Strategic Location Analysis for setting up of Manufacturing Facility

Case Study
Strategic Selection of FTZ for setting up a new
manufacturing facility for a global security systems
company
Dragon Sourcing - 龙源
Your Tailored Sourcing Approach to China

© 2015 Dragon Sourcing. All rights reserved. 2
Agenda
1. Context
2. Phase I Analysis
3. Phase II Analysis
4. Phase III Analysis
5. Results and conclusions

3
Context
• Client: A global digital security systems manufacturer
• Business Requirement: Our client wanted to select a Free Trade Zone in Asia to set-up a new
manufacturing facility in addition to a facility already operating in China
• Dragon Sourcing Approach: Dragon Sourcing conducted a structured 3- phase analysis of 11 FTZs
in Asia, pre-selected for the study by both the client and Dragon Sourcing, eliminating FTZs on pre-
set parameters in each phase
• 3- Phase Study: Study was conducted in 3 phases and each of the phase is explained in the
following slides
© 2015 Dragon Sourcing. All rights reserved.

4
Agenda
1. Context
2. Phase I Analysis

Phase I - Evaluation of Manufacturing Hubs
Objective
•Analysis and ranking of pre-selected Free Trade Zones in Singapore, Manila (Philippines), Ho Chi
Minh City (Vietnam), Chengdu (China), Phnom Penn (Cambodia), Johor (Malaysia), Batam and
Jakarta (Indonesia), Dubai, Delhi and Chennai (India)
Methodology
•DS used publicly available information sources through secondary research, government sources
and primary information from local logistics & customs clearance companies to analyze and rank
FTZs based on the following parameters:
– Freight capacity of the closest airport to FTZ
• Number of freight flights per day to major destinations in US, Canada, Europe and Africa
• Number of pallets handled per day
– Lead time for export and import clearance
5© 2015 Dragon Sourcing. All rights reserved.

The scope covered 11 cities (FTZ/hubs) in Asia. Airports in these FTZs were
analyzed for air cargo frequency and capacity to destination cities in Europe,
US, Canada, UAE.
Hub/ FTZ
Singapore
Manila
HCMC
Chengdu
Phnom Penh
South Malaysia (Johor)
Batam
Jakarta
Dubai
Delhi
Mumbai
Chennai (added)
Destinations
Los Angeles
Philadelphia
Toronto
Montreal
Paris
Amsterdam
Frankfurt
Dubai

Hubs connectivity direct flights all-cargo and passengers lines

Analysis and Scoring of Airports near Free Trade Zones

Based on Airport capacity and air cargo frequency, 9 FTZs were chosen for
Phase II analysis

Phase I – Summary
• 7 Free Trade Zones/ Hubs were shortlisted based on the ranking of airports close to the FTZ,
which include
– Jebel Ali Free Zone/Dubai International Airport
– Iskandar (Johor)/ Changi Airport (SG) or KLIA
– Batam/ Changi Airport (SG)
– Cavite Economic Zone to Manila/ Manila Niny Aquino International Airport (PH)
– Tan Thuan EPZ (HCMC)/ TSN International Airport (HCMC)
– Chengdu Hi-tech Zone/ Shuangliu International Airport (China)
– Sri City/ Chennai International Airport (IN) + Chennai Free Trade Zone, and
– Bangkok Free Trade Zone (TH)
• Malaysia, Indonesia, Philippines, Vietnam and Thailand Free Trade Zones/Hubs are considered
for Phase II analysis by Dragon Sourcing and the remaining Dubai, China and Indian Free Trade
Zones/Hubs will be analyzed by the client

11
Agenda
1. Context
2. Phase I Analysis

Phase II - Detailed Evaluation of Manufacturing Hubs
Objective
•A detailed evaluation and in-depth analysis of the FTZs shortlisted in Phase I was performed and the FTZs were
scored based on a scorecard developed jointly by the client and DS
Methodology
•Dragon Sourcing conducted phase II analysis of the following parameters on FTZs shortlisted from phase I
– Tangible Cost parameters like
• Rent of available factory space in FTZs, cost of electricity, water, other utilities and cost labor workforce
– Intangible Cost parameters like
• working hours, overtime, public holidays, termination contract and costs, religious and local specific lean
periods, availability of electricity, availability of space for factory, income tax and hub incentives, other
environmental parameters like logistics, infrastructure, corruption, neighbor industries
•Dragon Sourcing obtained information through desk research from primary data sources (HR resources,
government authorities and representative staff) and a multitude of legitimate secondary sources such as
websites of FTZ authority, government websites, etc.
•Dragon Sourcing created a scorecard and scored the FTZs on the above parameters

Sample Scoring of Tangible Parameters
Rental ChargesRental Charges
Electricity TariffElectricity Tariff
SalarySalary
Cost Driver Framework
StructuralStructural
• Cost is driven by
– Rental Charges
– Electricity Tariff
– Salary
• Cost is driven by
– Rental Charges
– Electricity Tariff
– Salary
(Engineer
Salary as an
example)
Cost Driver Framework

Sample: Comparison of Hubs based on Tangibles and Intangibles

Sample: Labor wage rate scoring
Workforce Measure
Maximum
Score per
Criteria
Hub 1 Hub 2 Hub 3 Hub 4 Hub 5 Hub 6 Hub 7 Hub 8 Hub 9 Hub 10
Total Cost of
an Operator
(monthly)
1=More than $400
2=$400 to $350
3=$350 to $300
4=$300 to $250
5=Less than $250
5 1 1 5 3 5 4 4 5 5 2
Total Cost of
a Technician
1=More than $600
2=$600 to $550
3=$550 to $500
4=$500 to $450
5=Less than $450
5 1 1 3 5 5 5 1 5 5 1
Total Cost of
a Supervisor
1=More than $1000
2=$1000 to $800
3=$800 to $600
4=$600 to $400
5=Less than $400
5 1 2 4 4 5 1 2 4 4 1
Total Cost of
an
Electrical/Mec
hanical
Engineer
1=More than $800
2=$800 to $700
3=$700 to $600
4=$600 to $500
5=Less than $500
5 1 1 3 2 1 3 1 5 3 1
Total Cost of
a Plant
Manager
1=More than $2,100
2=$2,100 to $1,600
3=$1,600 to $1,100
4=$1,100 to $600
5=Less than $600
5 1 1 1 1 1 1 1 1 1 1
Legend: 1 less than current facility 2 less than current facility 3+ less than
current facility
1 more than current facility 2 more than current facility 3+ more than
current facility

Phase II – Summary
• 4 FTZs were shortlisted for phase III part of the study based on the ranking in the scorecard,
which include
– Batam, Indonesia
– Ho Chi Minh, Vietnam
– Chennai, India
– Bangkok, Thailand

17
Agenda
1. Context
2. Phase I Analysis

Phase III – Physical Audit of the selected hubs
Objective
•To conduct a due diligence of the Free Trade Zones in the shortlisted countries by conducting a physical audit. The information
collected through desk research in phase II was also cross-verified and validated
Methodology
•Based on phase II study, 4 cities/ countries were selected for phase III analysis- physical audit of the short listed FTZs on the
parameters used in phase II analysis to make sure information collected through desk research is correct
•FTZs in these 4 cities/ countries were identified and Industrial Estates within these FTZs were identified based on the immediate
availability of factory space for move-in
•In addition to the parameters of phase II, the following information was also collected during physical visit
– Availability of factory space
– Amenities provided by the Industrial Estate and/ or FTZ
– Ease of getting labor force onboard through HR consultancies
– Local problems that could potentially impact labor and productivity
– Interview workers from neighboring companies to understand if there are any unions/ how active they are, etc.
– Verify access to Ports/ Airports
– Whether the area is prone to flooding/ natural disasters
– Availability of potable water
– Interview logistics and freight forwarders
– Time for customs clearance
– Whether the local customs agency is efficient or if any delay can be expected
•Dragon Sourcing visited the free trade zones & industrial estates and estimated the operating cost by discussing with the trade zone
authorities and other peer companies thus understanding the real operating conditions. Total monthly cost in each free trade zone is
compared to come up with the best suitable free trade zone for the client.

Sample: Phase III Analysis of FTZs
Parameters FTZ1 FTZ2 FTZ3 FTZ4
Section Sub-Section
Industrial
Estate 1
Industrial
Estate 2
Industrial
Estate 3
Industrial
Estate 4
Industrial
Estate 5
Industrial
Estate 6
Industrial
Estate 7
FTZ
• Is there a ready-to occupy factory
available?
 

 
No
Only land
available at
present

• Is the factory available for rent?     
No
Only land
available at
present
No
• Factory floor space (sq.m) • 9,217 • 12,155 • 11,700
• 8,070 (Total
area of 4
small
factories)
• 5,640
Expandable
twice in size
• 10,000
• (land only)
• 1,950
Location
Specific
• Approximate Distance from Airport (km) 72.5 73.5 84 40 147 18 36.5
• Time required to start operations
including obtaining permits
4-6 months 4-6 months 4-6 months 4-6 months 4-6 months 9-12 months 9-12 months
Rental
• Factory rent/sq.m (USD) 3.8 3.8 4.8 6.7 7 6 X
• Maintenance cost/sq.m (USD) 0.91 0.23 0.02 0.02 0.02 0.48 0.04
• Estimated Renovation Capex(USD) Per
Sq. M*
X X X X X X X
Utilities
• Electricity cost/kWh (USD) 0.16 0.12 0.09 0.09 0.09 0.16 0.1
• Water tariff/cu.m (USD) 1.29 1.4 0.5 0.6 0.7 0.46 0.87
• Sewerage tariff/cu.m (USD) 0.2 Nil 0.18 0.18 3.04 0.24 Nil

Sample Analysis of FTZs
Section Sub-Section
Industrial
Estate 1
Industrial
Estate 2
Industrial
Estate 3
Industrial
Estate 4
Industrial
Estate 5
Industrial
Estate 6
Industrial
Estate 7
Bureaucracy
• Administration Efficiency Good Good Good Good Good Poor Poor
• Customs clearance Quick (<24 hours) Quick (<24 hours) Quick (<24 hours) Quick (<24 hours) Quick (<24 hours)
Very quick (5-6
hours)
Very Slow (3-4
days)
Eco System
• Availability of Packaging
Suppliers (Estimation)
10-15 10-15 25+ 25+ 25+ 10-15 25+
• Availability of Tooling
Suppliers (Estimation)
5-10 5-10 25+ 25+ 25+ <5 25+
• Scheduled Power Cuts
(Yearly)
1-2 times per year
for 1 hour
1-2 times per year
for 1 hour
1-2 times per year
for 1 hour
1-2 times per year
for 1 hour
1-2 times per year
for 1 hour
1-2 times per year
for 1 hour
1 hour every day
• Unscheduled Power Cuts
in 2014
2 times 2 times Nil Nil Nil 3-4 times 10+ times
Tax • Corporate Tax (%) 25% 25% 20% 20% 20% 25% 30%

Sample Analysis of FTZs
Sub-Section
Industrial
Estate 1
Industrial
Estate 2
Industrial Estate 3 Industrial Estate 4 Industrial Estate 5 Industrial Estate 6 Industrial Estate 7
Minimum Monthly Wage (for
ref)
USD 215 (In 2014) USD 219 (In 2015) USD 145 (In 2015) USD 97 (In 2014)
Worker Termination
Compensation
High
•2 month per worked year 2 + 15% of
monthly allowance
Med
•30 days’ for employment period below 120 days,
•90 days’ for employment period from 1 to 3 years,
•180 days’ for employment period from 3 to 6 years,
•240 days’ for employment period from 6 to 10 years
•300 days wages for 10 years and more
Low
•15 days’ per worked year
Low
•15 days’ per worked year
Paid Sick leave
• 12 months paid sick leave (with
doctor certificate)
• An employee must be granted a minimum of 30 days paid sick leave with
pay (by employer) each year. An employee using sick leave for three
• consecutive working days can be required to provide a physician's certificate
proving the illness
• 30 days max with
proven document from
doctor. Paid by the
government.
Paid leave allowance
14 (Women get 1 day off every
month additional)
13 10 13
Min Wage Revision Period Every Year No systematic. Next revision in 3 years Every Year Every Year
Social/Health Insurance Cost 18% 5% 30% 42%
Approximate time to recruit an
employee
60 days 90 days 90 days 60 days
HR Benefits Package
• Accommodation, food, access
to prayer hall
Food, high bonuses (6 months by auto industry)
• Free two-wheeler
service annually,
food
• Food, transportation
allowance
Contract type (permanent /
temporary)
• Temporary: 2 + 1 year then
permanent
Permanent
• Temporary: 3 + 3
years then
permanent
• Permanent
Availability of English Speaking
Labor
High High Medium High
Projected Labor wage increase
(YOY %) 2014-15
14% 0% 12% 12%
Lean Month (Holiday Season in
2015)
Ramzan
(Jun-Jul)
Songkran (Apr) Chinese New Year (Feb)
Diwali
(Oct-Nov)
No of official holidays in 2015
(days)
12 15 10 15

Phase III – Summary
• Information was collected on available factory spaces in the Industrial Estates in FTZs of the 4
cities/ countries
• Tangible costs were calculated in the FTZs and compared against client’s current tangible costs
in their Chinese facility
• Two Industrial Estates were selected by the client based on both tangible costs associated with
those FTZs and intangible parameters like the country’s HR policy, availability of labour force, etc

Strategic Location Analysis for setting up of Manufacturing Facility

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