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  • 1. www.thebeijingaxis.com Procurement Roundtable Perth, 25 February 2013 China’s Transformation and the Future Merits of China Procurement - Why, What and How? Kobus van der Wath Founder and Group Managing Director The Beijing Axis kobus@thebeijingaxis.com China-focused International Advisory and Procurement The Beijing Axis 1 Disclaimer This document is issued by The Beijing Axis. While all reasonable care has been taken in the preparation of this document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information contained here has been compiled from sources believed to be reliable. While every effort has been made to ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. The Beijing Axis, and/or a connected company may have a position in any of the investments mentioned in this document. All concerned are advised to form their own independent judgement with respect to any matter contained in this document. The Beijing Axis 2 The Beijing Axis’ Knowledge & Network Synergies Beijing Axis Commodities • Commodity Marketing • Commodity Procurement Beijing Axis Capital • Transaction Origination • Corporate Finance Advisory Beijing Axis Procurement • Comprehensive Procurement Solutions Beijing Axis Strategy • Strategy Formulation • Strategy Implementation • Founded in 2002; has successfully worked with many small to large international and Chinese MNCs • Operates in four synergistic, cross-border China businesses • Provides services across various sectors, with a core focus on the MINING, RESOURCES, INDUSTRIAL ENGINEERING and OTHER SERVICES sectors • Provides solutions to international firms as they act in unfamiliar territory in China/Asia and to Chinese/Asian firms as they venture out and ‘go global’ • Committed to safety and sustainability, with solutions emphasising ‘actions and transactions’ • USD500m+ procured; clients globally including: Latam, Africa, Australia and Russia/CIS; 60+ full time staff The Beijing Axis - China-focused International Advisory and Procurement The Beijing Axis 3 At the highest level, China is an attractive sourcing destination for various products. Nevertheless, three key questions require a thorough understanding – Why? What? and How? Source: The Beijing Axis Analysis Why? What? How? China Procurement • Several factors, such as a developed infrastructure and a low price/quality ratio, enable China to have a competitive advantage in regards to global sourcing • Successful sourcing from China is complex and requires a thorough and thought-out process • China has the capability to supply a number of high value-added products that meet international standards at a competitive price The Beijing Axis 4 Compendium… Manufactured trailers Grinding mills Magnesium Electric Mining ShovelGensets The Beijing Axis 5 Compendium… Superheaters Grinding Media Boiler Shells Interpass Absorption Thickeners Pumps
  • 2. The Beijing Axis 6 Compendium… Pipes Round bars Angle steel Flat barsHollow bars Rails The Beijing Axis 7Source: The Beijing Axis Analysis Girth Gear Kiln Support Roller Shaft Kiln Shell Mill HeadKiln Shell Support Roller Compendium… The Beijing Axis 8 Why source from China? Source: The Beijing Axis Analysis The Beijing Axis 9 What to source from China? Source: The Beijing Axis Analysis The Beijing Axis 10 How to source from China? Source: The Beijing Axis Analysis The Beijing Axis 11 0 2 4 6 8 10 12 14 Q1 Q1 Q1 Q1 Q1 China’s Quarterly Y-o-Y GDP Growth Rate (%, 2009- 2013F) Source: National Bureau Statistics of China; World Bank; IMF; The Beijing Axis Analysis Contribution to China’s GDP (%, 1998-2012) Following a soft landing, the long-term trend of China’s economy will now be one characterised by more moderate and sustainable growth -40 -20 0 20 40 60 80 100 120 140 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Net Exports of Goods and Services Gross Capital Formation Final Consumption Expenditure (Household + Government) Falling net exports contribution Effect from stimulus package Gross capital formation became smaller in size than consumption 2009 2010 2011 3-year (2009-2011) average: 9.4% Government stimulus package (USD 586 bn) 2011 y-o-y GDP: 9.2% 2012 2012 y-o-y GDP: 7.8% Policy easing to engineer soft landing Q4 2012 y-o-y GDP: 7.9% Q1 2013 y-o-y GDP forecast: 8.1% 2013F
  • 3. The Beijing Axis 12 Agenda 1. Looking Ahead - the case for a China focus in future LCC sourcing 2. Best Practice: category focus, getting it right, overcoming the challenges and managing the many risks 3. Selected Case Studies 4. Final Word The Beijing Axis 13 There is a dynamic global sourcing timeline. From Western-Europe to North America in the 50’s, to Japan to NIEs, to new Dragons, to China, to India and Vietnam … (and next Myanmar, Laos, Cambodia, Africa?) Global Sourcing Migration (1940-2020) Source: Dennis Arnold, ‘Textile & Apparel Sourcing: the complexity behind low cost labour in supply chains’ 1940 1950 1960 1970 1980 1990 2000 2010 2020 North America to Japan Japan to HK, Taiwan, Singapore and Korea SE Asia and Mexico/Latin America China to India and Vietnam Britain, W-Europe to USA Indo-China? Africa? PNG? ??? Latest LCC Era Next LCC Era NIE’s to China, SE Asia, and Sri Lanka Why The Beijing Axis 14 20,337 19,634 25,807 4,280 4,486 2,259 0 5 10 0% 5% 10% 15% 20% 25% 30% 35% 40% Asia-Pacific North America Europe Emerging economies are outperforming the developed world. The Asia- Pacific region is expected to account for one third of world GDP by 2015 Regional GDP Comparison (2015F) South America Africa Other Asia A bubble this size represents GDP = USD 1,000 bn Developed economies are expected to continue to lose share in world GDP in the coming years Asia-Pacific is expected to account for the largest share of world GDP (34%) by 2015F 2011 to 2015F GDP Average Growth Rate (%, 2011-2015F) Forecast world average GDP growth until 2015F: 3.7% % of World GDP (2015F) Shaded bubbles represent 2011E figures Rising real incomes and high commodity prices will continue to drive growth BRICS 2015F GDP(USD bn) 2011 Growth Rate (%) 2011 GDP Per Capita (USD) China 10,904 9.2% 5,414 India 2,359 7.4% 1,389 Russia 1,926 4.1% 12,993 Brazil 2,547 2.7% 12,789 South Africa 426 3.1% 8,066 2011 to 2015F Note: Other Asia includes Bangladesh, Sri Lanka, Nepal, Pakistan, Bhutan, Burma, North Korea, Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan. Source: IMF; The Beijing Axis Analysis Why The Beijing Axis 15 0% 5% 10% 15% 20% 25% 30% 0 20 40 60 80 100 120 140 160 180 200 China is both the world’s largest and fastest-growing exporter World’s Top 25 Exporters (USD bn, 2011) Source: UN Comtrade; The Beijing Axis Analysis US Exports CAGR (2001-2011) Exports as % GDP (2011) Brazil France Poland Mexico Thailand Sweden Czech Republic UK Australia Switzerland China surpassed Germany in 2009 to become the world’s largest exporter Korea Norway Malaysia India Indonesia China Singapore Hong Kong Belgium Russia GermanyItaly Japan Canada Bubble Size: Value of Exports (USD bn, 2011) Why The Beijing Axis 16 China is steadily increasing its share of mid-range capital goods exports – the list goes on… China’s Share of Global Exports (2000-2011) Source: UN Comtrade; The Beijing Axis Analysis 0% 20% 40% 60% 80% 100% 2000 2011 0% 20% 40% 60% 80% 100% 2000 2011 0% 20% 40% 60% 80% 100% 2000 2011 Cranes Shipping Containers Excavators China ChinaGermany Germany US US Italy Italy Japan JapanAustria Austria Others Others China China S. Korea US South Africa South Africa Others Others 6% 24% 69% 85% China 3% Japan Japan Germany Belgium US France US Germany Belgium France Others Others ChinaChina 0.2% China is 8th China was 18th Why The Beijing Axis 17 High Technology Exports (USD bn, 2001-2010) Source: OECD STAN Bilateral Trade; China Customs; The Beijing Axis Analysis High Technology Exports as a Share of Manufacturing Exports (%, 2001-2010) China is overtaking developed countries in the upgrading of its exports in manufacturing towards more technology-intensive products 0 100 200 300 400 500 01 02 03 04 05 06 07 08 09 10 France Germany Japan UK US China 0 5 10 15 20 25 30 35 40 45 01 02 03 04 05 06 07 08 09 10 France Germany Japan UK US China Why
  • 4. The Beijing Axis 18 The top 100 industrial clusters in China are scattered throughout the whole country Source: Li & Fung Research Centre; The Beijing Axis Analysis Heilongjiang Suihua: Linen products Jilin Tonghua: Pharmaceutical, Steel Liaoning Shenyang: Ceramic building materials Yingkou: Magnesium products Dandong: Measuring instruments Shandong Qingdao: Textile machinery Yantai: Sweater, Wine Weihai: Textile Linqing: Axle bearing Rizhao: Fisheries Jinan: Transportation equipment Dezhou: Solar water heater Liaocheng: Steel pipe Linyi: Crop protection machinery Anhui Hefei: Household appliances Jiangsu Wuxi: Electric wires and cables, Environmental protection equipment, Purple clay teaware, Electrics, Photovoltaic Suzhou: IT, Circuit board, Apparel, Silk textile Zhenjiang: Eyewear Taizhou: Ship building, Energy equipment Xuzhou: Wood processing Yangzhou: Leather shoes Lianyungang: Silicone products Shanghai Jinshan: Chemicals Zhejiang Hangzhou: Steel structures, Boxboard Wenzhou: Lighter, Locks, Medium and low voltage electrical appliances, Valves, Plastic woven packaging Jiaxing: Fur, Leather, Warp knitting, Opto-mechatronics Ningbo: Mold, Household electronic appliances, Stationery Jinhua: Small commodities, Hardware, Electric tools Shaoxing: Textile, Dyeing, Socks, Pearls, Ties Taizhou: Plastic shoes, Solid waste recycling Huzhou: Bamboo products Fujian Quanzhou: Trainers, Zipper, Plumbing hardware, Snacks Putian: Jade processing, Chinese classical furniture Shishi: Children’s wear Guangdong Zhongshan: Machinery and electronics, Packaging, Lighting, Casual wear Dongguan: Electronic products Guangzhou: Denim clothing, Automobile Shantou: Underclothing, Toys Shenzhen: Electronic products Yunfu: Stone, Kitchenware Huizhou: Shoes Guizhou Zunyi: Chinese liquor Hunan Changsha: Fireworks and firecrackers Zhuzhou: Ceramics Chongqing Bishan: Motorcycle Hubei Yichang: Phosphorus chemicals Xiantao: Nonwoven textile Shaanxi Baoji: Titanium products Henan Zhenzhou: Aluminum products, Refractory materials Xinxiang: Cranes Shanxi Taiyuan: Stainless steel, Radiator Xinzhou: Forging Jinzhou: Coking Hebei Cangzhou: Insulation materials, Metal casting Xingtai: Cashmere Hengshui: Rubber (applied in engineering) Langfang: Furniture Handan: Fasteners Xinjiang Shihezi: Cotton textile Cities with 1 Cluster Cities with 2 Clusters Cities with 3 Clusters Cities with 4 Clusters Cities with 5 Clusters Cities with 6 Clusters Why The Beijing Axis 19 Indeed, current government policies are moving China towards becoming a high-tech economy. As a result, more R&D centres and hi-tech industrial zones are being established throughout China Relocation Trends of Regional Economic Structures Source: BrainNet EAC; The Beijing Axis Analysis West / Central China • In the past, five of seven fastest growing regions were located in western / central China • Shift of governmental investment from coastal areas to inner regions • Over 1995-2010 the number of economic zones in west / central China increased from 18% to 49% • Industrial focus (only central China ) • Automotive • Motorcycle production • Construction • Furniture industry • Metal processing / fabrication North China Industrial focus: • Steel industry • Automotive • Ship building • Chemical industry • Machine building • Aerospace East China Industrial focus: • Automotive • Machine building • Chemical industry • Plastic processing No. of Econ. Zones: West China No. of hi-tech industrial zones R&D / innovation center 1 158 1995 2010 No. of Econ. Zones: Central China 5 618 1995 2010 No. of Econ. Zones: Coastal area 27 808 1995 2010 6 9 11 13 15 South China Industrial focus • Automotive • Plastic processing • Machine building • Electrical industry Why The Beijing Axis 20 World R&D Spending and Employees (2010) Note:Bubble size is the annual R&D spending by country Source: 2012 Global R&D Funding Forecast; National Bureau of Statistics; The Beijing Axis Analysis China’s Major R&D Indicators (2000-2010) China ranks second in R&D spending, surpassing Japan and trailing only the US, demonstrating its high growth in a range of major R&D indicators 0.62 mn 0.9% The Total Value of Scientific Equipment USD 60 bn USD 21.4 bn 2010 China’s Total R&D Expenditure USD 87 bn 2010 R&D Personnel in Research Institutions 1.43 mn 2010 2010 The R&D to GDP Ratio 1.7% 2000 2000 2000 2000 Annual Growth 23% Scientists & Engineers/Million People R&D as % of GDP Finland Japan Sweden US S. Korea Taiwan China India Iceland Singapore Norway Germany Austria Switzerland Canada France UK Belgium Netherlands Russia Spain Czech Rep. Slovenia Ireland Italy Brazil South Africa TurkeyRomania Mexico Hungary Portugal Poland Greece Slovak Rep. New Zealand 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 Israel Americas Asia Europe Others Why The Beijing Axis 21 Note: (1) The result is based on a survey conducted by R&D Magazine (2) Best innovation Idea survey was conducted by the Economist Intelligence Unit (EIU) Source: R&D Magazine; Grant Thornton; EIU; The Beijing Axis Analysis More innovators are increasingly coming from emerging markets, particularly from Asia 4 8 6 10 12 26 29 42 64 79 7 7 7 9 17 29 35 39 69 85 0 20 40 60 80 100 Canada UK France Russia Brasil Germany Korea Japan India China 2009 2008 6 6 16 17 20 31 24 30 31 43 48 5 7 16 17 22 26 27 33 33 35 41 0 10 20 30 40 50 60 Other Outsourced R&D Team Special Innovation Team Sales Other C-Level Employees Business Partners and Suppliers CEO Inhouse R&D Team General Employees Head of Business Units Customers Global Asia Pacific North America Western Europe Source of Innovative Ideas across Markets (2)Largest Technology Gainers by 2014 (1) Some countries in EM Asia are exhibiting the fastest growth notably China, Korea, India and Taiwan Why The Beijing Axis 22 International Shipping Time (number of days) Note*: TEU – Twenty foot Equivalent Unit Source: AAPA World Port Rankings 2009; Inquiries to selected carriers; The Beijing Axis Analysis World’s Top 10 Sea Ports by Container Traffic (‘000 TEU*, 2010) China is the world leader in seaborne freight traffic. Of the world’s ten busiest container ports measured by container traffic, six are Chinese South Korea South Africa China 25,866 25,002 20,983 18,250 11,954 11,190 11,124 10,502 10,260 9,743 Singapore Shanghai Hong Kong Shenzhen Busan Guangzhou Dubai Ningbo Qingdao Rotterdam 1 2 3 4 5 7 8 6 10 9 1 2 34 5 6 7 8 9 10 Time from Shanghai port to Durban: 21-24 days Time from Busan port to Durban: 29-31 days Why The Beijing Axis 23Source: The Beijing Axis Analysis China is defying the ‘flying geese formation’ - As Japan outgrew a certain industry, it was passed on to Hong Kong, Taiwan, Singapore and Korea. Once these economies went up market, lower-end industries were passed on to the likes of Indonesia, Malaysia and Thailand…and China? Japan Emergence of China CHINA Hong Kong Taiwan Korea Thailand Philippines Malaysia Indonesia Labour intensive Value Chain CHINA CHINA Vietnam Singapore Why
  • 5. The Beijing Axis 24 Various factors underpin China’s attractiveness as a global sourcing destination *Note: Degree of importance in making China as an attractive sourcing country; Sustainability represents the time horizon that China will hold its current position Source: The Beijing Axis Analysis Low Advantage High Advantage Low Sustainability • Diversified supply base/ industrial clusters • Products of all ranges and different sizes • Narrowing cost advantage due to rise in labour cost • Costs vary across product categories and regions within China Bubble size: Degree of importance*High Sustainability • Developed and yet growing investment in the infrastructure sector • Increase in cost offset by improving quality standards • Opportunity to source high quality products at competitive prices Requires Action Requires Awareness Labour Cost Productivity Supplier Base Ease of Doing Business R&D Large-Scale Economy Infrastructure • Qualified labour force including scientists, researchers and engineers • Growing R&D expenditure leading to higher innovation capacity Currency Valuation • Second-largest economy and the largest exporter • Economies of scale Price/Quality Ratio Why The Beijing Axis 25 There is a clear potential to reduce procurement costs when sourcing from China China Sourcing – Value Proposition & Anticipated Savings (%) Source: Beijing Axis Procurement (BAP) RFQ Data (1) Insurance, including duties and other charges (2) Management, including risk management, consultants, QA/QC, trips, time and related 3rd parties expenses (3) TCC = Total Cost to the Company Labour Materials Tooling Transport Ins.(1) Mgmt.(2) 70% 45% Local Country Cost (Traditional SA sources) Low Cost Country Price (China sources) Final Cost from China or TCC(3) 100% Financing 30%Savings This assessment is based on BAP’s experience in the last 12-24 months Why The Beijing Axis 26 The savings are particularly substantial for heavy machinery and equipment Range of Expected Savings on Products Sourced from China (%) Source: Leading China Sourcing Practices; Beijing Axis Procurement (BAP) RFQ Data  Metal parts ̵ Forging and machining ̵ Casting and machining ̵ Stamping and machining ̵ Powder metallurgy ̵ Machining ̵ Extrusion  Electrical equipment and parts ̵ Passive components ̵ Motors  Electronics ̵ Printed circuit boards and printed circuit-board assemblies ̵ Electronic manufacturing systems  Capital expenditures ̵ Tooling ̵ Machinery 0 10 20 30 40 50 60 This assessment is based on BAP’s experience in the last 12-24 months Why -27- 0 5 10 15 20 25 30 35 40 45 Material price increases Reduced demand in home country Wage increases RMB appreciation Shortages of qualified personnel Concerns over IP protection Poor employee retention Sluggish product launch readiness Product quality Difficulties to find adequate suppliers Issue with the third highest impact Issue with the second highest impact Issue with the highest impact Source: Booz & Co. China Manufacturing Competitiveness Study; The Beijing Axis Analysis No. of Votes Major Issues in Terms of Impact on Foreign Companies in China (2009-2010 survey) Price / Quality Ratio Labour shortages are forcing companies to boost wages These used to be a major concern – not anymore RMB appreciation and shortage of qualified personnel are becoming an issue IP is becoming less of an issue Growing concerns The Beijing Axis 28 • Leading mining and engineering players have transformed or are transforming their supply chains – China and other low-cost centres in Asia now form an integral part of their businesses • Companies without global procurement strategies, will lose competitiveness over time • China's manufacturing environment is undergoing a major shift from low-end high-labour content to high-value added manufacturing • Integrating China into a CAPEX project or the MRO supply chain has its challenges but the benefits are real • In selected categories new markets are emerging that will challenge China’s supply position The upshot The Beijing Axis 29 Agenda 1. Looking Ahead - the case for a China focus in future LCC sourcing 2. Best Practice: category focus, getting it right, overcoming the challenges and managing the many risks 3. Selected Case Studies 4. Final Word
  • 6. The Beijing Axis 30 0 500 1,000 1,500 2,000 2001 2011 Machinery and Electrical Equipment Textile and Textile Articles Base Metals Transport Equipment Miscellaneous Manufactured Articles Chemical Products Others 32% 43% Exports of Commodities Produced in China (USD bn, 2001-2011) *Note: Based on HS 2-digit codes Source: UN Comtrade; The Beijing Axis Analysis China’s Top 10 Export Commodities and % Share of World’s Total Exports (HS 2007 2-digits, 2011) China is the leading exporter of many categories of goods, mainly electrical equipment and machinery – expect the trend to continue 46.2% 38.8% 34.1% 25.1% 23.5% 19.5% 18.9% 12.8% 9.7% 4.3% Articles of apparel, accessories, knit or crochet Articles of apparel, accessories, not knit or crochet Furniture, lighting, signs, prefabricated buildings Ships, boats and other floating structures Electrical, electronic equipment Articles of iron or steel Nuclear reactors, boilers, machinery, etc Optical, photo, technical, medical, etc apparatus Plastics and articles thereof Vehicles other than railway, tramway Global Rank 1 1 1 2 1 1 1 3 3 8 China exports approximately one- quarter of the world’s electronic equipment China is world’s largest exporter What The Beijing Axis 31 Supply chain shifts that underpin industrial development in Asia are still evolving. Over the past decade, machinery exports’ share has increased in China and India, whereas Japan and South Korea saw a decline Export Growth of Commodities Produced by Top Asian Countries (USD bn, 2001-2010) Source: UN Comtrade; The Beijing Axis Analysis 0 600 1,200 1,800 2001 2010 Machinery and Electrical Equipment Textile and Textile Articles Base Metals Transport Equipment Miscellaneous Manufactured Articles Chemical Products Others 32% 44% China 7% 8% 0 100 200 300 2001 2010 0 200 400 600 2001 2010 43% 37% 0 300 600 900 2001 2010 South Korea India Japan 41% 34%Increasing export share Increasing export share Decreasing export share Decreasing export share What The Beijing Axis 32 World’s Major Exporters of Heavy Equipment (USD bn, 2011) *Note: Bubble size is measured by the share of world total exports; For the purpose of this report 10 product categories and 12 HS codes with 4 digits were selected. These are Grinding Mills (8459, 8460), Kilns (8417), High Pressure Grinding Rolls (8455), Gyratory Crushers (8474), Hoists (8425, 8428), Derricks and Cranes (8426), Bulldozers (8429) Earth Movers, Borers, Pile-Drivers (8430), Forklifts (8427), Parts for Lifting and Moving Machinery (8431) Source: UN Comtrade; The Beijing Axis Analysis China has experienced the world’s fastest export growth of heavy equipment in the last decade 0 5 10 15 20 25 30 35 40 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Exports (USD bn, 2010 ) CAGR (2000-2011) US Germany China Italy France Singapore UK Norway Czech Republic Australia Denmark Mexico Finland SwedenCanada Belgium Switzerland Countries with high export volume and yet low growth rate High export volume and high growth rate Countries with low export volume and low growth rate Japan Brazil Bubble Size*: Share of World Exports (%, 1 What The Beijing Axis 33 Kilns and high pressure grinding rolls are some of the fastest-growing items exported from China. China is progressively increasing its world export share for all the selected items Growth and Share of Selected Heavy Equipment Exports from China (USD bn, 2000-2010) Source: UN Comtrade; The Beijing Axis Analysis 0% 5% 10% 15% 20% 25% 30% 0% 10% 20% 30% 40% 50% 60% Gyratory Crushers Kilns China as % of the World (2010) China CAGR (2000-2010) Derricks and Cranes Grinding Mills Hoists Earth Movers, Borers, Pile-Drivers High Pressure Grinding Rolls Parts for Lifting and Moving Machinery Forklifts Bulldozers, etc. % in 2000 Bubble Size: Value of Exports (USD bn, 2010) What The Beijing Axis 34 Geographic Distribution of Top 500 Machinery Companies (2006-2011) Note: (1) includes foreign-owned firms with fully integrated manufacturing in China Source: World Executive; World Machinery Summit; The Beijing Axis Analysis Top 500 Machinery Companies Breakdown by Asian Countries (2011) Asia continues to dominate the machinery industry – Nearly half of the top 500 machinery companies are from the region 195 201 209 225 225 223 0 50 100 150 200 250 300 350 400 450 500 2006 2007 2008 2009 2010 2011 Rest of the World Asia 116 81 15 821 Japan China Korea India Singapore Malaysia 53 60 69 74 77 81 0 30 60 90 2006 2007 2008 2009 2010 2011 No. of Chinese Companies in Top 500 (2006-2011) Asian companies continue their dominance in the global machinery ranking China had 53 companies selected as “Top 500 Machinery Companies” in 2006, and this increased to 81 in 2011 What The Beijing Axis 35 Based on our experience, several products and categories can be competitively sourced from China in a systematic manner *Note: 1) Only serves as a broad outline of products to source and should not restrict the consideration of other goods; Product assessment based on TBA’s experience, may change based on specs and complexity; 2) Price: VC = Very Competitive, C = Competitive, NC = Not Competitive; Quality: H = High, M = Medium, L = Low Source: The Beijing Axis Analysis Additional opportunities considered Material Handling Equipment Material Handling Equipment Selected Products1 • Conveyors, conveyor parts & accessories • Train loading and unloading systems • Cranes and hoists • Mining trucks and vehicles CommentsPrice2Categories • Crushers and spares • Grinding mills and spares • Flotation cells and spares • Magnetic separators • Electrical wires & cables • Electrical equipment and components • Generator sets • Motors • Blowers • Boilers • Compressors and air systems • Valves • Pipe fittings • Chemicals • Steel cable and wire/ rope • Safety items • Prices almost 30% less than European prices • Very competitive prices and int’l quality standards • Largest producer has 70% domestic market share • Comparable to international standards • High quality at a competitive price • Comparable to international standards • Competitive price and int’l standards • China's strength lies in the mid-low end of market • Agitators • Furnaces • Heat exchangers • Structural steelwork • Comparable to international standards • Competitive prices and high quality standards • Competitive prices and int’l standards • Valve producers occupy lower end of the market Quality2 Ore Dressing Machinery Ore Dressing Machinery Electrical Equipment Electrical Equipment Mechanical Equipment Mechanical Equipment Steel Vessels and Structures Steel Vessels and Structures Mine Consumables Mine Consumables 1 2 3 6 4 5 VC C NC H M L • Int’l standards at a competitive price • Comparable to international standards • Competitive price and international standards • Readily available with international standards • No availability concerns; competitive price • Comparable to international standards • Similar to European and American standards • Low-tech consumables with a large local market • China's strength lies in the mid-low end of market • Int’l quality standards, lead times may vary • Competitive prices and international standards • JV with world’s largest mining truck supplier What
  • 7. The Beijing Axis 36 China stands out and can be targeted for most procurement packages. For other Asian countries the sourcing potential is limited to a few select packages Japan Primary Secondary • Transformers • Switchgear • Stacker and reclaimers • Steel pipes • Variable speed drives • Grinding mills and crushers • Conveyors • Flotation cells and magnetic separators South Korea Primary Secondary • Transformers • Switchgear • Steel pipes • Conveyors • Stackers and reclaimers • Structural steel and plate work • Variable speed drives Malaysia Primary Secondary • Switchgear • Conveyors Indonesia Primary Secondary • Transformers • Switchgear • Structural steel and plate work China Primary* Secondary • Transformers • Switchgear • Grinding mills and crushers • Conveyors • Structural steel and plate work • Pre-fabricated housing • Steel pipes • Flotation cells and magnetic separators • Variable speed drives • Grinding media • Stacker and reclaimers India Primary Secondary • Grinding media • Switchgear • Steel pipes • Flotation cells and magnetic separators • Variable speed drives Thailand Primary Secondary • Structural steel and plate work • Grinding media • Transformers • Pre-fabricated housing What *Note: Primary relates to a country’s sourcing potential for each procurement package Source: The Beijing Axis Analysis The Beijing Axis 37 Beijing Axis Procurement has a tried and tested service delivery platform & methodology for sourcing SupplyChain Management& Support Procurement needs analysis and China procurement competitive analysis Supplier pre-qualification, due diligence & final selection Transaction monitoring Systematic industry search & supplier identification Commercial process, contracting & contract management Negotiation, tender evaluation Quality mgmt. (QA/QC), Expediting & 3rd party mgmt. Logistics 1 2 4 875 Analysis Initial scoping, supplier evaluation, due diligence and final selection Supplier Engagement Supplier engagement, client visits, testing, application of detailed filters and negotiation Supplier Process Management Transaction monitoring, quality assurance, expediting, 3rd party management and logistics Strategic Sourcing SupplyChain Management& Support 6 11109 Coordination & assistance on site (material mgmt., commissioning, etc.) 12 Supplier evaluation by application of high level filters 3 Site inspections, sample testing & standards Supplier engagement, RFQ & tendering (SOI, RFP) • Overall Project Management • Holistic Risk Management • Strategic Relationship Management Service Delivery Platform & Methodology OperationalProcurementProcessAnalysis Source: The Beijing Axis Analysis How The Beijing Axis 38 1 2 3 5 6 4 Contract Negotiation Supply Chain Integration Quality Management Supplier Readiness Key Challenges Various challenges and risks arise when sourcing from China Source: The Beijing Axis Analysis DescriptionKey Risks • Wrong currency movement projections can seriously damage the project performance by increasing the project costs • While many Asian companies already have the capability to manufacture mining and construction equipment in accordance with international quality standards, they still often lag behind industry leaders in terms of after-sales service • Gaps in communication between suppliers' different departments, especially in large state-owned enterprises are a common issue • Companies procuring from Asia must take into account reoccurring problems with documentation quality and timeliness in regards to suppliers Insufficient level of project documentation • Companies procuring from Asia must be prepared to deal with a certain level of inferiority in product quality • Firms procuring from Asia, sometimes do not attach enough importance to stringent supplier management Lack of communication and work coordination Quality issues Supplier non- performance Contract risk Currency risks Lacking transportation & logistics arrangements Insufficient after-sales service • The procurement process is not over once the products are manufactured. Transportation and delivery of manufactured products can be a huge risk if not planned properly How 1 8 7 6 5 4 3 2 Technical / Standards Doing Business in China Issues • Technical details not specified clearly as well as the governing language of the contract. Suppliers may insist the local language as the governing language The Beijing Axis 39 However, these challenges can be overcome and the risks mitigated Source: The Beijing Axis Analysis •Since Asian suppliers are often unaware of Australian/International quality standards, it is highly advised to coach them on these issues to make sure they understand all the details •During the contract stage and throughout the entire manufacturing process, a client should be as specific and meticulous as possible •Any design changes made after the engineering/design part is finalised can have a substantial impact on the project schedule •It is essential to acquire sufficient and comprehensive market intelligence that can influence the country’s export competitiveness •Dedicated internal project team must be created to coordinate the process from the project owner’s side and facilitate interaction with suppliers, contractors and third-party service provider Create an internal project team •In order to adequately select and efficiently supervise suppliers, it is critical to have a presence in a sourcing country •It is critical to perform a meticulous due diligence on a supplier before signing a contract and placing an order Gather market intelligence Establish local presence (directly or indirectly) Conduct proper supplier due diligence Provide and demand as many details as possible Educate and coach suppliers Be flexible and ready to adapt where possible •While a high level of stringency and meticulousness are needed to manage suppliers in Asia, excessive rigidness in pursuing contract terms and details can also prove to be counterproductive Minimise design changes How Critical Success Factors Description 1 8 7 6 5 4 3 2 The Beijing Axis 40 However, these challenges can be overcome and the risks mitigated (2) Source: The Beijing Axis Analysis •Early feedback to suppliers’ manufacturing schedule, inspection, testing plans as well as overall delivery plans •3rd parties augment Chinese suppliers’ capabilities and have a rich experience servicing international procurement out of China •Working towards diminishing the impact of cultural differences in regard to ways of doing business •Change in mindset from end users – business units, production engineers, project managers, etc. •Clear understanding of the strengths of Chinese suppliers, e.g. Chinese vs. international standards, flexible terms, etc. •Dedicated resource combining technical and commercial background at site or in shared services End-user buy-in (i.e. Engineering) Clear understanding of China’s entire SC Dedicated personnel Coordinated efforts of professional 3rd parties Early and detailed involvement in supplier’s post-PO planning Involvement of China supplier early in project/spend planning • Bringing China into equation during planning/ pre-feasibility stage Appreciation and adaption for culture How Critical Success Factors Description Exercise control and supervision on-site • It is crucial to exercise stringent control over a supplier’s actions. In order to exercise this supervision, it is necessary to have an on-site presence at the supplier’s premises, which can be done by deploying expediting and QC engineers in tandem with third-party quality inspectors 9 16 15 14 13 12 11 10 The Beijing Axis 41 International companies are using various ‘models and sourcing structures’ for China procurement – but one trend is clear: greater engagement *Note: Conceptual framework Source: The Beijing Axis Analysis Direct Indirect Outsource High Low Cost / Commitment Leading gold producer Leading copper producer Leading gold producer Leading engineering firm Large steel manufacturer Globally diversified miner Globally diversified miner Leading engineering company Large gold producer Globally diversified minerLeading platinum producer Large steel firm Leading gold producer Leading international contractor Leading steel producer Model 1: Outsource • Provides the lowest degree of China presence, but requires the least cost/commitment • Examples: Outsourcing the entire procurement operation in China to a agent or trading company ChinaPresence Model 3: Direct • Provides the highest degree of China presence, but requires the most cost/commitment • Examples: WOFE/FICE, JV Model 2: Indirect • China presence and cost/commitment somewhere in between outsource and direct models • Examples: Rep. office, Offshore structure with China rep. office High Aluminium producer Globally diversified retailer Apparel retailer Large diversified retailer Large apparel retailer Globally diversified miner Globally diversified retailer Leading coal producer Leading apparel retailer Representative Office WOFE/FICE Colors represent: Shapes represent: Retail Companies Mining/Engineering Firms China Procurement Models and Structures of Major International Mining, Engineering and Retail Firms How
  • 8. The Beijing Axis 42 International mining companies are using various ‘models and sourcing structures’ for China procurement Various Sourcing Models in China Note: (1) Also use EPCMs for projects (2) Selected BAP clients (3) 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) Office in ChinaOffice in China • 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 FIFO (3) • 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 (2): 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 Small Medium Large Level of Engagement and Commitment • Examples: Newcrest Kinross (2) PrimaryandSecondaryChannels How The Beijing Axis 43 Agenda 1. Looking Ahead - the case for a China focus in future LCC sourcing 2. Best Practice: category focus, getting it right, overcoming the challenges and managing the many risks 3. Selected Case Studies 4. Final Word The Beijing Axis 44 Case Study – Plant Equipment: Procurement of Heavy Rotating Equipment Project Objectives • Research and analyse Chinese market for kilns and mills, assess feasibility of procuring in China, shortlist suppliers, provide budget prices • Organise and manage RFQ process in China with shortlisted suppliers on behalf of the client • Assist client in drafting contract, negotiating terms and conditions and placing order • Manage order and coordinate among multiple parties to ensure timely, problem-free delivery • TBA: 2 project managers (PM, GM), senior project advisor, on-site supervising engineer, senior QA inspector, procurement specialists as required • Client’s PM office (no EPCM involvement), engineering consultants, Chinese supplier and sub-suppliers, 3rd party inspection company, 3rd party logistics management company • Design and specification changes management tackled by systematic review meetings and document controls • Poor supplier documentation management / control system – TBA assisted in improving • Suppliers lack experience of DDU delivery – TBA put together 3rd party solution • Quality and scheduling risks mitigated by on-site supervision • Chinese suppliers offer 20-35% price advantage but hands-on quality management and expediting is a must • Good OEM supply base for international vendors, excellent facilities and good design capabilities available Ferrochrome Smelter • Order value over 13 million USD, 2 kilns and 2 mills • Delivery to site 70% complete • Over 30% savings achieved compared to alternative local offerings Organisational Setup Key Risks and Issues Addressed Supplier Competitiveness 2 3 4 Results 1 Case Study The Beijing Axis 45 Case Study – Industrial Consumables: Conveyor Belts Project Objectives • Research and analyse Chinese market for conveyor belts, incl. heat resistant, steel cord, solid woven and other belts • Short-list 3-4 suppliers, assist client in conducting RFQ process and pre-contract negotiations • Assist client with placing trial orders and inspection • Hand over relationships with suppliers to client for ongoing orders • TBA team: procurement specialist and assistant procurement specialist, supported by procurement engineer as needed • TBA coordinated inspection and reports by 3rd party inspector, as well as all technical and commercial inquiries before and during trial orders • Client-appointed 3rd party inspection company unprofessional, improper inspection lead to a conflict situation • TBA able to resolve the conflict successfully, client was advised to re-test product, product was finally accepted and client satisfied • China is a leading producer and exporter of belts, has a good supplier base with a wide variety of conveyor belting products • Client achieved cost savings of 35-50% compared to similar European products Mining Supplies Company • TBA shortlisted 3 suppliers capable of complying with client specifications, 2 were selected for trial orders • TBA assisted client with contracting suppliers for trial orders and worked with 3rd party inspection company to ensure product quality for trial orders Organisational Setup Key Risks and Issues Addressed Supplier Competitiveness 2 3 4 Results 1 Case Study The Beijing Axis 46 Case Study – HME Equipment: Rope Shovels Project Objectives • Assure quality and expedite 2 rope shovels 35 m3 each • Establish quality risk control strategy for major capital procurement project • Assist client and supplier with compiling QCP and final quality documentation pack • Monitor and risk-manage manufacturing process on site for quality-related issues • TBA managed the project, assisted by 3rd party inspection company and client involvement at critical hold points • 1 full time TBA procurement engineer with support from GM, 3 full time 3rd party quality inspectors • Only client authorised to hold manufacturing • Added inspection resources to ensure adequate quality of component sources from sub-suppliers • Added inspection resources to defect repair and proper corrosion protection after discovering issues in these areas • Only one internationally competitive supplier in China for equipment of this size and technology level • Chinese supplier is #1 manufacturer globally and with significant cost advantage over major US rival (P&H) Large Regional Coal Company • The two rope shovels were delivered on time despite unexpected increase in project complexity vs. initial estimates • Equipment fully accepted by client in terms of quality of manufacturing and packaging for shipment. Currently being installed on site Organisational Setup Key Risks and Issues Addressed Supplier Competitiveness 2 3 4 Results 1 Case Study The Beijing Axis 47 Compendium… Manufactured trailers Grinding mills Magnesium Electric Mining ShovelGensets
  • 9. The Beijing Axis 48 Compendium… Superheaters Grinding Media Boiler Shells Interpass Absorption Thickeners Pumps The Beijing Axis 49 Compendium… Pipes Round bars Angle steel Flat barsHollow bars Rails The Beijing Axis 50Source: The Beijing Axis Analysis Girth Gear Kiln Support Roller Shaft Kiln Shell Mill HeadKiln Shell Support Roller Compendium… The Beijing Axis 51 Agenda 1. Looking Ahead - the case for a China focus in future LCC sourcing 2. Best Practice: category focus, getting it right, overcoming the challenges and managing the many risks 3. Selected Case Studies 4. Final Word The Beijing Axis 52 Final word Source: The Beijing Axis Analysis • The world is looking to source from LCCs – It’s a global phenomenon and its changing from ‘additional competitive advantage’ to a prerequisite for survival and development • Developing countries are becoming more important as new supply bases – This is truly an Asian story • China ranks at the top of the LCC equation; India is still searching for its place in the global production chain but is positioned in the flying geese formation (along with Vietnam, Malaysia, Thailand, Indonesia etc.) • Ignoring China (and India et al) is no longer possible or wise; Threat, opportunity; Must form part of a ‘global supply chain portfolio’ • Very complicated - many risks i.e. quality/safety, counterparty risk, financing, complexity, contracts, language, trade protectionism, etc. – Watch out! • Use information well – strategic intelligence is the main aid in risk mitigation • Communicate well and often; manage engagements – Both with HQ at home and with Chinese counterparties • Good strategy, good implementation – Processes, systems and people (and partners across SC) • Analysis, Engagement, Process • Three key questions - Why? What? How? • Learn from others! www.thebeijingaxis.com Beijing, China Cheryl Tang Director & GM, China cheryl@thebeijingaxis.com Shanghai, China Julia Wang Procurement Specialist Hong Kong TBA Secretary Corporate Office 3806 Central Plaza, 18 Harbour Rd Wanchai, HK Singapore Andrew Kagoro, Finance & Projects Penthouse & LV 42 Suntec Tower 3, 8 Temasek Blvd Singapore Perth, Australia Kobus van der Wath Founder & Group MD kobus@thebeijingaxis.com Johannesburg, South Africa Dirk Kotze Director & GM, Africa dirk@thebeijingaxis.com London, UK/Europe Matt Pieterse Non-Executive Director Russia Desk Lilian Luca Non-executive Director Latin America Desk Javier Cuñat (Beijing) Associate Director Yangon, Myanmar Dr. Wong YF Chief Representative India Desk Ankit Khaitan (Singapore) Beijing Axis Strategy Eastern Africa Desk Walter Ruigu (Beijing) Beijing Axis Strategy COPYRIGHT© The Beijing Axis Ltd. 2012. 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. China-focused International Advisory and Procurement Kobus van der Wath Founder and Group Managing Director, The Beijing Axis kobus@thebeijingaxis.com THANK YOU!