Case Study-China Factory Location Analysis and Sourcing

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China Factory Location Analysis & Sourcing
Case Study
© 2011 Dragon Sourcing. All rights reserved. 1

© 2011 Dragon Sourcing. All rights reserved.
Case Study Agenda
1.  Introduction & Approach
2.  China Sourcing
3.  Location Analysis
4.  Business Case
2

Introduction & Approach
China sourcing
Location Analysis
Detailed cost modeling
DevelopBusinessCase
Go-No Go decision
Phase 1:
Factory set up
Sourcing ramp up
Phase 2
Production Ramp-up
Phase 3
A Consumer Good company was looking to move production from Taiwan to China to deliver savings and
scale production. The approach taken was split into 3 stages. This case study illustrates the Phase 1.

Case Study Agenda
4.  Business Case
4

Objectives:
1)  To collect and challenge a detailed
and complete understanding of the
spend requirements.
2)  To build an extensive list of
potential suppliers in selected
target countries.
Objectives:
1)  To pre-select suppliers in the
supplier list based on some pre-
selection criteria
2)  To eliminate suppliers that should
not receive the RFI/RFQ
3)  To verify the contact details in the
supplier list and collect accurate
contact details for each supplier
Objectives:
1)  To develop a request for
information (RFI) and request for
quotation (RFQ) document that
includes all key supplier
qualification criteria & quotation
requirements
2)  To develop a balanced scorecard
based on your priorities that will
be used to rank suppliers.
Objectives:
1)  To administer the RFI/RFQ process
with identified suppliers to ensure as
high a return rate as possible.
2)  To analyze the responses to determine
the most competitive and capable
suppliers and recommend next steps.
Approach:
1) Collect all specifications
2) Collect volumes required
3) Collect other requirements
(certifications, testing, delivery)
4) Collect samples
5) Refine requirements through
questions
6) Research list of suppliers
7) Finalize and approve deliverables
Approach:
1) Contact all suppliers in the
database
2) Verify basic questions with the
suppliers:
ü Do they make category?
ü What materials, what purpose ?
ü Do they have export license ?
ü Trading or manufacturer ?
3) Request contact details for pre-
qualified suppliers
Approach:
1) Draft RFI/RFQ document
2) Review & Update RFI/RFQ
document
3) Draft Scorecard
4) Review & Update Scorecard
5) Finalize and approve deliverables
Approach:
1) Administer RFI/RFQ with suppliers
2) Chase for complete responses and field
questions
2) Analyze responses against scorecard
3) Prepare DDP calculations based on
quotes from forwarders
4) Prepare Final Report including
recommendation
5) Prepare Supplier Profiles for top
suppliers
6) Finalize and approved deliverables
Deliverables:
1) Detailed Requirements Document
(approved)
2) Supplier List (approved)
Deliverables
1)  Control sheet (updated weekly)
Deliverables:
1) RFI/RFQ document (approved)
2) RFI/RFQ scorecard (approved)
Deliverables:
1) RFI/RFQ analysis report (approved)
2) Supplier Profiles for top suppliers
(approved)
5 

5 

China Sourcing Approach
1. Demand Analysis &
Supplier Identification
3. Prepare RFI/RFQ
& Supplier Scorecard
4. Administer & Analyse
RFI/RFQ
2.  Supplier telephone
pre-screening
Completed
Completed
Completed
Completed

In the course of this phase we involved more than 350 suppliers in the RFI
process resulting eventually in 23 RFP being retained for the analysis
No. Segments RFI Sent Replied RFI
Participated to
Event
Retained RFP
1 Aluminum 80 21 10 5
2 Fabric 128 17 10 6
3 Plastic Injection 57 18 10 8
4 Stitching 93 17 7 4
Total 358 73 37 23

RFQ Results Excluding the very low cost supplier, we have 2
suppliers with ranges of savings of 12-19%
CIF Kaohsiang (Taiwan) Amount (K NTD)
Model Model 1
Part name Component
1
Component
2
Component
3
Component
4
Component
5
Part # T50001 T50005 T50004 T50002 T50003
Annual Qty 107,270 107,270 107,270 214,540 429,080
Total
Amount Savings Saving %
Current Supplier
(Supplier 1) 15,769 10,083 9,976 9,869 9,440 61,550 　　
Supplier 2 17,326 9,540 9,751 10,394 10,213 64,105 2,555 4.15%
Supplier 3 10,540 8,374 8,717 8,356 8,202 49,757 -11,794 -19.16%
Supplier 4 7,374 6,739 6,169 6,932 5,800 37,278 -24,272 -39.43%
Supplier 5 13,070 11,539 11,020 11,893 12,864 67,721 6,171 10.03%
Supplier 6 10,291 8,824 8,459 14,757 6,520 54,135 -7,415 -12.05%
Min Amount excluding
current supplier 7,374 6,739 6,169 6,932 5,800 37,278 -24,272 -39.43%
Max Saving per Parts 8,395 3,344 3,807 2,937 3,640
Max Saving Percentage per
Parts 53.24% 33.17% 38.17% 29.76% 38.56%
Min Amount Supplier Supplier 4Supplier 4Supplier 4Supplier 4Supplier 4

The big differences between suppliers are within the
manufacturing value added
Cost Analysis
26 21 23 27 25
34
28
12
39
28
0
10
20
30
40
50
60
70
Jianxing Jiayun Jinlan Norinco Fen'an
Suppliers
Cost(MNTD)
Manufacturing cost (M NTD)
Material cost (M NTD)
Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5

The variability in price levels for plastic is driven by 4 major factors: (1)
first and foremost by differences in hourly rates on the injection machines
Plastic Injection Machine Rates
390
252
91 94
756
178
300
80
0
100
200
300
400
500
600
700
800
900
Bey onics First Rate Hengda Lida Menshen Qingtai Shengguang Unimolding
Suppliers
MachineTotalHourlyRate(NTD)
Machine total
hourly rate
(NTD)
Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 Supplier 8

…(4) and finally by differences in margin levels
Margin
8%
15%
3%
20%
8%
15%
8%
40%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Beyonics First Rate Hengda Lida Menshen Qingtai Shengguang Unimolding
Suppliers
MarginRate
% Margin Applied
to the Total Cost
Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 Supplier 8

Case Study Agenda
4.  Business Case
11

Location Analysis
1.  Introduction and Approach
2.  Cost comparison
3.  Convenience comparison
4.  Conclusions and recommendations
12

TAIWAN
FUJIAN
GUANGDONG
The analysis focused on the 2 pre-selected cities, Xiamen and Shenzhen,
with the objective to establish a preference among these 2 options
Client
Preliminary
Considerations
•  Development of the area
•  Direct sea access
•  Air Access from Europe
•  Proximity and access to
Taiwan
Xiamen
Shenzhen
Client
Pre-selected Cities
•  Xiamen
•  Shenzhen
People Republic of China

Information from multiple sources were used to analyze each of the 2
options in terms of cost and convenience
•  Shenzhen bureau of trade & industry information center
•  Shenzhen council for the promotion of International
investment
•  Shenzhen Administrative bureau of free trade zones
•  Administrative of local taxation of Shenzhen municipality
•  Guangdong province price information website
Information Sources
•  Xiamen Foreign Investment Bureau
•  China council for the promotion of
International trade – Xiamen office
•  Xiamen Price bureau website
•  Interviews with General Managers of western companies already located in Shenzhen or Xiamen
•  Various others (Sea shipment companies and sea forwarders, Airlines schedule, etc.)
COST RELATED CRITERIA
•  Existing building rent / Land cost
•  Labor cost
•  Shipment cost
•  Utilities costs
•  Taxes
CONVENIENCE RELATED CRITERIA
•  Infrastructure / Ease to get around
•  Safety
•  Local authorities attitude
•  Utilities supply quality
•  Labor "manageability"
•  Air access to/from The Netherlands & Taiwan
•  Seaport convenience

Location Analysis
15

Cost related criteria
CRITERIA INDICATOR / PRACTICAL MEASURE
Building cost
Rental cost/m²
Land cost
Labor cost
Minimum wages level set by local government
Actual average wages for the typical worker profile
Other employment related costs: insurances and other
charges, allowance, etc…
Sea shipment cost Freight cost to respectively Rotterdam and Los Angeles
Utilities Utilities cost
Taxes Local taxes

Both Shenzhen and Xiamen are big cities encompassing multiple districts
and offering a very large range of prices for land and buildings
~85 km
~30km
~45 km
~50km
Shenzhen (1952 km² ) Xiamen (1565 km²)
SHENZHEN XIAMEN
Building rent (RMB/m2/month) 4 – 150 7 - 30
Land cost (RMB/m2 for 50 years) 130 – 720 80 - 700

Shenzhen has specific industry oriented or dedicated areas: High-Tech,
Advanced Manufactures in the north, Modern Services in the south.
Shenzhen Industry Layout

In Xiamen, 16 industrial areas are spread across 5 of the 6 districts, several
of them with either an industry or investment origin specificity
District Area industrial area name
Huli
(Island)
3 Free trade zone
10 Torch High-tech area
14 Aviation industrial area
Haicang
2 Export processing zone
7 Haicang taiwanese investment area
Jimei
8 Xinglin taiwanese investment area
13 Machinery & Electric Industrial area
6 Jimei taiwanese company investment area
Tongan
11 Torch Tongji high-tech industrial park
4 Tongan south industrial area
5 Tongan east industrial area
15 Light industry & food stuff industrial area
16 Yinlu Foodstuff industrial area
17 Rock material industrial area
Xiangan
9 Xiangbei industrial area
12 Torch East industrial area

In Shenzhen, industrial building rental costs are in the range of 4 to 150
RMB/m²/month, and land to build costs between 130 and 720 RMB
Baoan District
Building: 5 – 14 RMB(1)
Hi-tech area:
Land: 130 – 170 RMB (2)
(1) All building cost are in RMB/m²/month. (2) All Land cost are in RMB/m² for 50 years (3) Passage between SZ and HK
Yantian District
Building: 8– 60 RMB(1)
Land: 366 – 556 RMB(2)
Shatoujiao bonded zone:
Yantian port bonded area
Nanshan District
Land: 303 – 720 RMB (2)
Longgang District
Land: 186 – 376 RMB(2)
Export processing zone
Building: ~17 RMB(1)
Land: 222 – 236 RMB(2)
Futian District
Land: 348 – 676 RMB(2)
Futian bonded zone
Luohu District
Land: 308 – 700 RMB(2)
Luohu Inspection station(3) See Appendix I for
precise prices in
the industrial areas

Similarly in Xiamen, industrial building rental costs are in the range of 7 to 30
RMB/m²/month, and land to build costs between 80 and 700 RMB.
~40 km
(1) All building cost are in RMB/m²/month. (2) All Land cost are in RMB/m² for 50 years
Out of the Island, other
than Haicang
(Jimei, Tongan & Xiangan
district)
Land: 80 – 250 RMB (2)
On the Island:
(Huli district)
Land: ~700 RMB (2)
Haicang district:
Amoy export processing zone
Building: 11-26RMB(1)
Land: ~300 RMB(2)
Land:
Dongfu industrial park: ~150 RMB (2)
South industrial park: ~230 RMB(2)
Xinyang industrial park: ~200RMB(2)
~60km
Tongan district:
Tongan industrial area:
Land: 100-150 RMB (2)
Huli district:
Xiamen free trade zone:
Building: 20-30 RMB (1)

Export processing, bonded or free trade zones could be interesting options
to investigate; both Shenzhen and Xiamen offer these types of zones
Being located in one these zones may have several impacts:
•  Imported material and production equipment can be exempted of import
duties
•  EDI systems with computer network linking between customs and company
are more easily applied
•  More flexibility in the settlement of exchanges for companies' income in
foreign currency
•  Possibility to open foreign currency accounts
•  On the other hand, goods produced in these zones must pay "import taxes" to
be sold in China
See appendix III for more details through:
•  Preference policy of Xiamen Amoy export processing zone
•  Policy advantage of Shenzhen Bonded area

In summary, buildings in the "downtown" districts are cheaper in Xiamen;
this advantage melts down when moving toward the "suburban" zones
City / Area
"Downtown" "Suburban"
SHENZHEN
Modern Service
Industry Area
XIAMEN
On Island
(/ Haicang)
SHENZHEN
Northern Industry
zones
XIAMEN
Outside Island
(Jimei, Tongan, Xiagan)
Building rent
RMB/m²/month
8 - 150
8 – 30
(/ 11 – 26)
4 - 17 7 - 12
Land cost RMB/
m²
for 50 years
303 -720
700
(/150 – 300)
130 - 236 80 - 250
In "downtown" areas, Xiamen could represent around 310k€ of savings assuming
•  Need of 13 000 m²
•  Price of 50 RMB/m²/month in Shenzhen vs. 30 in Xiamen

Labor cost are slightly cheaper in Xiamen than in Shenzhen, without being
significant
(1) See appendix for details of Insurance & Charges
Siming & Huli
districts
Jimei &
Haicang
districts
Tong an &
Xiang’an
districts
within SEZ
(special
economic zone)
Outside SEZ
650 600 550 810 700
Local resident
Non-local resident
12.9%
(up to 14.4%)
Local resident
Non-local resident 1 355
Min. wages (RMB/month)
34.8% 16.54%
(up to 32.54%)
City Xiamen Shenzhen
District
1 618
1 331
10.9%
(up to 12.4%)
9.54%
(up to 10.54 %)
Actual average wages (RMB/month)
Insurances & charges (1)
(% of salary)
1 200 1 400
Common workers
Total paid by company:
Salary + Insurance &
charges
1 632
1 534

Container (FCL) shipping rates are in average cheaper departing from
Shenzhen
All figures in USD Shenzhen Xiamen Difference
to Rotterdam
20' FCL 1 033 1 307 +27%
40' FCL 2 048 2 549 +24%
to Los Angeles
20' FCL 1 335 1 397 +5%
40' FCL 1 771 1 916 +8%
(1) BAF & CAF included. Calculated based on multiple quotations from sea shipping companies and forwarders.
(2) See appendix for detailed list of quotations considered
Container average shipping rates(1)(2)

Electricity costs are comparable across the 2 cities, with however cheaper
rates in Xiamen during peak hours of the day
Utility description
Cost (RMB)
Xiamen Shenzhen
Industry Electricity
supply rate ( RMB/kWh )
101 to 3000kVA, according to
transformer capacity
Power consumption above
250 kW*h
10 kV high supply with low
calculation (380V/220V
calculation)
Basic charge/month 20 24
Peak hours
( 8:30 – 11:30；14:30-17:30
19:00-21：00)
0.956
1.005
(+5%)
Normal hours
(7:00-8:30；
11:30-14:30；17:30-19:00 ;
21:00-23:00)
0.643
0.625
(-3%)
Off-peak hours
(23:00-7:00)
0.330
0.290
(-12%)
Average over 24h 0.643
0.640
(-1%)
See Appendix for complete rate tables

Water and gas are cheaper respectively in Shenzhen and Xiamen, with
significant differences
Utility description
Cost (RMB)
Xiamen Shenzhen
Industry Water supply rate
( RMB/m3 )
Industrial water consumption 2.80 2.26
Sewage treatment 1.20 1.05
Total 4.00 3.31 (-17%)
See Appendix for complete rate tables
Utility description
Cost (RMB)
Xiamen Shenzhen
Gas supply rate (RMB/m3) Piped air-mixed gas 7.35 16.50 (+124%)

On the Tax side, we didn't find any difference between Xiamen and Shenzhen
•  Same tax schedule
•  Same "tax holiday" for Foreign Investment Companies
– 100% during 2 years
– 50% during following 3 years (i.e. 7.5% instead of 15%)
– Normal after 5th year

In summary, the cost difference between the 2 cities can at this stage be
estimated between -230k€ and +80k€
Shenzhen Xiamen Difference / Comment
Building / Land
Potentially -310k€
in "downtown"
areas
Could represent around 310k€/year
[50-30] x 13 000 x 12 = 3 120 000 RMB = 310 k€
Labor Insignificant difference
Container shipping +80k€ 30 containers/month (45% Rotterdam, 35% LA)
Utilities
Electricity
+5% during peak
hours
-1% over 24 hours
Water -17%
We may need to clarify the importance
of water and gas consumption
Gas +124%
Taxes No difference

Location Analysis
30

Convenience related criteria
CONVENIENCE RELATED CRITERIA
• Infrastructure / Ease to get around
• Safety
• Local authorities attitude
• Utilities supply quality
• Labor "manageability"
• Air access to/from The Netherlands & Taiwan
• Seaport convenience

We surveyed 13 GMs of Western companies with factories in Shenzhen or
Xiamen to assess convenience criteria and complete unavailable information
37 General Managers
from Western
companies with a factory
located either in
Shenzhen or Xiamen
invited to respond to the
questionnaire through a
phone interview
23 questions survey
covering:
• Road Infrastructure
• Safety
• Local Authorities
• Utilities supply
• Labor
• 13 participants to the
survey
• 7 from Shenzhen
• 6 from Xiamen
• 30-45 minutes phone
interview with each of
them for comments on
their answers
• Statistical assessment
of soft criteria through
the satisfaction level of
people in these 2
locations
• Complement when no
available information

Road Infrastructure & Traffic
Questions SHENZEN - 63% XIAMEN – 82%
Well served area (highways, access to the sea port)
Road traffic jams penalize company activity
Personally bothered by traffic jams
Average
Comments
• Congested highways, too much truck
traffic
• Truck drivers penalized for their deliveries
• Infrastructure hasn't been developed to
support the actual growth of activity
• More and more private cars.
Currently a lot of works cause
additional problem, but they will
improve the traffic in the longer
term
• New bridge + tunnel under
construction
Very Good Good Fair Bad Very Bad

Safety
Questions SHENZEN – 88% XIAMEN – 94%
Area safe for the workers
Area safe for the Management team
Area safe for the company
Average
Comments
• Fuyong seems to be an area to avoid:
50+ attacks (factory & personnel) over
last 3 year. Only 1 policeman for 10.000
people in factory village
• Attacks are common on the streets;
slightly safer for Westerners, but we also
heard about several bad stories
• 2 km between factory and downtown
Pingfu. People sometimes robbed on their
way
• Tongan less safe than other
districts, poor people, operators
sometimes locked on their way
home (2 shifts either starting at
6:00 or finishing at 23:30)
• Haicang is safer with ~1 incident
per year (snatching)
• Xiamen island should be
considered as one of the safest
area (controlled access through the
2 bridges, with a lot of cameras…)

Local Authorities - scores
Local Administration offers subsidies to encourage
foreign investments
No
Basis
Frequency of the visits by the local Authorities
Local Administration overall supportive of the
companies
Special treatment from the local authorities for the
foreign companies
Local authorities level of corruption
No
Answer
Local authorities priority given to enforcing SCR
compliance
Easiness of getting of company license
Local administration overall efficiency (e.g.,customs)
Average
Comments • See next page • See next page

Local Authorities - comments
SHENZEN – 72% XIAMEN – 78%
•  In Baoan district, local authorities provided a building in Gongmin zone as well as
helped to hire somebody to take care of all government related issues. Always
come with solution in case of problem, very helpful. Very friendly people, new
generation 30-40 years old, usually well educated. Corruption definitely not
eliminated. Highest efficiency among Chinese cities.
•  Some subsidies for companies with a lot of R&D
•  Until 2005 some local companies were not paying overtime; this is now enforced
by local govt. But housing funds, medical insurance… not enforced.
•  PR fees can help lower the level of SCR compliance
•  Very open and very easy to deal with customs office in some cases, very difficult in
others
•  Customs, tax authorities, safety bureau not here to be helpful. They follow the
rules without interpretation. Very black & white
•  They watch at us to obey the local regulation more than the local companies. No
problem because laws are reasonable
•  Local authorities visit our factory only when they want a free lunch or a pay-off
•  Tolerable amount of money, but very frequent. 2-3 times more frequent than in
Taiwan. Annual total also higher than in Taiwan, but not 2-3 times higher
•  Corruption not eliminated, but considered not to be any worse that anywhere else
by some. Others consider that it's worse than in Guanzhou, better than North
China (Shandong)
•  Main corruption issue with Customs; can easily block import or export… impossible
to avoid. You need good relationship with Customs. Even if you try to follow the
rules (but you can't make money if you follow the rules; you need to know what is
important) money under the table is needed to solve some issues. Except if you
are a westerner, they can be a bit more reluctant to ask… no hesitation with
Taiwanese.
•  Subsidies depend on project. In an example, relocation cost were even absorbed.
•  More generally, foreign investment no longer encouraged… polluting business are
even asked to move to center provinces
•  Open and supportive attitude to western company. Network is important. Neither
strong support, nor strong barrier
•  Foreign Invest Bureau (FIB) organize monthly meetings with GM of foreign
companies… opportunities to raise issues to the authorities. Usually good support
from FIB, especially when talking about investment
•  The "large employer" companies get better support (issues related to policies).
Otherwise, operational issues (customs,…) have to be handled by the company
•  New project launched last year. All authorizations obtained in 30 days! Keen not to
be an obstacle
•  Usually visits 2-4 times a year, because business is changing. Authorities want to
understand the change. Or to control safety. Not bothering
•  Request on environmental issue, unprofessional… not supportive, but still
threatened to close the factory
•  Interested in waste handling, progress on energy, health & safety compliance
•  Govt watch out quite carefully: insurances, indiv. Tax. All has to be legal
•  Don't enforce limit of 36 extra hours/month, not keen to enforce labor unions
•  Tough customs and strict degree of enforcement of Handbook; However, Custom
organization considered to be very efficient with eHandbook: bonded warehouse
management over internet. 24h customs clearance in case of emergency
(Otherwise only 48h)
•  Another respondent ever had any trouble with customs. Has special connection
•  PR funds are needed, but overall negligeable

Utilities supply
Electricity power shortage and control
Quality of electricity supply
Quality of water supply
Average
Comments
• In summer (8 months!), 2 days per week without
electricity. Sometimes unannounced. Companies
runs their own generators.
•  Can negotiate the day of power cut; some
succeeded(!) to get it on Saturday.
•  "Voluntary" day off during the week which can be
exchanged with week-end work
•  Some heard that this electricity problem could be
solved by end of 2007
•  No problem in Shika district which is powered by
HK
•  From time to time, water shortage during 2-3 days
between April and July. Tank for water storage,
holes in the ground to pump water (not sure if
legal).
• Two power cut in 2004, no problem
since then
• In 2004, local government made a
good job to manage the issue
(information)

Labor
Easiness to find common workers (>1 year exp.)
Workers native from local area
Dormitories needed
Canteen needed
Workers stability in the area
Average
Comments
•  Most workers come from surrounding Southern
provinces (Yunnan, Guangxi, Jiangxi, Sichuan)
•  People come for short term (2-5 years). Then go
back home, marry and don't come back. A lot of
people to replace after CNY
•  2 month before CNY and 1.5 month after is a
difficult time to find people
•  Need to have dormitories or to be in a zone that
have some.
•  A lot of migrants prefer to go Shanghai or Suzhou.
Shenzhen not as attractive as it used to be
•  30-50% annual employee turnover. Higher when
no AC in factory/dormitories. Up to 100 to 200%
for a company that doesn't follow the salary spiral!!
•  Majority of workers from Fujian. 0 to 40%
from other province
•  Can have some problems finding people
depending on how company take care of
employees
•  Much easier if you pay good salary,
everything is legal, smart environment
•  Preferable to have dormitories, otherwise
100RMB allowance per month
•  5-50% annual employee turnover
•  Canteen preferable, otherwise vendors in
the street.

39
In summary, if you had to choose today a location for your factory…
If you had to pick today a location for your factory,
would you choose your current area
Average
Comments
2nd choice and why
•  Chengdu for labor intensive industry. Then truck to
seaport or airfreight
•  Zhuhai. No power/water shortage, plenty of
incentive programs, also SEZ, special rate on
lands for Foreign companies, help with
construction, local authorities have a special
bureau for company license, custom contract, etc.
Deep water port, good communication with HK
•  Shanghai, to be close to our customers
•  Guanzhou, because less corruption
•  Suzhou, still a bit underdeveloped with good
infrastructure and a big boom expected +
important customer base
•  We're now used to this area, but we're hearing
only good comments on Xiamen
•  Suzhou, Wuxi or Ningbo. Less polluted,
less people, better traffic, better educated
people, more cultural. Also, too many
Taiwanese companies in Xiamen
•  Not Shanghai!
•  Recently made complete analysis for new
investment (SEZ, energy,..) And Xiamen
came 1st (Wuxi was 2nd choice)
•  Xiamen is one the best city in China. Major
difference between Xiamen & Shenzhen:
2mio people with 600 to 700 years of
history vs. 5-6mio and only 30-40 years for
Shenzhen. Operation cost lower also lower
then Shenzhen. More developed university
in Xiamen

40
Air access: Shenzhen benefits from the proximity of Hong Kong airport, in
addition to its own one
See appendix for detailed flight timetables
Air access Shenzhen Xiamen
To / From The Netherlands
(Amsterdam)
Direct
•  Daily direct flight to HK (~ 12 hours)
+ 2 hours car drive from HK to
Shenzhen
Travel time: ~ 14 hours
•  No direct flight
1 stop
•  Also 1 stop daily flight to Shenzhen
airport Via (Beijing, Shanghai,
Chengdu.)
Travel time: ~ 15 to 17 hours
•  1 stop daily flight to Xiamen via Beijing
(~ 9.5 hours + 2.5 hours)
Travel time: ~14 – 15 hours
To / From Taiwan
(Kaohsiung)
Direct
•  Daily direct to/from Hong Kong (1.5
hours) + Car drive to/from Shenzhen
(2 hours)
Travel time: ~ 3.5 hours
•  No direct flight, except around CNY
period
1 stop
•  Daily 1 stop flight between Shenzhen
and Kaohsiung Via Macau.
Travel time: 3.5 to 6 hours (stop at
Macao for 1.5-4 hours)
•  Daily flight between Xiamen and
Kaohsiung Via Macao or HongKong.
Travel time: 4.5 to 11 hours

41
Convenience for sea shipment: lead-time to Europe is better from Shenzhen
See appendix for details
Convenience for sea shipment Xiamen Shenzhen
Line to EU
(Rotterdam)
Direct line ? Y Y
shipment lead-time of direct line 22-28 18-25
Weekly Frequency
at least 4
(Tue. Thur. Fri. Sun.)
at least 5
(Tue. Wed. Thur. Sat. Sun.)
Line to US
(Los angeles)
Direct line ? Y Y
shipment lead-time of direct line 12 - 16. 11-18.
Weekly Frequency
at least 3
(Tue. Thur. Fri.)
at least 5
(Mon. Tue. Wed. Sat. Sun.)

42
Despite Shenzhen slightly better sea shipping and air travel services, Xiamen is
clearly a better place to be than Shenzhen, from a convenience point of view
Shenzhen Xiamen Difference / Comment
Infrastructure / Ease to get around Clear advantage to Xiamen
Safety
Responses to the survey don't reflect the
danger often associate to Shenzhen
Local authorities attitude
Small difference on the average, but
significant on support to companies,
efficiency and corruption
Utilities supply quality Clear advantage to Xiamen
Labor "manageability"
Clear advantage to Xiamen, mostly due to
the higher weight of "local" workers
Air access Benefit from Hong Kong proximity
Seaport convenience Mostly due to shorter lead-time to Europe

Location Analysis
43

44
In conclusion, Xiamen appears to most likely be a better option for an
assembly plant in China
Shenzhen Xiamen Comment
Cost + + +
•  Only certainty on sea shipping (~80k€/year)
•  Building would actually be cheaper in
Xiamen should client decide to pick a
"downtown" location (estimated ~310k€/year)
Convenience + +
•  Sea shipping and air travel services are
Xiamen only identified weaknesses
Considering:
•  The importance given by client to most of the convenience criteria
•  The cost difference that can either be in favor of Xiamen, or represent in the worst case
~80k€ per year
We consider Xiamen is most likely a better option for client

Case Study Agenda
4.  Business Case
45

Based on the RFP results, we have laid out at set of assumptions
that drive the business case modelling
•  For each of the categories we have made three scenario:
–  Worst, average, best case
•  Additionally, we have built a detailed cost model of the current factory operations in order to be
able to model the « to-be » situation in China
•  Finally, we have made assumptions about the cost and time it would take to migrate production
from the current factory to the new factory in China, again with:
–  Worst, medium and best case scenarios
•  The following pages describe both all the assumptions made and the financial outcome of the
business model in terms of:
–  Unit cost per product
–  Investments required
–  Total cash flows over 5 years
–  Risk analysis

Sourcing and localization of the factory in China could
reduce total unit product cost by a range of 15 to 27%
Total Unit Cost - Stroller
46,6
37,2 33,2
26,5
17,5
15,6
13,2
11,7
16,9
15,6
14,0
12,9
16,6
12,1
12,7
9,3
6,3
6,3
7,3
7,3
4,9
4,4
1,5
1,4
12,4
4,0
9,2
3,0
5,8
4,8
5,8
4,8
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
Current Target Current Target
Cameleon EU Gecko EU
€
Operating cost
Personnel cost
Packaging
Plastic (DSM)
Plastic injection
Aluminium
Other
Stitching
Cogs
Factory
Cost
126,9
100,1
96,7
76,892,7
107,3
82,3
71,1
Product 1 Product 2
Total Unit Cost

The benefits are split pretty much 50/50 between China
Sourcing and localising the factory in China
Unit Cost - Savings - Cameleon EU
14,3
17,5
8,4
1,0
0,0
5,0
10,0
15,0
20,0
25,0
30,0
Sourcing In China Sourcing & Set up factory in China
€
Operating cost
Personnel cots
Cogs
14,3
26,8
Product 1

The incremental sourcing savings associated with locating the factory
in China come from reduced transportation and packaging costs
Ratio of total cost to Shenzhen vs Taiwan
95%
98%
94% 94%
90%
92%
94%
96%
98%
100%
Aluminum Fabric Plastic Stitching
Category
Percentage
Further « softer » savings can be expected on injection and stitching from the
Co-localisation principle

Unit Cost - Cameleon EU - CoGs
46,6
39,6 41,9
37,2
17,5
15,6
16,2
15,0
16,9
15,6
16,1
15,2
16,6
12,9
13,8
12,1
6,3
6,3
6,3
6,3
4,9
4,4
4,7
4,2
0,0
20,0
40,0
60,0
80,0
100,0
120,0
Current Average Worst Best
€
Packaging
Plastic (DSM)
Plastic injection
Aluminium
Other
Stitching
On the sourcing side alone, the savings are mostly generated
by stitching and plastic injection
108,7
94,4 98.9
90,0
Savings hypothesis on CoGs
Category Average Min Max
Packaging 10,0% 5,0% 15,0%
Plastic (DSM) 0,0% 0,0% 0,0%
Plastic injection 22,0% 17,0% 27,0%
Aluminium 7,5% 5,0% 10,0%
Other (*) 10,9% 7,4% 14,4%
Stitching (including Fabric) 15,0% 10,0% 20,0%
Fabric 0% 3% 6%
(*) Average of all categories
Product 1 - COGS

Setting up the factory in China under the co-location vision
generates significant personnel savings while improving the
sourcing economics
Senior manager 106 224 29 400 35 280 21 560
Manager 74 847 21 560 27 440 17 640
Assistant manager 47 798 15 680 17 640 9 800
Supervisor 38 248 12 740 15 680 6 860
Deputy Supervisor 31 992 8 820 13 720 5 880
Senior staff 27 389 6 860 11 760 4 900
Staff 23 457 4 312 4 508 3 136
Benefits 17% 41% 44% 32%
Savings on operating cost 10% 0% 20%
Salaries in NTD per month
Additionnal savings on CoGs - Unit Cost
2,3
1,4
3,3
0,8
0,5
1,2
0,0
1,0
2,0
3,0
4,0
5,0
Average Worst Best
€
Plastic injection
Stitching
Unit Cost - Personnel and Operating Cost - Cameleon EU
12,4
4,0 5,0
2,9
5,8
4,8
5,3
4,3
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
18,0
20,0
€
Operating Cost
Personnel Cost
Category Average Min Max
Plastic injection 5,0% 3,0% 7,0%
Stitching (including Fabric) 5,0% 3,0% 7,0%
Savings on CoGs
Product 1
Product 1

Taking into account the expected increase in production over
the next 4 years, total yearly savings would amount to €14M in
2010 (in the average scenario)
Total Cost and Production Forecast
29,7
38,2
45,5
49,9
21,6
26,1
33,6
40,0
43,8
23,6
30,5
36,4
39,9
0,0
10,0
20,0
30,0
40,0
50,0
60,0
2006 2007 2008 2009 2010
M €
0
50000
100000
150000
200000
250000
300000
350000
# strollers
Current
Sourcing in China
Set Up Factory in China
Production forecast
• Based on average savings hypothesis

Investments
0
500
1 000
1 500
2 000
2 500
3 000
Best Medium Worst
K€
Other cost (moving - stock of finished goods)
Redundancy cost
Factory set up
Travel
Housing
Salaries to management during factory set up
Moving from Taiwan to China will require investments
ranging from €0.5M to €3M
549
1 203
Management
relocation costs
Rellocate Management hypothesis Best Medium Worst
Period (months) 6 12 18
Incentive vs current salary in Taiwan 50% 80% 100%
Number of Managers 5 10 15
Housing (per month/per head) 800 1250 1600
Air ticket (total/per head) 2 6 18
2 583

Return on Investments
2 482
3 087
3 569
3 831
-1 203
-2 000
-1 000
0
1 000
2 000
3 000
4 000
5 000
2006 2007 2008 2009 2010
K€
The ROI of the factory move is still positive even in the
worst case scenario
Additional savings due to set up factory in China
Investments due to set up factory in China
Net Present Value : 33,1 M € based on :
• Average hypothesis on Cogs – Personnel and
Operating Costs
• Average hypothesis on investments
• 5% discount rate
• Exit Value
33,1 M€ 78,4 M€0,3 M€Net Present Value:
Worst Case on
• Savings
• Investments
Average Case on
• Savings
• Investments
Best Case on
• Savings
• Investments

Finally, it would take significant degradation of several of the key
risk factors for the business case to be invalidated
Taiwan vs China Personnel Cost
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
3% Increase- Taiwan
15% Increase - China
Impact of Productivy level in China vs Taiwan
5 000
7 000
9 000
11 000
13 000
15 000
17 000
19 000
21 000
23 000
100% 110% 120% 130% 140% 150% 160% 170% 180% 190% 200%
China vs Taiwan
Net Present
Value (K €)
Impact of Yuan vs Euro
5 000
7 000
9 000
11 000
13 000
15 000
17 000
19 000
21 000
23 000
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Yearly currency increase Yuan vs Euro
Net Present
Value
200%means :
• Working time to built Model 1 : 1.74 hour in China vs
0,87 hour in Taiwan
• Management needed : 1 Senior staff per 4 Staff in China
vs 1 Senior staff per 8 staff in Taiwan
5 %means :
• Yearly Increase of Yuan vs uro
Composite scenario :
• Yearly increase of salaries : 9%
• Yearly increase of Yuan vs Euro : 7%
• Productivity : 150% in China vs Taiwan
• Average cogs savings
NPV: 13,7 M €

Case Study-China Factory Location Analysis and Sourcing

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