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Business Best Practices & Emerging     Technologies ConferenceStrategic Implications of China’s      Market Development   ...
Themes China today Perspectives on infrastructure / distribution China tomorrow? What should we do?                   ...
China’s Market EvolutionChina is in a “late adolescent” phase of growth…   150,000                                        ...
China today                                                                                 -             +               ...
How US companies are faring 2010 was a strong year for U.S. companies in China, achieving record results…             100%...
How US companies are faringChina operating profit did relatively well against globalperformance…and US firms are optimisti...
How US companies are faringChina operating profit did relatively well against globalperformance…and US firms are optimisti...
How US companies are faringChina operating profit did relatively well against globalperformance…and US firms are optimisti...
Top 10 challenges remain unchangedTop 10 Challenges1. HR constraints                           HR Constraints: Finding qua...
“In China for China” is growing• A majority of US companies:     – Say they produce or source goods and services in China ...
China trade linked to US economy•   A majority of Amcham member        •   >75% of congressional districts    companies ar...
Tough business environment!                              CONFIDENTIAL — Use or disclosure of this information is restricte...
Tough business environment! Lack of good market intelligence Defining your addressable market Dealing with high level o...
Tough business environment! Lack of good market intelligence    Being cost competitive Defining your addressable market...
Painful Lessons Learned Structure before strategy A “snapshot” view of the market Unexpected competition – over supply...
Challenges in China’s evolving infrastructure High logistics cost is -- ~18% of total GDP versus 10% in US.   Transportat...
State of warehousing industryChina’s warehousing industry is evolving but there is widevariation in level of progress.    ...
China’s Retail Distribution LandscapeIT Systems                  Storage Systems                        Order Fulfillment•...
Evolving Distribution NetworksNetwork analysis is becoming more critical as China expands internallyand integrating with y...
12th Five Year PlanChinese Central Government Major Investments for 12th 5Year Plan…•   Green Tech and Alternative Energy•...
Where is China headed? Annual Growth… 1985-1991 = 8.8% 1991-2001 = 10.0% 2001-2009 = 9.9% 2009-2020F = 7.3%               ...
Urbanization will drive major change…    Level of Urbanization by Country                                          91%  UK...
…resulting in… Another 50 cities reaching >1 million population ~150 million new urban consumers will be in the market ...
Geographical Landscape                   Anhui                 Chongqing                                                  ...
Supply Chain Implications…Trend                       Supply Chain ImpactSlowing growth rate         Higher competitive in...
Supply Chain Implications… Trend                        Supply Chain Impact Despite investment,          Need to modernize...
What should we do? Need a proactive strategy, whether there already or not Bring your “A” game Observe some key princip...
Just remember…   In China, everything ispossible…but nothing is easy!                   CONFIDENTIAL — Use or disclosure o...
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Business Strategies and Best Practices in China Markets

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Presentation by Steve Ganster, EVP Asia for Tompkins International on best practices and business strategies in China. This presentation was given at the Business Best Practices and Emerging Technologies Conference on September 27 at the University of Wisconsin in Madison, WI. A news release is available at www.technomicasia.com/blog

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Business Strategies and Best Practices in China Markets

  1. 1. Business Best Practices & Emerging Technologies ConferenceStrategic Implications of China’s Market Development Steven H. Ganster, EVP Asia Tompkins International sganster@tompkinsinc.com www.tompkinsinc.com www.technomicasia.com September 27, 2011 Madison WI
  2. 2. Themes China today Perspectives on infrastructure / distribution China tomorrow? What should we do? CONFIDENTIAL — Use or disclosure of this information is restricted. 2
  3. 3. China’s Market EvolutionChina is in a “late adolescent” phase of growth… 150,000 6000.0 Late Adolescent 112,500 4500.0 Young Teen 75,000 Toddler 3000.0 37,500 1500.0 Infant 0 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Inward Direct Investment (US$Mn) Real GDP at 2009 Prices CONFIDENTIAL — Use or disclosure of this information is restricted. 3
  4. 4. China today - +  Uneven economic development  Ability to manage a diverse, complex GDP growth will remain robust and regional market Becoming true “market economy”  Significant environmental challenges Moving up the value chain  Strained infrastructure Vibrant group of young, new urban  Too few key resources (energy, consumers water, oil) Strengthening technology capability  Constant need to create jobs Emerging new global companies  Responsibility to be a global citizen Focus on domestic market development CONFIDENTIAL — Use or disclosure of this information is restricted. 4
  5. 5. How US companies are faring 2010 was a strong year for U.S. companies in China, achieving record results… 100% 87% 79% 77% 75% 70% 65% 61% 52% 50% 47% 40% 25% 2008 2009 0% 2010 Profitable Revenue Up from Previous Year Gained Market ShareSource: Amcham-Shanghai 2010 China Business Report; Technomic Asia CONFIDENTIAL — Use or disclosure of this information is restricted. 5
  6. 6. How US companies are faringChina operating profit did relatively well against globalperformance…and US firms are optimistic about the future 100% 90% 75% 71% 50% 41% 25% 0% Forecast 2011 Revenue (increase>10%) Forecast 2011 Investment (increase>15%) Optimistic Five-Year Business Outlook Source: Amcham-Shanghai 2010 China Business Report; Technomic Asia CONFIDENTIAL — Use or disclosure of this information is restricted. 6
  7. 7. How US companies are faringChina operating profit did relatively well against globalperformance…and US firms are optimistic about the future • China among top 3 priorities for 2/3 of companies 100% 90% 75% 71% 50% 41% 25% 0% Forecast 2011 Revenue (increase>10%) Forecast 2011 Investment (increase>15%) Optimistic Five-Year Business Outlook Source: Amcham-Shanghai 2010 China Business Report; Technomic Asia CONFIDENTIAL — Use or disclosure of this information is restricted. 6
  8. 8. How US companies are faringChina operating profit did relatively well against globalperformance…and US firms are optimistic about the future • China among top 3 priorities for 2/3 of companies • #1 global priority for ~20% 100% 90% 75% 71% 50% 41% 25% 0% Forecast 2011 Revenue (increase>10%) Forecast 2011 Investment (increase>15%) Optimistic Five-Year Business Outlook Source: Amcham-Shanghai 2010 China Business Report; Technomic Asia CONFIDENTIAL — Use or disclosure of this information is restricted. 6
  9. 9. Top 10 challenges remain unchangedTop 10 Challenges1. HR constraints HR Constraints: Finding qualified staff the greatest challenge2. Inconsistent regulatory interpretation3. Unclear regulations Unclear regulations: Regulatory environment perceived to be not4. Bureaucracy improving5. Lack of transparency6. IPR infringements IPR Infringements: Disappointing progress in IPR protection7. Tax administration8. Domestic protectionism Domestic Protectionism: Growing9. Difficulty enforcing contract terms concern over indigenous innovation policies10. Corruption CONFIDENTIAL — Use or disclosure of this information is restricted. 7
  10. 10. “In China for China” is growing• A majority of US companies: – Say they produce or source goods and services in China for the China market as a primary strategy – Have or are designing unique products or services to sell in China – Import finished goods or parts from the U.S.• 87% of confident companies are in China for China*• 80% of successful companies are in China for China***I.e. those with long-term market growth target >15%, increasing China investment and are optimistic or very optimistic about China**i.e. those who are very profitable in China with positive cash flows CONFIDENTIAL — Use or disclosure of this information is restricted. 8
  11. 11. China trade linked to US economy• A majority of Amcham member • >75% of congressional districts companies are importing from had higher export growth to the U.S, mostly to sell in China China than any other country for the China market. • 94% of districts witnessed triple• U.S. China operations clearly digit growth to China over last 10 maintain links with their U.S. years. supply chain and continue to add • Since 2000, total US exports to value to the U.S. economy. China grew 468% vs. 55% to• The vast majority (86%) of U.S. other markets companies that import from the • …but US import share to China U.S. say that their China dropped to 7% from 10% operations contribute to the • China is US’ 3rd largest export growth of U.S. production.. market*Based on survey of Amcham-Shanghai *Based on recent survey of US-China members end 2010 Business Council members CONFIDENTIAL — Use or disclosure of this information is restricted. 9
  12. 12. Tough business environment! CONFIDENTIAL — Use or disclosure of this information is restricted. 10
  13. 13. Tough business environment! Lack of good market intelligence Defining your addressable market Dealing with high level of uncertainty Access to local markets Understanding Chinese business culture Successfully adapting your business model CONFIDENTIAL — Use or disclosure of this information is restricted. 10
  14. 14. Tough business environment! Lack of good market intelligence  Being cost competitive Defining your addressable market  Opaque financial systems  Corruption and IP infringement Dealing with high level of uncertainty  Rule of man versus rule of law Access to local markets  Unpredictable regulations Understanding Chinese business  Managing relationships culture  Expensive and time consuming to get things done Successfully adapting your business model  Lack of sufficient local talent CONFIDENTIAL — Use or disclosure of this information is restricted. 10
  15. 15. Painful Lessons Learned Structure before strategy A “snapshot” view of the market Unexpected competition – over supply Lack of due diligence in partner selection Poor relationship management Not enough support for the local operation Naive financial planning CONFIDENTIAL — Use or disclosure of this information is restricted. 11
  16. 16. Challenges in China’s evolving infrastructure High logistics cost is -- ~18% of total GDP versus 10% in US. Transportation cost is 51% of the total logistics cost. ~25% shortage in railway capacity (down from 40% in 1999) High internal toll rates (30-40% of transportation cost) Air freight in early development stage Cheap river option but no standards, poor tracking/handling Low technology warehousing 50-60% of logistics companies with no proper IT systems Fragmented supply base (>800,000 trucking firms) CONFIDENTIAL — Use or disclosure of this information is restricted. 12
  17. 17. State of warehousing industryChina’s warehousing industry is evolving but there is widevariation in level of progress. High Tobacco Industry Concentration Pharmaceuticals Retail Electronics Apparel 3PL Warehousing Low Overall Level of DC Technology High Industry Scale < 1 trillion RMB Industry Scale 1-10 trillion RMB Industry Scale > 10 trillion RMB Note: Size of circles drawn to rough, but not exact, industry scale. CONFIDENTIAL — Use or disclosure of this information is restricted. 13
  18. 18. China’s Retail Distribution LandscapeIT Systems Storage Systems Order Fulfillment• Legacy/ERP based  Wide range of technology  Paper-based picking Warehouse/DC utilized, often MHE solutions widely control systems still supplier driven utilized prevalent  In general, good  Stratification of product by• Manual data entry application of the correct velocity (Pareto) not well common storage medium understood• Many home grown  Mismatch between  Discrete order picking systems but storage medium and prevalent international players industrial trucks (poor  Too many “touches” now active integration)  Most significant opportunity Floor for improvement stacking AS/RS VNA CONFIDENTIAL — Use or disclosure of this information is restricted. 14
  19. 19. Evolving Distribution NetworksNetwork analysis is becoming more critical as China expands internallyand integrating with your global supply chain becomes more important. Intra-China trend… Global trend… CONFIDENTIAL — Use or disclosure of this information is restricted. 15
  20. 20. 12th Five Year PlanChinese Central Government Major Investments for 12th 5Year Plan…• Green Tech and Alternative Energy• Healthcare• Environmental Cleanup• Transition From Dirty to Clean Manufacturing• Transition From Commodity Manufacturing to Service Economy• Western China Development• Raising Standard of Living for Low Wage Workers• Modernization of national transportation systemChina’s 12th 5 Year Plan Makes Clear That Profound Changes are Needed For Sustainability and Continued Prosperity CONFIDENTIAL — Use or disclosure of this information is restricted. 16
  21. 21. Where is China headed? Annual Growth… 1985-1991 = 8.8% 1991-2001 = 10.0% 2001-2009 = 9.9% 2009-2020F = 7.3% Real GDP at 2009 Prices (US$Bn) 15000.0 Doubling by 2020 - $5-6 trillion pa more than 2009 Today 11250.0 Take-off! 7500.0 -----The “Gold Rush”--- 3750.0 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 20 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 CONFIDENTIAL — Use or disclosure of this information is restricted. 17
  22. 22. Urbanization will drive major change… Level of Urbanization by Country 91% UK 90% 85% USA 81% Closing Urbanization Gap 55%World 70% China World 51% 53% 2020China 43% 2010 34%India 29% 0% 25% 50% 75% 100% 20% 1990 2000 2010 2020 2030 CONFIDENTIAL — Use or disclosure of this information is restricted. 18
  23. 23. …resulting in… Another 50 cities reaching >1 million population ~150 million new urban consumers will be in the market High-speed rail system – old rail shifts to freight 100 new (modern) airports built 1000s of additional kilometers of highway Another ¼ billion cars on the road (electric car!) Rising labor rates Even greater environmental challenges Even less resources Constant strain on infrastructure CONFIDENTIAL — Use or disclosure of this information is restricted. 19
  24. 24. Geographical Landscape Anhui Chongqing Beijing Guangxi Fujian Hainan Hebei Guangdong Heilongjiang Jiangsu Henan Hubei Shandong Hunan Shanghai Jilin Liaoning Tianjin Shanxi Zhejiang SichuanDeveloping Developed Gansu Inner Mongolia Jiangxi Guizhou Shaanxi Ningxia Xinjiang Qinghai Yunnan TibetEmerging Undeveloped CONFIDENTIAL — Use or disclosure of this information is restricted. 20
  25. 25. Supply Chain Implications…Trend Supply Chain ImpactSlowing growth rate Higher competitive intensity - greater need for efficient supply chainsMovement “west”, growth Significant expansion in your supplyin tier 2,3 and 4 cities chain’s geographic reach I - regionally centric with myriad of cross-province trade challenges.Another 150 million urban Reaching these consumers effectively willconsumers to enter be a critical component of your growthmarket by the end of strategy and will require a competitivedecade. supply chain.Shift to higher value May need to revamp supplier portfolio andadded production LCC sourcing strategy CONFIDENTIAL — Use or disclosure of this information is restricted. 21
  26. 26. Supply Chain Implications… Trend Supply Chain Impact Despite investment, Need to modernize and streamline supply infrastructure will remain chain structure and processes strained, inefficient and costly. In China for China trend Must have more visibility and control over will cause increasing need supply chain to optimize competitiveness to localize operations Rising costs (labor, land, Modernize operations, more technology etc.) and automation China’s retail landscape Will change go-to-market strategies for will morph - E-commerce many firms and require change in supply sales exploding chain strategy CONFIDENTIAL — Use or disclosure of this information is restricted. 22
  27. 27. What should we do? Need a proactive strategy, whether there already or not Bring your “A” game Observe some key principles of success…  Pursue strategy before structure  Develop a robust dual strategy if possible  Become a strategic sourcer  Focus on relationship management  Observe the 6Ds CONFIDENTIAL — Use or disclosure of this information is restricted. 23
  28. 28. Just remember… In China, everything ispossible…but nothing is easy! CONFIDENTIAL — Use or disclosure of this information is restricted. 24

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