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

1. China/Asia Sourcing
Landscape and Implications
for Global Supply Chains
For CHaINA’14 Live
International Advisory and Procurement
www.thebeijingaxis.com
11 June 2014
Javier Cuñat
Associate Director,
The Beijing Axis
javiercunat@thebeijingaxis.com
The Beijing Axis 1
The Beijing Axis (TBA) is an international advisory and procurement firm
• Established in 2002, The Beijing Axis:
o Supports our clients’ international initiatives with cross-border advisory and procurement solutions
o Thrives in dynamic and challenging emerging and frontier markets
o Emphasizes strategy implementation, focused on ‘actions and transactions’
o Collaborates with clients and provides integrated solutions across their value chain
• The Beijing Axis has formed a strategic partnership with Imperial Logistics, which creates
an end-to-end, integrated supply chain from Asia to Africa and vice versa
• The Beijing Axis Africa has been integrated within Resolve, an Imperial Logistics company.
Resolve is a newly formed venture that merges Imperial Group companies Volition, e-Logics
and associated Consulting, Technology and Managed Services businesses within the group
Strategy and
Management Consulting
1
• Research and analytics
• Strategy formulation
• Strategy implementation
• Sales activation
Procurement
Services
2
• Procurement advisory
• Strategic sourcing
• Transactional procurement
• Outsourced and managed
procurement
Commodity
Trading
3
• Sales and marketing
• Procurement
• Financial structuring and
transaction assistance
• Intelligence
Capital
Advisory
4
• Origination
• Financial advisory
• Due diligence
• Transaction project
management
The Beijing Axis 2
Full press release can be found at www.thebeijingaxis.com.
For more information, please contact: barbieco@thebeijingaxis.com
The Beijing Axis 3
• Potential still exists to reduce
procurement costs when
sourcing from China
• Potential for cost savings must
drive sourcing decisions
• Design, quality and on-time
delivery in China often meet
international standards but
need to be managed pro-
actively
• Chinese suppliers struggle with
project integration - project
management, on-site
supervision, project
coordination, logistics
coordination, sub-supplier
supervision are key
• Various procurement
challenges and risks exist when
sourcing from China/Asia -
these require awareness and
action
• Finding the ‘right’ supplier and
managing the supplier
appropriately are key
• Supply chain managers able to
anticipate market shifts, and
adapt quickly will create a
unique competitive advantage
– a strategic approach to
sourcing is essential
• International companies are
using various ‘models and
sourcing structures’ for China
procurement
• Various emerging
manufacturing clusters in Asia
will continue to redefine ‘what
to source’ and ‘where to source’
• China’s manufacturing export
structure has shifted from
labour-intensive goods to high-
value manufactured goods –
such supply chain shifts are still
evolving
• China/Asia stand out as a key
sourcing destination for both
upstream and downstream oil &
gas equipment
• China’s capabilities in quality
and price enable it to provide
substantial cost savings –
CAPEX, MRO, consumables
At the highest level
Source: The Beijing Axis Analysis
Shifts in China’s Relative
Competitiveness and New
Supply Markets That Matter
Products, Categories and
Packages That Make Sense
Strategies, Tactics and
Practical Advice on Managing
the Risks and Outcomes
Selected Cases Studies
• Developing economies in Asia,
are transforming the global
manufacturing landscape
• China is the world’s largest
exporter and a global
manufacturing powerhouse
• The era of cheap labour in
China is over, but key
manufacturing advantages
remain intact
• Various factors will reshape
China’s position in the global
manufacturing landscape
• India, Indonesia, Vietnam, etc.
will emerge as leaders of low-
value manufacturing during the
same time
SummaryOverview

2. The Beijing Axis 4
Agenda
1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter
2. Products, Categories and Packages That Make Sense
3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes
4. Selected Case Studies
5. Final Word
Why and Where?
What?
How?
Are we really sure?
The Beijing Axis 5
Rank 1980 1990 2000 2013
Gross
Value Add
(USD bn)
2030F*
1 United States United States United States China 2980 China
2 Germany Japan Japan United States 2168 United States
3 Japan Germany Germany Japan 913 Japan
4 UK Italy China Germany 814 Brazil
5 France UK UK South Korea 379 India
6 Italy France Italy Italy 324 South Korea
7 China China France Russia 322 Germany
8 Brazil Brazil South Korea Brazil 297 Indonesia
9 Spain Spain Canada France 273 Russia
10 Canada Canada Mexico India 263 Mexico
11 Mexico South Korea Spain UK 255 Italy
12 Australia Mexico Brazil Mexico 219 France
13 Netherlands Turkey Taiwan Canada 218 UK
14 Argentina India India Indonesia 208 Canada
15 India Taiwan Turkey Spain 181 Thailand
Global Manufacturing by Gross Value Added (USD
bn, 2013)
Top Manufacturers by Nominal Manufacturing Gross
Value Added (1980-2030F)
Note*: 2030 rankings are based on The Beijing Axis forecasts
Source: World Bank; IMF; CIA Factbook; The Beijing Axis Analysis
Developing economies led by China, India and Indonesia are transforming the
global manufacturing landscape - expect the trend to continue
World China US Japan Germany Others
(Developed)
Others
(Developing)
TotalManufacturingValueAdded(USDbn,2012)
17%
X%
represents manufacturing value added as
a % of GDP
32% 22%13% 19%
12546
2980
2168
913
814
3469
2202
Share of
world
14% 15%
24%
17%
7%
6%
28%
18%
100%
In the last decade, manufacturing
output grew by 2.6% annually in
developed economies and 7.8%
annually in developing economies
Why and where?
The Beijing Axis 6
China’s importance to the global economy is illustrated by its position as the
world’s largest exporter – driven by its manufacturing sector, it has rapidly
outstripped developed markets
World’s Major Exporters (2013)
Source: World Bank; IMF; UN Comtrade; The Beijing Axis Analysis
0
400
800
1,200
1,600
2,000
2,400
2,800
0 10 20 30 40 50 60 70 80 90
Exports (USD bn)
Exports/GDP (%)
Bubble Size: GDP = USD 1,000 bn
China Developing Asia Developed Asia Others
China’s Exports (USD bn)
2003 485
2008 1,582
2013 2,225
CAGR (2003-2013) 16%
Malaysia
Netherlands
Thailand
S. Korea
Germany
China
US
Japan
Brazil
India
Australia
Switzerland
Mexico
China in 2003
Russia
Canada
Spain
France
UK
China overtook
Germany to become
the world’s largest
exporter in 2010
A large economy, large exports
and high exports to GDP ratio –
however, its future growth model
will not depend on exports
Why and where?
The Beijing Axis 7
80
120
160
200
04 06 08 10 12
China’s manufacturing competitiveness among developed markets remain
intact despite a narrowing gap in labour costs, increased industrial land costs
and rising electricity costs
Cost Input Comparison Between China and Developed Markets1
Note 1: Value of first utilised year for a country is assigned a base value of 100 for indices
Note 2: Wholesale Price Index for China is based on TBA computation
Source: Various; The Beijing Axis Analysis
60
120
180
240
300
00 02 04 06 08 10 12
60
140
220
300
380
01 03 05 07 09
80
130
180
230
280
01 03 05 07 09
70
85
100
115
130
02 04 06 08 10 12
90
110
130
150
02 04 06 08 10 12
Wholesale Price Index2
Diesel Price Index
Real Effective Exch. Rate
80
160
240
320
400
02 04 06 08 10 12
Hourly Labour Rate Index
Labour Productivity Index Electricity Price Index
Rental Cost Index
China
Japan
US
Germany
?
Rental cost reflects
China’s overheating
commercial real
estate market
Exponential rise in
labour costs
Upward sloping curve
indicates increased
competitiveness
Why and where?

3. The Beijing Axis 8
China’s manufacturing competitiveness has begun to partially erode
recently due to increasing labour costs, real estate costs, and rising inflation
- is there a next China in Asia?
Cost Input Comparison Between China and Other Asian LCC Markets1
Note 1: Value of first utilised year for a country is assigned a base value of 100 for indices
Note 2: Wholesale Price Index for China is based on TBA computation
Source: Various; The Beijing Axis Analysis
40
190
340
490
640
790
940
00 04 08 12
80
160
240
320
400
01 03 05 07 09
80
130
180
230
280
01 03 05 07 09
40
60
80
100
120
02 04 06 08 10 12
90
140
190
240
290
02 04 06 08 10 12
90
165
240
315
390
02 04 06 08 10 12
90
130
170
210
04 06 08 10 12
Compared to other LCCs in Asia,
China has seen greater increases
in both hourly labour rates and
labour productivity
?
Wholesale Price Index2 Real Effective Exch. RateHourly Labour Rate Index Rental Cost Index
Diesel Price IndexLabour Productivity Index Electricity Price Index
China
Vietnam
India
Indonesia
Upward sloping curve
indicates increased
competitiveness
Why and where?
The Beijing Axis 9
China’s manufacturing competitiveness has begun to partially erode
recently due to increasing labour costs, real estate costs, and rising inflation
- is there a next China elsewhere?
Cost Input Comparison Between China and Other Non-Asian LCC Markets1
Note 1: Value of first utilised year for a country is assigned a base value of 100 for indices
Note 2: Wholesale Price Index for China is based on TBA computation
Source: Various; The Beijing Axis Analysis
60
140
220
300
380
00 02 04 06 08 10 12
60
135
210
285
360
01 03 05 07 09
80
120
160
200
240
280
01 03 05 07 09
40
60
80
100
120
02 04 06 08 10 12
80
140
200
260
320
380
02 04 06 08 10 12
90
140
190
240
290
340
390
02 04 06 08 10 12
90
130
170
210
04 06 08 10 12
Increases in cost inputs for
manufacturing is a global
phenomenon and can be seen in
other LCCs worldwide
?
Diesel Price IndexLabour Productivity Index Electricity Price Index
Wholesale Price Index2 Real Effective Exch. RateHourly Labour Rate Index Rental Cost Index
China
Turkey
Poland
Mexico
Upward sloping curve
indicates increased
competitiveness
Why and where?
The Beijing Axis 10
0 6 12 18 24 30
Vietnam
Indonesia
Philippines
India
China
Mexico
Poland
USA
Japan
Germany
2001 2013
0 5 10 15 20 25
Vietnam
Indonesia
Philippines
India
China
Mexico
Poland
USA
Japan
Germany
2007 2012
Average Hourly Manufacturing Wage Comparison in
Selected Economies (USD, 2002 vs. 2013)*
Note*: Hourly manufacturing wage is computed using total manufacturing compensation, which includes compensation elated to all employees in the manufacturing sector and includes (1) direct pay and
(2) employer social insurance expenditures and labour-related taxes
Source: Bureau of Labour Statistics; National Bureau of Statistics; CBRE; The Beijing Axis Analysis
Average Industrial Rentals in Selected Economies
(USD/sq. ft./annum, 2008 vs. 2013)
Although manufacturing input prices have increased in China, they are still
low in absolute terms when compared to other manufacturing powerhouses
7
CAGR (%)
11
8
8
9
16
2
9
3
3
Chinese government‘s 12-
year plan calls for a minimum
13% wage increase every
year over the next five years
Developed
markets
Non-Asian
LCCs
Other Asian
LCCs
China's wage increase is
partly driven by rising inflation
and the government's drive to
reduce income inequality
1
5
3
6
11
9
3
-1
-4
1Developed
markets
Non-Asian
LCCs
Other Asian
LCCs
CAGR (%)
Tight supply and
sustained demand have
led to a robust increase in
industrial rentals n China
Why and where?
The Beijing Axis 11
1%
1%
11%
8%
1%
0%
6%
6%
4%
4%
4%
3%
Labour Productivity Comparison Across Selected Economies (USD, 2003-2013)*
Note*: GDP per person employed in 1990 USD is used as a measure of labour productivity
Source: The Conference Board; The Beijing Axis Analysis
China’s labour productivity has improved significantly over the past decade
but it is still far lower than that of developed economies - this presents both
opportunities and challenges
China's GDP per
person employed is
only 23% of USA’s
X% Represents CAGR
Represents a GDP
per person employed
of USD 20,000
Year USA China Mexico India Indonesia Vietnam
2003 61,783 6,517 18,931 5,491 8,208 4,328
2008 65,495 10,990 19,996 7,289 9,832 5,309
2013 70,242 16,470 20,289 9,639 11,880 6,210
Why and where?

4. The Beijing Axis 12
2.0
2.5
3.0
3.5
4.0
4.5
5.0
30 35 40 45 50 55 60 65
Comparison of Sourcing Capabilities of Selected Economies (2013)
Note*: Technology Index based on WIPO’s Global Innovation Index (out of 100) and Infrastructure Index based on World Bank’s Logistics Performance Index (out of 5)
Source: World Intellectual Property Organisation; World Bank; UN; The Beijing Axis Analysis
China will continue to hold certain key advantages compared to its
manufacturing competitors i.e. robust infrastructure, advanced technology/R&D
and a skilled labour force
Infrastructure Index*
Technology Index*
A bubble of this size represents 50% of the population aged
25 and older with a college degree
US
Germany
Japan
Czech
Republic
Malaysia
China
Brazil
India
Vietnam
Mexico
Indonesia
Developed markets - high
technology capability, robust
infrastructure and highly
skilled labour force
Emerging LCCs still have a long way to
go before catching up with China in
terms of technology, infrastructure and
skilled labour pool
Poland
Why and where?
The Beijing Axis 13
Various positive and negative factors will reshape China’s position in the
global manufacturing landscape over the short, medium and long term – the
implications are clear
Positive/Negative Factors that will Affect China’s Competitiveness in the Short, Medium and Long Term
Source: The Beijing Axis Analysis
Robust Infrastructure
to Support Manufacturing
Robust Infrastructure
to Support Manufacturing
Large Skilled Labour PoolLarge Skilled Labour Pool
Integrated Supply Chain and
Diversified Supply Bases
Integrated Supply Chain and
Diversified Supply Bases
Increasing Focus on High-end Value
Products and R&D/Technology/Innovation
Increasing Focus on High-end Value
Products and R&D/Technology/Innovation
Product Integration Capability and
Established Industrial Clusters
Product Integration Capability and
Established Industrial Clusters
Increasing Environmental Costs
and Stringent HSE Regulations
Increasing Environmental Costs
and Stringent HSE Regulations
Increasing Wage InflationIncreasing Wage Inflation
Increasing Competition
from Other LCCs
Increasing Competition
from Other LCCs
‘Made in China’ Brand/Quality Risk‘Made in China’ Brand/Quality Risk
Strengthening Currency (RMB)Strengthening Currency (RMB)
Ageing PopulationAgeing Population
Positive Factors Negative Factors
1
2
3
4
5
1
2
3
4
5
6
Factors that will persist in
the short-term
Factors that will persist in
the medium-term
Factors that will persist in
the long-term
China’s
Manufacturing
Competitiveness
Factors
arranged in
the order of
importance
Numerous National and Local
Government Incentives
Numerous National and Local
Government Incentives
6
Factors
arranged in
the order of
importance
Why and where?
The Beijing Axis 14
China’s alternatives in LCC sourcing continue to attract global attention
Selected Recent Quotes on China and Emerging LCC Alternatives
Source: Various; The Beijing Axis Analysis
“The days of ultra-cheap labor and little regulation are gone. As
manufacturers' costs climb, export prices will follow."
— Businessweek
“A majority of buyers report paying higher prices for products sourced in
China, and China’s exporters are becoming less competitive with other
low-cost countries such as Vietnam, particularly in the market of low-end
products.” — AmCham Vietnam
“Over the years [sourcing from India] has been increasing year on year
by around 100%. Of course, it's on a small base. China is big for us from
a market perspective. From a sourcing perspective, India is ahead of
China." — James Chelliah, CFO, AstraZeneca India
“After China, Thailand is the second best place for investment for
emerging markets. Ford recently started its production of their all new
Ford Focus in Raygong. If you’re looking for a new place to set up your
manufacturing, Thailand is one place you should consider.” —
Bloomberg
“We still have a lot of sourcing from China. We have a Far East office and
we have marginally increased the amount we take out of China in the last
year and some of the locations have changed. Costs have increased
marginally but we are sticking with China.” — CEO, Prominent high
street chain
“The challenge for rival destinations such as Vietnam is that China still
offers great value and other countries will be hard pushed to take pole
position.”— Richard Lowe, Head of Retail and Wholesale, Barclays
Corporate
“All the responding Indian companies say they already collaborate with
customers at the R&D level. This could reflect the historical lack of
manufacturing in India, and a strong national desire to catch up” — Cap
Gemini-IDG Research
“International companies sourcing from Thailand should raise concerns
with the government that using criminal charges to silence rights critics
could adversely affect the overall reputation of Thailand’s major export
sectors.”— Brad Anamy, Business Watch
Why and where?
The Beijing Axis 15
Agenda
1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter
2. Products, Categories and Packages That Make Sense
3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes
4. Selected Case Studies
5. Final Word
Why and Where?
What?
How?
Are we really sure?

5. The Beijing Axis 16
Various emerging manufacturing/industrial clusters in Asia will continue to
redefine ‘what to source’ and ‘where to source’
Source: Various; The Beijing Axis Analysis
China
• Medical and technical equipment
• Electrical transformers
• Data processing machines
• Mining equipment
• Drilling platforms
• Electronic integrated circuits
• Displays, monitors and projectors
• Furniture
• Electronic products
• Plastic products
• Textiles and garments
• Footwear
India
• Pharmaceuticals
• Drilling platforms
• Gems and precious stones
• Vehicles
• Electrical filaments
• Fertilisers and other organic
chemicals
• Textiles and garments
• Footwear Indonesia
• Motor vehicles
• Tires and other rubber products
• Furniture and other wood
products
• Textiles and garments
• Footwear
• Paper products
Malaysia
• Semiconductors
• Office equipment
• Displays, monitors and
projectors
• Rubber products
• Furniture and other wood
products
South Korea
• Data processing machines
• Electronic integrated circuits
• Drilling platforms
• Vehicles
• Semiconductors
• Displays, monitors and projectors
• Optical fibers
• Storage batteries
Japan
• Mining equipment
• Electronic integrated circuits
• Vehicles
• Semiconductors
• Office equipment
• Displays, monitors and projectors
• Vacuum pumps
• Electric capacitors
• Pneumatic tires
Thailand
• Data processing machines
• Electronic integrated circuits
• Vehicles
• Air conditioners
• Rubber products
Vietnam
• Furniture
• Metallic wires
• Textiles and garments
• Footwear
High-value products highlighted in red
Low-value products highlighted in black
What?
The Beijing Axis 17
0
500
1,000
1,500
2,000
2001 2013
Machinery and Electrical Equipment
Foodstuffs
Miscellaneous Manufactured Articles
Products Classified by Material
Mineral Items
Chemical Products
Others
Composition of China’s Exports* (USD bn; 2001, 2013)
CAGR
Represents CAGR for the period 2001-2013
Note*: SITIC Classification System
Source: China Customs; The Beijing Axis Analysis
Over the last decade, China’s manufacturing export structure has shifted from
labour-intensive goods to high-value manufactured goods such as machinery -
such supply chain shifts are still evolving
Increasing
exports share
22.1%
13.1%
17.1%
19.2%
12.3%
20.1%
10.7%
36%
47%
X%
33%
26%
China’s Exports as a Share of Global Exports for
Selected High-Value Items (%, 2002 vs. 2012)
0 10 20 30 40 50
Centrifuges
Transmission
Shafts/Cranks
Construction and
Mining Parts
Silicon Wafers
Optical Fibres
Refrigerators,
Freezers
Cruise/Cargo
Ships, Barges
Derricks and
Cranes
Motorcycles
2002 2012
15
22
CAGR (%)
12
13
15
14
13
22
22
China’s global exports presence
in mid- and high-value products
is considerably larger today than
it was a decade ago
Machinery:
22.1 %
Textiles and garments exports
grew from 46.1 bn to 256 bn,
representing a CAGR of 15.3%
19.3%
What?
The Beijing Axis 18
Several industries have historically focused on China's coastal regions but the
trend is clear – as wage inflation continues to rise in coastal regions,
manufacturers are moving to emerging inland clusters
China’s Manufacturing Clusters (2012)
Note: The dots on the map represent key industrial cities in each cluster
Source: The Economist; China Statistical Bureau; The Beijing Axis Analysis
Bohai Bay Economic Rim
Industry Clusters: Automobiles, Aeronautics,
Consumer Electronics, Textiles, Industrial Machinery,
Electrical Equipment, Chemicals
Important Cities: Beijing, Tianjin, Dalian, Shenyang
Total Exports (2011): USD 164 bn
South-West
Industry Clusters: Automotive, Industrial
Machinery, Pharmaceuticals, Medical Products,
Chemicals
Important Cities: Chongqing, Chengdu
Total Exports (2011): USD 22 bn
Pearl River Delta
Industry Clusters: Textiles, Automobiles, Apparel,
Foodstuff, Consumer Electronics, Petrochemicals,
Industrial Equipment, Electrical Equipment
Important Cities: Shenzhen, Zhuhai, Jiangmen, Foshan,
Dongguan, Guangzhou
Total Exports (2011): USD 438 bn
Yangtze River Delta
Industry Clusters: Automobiles, Shipping, Aeronautics,
Consumer Electronics, Textiles, Pharmaceuticals,
Chemicals, Industrial Machinery, Electrical Equipment
Important Cities: Shanghai, Nanjing, Yangzhou, Suzhou,
Hangzhou, Ningbo, Shaoxing, Wenzhou
Total Exports (2011): USD 590 bn
Central
Industry Clusters: Automotive, Industrial
Machinery, Textiles, Electronics, Chemicals
Important Cities: Changsha, Wuhan,
Zhengzhou
Total Exports (2011): USD 37 bn
What?
The Beijing Axis 19
The Indonesian textile industry is highly concentrated on the island of Java,
particularly in West Java. For the garment industry, clusters can be found in
West Java, Jakarta and Batam Island
Source: Various; The Beijing Axis Analysis
Bandung, West Java: Footwear
Wonosobo, Central Java: Flax fiber
Almost 90% of textile exports
come from Java, with more
than 50% of exports originating
in West Java alone
Batam: Denim, Dyed twills, Swim wear
Tangrang: Footwear West Kalimantuan: Woven clothes
Within the garment industry, a high
concentration can be found in West
Java, Jakarta and Batam Island, the
latter being a free trade zone
Jakarta, Central Java: Domestic buying hub
Semarang, Central Java: Denim product
Bekasi, Central Java: T-shirts, Sweaters, Jackets, Sports wear
Sumedang Utara, Central Java: Knitted fabrics, Acrylic fabric, socks
Select Apparel Industrial Clusters in Indonesia
Select Industrial Clusters
What?

6. The Beijing Axis 20
Digging down to the product level, China exports a wide variety of product
categories – supply chain partner to the world
List of Selected Key Export Product Categories from China (USD bn, 2012)
Source: UN Comtrade; The Beijing Axis Analysis
Machinery
(USD 375.9 bn)
Taps, Cocks, Valves for
Pipes, Tanks, Motors
13.1 bn
Air Pumps and
Compressors
10.3 bn
Liquid Pumps and
Elevators
5.8 bn
Derricks and Cranes
3 bn
Outboard Motors
2.1 bn
Electrical and
Electronic
Equipment
(USD 487.3 bn)
Electric Transformers
and Static Converters
23.7 bn
Electrical Motors and
Generators
9.2 bn
Storage Batteries
4.1 bn
Electromagnets
3 bn
Drills
2 bn
Ships
(USD 38.8 bn)
Passenger and Goods
Transport Ships
31.8 bn
Special Purpose Ships and
Vessels
4.6 bn
Tankers
3.8 bn
Drilling Platforms
2.5 bn
Tugs and Pusher Crafts
1.1 bn
Other Equipment
Cargo Containers
8.4 bn
Screws, Nuts and Bolts
4.5 bn
Casing
1.6 bn
Tubing and Drill Pipes
1 bn
Gas Filters and Purifiers
0.9 bn
What?
The Beijing Axis 21
As an example, China stands out with the largest number of mining
procurement packages in the region. For other Asian countries, the sourcing
potential is limited to a few select packages
Source: The Beijing Axis Analysis
Japan
Upstream Downstream
• Engines
• Cranes
• Drilling Machines
• Pumps
• Valves
• Filtration Devices
• Generators
• Rubber Pipes
• Steel Pipes
• Tankers
• Motors
• Mixers
South Korea
Upstream Downstream
• Engines
• Cranes
• Floating Docks
• Valves
• Wellheads
• Generators
• Steel Pipes
• Tankers
• Motors
• Vapour Recovery Units
Malaysia
Upstream Downstream
• Cranes
• Floating Docks
• Filtration Devices
• Rubber Pipes
• Mixers
Indonesia
Upstream Downstream
• Dredgers
• Pumps
• Filtration Devices
• Steel Pipes
• Motors
• Mixers
China
Upstream Downstream
• Engines
• Cranes
• Floating Docks
• Rigs
• Drilling Machines
• Dredgers
• Pumps
• Valves
• Filtration Devices
• Wellheads
• Generators
• Rubber Pipes
• Steel Pipes
• Tugs and Barges
• Tankers
• Mixers
• Vapour Recovery Units
• Motors
India
Upstream Downstream
• Cranes
• Floating Docks
• Dredgers
• Valves
• Filtration Devices
• Wellheads
• Generators
• Steel Pipes
• Tugs and Barges
• Mixers
• Vapour Recovery Units
Thailand
Upstream Downstream
• Floating Docks
• Rigs
• Pumps
• Valves
• Rubber Pipes
• Tugs and Barges
• Motors
What?
The Beijing Axis 22
0%
10%
20%
30%
40%
50%
60%
0% 10% 20% 30% 40% 50% 60%
Analysis of China’s Exports of Top Oil & Gas Equipment* (2012)
Note*: The top 5 oil & gas-related equipment in each product category based on total global traded value were selected for comparison
Source: UN Comtrade; The Beijing Axis Analysis
Over the last decade, China’s exports of major oil & gas equipment has grown
rapidly as the country transitions towards manufacturing high-value goods
Export CAGR for the period 2001-2012 (%)
Fixed Plant & Equipment Mobile Equipment Production Consumables MRO Consumables Global Market Share (%)
Bulk Bags
Pneumatics
Drilling
Machines
Labels and
Metallised Logos
Light Mobile
Equipment
Packaging
Steel and
Structural
Products
Floating
Drillers
Tugs and
Barges
Engines and Generators
Iron and Steel
Pipe Fittings
HVAC
Parts
Tankers
Dredgers
Steel Shot and
Steel Balls
Screws, Nuts
and Bolts
Floating Docks
Instrumentation
and Automation
Cranes and Spares
Paints/Marine
Coatings
A bubble of this size represents
total export value of USD 5 bn
What?
The Beijing Axis 23
0%
10%
20%
30%
40%
50%
60%
0% 10% 20% 30% 40% 50% 60%
Analysis of Developing Asia’s1 Exports of Top Oil & Gas Equipment2 (2012)
Note: (1) ‘Developing Asia’ includes both developing and emerging Asian economies as per the economic classification
(2) The top 5 oil & gas-related equipment in each product category based on total global traded value were selected for comparison
Source: UN Comtrade; The Beijing Axis Analysis
Developing Asia’s global exports of major oil & gas equipment has also
grown rapidly – China leads, but alternatives are rising
Global Market Share (%)
A bubble of this size represents
total export value of USD 5 bn
Fixed Plant & Equipment Mobile Equipment Production Consumables MRO Consumables
Represents considerable
shift towards the right
Bulk Bags
Pneumatics
Drilling
Machines
Labels and
Metallised Logos
Light Mobile
Equipment
Packaging
Steel and
Structural
Products
Floating
Drillers
Tugs and
Barges
Engines and
Generators
Iron and Steel
Pipe Fittings
HVAC
PartsTankers
Dredgers
Steel Shot and
Steel Balls
Screws, Nuts
and Bolts
Floating
Docks
Instrumentation
and Automation
Cranes and
Spares
Paints/Marine
Coatings
Export CAGR for the period 2001-2012 (%)
Dev. Asia has a
market share of
78% in bulk bags
What?

7. The Beijing Axis 24
Agenda
1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter
2. Products, Categories and Packages That Make Sense
3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes
4. Selected Case Studies
5. Final Word
Why and Where?
What?
How?
Are we really sure?
The Beijing Axis 25
What are the key procurement challenges in China/Asia?
Key Procurement Challenges in China/Asia
Source: The Beijing Axis Analysis
Supplier
Selection
Information
Availability/
Reliability
Supplier
Attitude/
Professionalis-
m
Contract
Documentation
Quality of RFx
Submission
Technical/
Standards
Supplier
Social/HSE
Audit
Supplier
Management
Quality
Management
Expediting
Communication
and
Coordination
Schedule
Delays
Documentation
Management
Packaging
How?
• Supplier benchmarking
• Lack of transparency
• Unwillingness to tender
• Language
• Sub-contract management
• Insufficient after-sales service
• Supplier non-performance
• Language
The Beijing Axis 26
How to overcome these challenges – supplier selection
Source: The Beijing Axis Analysis
Supplier
Selection
Information
Availability/
Reliability
Supplier Attitude/
Professionalism
Contract
Documentation
Quality of RFx
Submission
Technical/
Standards
Supplier
Social/HSE
Audit
a. Conduct thorough background checks
b. Challenge information submitted
c. Probe inconsistencies
a. Pro-active engagements
b. On-going clarification
c. Challenge submission
a. Clarify detailed standards
b. Accommodate/adjust
c. Adapt
a. Verify procedure
b. Ensure implementation
matches procedure
c. Educate suppliers
a. Simplify documents
b. Find common ground
c. Compromise
d. Negotiate/spend time
How?
The Beijing Axis 27
How to overcome these challenges – supplier management
Source: The Beijing Axis Analysis
Supplier
Management
Quality
Management
Expediting
Communication
and
Coordination
Schedule Delays
Documentation
Management
Packaging
a. ‘Right’ supplier selection
b. On-site inspection
c. Good supplier management
a. Understand manufacturing
processes
b. Coordinate across supplier’s
various departments (engineering,
production, quality, etc.)
c. Proactively monitor and probe
progress
a. Involve suppliers during planning
b. Avoid/minimise design change
c. Implement necessary checkpoints
d. Manage sub-suppliers
a. Clarify document requirements
b. Ensure accurate documentation
c. Ensure document quality meets
requirements
a. Specify detailed packaging
requirements
b. Ensure accurate numbering
system in place
c. Ensure packaging meets safety
and environmental requirements
How?

8. The Beijing Axis 28
Towards a strategic procurement approach and process
Strategic Procurement Process – Planning and Execution
‘Right’ supplier through in-depth, and
rigorous engagement
Optimal shortlist of potential
suppliers based on ‘pre-
qualification’ filters
Products delivered on time with
required specifications/quality
• Procurement industry search
• Supplier identification and
universe list compilation
• Supplier evaluation and long list
• RFI, pre-qualification and supplier
shortlist
• (RFQ, RFP and/or RFT) process
• Supplier site visit and plant audit
• Post-trip commercial and
technical evaluation
• Commercial negotiation
• Contracting
• Supplier contract administration
• Quality management (QA/QC)
and on-site manufacturing
supervision
• Expediting
• Logistics coordination
• Supplier installation and
commissioning support
• After sales service support
Supplier Identification Supplier Engagement Transaction Management
Procurement Planning
OutcomeProcurementProcess
Purchase
Order (PO)
1 2 3
How?
Source: The Beijing Axis Analysis The Beijing Axis 29
International companies are using various ‘models and sourcing structures’
for China procurement
Various Sourcing Models in China
Note: (1) Also use EPCMs for projects
(2) FIFO: Fly-in-fly out
Source: Various; The Beijing Axis Analysis
No China SourcingNo China Sourcing Sourcing via AgentSourcing via Agent
Fly-in-fly out
(FIFO)
Fly-in-fly out
(FIFO)
via a Procurement
Service Provider (PSP)1
via a Procurement
Service Provider (PSP)1
• No agents • High use of agents • Medium use of agents • Light use of agents • Very light use
of agents
• No fly-in-fly out (FIFO) • Light FIFO2 • High FIFO • Medium FIFO • Medium FIFO
• No PSPs • Light use of PSPs • Medium use of PSPs • High use of PSPs • High use of
PSPs
• No Office • No Office • No Office • No Office • Small Office
• Examples:
Gold Fields,
Harmony (2)
Lonmin (2)
Impala
• Examples :
Xstrata Ferroalloys, ENRC,
Hulamin,
DCD, Lonmin, Trident,
Robor, Crosslands, CBH,
Lihir Gold (Newcrest)
• Examples:
Newmont,
Exxaro(2),
Peabody (2),
Bateman Eng.(2),
Xstrata Coal,
Anglo Gold (2),
Votorantim (2),
Aditya Birla,
Barick
FMG (2)
• Very light use of
agents
• Light FIFO
• Medium use of
PSPs
• Medium Office
• Examples:
Anglo PLC,
BHPBilliton,
Jindal Steel
• Very light
use of agents
• Light FIFO
• Light use of
PSPs
• Large Office
• Examples:
Rio Tinto,
Vale,
Essar
Office in China
Small Medium Large
Office in China
Small Medium Large
Level of Engagement and Commitment
• Examples:
Newcrest
Kinross (2)
PrimaryandSecondaryChannels
How?
The Beijing Axis 30
What does it mean for procurement and supply chain managers?
Source: The Beijing Axis Analysis
• Advanced analytics, i.e. benchmarking, becomes a value driver
• Supplier relationship management becomes key
• Supplier performance management becomes more complex
• Supplier development becomes challenging
• Category knowledge and management necessary
• Global supply chain portfolio management becomes essential
• Total cost of ownership has become more complex
• Contract management a differentiator
• Risk management becomes key
• Need wider board room involvement – more complex, more strategic
• New skills become necessary – i.e. languages, cultural astuteness and international business
experience
How?
The Beijing Axis 31
Agenda
1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter
2. Products, Categories and Packages That Make Sense
3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes
4. Selected Case Studies
5. Final Word
Why and Where?
What?
How?
Are we really sure?

9. The Beijing Axis 32
What can we learn from complex case studies?
Source: The Beijing Axis Analysis
Project Type Product Categories LearningsClient
Case Study 3
• Establishment of quality risk control
strategy for major capital
procurement project, compilation of
QCP and final quality documentation
pack, and risk-management of
manufacturing process on site
• Electric rope shovels
• Hydraulic shovels
• Large regional coal
company
• Quality documentation
• QCP compilation
• Project coordination
• On-site risk management
• On-site expediting
3
Case Study 2
• A multi-year service agreement
whereas TBA acts as client’s
procurement office in China,
providing procurement management,
strategic sourcing and market
monitoring services to the client
• Magnesium ingots
• Hardeners - silicon, FeAl,
CrAl, MnAl
• Casting equipment
• Wire belt
• Generator sets
• Supplier vetting
• QC inspections
• Logistics coordination
• Post-delivery support to client
• Large listed
international aluminum
company
2
Case Study 1
• Vendor identification, tender
management, order placement and
comprehensive management for
heavy equipment and structural steel
for plant expansion project
• Kilns
• Mills
• Structural steel
• Platework
• Transformers
• RFQ adaptation to China
• Coordination of design changes
• QA plan implementation
• On-site expediting
• Leading global
ferroalloy producer
1
The Beijing Axis 33
Case studies key takeaways
Source: The Beijing Axis Analysis
Plant Equipment Mining and Plant Equipment Rope Shovels
 Supplier involvement in early stage
planning and design
 Permanent on-site supervision of
suppliers
 Chinese suppliers struggling with project
integration
 Dedicated project management team with
complementary skills
 Client's technical support is crucial
 Initial category feasibility assessment for
China sourcing
 Periodic analysis of China supply and
feasibility review
 Hands-on quality assurance including
selective inspection
 Client's technical support is crucial
 Engage supplier during design phase to
benefit from innovation
 Both clients and suppliers require
assistance for QCP and documentation
 On-site management key in mitigating
risks associated with complexity
 Quality control is essential – inspections
enable control over defects and repairs
 Management of component sub-suppliers
also required
 Highly competitive suppliers exist in
China, but may be small in number
Shift of China’s competitiveness –
from single components to large
pieces of equipment
Shift of QA/QC model – from full-time
to part time inspection
CSF: Supplier selection, supplier
relationship management
The Beijing Axis 34
Agenda
1. Shifts in China’s Relative Competitiveness and New Supply Markets That Matter
2. Products, Categories and Packages That Make Sense
3. Strategies, Tactics and Practical Advice on Managing the Risks and Outcomes
4. Selected Case Studies
5. Final Word
Why and Where?
What?
How?
Are we really sure?
The Beijing Axis 35
• Potential still exists to reduce
procurement costs when
sourcing from China
• Potential for cost savings must
drive sourcing decisions
• Design, quality and on-time
delivery in China often meet
international standards but
need to be managed pro-
actively
• Chinese suppliers struggle with
project integration - project
management, on-site
supervision, project
coordination, logistics
coordination, sub-supplier
supervision are key
• Various procurement
challenges and risks exist when
sourcing from China/Asia -
these require awareness and
action
• Finding the ‘right’ supplier and
managing the supplier
appropriately are key
• Supply chain managers able to
anticipate market shifts, and
adapt quickly will create a
unique competitive advantage
– a strategic approach to
sourcing is essential
• International companies are
using various ‘models and
sourcing structures’ for China
procurement
• Various emerging
manufacturing clusters in Asia
will continue to redefine ‘what
to source’ and ‘where to source’
• China’s manufacturing export
structure has shifted from
labour-intensive goods to high-
value manufactured goods –
such supply chain shifts are still
evolving
• China/Asia stand out as a key
sourcing destination for both
upstream and downstream oil &
gas equipment
• China’s capabilities in quality
and price enable it to provide
substantial cost savings –
CAPEX, MRO, consumables
At the highest level
Source: The Beijing Axis Analysis
Shifts in China’s Relative
Competitiveness and New
Supply Markets That Matter
Products, Categories and
Packages That Make Sense
Strategies, Tactics and
Practical Advice on Managing
the Risks and Outcomes
Selected Cases Studies
• Developing economies in Asia,
are transforming the global
manufacturing landscape
• China is the world’s largest
exporter and a global
manufacturing powerhouse
• The era of cheap labour in
China is over, but key
manufacturing advantages
remain intact
• Various factors will reshape
China’s position in the global
manufacturing landscape
• India, Indonesia, Vietnam, etc.
will emerge as leaders of low-
value manufacturing during the
same time
SummaryOverview

10. The Beijing Axis 36
Final word
• The global manufacturing landscape is changing and China/Asia is now at the forefront of it
• China’s competitive strengths and weaknesses will continue to evolve – realities, myths,
threats and opportunities will differ
• Understand the China/Asian System – market dynamics, language, culture, business
practices
• Very complicated - many risks i.e. quality/safety, counterparty risk, financing, complexity,
contracts, language, trade protectionism, etc. – Watch out!
• Finding the ‘right’ supplier and managing supplier appropriately are key!
• Communicate well and often; manage engagements – Both with HQ at home and with
Chinese counterparties
• Four key questions - Why? Where? What? How?
• Learn from others!
www.thebeijingaxis.com
COPYRIGHT© The Beijing Axis Ltd. 2014. No part of this publication may be reproduced or transmitted in any form
or by any means without prior written consent of The Beijing Axis.
International Advisory and Procurement
Beijing
The Beijing Axis
Phoenix Place Tower A, Unit 2306-2307, 5A Shuguang Xili, Chaoyang, Beijing 100028, China
Tel: +86 10 6440 2106
china@thebeijingaxis.com
Singapore
The Beijing Axis Group
Level 42, Suntec Tower 3, 8 Temasek Boulevard, 038988 Singapore
Tel: +65 6829 2189
singapore@thebeijingaxis.com
Perth
The Beijing Axis
Level 11 Brookfield Place, 125 St Georges Terrace, Perth, Western Australia 6000, Australia
Tel: +61 8 6189 8637
australia@thebeijingaxis.com
Mumbai
The India Axis (a member company)
Level 7, Vibgyor Towers, Bandra Kurla Complex, Bandra (East), Mumbai 400072, India
Tel: +91 88 0063 9399
india@thebeijingaxis.com
Johannesburg
The Beijing Axis Africa
Gijima Office Park, Jupiter Building, 47 Landmarks Avenue, Kosmosdal, Samrand, South Africa
Tel: + 27 (0) 12 492 1001
southafrica@thebeijingaxis.com
Thank You!
Javier Cuñat
Associate Director
javiercunat@thebeijingaxis.com