integration with back office applications for real-time import and export Integration Broker of data. Shipping manifests for materials in-transit, electronic invoices and logistics data received from suppliers will need to be inserted into ERP applications. Mapping and translation of data received from suppliers into the appro- Translation Server priate back office formats. Support for popular document types including EDI, XML, SAP IDOC, Oracle Application format and flat files is recommended. Supporting a broader set of B2B standards accelerates and broadens adoption by suppliers. Exchange of electronic documents with suppliers in China using a secure, Transaction Management— high performance, reliable transaction processing network. Local to China Exchange of electronic documents with import suppliers from other Transaction Management— regions of the world using a secure, high performance, reliable transac- International tion processing network. Case Studies in Supplier Integration Global Tier 1 Automotive Supplier GXS was approached by a multi-national Tier 1 supplier to integrate its Asia-Pacific operations. The Tier 1 supplier operates 10 production plants throughout Asia-Pacific primari- ly in China. The first phase of the project will integrate 200 domestic and international suppliers with one of the Tier 1’s Chinese production facilities. The Tier 1 supplier will provide production release schedules to its supplier community. Suppliers can download the schedules via an on-line web portal accessible via any PC with an Internet browser. Suppliers will provide acknowledgements of material releases and the corresponding advanced ship notices electronically. Electronic documents will flow directly in and out of the Tier 1’s suppliers’ QAD production and manufacturing systems. The second phase of the project will expand to include all of the Tier 1 supplier’s Chinese production facilities. Integration will extend to additional suppliers as well as third party logistics providers (3PLs). Many of the 3PLs provide vendor managed inventory services on behalf of their suppliers. An electronic workflow will coordinate the distribution of production schedules to suppliers and return the related advanced ship notices from 3PLs. Electronic proof of receipts will be provided by the Tier 1. Suppliers will use the receipt confirmations to generate electronic invoices. The Tier 1 supplier will gain visibility to its supply chain through a web based dashboard that tracks all activity. Reporting on supply chain metrics to key performance indicators will be generated. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 29 A GXS White Paper

Small and Medium Suppliers Finally, we will explore integration with small and medium suppliers. The fastest return on investment will come from integrating with your highest volume suppliers. However, once large suppliers are enabled, significant additional supply chain efficiencies can still be achieved by integrating with the remainder of your trading partner community. The majority of small and medium suppliers will be currently manufacturing in China for sale on the local, domestic market. Typically, lower volume suppliers will be highly specialised manufacturers with lower revenues. These smaller suppliers are often more challenging to integrate to your extended enterprise. Most small suppliers are constrained by limited resources, expertise and budget. These limitations delay, deter or prohibit the small suppliers from implementing a B2B e-Commerce program. Current State of Readiness of Small Manufacturers The AIAG China B2B Survey evaluated the readiness of automotive manufacturers to participate in e-Commerce initiatives. Survey participants were asked via what means they typically used to communicate with their customers. A large percentage of the surveyed manufacturers were using verbal communication (in-person meetings and phone calls) or paper-based processes (post or fax) to exchange information with customers. Only 30 percent of the manufacturers surveyed used computers for e-Commerce. Figure 11—Communications Methods Used with Customers Source: AIAG China B2B Survey - September 2005 Computer based e-Commerce communications range from unstructured data exchange via email; keying data into customer portals and automated machine-to-machine transactions. Most automotive manufacturers using computers for B2B e-Commerce today prefer email or a web portal. GXS anticipates that this trend will change in the near future. However, most small to medium sized manufacturers will continue to use the most cost-effective, easy-to-use B2B e-Commerce platform available to them. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 30 A GXS White Paper

Figure 12—Computer Based Customer Interactions Source: AIAG China B2B Survey - September 2005 The leaders in the Chinese automotive market will be able to master the complexity of their supply chains including interactions with smaller suppliers. A successful B2B e-Commerce program must offer a variety of e-Commerce enablement options for smaller suppliers. Technical Solution Requirements To achieve a critical mass of small business suppliers, a choice of relevant solutions must be offered. Solution options with multiple tiers of pricing and levels of technical complexity are recommended to maximise participation. Additionally, it is important to recognise that a comprehensive range of support services for smaller businesses will be required. Requirements for Integration with Small and Mid-Size Suppliers Requirement Technology For small businesses an easy-to-use, low cost solution should be offered. Web portal with pre-con- Ideally the solution would require a minimum level of technology infra- figured automotive forms structure. Web-based forms are the most popular solution. Only a PC and an Internet connection are required to use such a solution. The Web forms should have pre-configured templates for creating popular documents such as advanced ship notices (ASNs). The Web forms should also be able to display and print planning schedules, shipment schedules, receiving advices and application advices. For mid-sized businesses a solution which allows for quick deployment Translation software— should be offered. This solution should be extensible to a broader set of desktop or server based business processes and trading partners as e-Commerce needs grow. Translation software packages are a popular solution and can be either desktop or server based. A translation package should allow for simple, GUI-based mapping of data fields. Translation packages should also support a variety of e-Commerce standards which include XML, VDA, EDIFACT and ANSI X.12 EDI. Exchange of electronic documents with suppliers in China using a secure, Transaction Management high performance, reliable transaction processing network is required. Trading partners must be educated on the importance of e-Commerce Education programs in the value chain. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 31 A GXS White Paper

Requirements for Integration with Small and Mid-Size Suppliers (continued) Requirement Technology Trading partners must be offered consultation on the variety of enable- Consultation ment solutions available. Once a solution is selected, trading partners will require on-site or Implementation Support phone-based implementation support. Requires a test with sample data exchange to validate connectivity and Testing Services interoperability—this is a recommended GXS best practice. Success in the local Chinese market will require offering services in both Local Language Support Cantonese and Mandarin. On-going technical support should be offered for troubleshooting and Technical Support problem resolution. Ideally, 24x7 support should be offered across multiple channels such as web, chat and phone. As time passes your B2B e-Commerce program will continue to develop. Change Management OEMs and suppliers around the world will continue to automate an extended set of business processes. Additionally, each new vehicle and part design year will change your supplier community. It is imperative that your e-Commerce program should include a process for managing change. Figure 13—Recommended B2B Architecture for Supplier Integration B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 32 A GXS White Paper

Case Studies in Small Supplier Integration Joint Venture with North American OEM GXS provides B2B e-Commerce services to one of China’s largest domestic OEMs. The OEM is a joint venture of a North American OEM and a Chinese state owned enterprise. Today the joint venture has over $1B USD in annual revenues. The OEM is aggressively expanding in order to service the Chinese market. Their plans include investing in new manufacturing plants throughout China and also over 10 new vehicle models in the next two years. The OEM has already completed several phases of its B2B e-Commerce program including the deployment of an Enterprise gateway. The next phase was to broaden the e-Commerce program to include an additional 150 suppliers in the Chinese community. The supplier had a community which had suffered from a widely differing range of skills which had complicat- ed the integration efforts. Each supplier had a different level of e-Commerce experience, IT resources and capital budget. The OEM required a specialist to contact each of the suppliers, assess readiness for e-Commerce, provide consultation on an approach and support the implementation process. The OEM decided that the GXS Community Link service could help to resolve previous issues and provide both on-boarding and technical support. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 33 A GXS White Paper

Section 6 GXS, YOUR TRUSTED PARTNER IN CHINA Automotive Industry Domain Expertise Global Presence—GXS is the only B2B e-Commerce service provider offering services in the GXS IN AUTOMOTIVE key automotive hubs around the world including France, Germany, Italy, Japan, Korea, Standards Relationships • AIAG China, US and Brazil. GXS customers include all of the Top 25 OEMs globally, 7 of the top • AAIA 10 Tier 1 suppliers and 6,000 other automotive value chain participants. • ODETTE • MEMA • AAMVA Technology Interoperability—GXS is the only company that can offer true interoperability to all the key networks and standards throughout the world. GXS Trading GridSM offers Strong Presence in: • Japan message exchange for all the popular EDI-based standards (ANSI X12, EDIFACT and VDA) • Korea as well as for emerging XML standards. Additionally, GXS Trading Grid offers interoperabili- • China • France ty with the regional automotive industry networks ANX, ENX and JNX. • Germany • Italy Standards Leadership—GXS is active in the VDA and Galia organisations in the European- • Sweden • US based ODETTE organisation. GXS also participates in the US-based Automotive Industry • Brazil Action Group (AIAG) and Automotive Aftermarket Industry Association (AAIA). GXS also has strategic partnerships with the Motor Equipment Manufacturers Association (MEMA) and the American Association of Motor Vehicle Administrators (AAMVA). Business Process Expertise—GXS has extensive experience in core business processes such as automotive manufacturing. Our solution consultants understand the process and data flows that support forecasting, releasing, shipping, receiving, invoicing and payment processes. GXS Resources in China GXS has more than ten years of experience in serving the greater Chinese market. The GXS GXS IN CHINA China headquarters is located in Hong Kong. Satellite offices provide local sales and consulting Offices support in Beijing and Shanghai. E-Skylink, a GXS distributor, provides support for Taiwan. • Hong Kong • Beijing • Shanghai A state-of-the-art data centre in Hong Kong’s Cyberport complex serves as the central node Customers for GXS technology infrastructure throughout Asia. Multi-national customers may also • Over 1000 choose to have their transactions processed at one of GXS’s other facilities in Europe or • Bsteel • Asia Pulp and Paper North America. • OOCL • COSCO The GXS Cyberport data centre features multi-tiered physical security including biometric and • Sinotrans • SAI Cheng hand geometry authentication. The data centre is designed to operate flawlessly in the event of Support a network or power disruption. Two DS3 ATM connections provide 54Mbps connectivity to • Data Centre in Hong Kong the Internet. The circuits are operated by two separate carriers with diverse physical paths. • 24 x 7 Call Centre Uninterruptible power supplies (UPS) provide continuous power cycling in the event of any • English, Cantonese and Mandarin Language Support commercial disruption. Diesel generators capable of on-going replenishment provide a sus- B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 34 A GXS White Paper

tained power source in the event of a long term outage. Gaseous, FM-200 fire suppression systems rapidly extinguish threats while minimising damage to computing equipment. GXS has a team of experienced staff of consultants, implementation support and customer support located in China. All of our technical support and consultants personnel are local and thus have local language and cultural skills. GXS Experience in China GXS has more than 1,000 customers in China. Larger customers include many of the PARTNERS, STANDARDS AND GOVERNMENT biggest, technologically advanced Chinese enterprises. GXS clients include top 10 companies RELATIONSHIPS in the automotive, telecommunications, paper, steel, and logistics sectors. New GXS cus- • China ECNet tomers benefit from GXS’s experience in implementing B2B e-Commerce programs for such • GS1 Hong Kong industry leaders. GXS can ensure best practices to accelerate growth and adoption of your B2B programs. • GS1 Taiwan • eSkylink China is in the process of dissolving much of the protectionist legislation that existed prior to its accession into the World Trade Organisation. The deregulation will follow a phased approach that will occur over a multi-year horizon. The new open economic structure will bring significant change. However, the government will remain a key influence in the private sector for the foreseeable future. Industry standards organisations have an increasingly important role to play in China’s new economy. Together, the government and standards organisations are collaborating to increase the competitiveness of Chinese manufacturers in the world economy. Understanding the changing dynamics of e-Commerce standards in China is a critical element to supply chain success. GXS has relationships with state agencies such as the Ministry of Information Industries (MII) through its partnership with China ECNet. Furthermore, GXS has a long history of leadership in local standards communities. GXS operates or maintains relationships with most of the key e-Commerce exchanges in the electronics, logistics and retail sectors. GXS can leverage its understanding of the market to expedite growth and adoption of your B2B programs. GXS in China’s Automotive Electronics Market An increasing percentage of vehicle content is now in electronics. A recent Gartner Group study on global sourcing in the automotive industry found that 40 percent of a vehicle’s content is now electronics. Navigation systems, satellite radio, and television entertain- ment systems are becoming mainstream “add-ons” in western markets. Increasing comput- erisation of engines and automotive subsystems are driving enhancements, efficiencies and electronics into every vehicle platform. OEMs and suppliers selling in the domestic China market will need to leverage high tech features to differentiate and satisfy the demands of China’s emerging middle class market. OEMs and suppliers should also consider the com- pelling benefits of sourcing high tech components from China. China’s low-cost manufacturing base has made it the new centre for electronics and high tech design, development and production for OEMs around the world. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 35 A GXS White Paper

As a result, integration with the high tech value chain is a priority to both OEMs and suppliers both in sourcing and selling in China. GXS can ensure that your business is quickly integrated with the local Chinese electronics community. GXS has a partnership with China ECNet, a joint venture between the leading electronics distributor Avnet and the Chinese Ministry of Information Industries (MII). Together GXS and China ECNet have developed the China e-Hub exchange. China e-Hub offers rapid enablement for high tech value chain participants in the domestic market. China e-Hub services are available for many cross-enterprise business processes such as procurement, logistics and forecasting. GXS B2B E-Commerce Solutions GXS offers a complete solution for your B2B e-Commerce needs in China. A review of the needs for B2B e-Commerce integration with customers and suppliers results in four primary requirements: • A B2B Gateway to extract and deliver data to and from your enterprise applications • A network to deliver B2B transactions to and from your trading partners • Enablers for your trading partners of all sizes—small, medium and large • A full lifecycle of community management services to ensure small and mid-size trading partners are quickly and successfully enabled. GXS offers a complete e-Commerce solution for the Chinese automotive market consisting of all four components discussed above: • Enterprise Gateway—GXS integration broker suite, Enterprise Gateway, functions as a central gateway for all information exchange with your customers and suppliers. Enterprise Gateway is deployed behind the firewall then integrated directly with supply chain management and enterprise resource planning (ERP) applications. Additional adapters are available which can integrate directly with SAP and Oracle’s ERP applications. Enterprise Gateway provides high-performance document translation in a variety of formats such as ANSI EDI, ODETTE, EDIFACT and XML. GXS provides a full range of professional services which can quickly enable your Enterprise Gateway and provide on-site technical installation, mapping of transaction flows as well as integration with back office applications. • Transaction Processing Network—GXS transaction management service, Interchange Services (ICS), provides guaranteed message delivery to your customers and suppliers. ICS is the only transaction management service in the market which offers global reach. ICS can be used for both domestic and export production needs. You can exchange electronic documents with trading partners throughout China and Europe, Japan and North America. ICS supports transaction exchanges using a wide variety of communications protocols ranging from File Transfer Protocol (FTP), IBM MQ Series; vertical industry specific protocols such as RosettaNet RNIF, ODETTE OFTP and AS2. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 36 A GXS White Paper

• Trading Partner Enablers—GXS offers a number of e-Commerce solutions for your entire trading partner community. – Large Corporations—Both multi-national corporations and Chinese corporations will require a high performance integration broker to manage a high volume of B2B transactions. GXS offers Enterprise Gateway (described above) for multi- nationals. – Small and Medium Business Enablers—Small and medium Chinese trading partners require a low-cost, easy-to-use e-Commerce solution. GXS offers three options—GXS Application Integrator, GXS Desktop EDI and AutoHub. • Application Integrator—is a highly-scalable, server-based translation software package. Application Integrator includes an easy-to-use graphical mapping tool. Application Integrator supports translation of a broad range of e-Commerce document standards including XML, VDA, EDIFACT and ANSI X.12 EDI. • Desktop EDI—is a desktop translation software package. Desktop EDI includes an easy-to-use mapping tool. Desktop EDI supports translation of EDIFACT and ANSI X.12 EDI documents. • AutoHub—is a hosted, on-line service available through any PC with an Internet browser. The web forms are pre-configured to display and print the most popular automotive documents including planning schedules, shipment schedules, receiving advices and application advices. Additionally, turnaround technology enables end-users to quickly create advanced ship notices, barcode labels and electronic invoices. • Community Management Services—GXS Community Link offers a full life-cycle of services to enable and support your trading partner community including education, consultation, implementation, testing, technical support and change management. Community Link is available in 30 countries and 20 languages including Mandarin and Cantonese. Learn more about GXS capabilities in the automotive space at www.gxs.com/auto About GXS GXS is a leading provider of B2B e-commerce solutions that simplify and enhance business process integration and collaboration. Organizations worldwide, including 75 percent of the Fortune 500, leverage GXS’ GS1 certified global interoperability and supply chain execution solutions. Active in the global standards arena, GXS offers solutions, powered by the Trading GridSM, that enable customers both large and small, to connect with global partners, synchronize product information and optimize the execution of supply chains. Headquartered in Gaithersburg, MD., GXS provides sales and support to businesses and their partners worldwide. For more information about GXS visit www.gxs.com. B2B E-COMMERCE STRATEGIES FOR THE CHINESE AUTOMOTIVE MARKET 37 A GXS White Paper

CHINA HEADQUARTERS Suite 4608, 46/F, Plaza 66, 1266 Nanjing Road (West), Shanghai 200040, China +86 (21) 6120 1088 t +86 (21) 6120 1078 f www.gxs.com/cn NORTH AMERICA AND GLOBAL HEADQUARTERS 100 Edison Park Drive Gaithersburg, MD 20878 U.S.A. +1-800-560-4347 t +1-301-340-4000 t +1-301-340-5299 f www.gxs.com EUROPE, MIDDLE EAST AND AFRICA 1 Station Road Sunbury-on-Thames Middlesex TW16 6SU United Kingdom +44 (0)1932 776047 t +44 (0)1932 776216 f www.gxs.com/uk ASIA PACIFIC 25th Floor, Shell Tower Times Square Causeway Bay Hong Kong +852 2884-6088 t +852 2513-0650 f About GXS GXS is a leading provider of B2B e-commerce solutions that simplify and enhance business process integration and collaboration. Organizations worldwide, including 75 percent of the Fortune 500, leverage GXS’ GS1 certified global interoperability and supply chain execution solutions. Active in the global standards arena, GXS offers solutions, powered by the Trading GridSM, that enable customers both large and small, to connect with global partners, synchronize product information and optimize the execution of supply chains. Headquartered in Gaithersburg, MD., GXS provides sales and support to businesses and their partners worldwide. For more information about GXS visit www.gxs.com. © Copyright 2005. GXS, Inc. All Rights Reserved.

B2B e-Commerce in China's Automotive Market

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