China Purchasing Development Report (2012) For more information

Size: px
Start display at page:

Download "China Purchasing Development Report (2012) For more information"

Transcription

1

2 China Purchasing Development Report (2012) For more information Li & Fung Research Centre Member of the Fung Group 10/F, LiFung Tower, 888 Cheung Sha Wan Road, Hong Kong Tel : (852) Fax : (852) lfdc@fung1937.com Website : China Federation of Logistics & Purchasing The Specialized Committee for Purchasing and Supply China Management Rm 615 Henghua International Business Centre, 26 Yuetan Beijie, Beijing, China Phone : (010) / -122 Fax : (010) Website : Li & Fung Research Centre 1

3 The Report IIn view of the growing importance of sourcing in China, the China Federation of Logistics and Purchasing (CFLP), the most authoritative industry organization in areas of sourcing, logistics and supply chain management in China, has published four annual China Purchasing Development Reports 1 since The reports provided a comprehensive view of the latest development of sourcing activities in China, and were well received by the academia and practitioners. The CFLP published the fifth report in Li & Fung Research Centre of the Fung Group is delighted to work jointly with the CFLP in the China Purchasing Development Report project, and is solely responsible for the content of the English version of the report. This English version summarized the key takeaways of the full report in Chinese. We hope our readers can get an overview of the sourcing environment in China. 1 The English version of the four reports can be found here: (2008) (2009), (2010) and (2011) 2 China Purchasing Development Report (2012)

4 Table of Content About the Organizations 4 Chapter 1 China Sourcing Survey 5 Executive Summary 5 I. Sourcing Performance of Enterprises in China 6 II. Sourcing Management of Enterprises in China 14 III. Supplier Management of Enterprises in China 20 IV. Sourcing Cost Control of Enterprises in China 27 V. Salary Levels of Sourcing Staff of Enterprises in China 35 VI. Industry Surveys: Sourcing Performance of Five Industries in China 42 Chapter 2 An Analysis of Purchasing Activities and Sourcing Situations with PMI 46 Chapter 3 An Analysis of China s Non-Manufacturing Sector with NMI 67 Chapter 4 Sourcing Light-Manufactured Consumer Products in China: 74 Cost Trends and Outlook Chapter 5 China s Current Development in Global Sourcing Activities 106 and Sourcing Strategies for Enterprises Chapter 6 Three Models in Strategic Procurement Management 118 Appendix : About the China Purchasing Development Report (Chinese Version) 126 Li & Fung Research Centre 3

5 About the organizations China Federation of Logistics & Purchasing (CFLP) is the first logistics and purchasing industry association approved by the State Council. CFLP s mission is to promote the development of the logistics industry and the sourcing businesses of both government and enterprises, as well as the circulation of factors of production in China. The CFLP is also China s representative in the Asian-Pacific Logistics Federation (APLF) and the International Federation of Purchasing and Materials Management (IFPMM). China Society of Logistics is a non-profit making academic organization comprising experts, academia and practitioners in logistics sector in China with special focuses on logistics theories, management science of logistics and modernization of logistics technology. The Society endeavors to channel members opinions to relevant government departments, organize activities for exchanging knowledge and experiences, nurture talents for the sector and publish logistics publications and information. The Fung Group (formerly known as the Li & Fung Group) is a Hong Kong-based multinational company. The Group s trading, logistics and distribution businesses are under Li & Fung Limited, and its retailing businesses are grouped under Fung Retailing Limited. Founded in Guangzhou in 1906, the Fung Group achieved an annual turnover exceeding US$21.1 billion in Today, the Fung Group operates in some 40 countries and regions and employs over 41,000 people worldwide. One of its core competencies is Supply Chain Management (SCM). In 2011, the Fung Group s revenue in China exceeded USD 12 billion, representing 60% of the total revenue of the Group. The extensive sourcing network of Li & Fung Limited covers about over 15,000 suppliers through more than 130 offices and distribution centers in China. China is Li & Fung Limited s most important market in global sourcing. The Li & Fung Research Centre serves as a knowledge bank for the Fung Group on China s economy, industries, logistics and distribution sector, with its research scope covering the whole spectrum of the entire supply chain, from ideas, production, distribution, retailing to consumers.. The Centre has been actively promoting the application of SCM. In 2003, the Centre published the book The Orchestrator of Global Supply Chain Management, which is regarded as a very useful reference among businessmen and academics in China. The revised and expanded edition was published in August China Purchasing Development Report (2012)

6 China Sourcing Survey Chapter 1 China Sourcing Survey Executive Summary In order to have a comprehensive review and analysis of China s sourcing environment, the China Federation of Logistics and Purchasing (CFLP) conducted the fifth annual survey on sourcing activities of enterprises in China in The survey was conducted nationwide from April to May, The 2012 sourcing survey comprises 10 surveys, including five on various aspects of sourcing activities of enterprises in China (sourcing performance, sourcing management, supplier management, sourcing cost control, and salary levels of sourcing staff), and five individual surveys on the sourcing performance of five industries, namely automotive industry, communications industry, energy industry, information technology (IT) industry, and machinery and equipment industry. Each survey covered different groups of enterprises and the sample size also varied. All of the sampled enterprises were broadly representative, in terms of type, size, and industry. Detailed profiles of the respondents are provided under each section. Several trends are observed. First, effective cost and time management in sourcing are important to sourcing enterprises in China in the high cost era. Cost has long been the primary objective of sourcing enterprises. Delivery lead time, for the first time, overtook product quality as the second most important objective of the surveyed enterprises, indicating quick response to customers demand is highly appreciated. Meanwhile, shortened delivery lead time also helps eliminate the cost associated with inventory pile-up. Second, the growing importance of the function of sourcing within organizations was highlighted. Leadership participation in sourcing activities has increased notably in recent years; an increasing amount of sourcing activities was directly handled by senior management responsible for sourcing. However, the role of sourcing within enterprises was comparatively weak comparing to other business functions; only 5.1% of the total employees of the surveyed enterprises were sourcing staff. Third, the sourcing department of many surveyed enterprises was not the only department handling sourcing activities and purchases. Expenses of purchased items that were channeled through the sourcing department accounted for 69% of the total sourcing expenditure, indicating Li & Fung Research Centre 5

7 that many sourcing activities were distributed across different departments of the surveyed enterprises. The diversity of sourcing practices across different departments remained a significant challenge facing the top management in making corporate sourcing cost control plan. Fourth, it is observed that sourcing enterprises now place increasing emphasis on the supplier seeking process, especially for those participating in global sourcing activities. Enterprises supplier-seeking strategy has shown to have a high degree of correlation with their corporate strategy. On the other hand, 75% of the surveyed enterprises dedicated cross-functional teams to seek suppliers, reflecting a more cross-disciplinary and collaborative approach towards sourcing. However, the use of quantitative tools and techniques to evaluate potential supplier was uncommon and the whole recruitment process still remained fairly lengthy. Lastly, the average income of sourcing staff has been on the rise, showing the increasing value of sourcing professionals and sourcing managers. Sourcing staff with more work experience and higher qualification generally obtained the highest salary growth. All in all, the survey results indicated that enterprises sourcing performance is constantly improving. However, issues such as relatively low leadership participation in sourcing activities and cost-oriented approach to sourcing performance management are some key concerns that sourcing enterprises need to tackle. In today s globalization era, enterprises are putting more emphasis on sourcing management, in a hope of enhancing core competencies and reducing costs. It is expected that the potential of sourcing will be fully unleashed in the near future. I. Sourcing Performance of Enterprises in China The survey examined and assessed two aspects: sourcing performance evaluation and sourcing performance management. A total of 244 effective responses were collected. Sourcing performance evaluation The survey indicated that 94.3% of the surveyed enterprises conducted performance evaluation on their sourcing department on a regular basis. In terms of the frequency of conducting the evaluations, 33.6% conducted on a monthly basis; 23.0% on a quarterly basis; 19.3% on a semiannual basis; and 23.0% on an annual basis. Among the respondents, 83.5% of the sourcing performance evaluation was linked to a reward system. 6 China Purchasing Development Report (2012)

8 China Sourcing Survey Price/cost remained the preferred indicator of the sourcing performance evaluation, favored by 91.9% of the surveyed enterprises. Delivery lead time, for the first time, overtook product quality as the second most preferred indicator, favored by 83.5% of the surveyed enterprises. Sourcing performance management Most respondents (53.8%) cited sourcing cost as the most important objective of sourcing performance management. However, among the SOEs, product quality was chosen by most (51.3%) as their primary objective. The average time span of implementing a sourcing plan was 38 days, while the delivery lead time averaged 31.5 days. Majority of the surveyed enterprises (87.3%) had on-time delivery rate of more than 80%. 1. Background of respondents i. Types of the surveyed enterprises Among the respondents of this survey, 69.4% were foreign investment enterprises and joint ventures (FIEs and JVs), 15.7% were private enterprises (PEs), 10.1% were state-owned enterprises (SOEs), and 4.8% were others (see Exhibit 1.1). Exhibit 1.1: Types of the surveyed enterprises Li & Fung Research Centre 7

9 ii. Sizes of the surveyed enterprises A total of 244 surveyed enterprises were collected. As shown in Exhibit 1.2, 58.0% were large-sized enterprises with sales revenue over 300 million yuan, 27.8% were medium-sized enterprises with sales revenue between 30 million to 300 million yuan, and 14.2% were smallsized enterprises with sales revenue less than 30 million yuan. Exhibit 1.2: Sizes of the surveyed enterprises iii. Industries of the surveyed enterprises Among the respondents, 23.7% were from machinery and equipment industry, 10.2% were from communications industry, 9.4% were from automotive industry, 9.4% were from energy industry, 7.3% were from information technology (IT) industry, and 40% were from other industries, including home & building materials industry, food & pharmaceutical industry, household appliances industry, distribution sector, chemical industry, services industry, financial industry, etc. (see Exhibit 1.3). 8 China Purchasing Development Report (2012)

10 China Sourcing Survey Exhibit 1.3: Industries of the surveyed enterprises 2. Sourcing performance evaluation i. Regularity of conducting sourcing performance evaluation The survey showed that 94.3% of the surveyed enterprises conducted sourcing performance evaluation on a regular basis. Among all, PEs had the highest rate at 94.9%, followed by FIEs and JVs at 94.2%, and SOEs at the lowest rate of 84.0%. ii. Frequency of conducting sourcing performance evaluation In terms of the frequency of conducting the evaluations, 33.6% conducted on a monthly basis; 23.0% on a quarterly basis; 19.3% on a semi-annual basis; and 23.0% on an annual basis. As shown in Exhibit 1.4, the practices of SOEs, FIEs and JVs were similar. However, PEs mainly conducted evaluation on a monthly- (48.7%), quarterly- (33.3%) and annual-basis (15.4%), but never on a semi-annual basis. Li & Fung Research Centre 9

11 Exhibit 1.4: Frequency of performance evaluations iii. Link between reward system and sourcing performance evaluation 83.5% of the surveyed enterprises sourcing performance evaluation was linked with some kind of reward system. However, significant variations among different types of enterprises were observed. Only 72.0% of SOEs reported that their sourcing performance evaluation was linked with reward system; while 87.2% of PEs, and 81.4% of FIEs and JVs cited that their sourcing performance evaluation was linked with some sort of reward system (see Exhibit 1.5). Exhibit 1.5: Percentage of enterprises with reward system linking with performance evaluation iv. Indicators of sourcing performance evaluation The survey showed that price/cost remained the preferred indicators, as chosen by 91.9% of the surveyed enterprises. For the first time, delivery lead time overcame product quality as the second most preferred indicator, chosen by 83.5% of the surveyed enterprises. Product quality was the third most preferred indicator (see Exhibit 1.6). 10 China Purchasing Development Report (2012)

12 China Sourcing Survey Exhibit 1.6: Preferred indicators for sourcing performance evaluation 3. Sourcing performance management i. Objective of sourcing performance management The survey indicated that cost remained the main objective of sourcing performance management, as selected by 53.8% of the surveyed enterprises; while 31.6% of the enterprise selected quality, and 14.7% selected delivery lead time (see Exhibit 1.7). However, significant difference in terms of their objective of sourcing performance management was observed among the different types of enterprises. 44.0% of the SOEs and 50.6% of the FIEs and JVs chose cost as the most important objective, while 51.3% of the PEs chose quality as the most important objective. Li & Fung Research Centre 11

13 Exhibit 1.7: Primary objective of sourcing performance management ii. Time span of implementing sourcing plan As shown in Exhibit 1.8, the average time span of implementing a sourcing plan was 38 days. The average time span varied considerably among the different types of enterprises. The longest average time span was 73 days for SOEs, and the shortest was 24 days for PEs. The average time span of sourcing plan for FIEs and JVs was 39 days. Exhibit 1.8: Time span of implementing sourcing plan (average number of days) iii. Delivery lead time Exhibit 1.9 indicated that the average delivery lead time was 31.5 days. The average delivery lead time varied among the different types of enterprises days for SOEs, 21.4 days for PEs, and 32.4 days for FIEs and JVs. Exhibit 1.9: Delivery lead time (average number of days) 12 China Purchasing Development Report (2012)

14 China Sourcing Survey iv. On-time delivery 87.3% of the surveyed enterprises reported that their suppliers had on-time delivery (OTD) rate of over 80%. Among the different type of enterprises, suppliers of FIEs and JVs performed the best in terms of OTD (see Exhibit 1.10). Exhibit 1.10: On-time delivery rate of the surveyed enterprises suppliers v. Emergency purchases As shown in Exhibit 1.11, the average amount spent on emergency purchases accounted for an average of 11.4% of total sourcing expenditure. Within the same type of enterprises, some enterprises did not spend on emergency purchases, while other spent huge amount on it (over 80.0% of their total expenditure). However among the different types of enterprises, the variation was less prominent. Exhibit 1.11: Share of emergency purchases in total sourcing expenditure Li & Fung Research Centre 13

15 II. Sourcing Management of Enterprises in China The survey examined and assessed two aspects: strategic importance of sourcing within enterprises and sourcing management. A total of 210 effective responses were collected. Strategic importance of sourcing within enterprises Sourcing professionals accounted for 5.1% of the total number of employees of the surveyed enterprises. Among the surveyed enterprises, 45.2% of the vice presidents and 34.8% of the general managers were directly responsible for and managed sourcing activities, indicating that enterprises have begun to pay greater attention to sourcing activities in an organization. Sourcing management Seeking suppliers was ranked by 96.7% of the respondents as the most important duty of their sourcing department, followed by contract and order management (88.7%), sourcing information management (79.7%), supplier quality management (74.5%), and the introduction of new product development (71.2%). 1. Background of respondents i. Types of the surveyed enterprises Among the respondents of this survey, 68.5% were FIEs and JVs, 14.6% were PEs, 12.3% were SOEs, and 4.6% were others (see Exhibit 2.1). Exhibit 2.1: Types of the surveyed enterprises 14 China Purchasing Development Report (2012)

16 China Sourcing Survey ii. Sizes of the surveyed enterprises Among the 210 surveyed enterprises, 60.1% were large-sized enterprises, 25.3% were mediumsized enterprises, and 14.6% were small-sized enterprises, as shown in Exhibit 2.2. Exhibit 2.2: Sizes of the surveyed enterprises iii. Industries of the surveyed enterprises Among the respondents, 24.5% were from machinery and equipment industry, 11.2% were from communications industry, 8.6% were from energy industry, 8.4% were from automotive industry, 7.6% were IT industry, and 39.7% were from other industries (see Exhibit 2.3). Exhibit 2.3: Industries of the surveyed enterprises Li & Fung Research Centre 15

17 2. Strategic importance of sourcing within enterprises i. Sourcing professionals Sourcing professionals accounted for 5.1% of the total number of employees of the surveyed enterprises. As shown in Exhibit 2.4, this proportion was more or less the same among the different types of enterprises. Exhibit 2.4: Percentage of sourcing professionals within enterprises ii. Head of the sourcing department Among the surveyed enterprises, 45.2% of the vice presidents and 34.8% of the general managers were responsible for and managed sourcing activities, indicating that most enterprises have placed more emphasis on sourcing activities. On the other hand, only 15.2% of sourcing activities were directly reported to chief executive officers (CEOs), 11.0% directly to chief operating officers (COOs), and 1.4% directly to chief financial officers (CFOs), indicating that professionalism within the sourcing department can still be further strengthened. As shown in Exhibit 2.5, only 25.0% of the sourcing activities of SOEs were reported directly to the general managers, well below the overall level and levels of enterprises of other types. Sourcing activities that were reported directly to responsible vice presidents and CEOs accounted for 65% and 5% respectively. Sourcing activities in PEs were mainly directly reported to responsible vice presidents and general managers, at 36.4% and 27.3% respectively. FIEs and JVs had a higher rate of direct report to CEOs, at 16.4%. This reflected that sourcing has yet to develop as a specialized division, especially for SOEs. 16 China Purchasing Development Report (2012)

18 China Sourcing Survey Exhibit 2.5: Head of the sourcing department 3. Sourcing management i. Degree of centralization of sourcing activities 56.5% of enterprises chose to adopt a mixed sourcing method of combining centralized sourcing and decentralized sourcing. It is believed that enterprises opted for more flexible sourcing approaches to cope with the challenging business environment. Among the different types of enterprises, 23.5% of the PEs selected purely decentralized sourcing as their sourcing approach, much higher than the overall level (see Exhibit 2.6). Exhibit 2.6: Degree of centralization of sourcing activities Li & Fung Research Centre 17

19 ii. Primary duty of the sourcing department The survey indicated that seeking appropriate suppliers was the prioritized duty of sourcing department, as cited by 96.7% of the respondents. This was followed by contract and order management (88.7%), sourcing information management (79.7%), supplier quality management (74.5%), and the introduction of new product development (71.2%). Among the different types of enterprises, SOEs had the highest priority for contract and order management, as favored by 76.0%, followed by seeking appropriate suppliers, at 72.0%. On the other hand, seeking appropriate suppliers was cited mostly by PEs, and FIEs and JVs, at 84.6% and 84.3% respectively (see Exhibit 2.7). Exhibit 2.7: Primary duty of the sourcing department 18 China Purchasing Development Report (2012)

20 China Sourcing Survey iii. Sourcing plans generated by information system 71% of the surveyed enterprises generated sourcing plans via information system. This varied greatly among different enterprises, as some enterprises did not use information system to generate sourcing plans at all; while some used information system to generate all of their sourcing plans. However, among the different types of enterprises, the proportions were very similar (see Exhibit 2.8). Exhibit 2.8: Percentage of sourcing plans generated by information system iv. Tendering in purchases 77% of the total purchases of the respondents were done through tendering. Among the different types of enterprises, 84% of the purchases were done through tendering for SOEs, much higher than the average, followed by PEs at 81%, and FIEs and JVs at 77% (see Exhibit 2.9). Exhibit 2.9: Tendering in purchases Li & Fung Research Centre 19

21 III. Supplier Management of Enterprises in China The survey examined and assessed three aspects: means of seeking suppliers, supplier performance evaluation and supplier management. A total of 248 effective responses were collected. Means of seeking suppliers Around 75% of the surveyed enterprises believed that seeking appropriate suppliers was an important but complex task such that many of them dedicated cross-functional teams to complete the task. However, nearly half of the PEs relied on their sourcing department to seek suppliers. In supplier seeking assessment, although around 80% of the enterprises conducted quantitative assessments and 80% conducted qualitative assessments, only 57% conducted a combination of both. On the other hand, among the enterprises, there was significant difference in the cycle time span of seeking appropriate suppliers, from the shortest cycle of 2 days to the longest of 730 days, averaging 58.2 days. Supplier performance evaluation Most of the supplier performance evaluations were conducted quantitatively (94.6%). The supplier performance evaluations were mainly conducted by the sourcing department (79.6%), while user departments accounted for only 20.4%. In terms of the frequency of the evaluations, 30.6% of the completed evaluations were conducted on a quarterly basis; 28.2% on a monthly basis; 21.6% on an annual basis; and 17.6% on a semi-annual basis. Supplier management The degree of concentration of suppliers of the surveyed enterprises followed the 80/20 principle, indicating that 80% of the orders of the surveyed enterprises were fulfilled by 20% of the suppliers. SOEs had an even higher degree of concentration, where 80% of the total orders were fulfilled by only 11% of the suppliers. Regarding the use of supplier quality engineers, 73.0% of all the surveyed enterprises employed supplier quality engineers. Among the different types of enterprises, 78.1% of the surveyed FIEs and JVs employed supplier quality engineers, compared to only 64.0% and 60.5% of SOEs and PEs respectively. In terms of quality control of suppliers, over 75% of the surveyed enterprises used incoming quality control system for quality control; while 55% of the enterprises employed manufacturing process control system. 20 China Purchasing Development Report (2012)

22 China Sourcing Survey 1. Background of respondents i. Types of the surveyed enterprises 69.4% of the respondents were FIEs and JVs, 15.7% were PEs, 10.1% were SOEs, and 4.8% were others (see Exhibit 3.1). Exhibit 3.1: Types of the surveyed enterprises ii. Sizes of the surveyed enterprises Among the 248 surveyed enterprises, 58.0% were large-sized enterprises, 27.8% were mediumsized enterprises, and 14.2% were small-sized enterprises (see Exhibit 3.2). Exhibit 3.2: Sizes of the surveyed enterprises Li & Fung Research Centre 21

23 iii. Industries of the surveyed enterprises Among the surveyed enterprises, 23.7% were from machinery and equipment industry, 10.2% were from communications industry, 9.4% were from automotive industry, 9.4% were from energy industry, 7.3% were from IT industry, and 40% were from other industries (see Exhibit 3.3). Exhibit 3.3: Industries of the surveyed enterprises 2. Means of seeking suppliers When asked about the formation of corporate strategy and supplier seeking strategy, 100% of the respondents agreed that the strategy for seeking suppliers must align with the requirements of corporate strategic development plans, showing the importance enterprises place on sourcing in the organization. i. Departments involved in seeking suppliers Among the respondents, 74.6% of the supplier teams were selected by cross-functional teams, and 25.4% were selected by their respective sourcing department. This showed that seeking appropriate suppliers was an important but complex task such that many companies dedicated cross-functional teams to complete the task (See Exhibit 3.4). As shown in Exhibit 3.4, nearly half of the PEs sought suppliers through their sourcing department, while SOEs, and FIEs and JVs mainly sought suppliers through cross-functional teams. 22 China Purchasing Development Report (2012)

24 China Sourcing Survey Exhibit 3.4: Departments involved in seeking suppliers Overall SOEs PEs FIEs & JVs 0% 20% 40% 60% 80% 100% ii. Assessment of potential suppliers 77.4% of the surveyed enterprises evaluated and assessed their potential suppliers quantitatively, and 79.5% evaluated them qualitatively. Only 56.9% conducted the combination of both (see Exhibit 3.5). Different types of enterprises used very similar evaluation and assessment methods for selecting their respective potential suppliers. Exhibit 3.5: Use of different assessment methods for selecting potential suppliers iii. Cycle time span for seeking appropriate suppliers As shown in Exhibit 3.6, the shortest cycle for seeking suppliers was 2 days, and the longest was up to 730 days, averaging days. The average cycle for seeking suppliers was days for SOEs, days for PEs, and days for FIEs and JVs. Exhibit 3.6: Cycle time span for seeking suppliers (average number of days) Li & Fung Research Centre 23

25 3. Supplier Performance Evaluation i. Quantitative assessment in supplier performance evaluations 94.6% of the surveyed enterprises used quantitative assessments in supplier performance evaluations. Among the respondents, 94.9% of the PEs, 95.8% of the FIEs and JVs, and 87.5% of the SOEs used quantitative assessments (See Exhibit 3.7). Exhibit 3.7: Use of quantitative assessment in supplier performance evaluations ii. Departments involved in supplier performance evaluations Among the evaluations, 79.6% were completed by the enterprises respective sourcing department, and 20.4% were completed by their user departments. For SOEs, FIEs and JVs, a higher percentage of enterprises had evaluations conducted by user departments, at 24.0% (see Exhibit 3.8). Exhibit 3.8: Departments involved in supplier performance evaluations iii. Frequency of conducting supplier performance evaluations As shown in Exhibit 3.9, 30.6% of the completed evaluations were conducted on a quarterly basis; 28.2% on a monthly basis; 21.6% on an annual basis; and 17.6% on a semi-annual basis. The frequency of conducting evaluations varied among the types of enterprises. 32.0% of the SOEs conducted evaluations on an annual basis, while PEs, and FIEs and JVs mainly conducted evaluations on a quarterly basis, at 35.9% and 31.4% respectively (see Exhibit 3.9). 24 China Purchasing Development Report (2012)

26 China Sourcing Survey Exhibit 3.9: Frequency of supplier performance evaluations 4. Supplier management i. Degree of concentration of key suppliers The degree of concentration of suppliers of the surveyed enterprises followed the 80/20 principle, indicating that 80% of the orders of the surveyed enterprises were fulfilled by 20% of the suppliers. All of the surveyed enterprises except the SOEs followed the 80/20 principle. For SOEs, 80% of the total orders were fulfilled by 11% of the suppliers, reflecting that the surveyed SOEs relied heavily on a small group of key suppliers. ii. Number of suppliers handled by a sourcing staff According to the survey, a sourcing staff was responsible for 30 suppliers on average, with a sourcing staff responsible for at least 1, and the most being 300, displaying a large variation among different surveyed enterprises. In contrast, among the different types of enterprises, there were no significant differences in the proportion (see Exhibit 3.10). Exhibit 3.10: Number of suppliers handled by a sourcing staff (in average persons) Li & Fung Research Centre 25

27 iii. Use of supplier quality engineers 73.0% of the surveyed enterprises employed supplier quality engineers. Among the respondents, 78.1% of the FIEs and JVs employed supplier quality engineers, comparatively more than the other types of enterprises. The percentages of the SOEs and PEs that employed engineers were 64.0% and 60.5% respectively (see Exhibit 3.11). Exhibit 3.11: Use of supplier quality engineers iv. Supplier quality control 75.2% of the surveyed enterprises used incoming quality control (IQC) system for quality control, while 55.4% of the enterprises deployed manufacturing process control (MPC) system for quality control. Only 26.9% used outgoing quality control (OQC) system for quality control. Looking at the types of enterprises, PEs had the highest usage of IQC, at 84.6%, while FIEs and JVs had the highest usage of MPC, at 57.0% (see Exhibit 3.12). Exhibit 3.12: Use of various supplier quality control systems 26 China Purchasing Development Report (2012)

28 China Sourcing Survey IV. Sourcing Cost Control of Enterprises in China The survey examined and assessed two aspects: sourcing cost and sourcing cost control of the surveyed enterprises. A total of 240 effective responses were collected. Sourcing cost The survey indicated that total sourcing cost of the surveyed enterprises accounted for around 55% of the total revenue. Evidently, enterprises with better sourcing performance and management would make more profit; and sourcing cost control has a large and direct impact on enterprises core competencies. In terms of the composition of sourcing cost, expenses of direct sourcing accounted for the highest proportion of total sourcing expenditure of enterprises. Expenses of purchased items that were channeled through the sourcing department of respective enterprises accounted for 69% of the total sourcing expenditure. This indicated that the sourcing department of the respective enterprises was not responsible for all of the enterprise s sourcing activities and purchases. Sourcing cost control In 2011, the surveyed enterprises set a target of reducing sourcing cost by 6% on average. Within the sourcing department of respective enterprises, the preferred tool for cost reduction was total cost of ownership (TCO) analysis, as selected by 79% of the respondents. When asked about the key elements the enterprises concerned most when applying the TCO analysis, over 90% cited price and logistics cost as the most important elements. 86.2% of the surveyed enterprises reported that their respective sourcing department was not involved in hedging activities. 1. Background of respondents i. Types of the surveyed enterprises Among the respondents of this survey, 68.6% were FIEs and JVs, 16.3% were PEs, 10.0% were SOEs, and 5.1% were others (see Exhibit 4.1). Li & Fung Research Centre 27

29 Exhibit 4.1: Types of the surveyed enterprises ii. Sizes of the surveyed enterprises Among the 240 surveyed enterprises, 57.1% were large-sized enterprises, 26.6% were mediumsized enterprises, and 16.3% were small-sized enterprises, as shown in Exhibit 4.2. Exhibit 4.2: Sizes of the surveyed enterprises iii. Industries of the surveyed enterprises Among the respondents, 24.2% were from machinery and equipment industry, 12.3% were from communications industry, 10.3% were from automotive industry, 9.4% were from energy industry, 7.1% were from IT industry, and 36.7% were from other industries (see Exhibit 4.3). 28 China Purchasing Development Report (2012)

30 China Sourcing Survey Exhibit 4.3: Industries of the surveyed enterprises 2. Sourcing cost i. Proportion of sourcing cost to total revenue As shown in Exhibit 4.4, sourcing cost of the surveyed enterprises accounted for around 55.0% of total revenue. Among all the surveyed enterprises, there was a huge variation in terms of the proportion of sourcing cost in the total expenditure - ranging from 3% to 95%. However, among the different types of enterprises, the proportions were quite similar. Exhibit 4.4: Total sourcing cost as a percentage of total revenue ii. Composition of sourcing cost Sourcing cost consisted of expenses of direct sourcing (items under the bill of materials, BOM), maintenance, repair & operations (MRO) and services (non-manufacturing). According to the survey, expenses of direct sourcing accounted for the highest proportion of total sourcing expenditure of enterprises, at 61%; MRO accounted for 14% and services (non-manufacturing) accounted for 15%. Among the different types of enterprises, the proportions were similar (see Exhibit 4.5). Li & Fung Research Centre 29

31 Exhibit 4.5: Composition of total sourcing cost iii. Expenses of purchased items channeled through sourcing department Among the respondents, 69.0% of total expenses of purchased items were channeled through their respective sourcing department. This proportion was similar among the different types of enterprises (see Exhibit 4.6), indicating that the sourcing department of the respective enterprises was not responsible for all of their enterprise s sourcing activities and purchases, as 31% of budget for purchasing were controlled by other departments within the enterprises. Exhibit 4.6: Percentage of total expenses of purchased items channeled through sourcing department iv. Operation expenditure in sourcing management The survey indicated that the operation expenditure of sourcing activities (personnel, travel, office, etc.) accounted for 8% of the total sourcing expenditure. This proportion was similar among the different types of enterprises, except for PEs, which had a much highest level of 9% (see Exhibit 4.7). 30 China Purchasing Development Report (2012)

32 China Sourcing Survey Exhibit 4.7: Sourcing activities expenditure as a percentage of total sourcing expenditure v. Expenses managed by individual sourcing staff Among the surveyed enterprises, the expenses managed by the employees of the sourcing department amounted to an average 392 million yuan per sourcing employee. Among the different types of enterprises, the expenses managed by the employees of the sourcing department totaled 429 million yuan per sourcing employee for SOEs, 404 million yuan per sourcing employee for PEs, and 397 million yuan per sourcing employee for FIEs and JVs (see Exhibit 4.8). Exhibit 4.8: Expenses managed by individual sourcing staff (million yuan per capita) 3. Sourcing cost control i. Sourcing cost reduction targets In 2011, the surveyed enterprises set a target of reducing sourcing cost by 6% on average. The sourcing cost reduction targets varied greatly among all the surveyed enterprises - some were up to 30%, while some were zero. However, among the different types of enterprises, the target reduction rates were similar. Li & Fung Research Centre 31

33 ii. Sourcing cost control methods Cost reduction and cost avoidance are the most common cost control methods adopted by enterprises 1. Cost reduction was cited by most of the surveyed enterprises (85.2%) as the most common cost control method, followed by cost avoidance (60.1%). 50.2% of the surveyed enterprises selected a combined method of both cost reduction and cost avoidance. Among the different types of enterprises, no significant differences in these proportions were observed (see Exhibit 4.9). Exhibit 4.9: Sourcing cost control methods used by enterprise iii. Types of cost reduction Within the sourcing department of respective enterprises, the most preferred type of cost reduction tool was total cost of ownership (TCO) analysis 2, as selected by 79.4% of the respondents. This was followed by value analysis / value engineering (9.9%) and inventory turnover control (4.5%). It is worth noting that no enterprise chose the method of recycling to reduce cost. Among the different types of enterprises, fewer PEs used TCO analysis to reduce cost (see Exhibit 4.10). 1 Cost reduction is the action taken today to decrease cost at the present time. Cost avoidance is the action taken today in a hope to reduce cost in the future. (Source: 2 Total cost of ownership is a measurement of the total cost of the purchased goods that includes the purchase price and operating cost. 32 China Purchasing Development Report (2012)

34 China Sourcing Survey Exhibit 4.10: Types of cost reduction tools iv. Application of TCO analysis When asked about the key elements they concerned most when applying the TCO analysis, 97.1% and 91.2% of the respondents cited price and logistics cost as the most important elements. This was followed by inventory cost (84.6%), and cost of quality (74.6%). The proportions were similar among the different types of enterprises (see Exhibit 4.11). Exhibit 4.11: Application of TCO analysis Li & Fung Research Centre 33

35 v. Methods of inventory management As shown in Exhibit 4.12, 44.4% and 42.7% of the respondents chose vendor managed inventory (VMI) and just in time (JIT) production as the most commonly used inventory management tools. This was followed by consignment (26.1%), and other methods (37.6%). Among the different types of enterprises, PEs, and FIEs and JVs showed a preference for adopting other inventory management tools. Exhibit 4.12: Methods of inventory management vi. Participation in hedging activities 86.2% of the surveyed enterprises reported that their respective sourcing department was not involved in hedging activities. Among the different types of enterprises, the percentage was very similar (see Exhibit 4.13). Exhibit 4.13: Participation in hedging activities 34 China Purchasing Development Report (2012)

36 China Sourcing Survey V. Salary Levels of Sourcing Staff of Enterprises in China The survey examined the salary levels of sourcing staff of the surveyed enterprises. The salaries in the survey were pre-tax income. A total of 250 effective responses were collected. Salary levels of sourcing staff The salary levels of sourcing staff of respective enterprises were analyzed and compared in eight aspects: the overall level, type of industry, type of enterprises, location of enterprises, staff position, work experience, staff education, and professional certifications. 1. Background of the respondents i. Types of the respondents Among the respondents of this survey, 69% were from FIEs and JVs, 16% were from PEs, 10% were from SOEs, and 5% were from others (see Exhibit 5.1). Exhibit 5.1: Types of the surveyed enterprises ii. Industries of the respondents Among the respondents, 23.4% were from machinery and equipment industry, 10.1% were from communications industry, 9.3% were from automotive industry, 9.3% were from energy industry, 7.3% were from IT industry, and 40.6% were from other industries (see Exhibit 5.2). Li & Fung Research Centre 35

37 Exhibit 5.2: Industries of the surveyed enterprises iii. Geographical locations of the respondents 63% of the respondents were situated in first-tier cities, and 31% were situated in second-tier cities (see Exhibit 5.3). Exhibit 5.3: Geographical locations of the respondents iv. Working levels of the respondents in their respective enterprises The working levels of the respondents were divided into four categories: officer level (such as planners, sourcing officers and supplier quality engineers and sourcing engineers), manager level (such as sourcing managers, planning managers, supplier quality managers and supply chain managers), senior manager level (such as senior supply chain managers, senior sourcing managers and senior supplier quality managers) and director level or above (such as sourcing 36 China Purchasing Development Report (2012)

38 China Sourcing Survey directors, supply chain directors, vice presidents of sourcing and vice presidents of supply chain management). Among the respondents, 26% were on the officer level, 51% were on the manager level, 15% were on the senior manager level, and 8% were on the director or above level (see Exhibit 5.4). Exhibit 5.4: Working levels of the respondents in their respective enterprises v. Work experience of the respondents 51% of the respondents had 6-10 years of sourcing experience, accounting for half of the total sample. 23% had 1-5 years of experience, and 21% had years of experience. The number of respondents that had over 20 years of experience and those with less than one year of experience accounted for 2% and 3% of the total number of respondents respectively (see Exhibit 5.5) Exhibit 5.5: Work experience of the respondents Li & Fung Research Centre 37

39 vi. Education levels of the respondents 60% of the respondents had bachelor degree, 32% had master degree, and 8% had junior college level of education (see Exhibit 5.6). Exhibit 5.6: Education levels of the respondents 2. Salary levels of sourcing staff i. The overall income level The average annual salary of sourcing staff was 177,300 yuan in The salary levels of the respondents varied from 40,000 yuan to 2 million yuan. However, the salary of most respondents (44.4%) fell in the 100, ,000 yuan range (see Exhibit 5.7). Exhibit 5.7: The overall income level of respondents (yuan) 38 China Purchasing Development Report (2012)

40 China Sourcing Survey ii. Average annual salary by type of enterprises According to the survey, salary levels differed among the different types of enterprises. FIEs and JVs had the highest average annual salary level, at 222,600 yuan, followed by PEs at 139,200 yuan and SOEs at 120,600 yuan (see Exhibit 5.8). Exhibit 5.8: Average annual salary by type of enterprises (yuan) iii. Average annual salary by industry of enterprises The average annual salary level for communications industry was the highest, at 272,700 yuan, followed by energy industry at 253,100 yuan, and the IT industry at 247,800 yuan. The average salary for distribution sector, household appliances industry, and machinery and equipment industry was all above 200,000 yuan (see Exhibit 5.9). Exhibit 5.9: Average annual salary by industries of enterprises (yuan) Li & Fung Research Centre 39

41 iv. Average annual salary by location of enterprises Average annual salary levels of the respondents varied greatly with respect to enterprise location. Average annual salary was 236,300 yuan in first-tier cities, 162,800 yuan for the second-tier cities, and 150,600 yuan for other cities (see Exhibit 5.10). Exhibit 5.10: Average annual salary by location of enterprises (yuan) v. Average annual salary with respect to working level in an enterprise Exhibit 5.11 shows the average annual salary with respect to working level in an enterprise. The average annual salary was 119,600 yuan for an employee at the entrance level (i.e. officer level), 190,500 yuan at the manager level, 308,600 yuan at the senior manager level, and 366,300 yuan at the director level or above. Exhibit 5.11: Average annual salary with respect to working level in an enterprise (yuan) vi. Average annual salary with respect to years of work experience Exhibit 5.12 shows the level of salary with respect to years of work experience. The annual salary of sourcing staff with more than 20 years work experience was nearly seven times more than staff with 1 year of experience, reflecting that salary level and work experience are highly and positively correlated (see Exhibit 5.12). 40 China Purchasing Development Report (2012)

42 China Sourcing Survey Exhibit 5.12: Average annual salary with respect to years of work experience (yuan) vii. Average annual salary with respect to education level The survey showed that salaries differed among different education levels of employees. Staff with master degree earned an average of 292,500 yuan, followed by those with bachelor degree at 210,500 yuan, and those with junior college level education at 119,300 yuan (see Exhibit 5.13). Exhibit 5.13: Average annual salary with respect to education level (yuan) viii. Average annual salary with respect to professional certifications Salary levels varied among employees with professional certifications. The respondents with the Certified Purchasing Manager (CPM) certification or the Certificate in Professional Supplier Management (CPSM) had an average annual salary of 235,500 yuan, followed by 206,900 yuan for those certified by the Chartered Institute of Purchasing & Supply (CIPS), 200,000 yuan for those certified by the International Trade Centre (ITC), and 152,800 yuan for those with other certifications issued by local institutes (see Exhibit 5.14). Exhibit 5.14: Average annual salary with respect to professional certifications (yuan) Li & Fung Research Centre 41

43 VI. Industry Surveys: Sourcing Performance of Five Industries in China The CFLP conducted five individual surveys on the sourcing performance of enterprises across five different industries in China, namely automotive industry, communications industry, energy industry, IT industry, and machinery and equipment industry. Each of the five survey covered enterprises that belong to the particular industry; the sample size also varied. All of the sampled enterprises were broadly representative in terms of ownership structure and company size. This section will highlight the key findings of the five industry surveys. For details of the survey results, please refer to Appendix Automotive industry Sourcing department of most of the surveyed automobile enterprises was well-functioned; they have placed significant emphasis on sourcing process optimization and informatization. For the automotive industry as a whole, the cost-oriented approach to sourcing was evident. Most enterprises emphasized on-time delivery (OTD) of orders and were keen on improving sourcing management. Although the cost control methods used by the automotive industry were fairly sophisticated, large discrepancies among different enterprises were noted. 2. Communications industry Surveyed enterprises in the communications industry gave the highest priority to the all-round development of sourcing function within the organization. However, due to strong competition in the industry, enterprises have become more cost conscious and placed more emphasis on strategic cost management. Cost reduction and cost avoidance were the two major methods widely used by the surveyed enterprises to control sourcing cost. Moreover, the enterprises have shown relatively strong dependence on their suppliers. 42 China Purchasing Development Report (2012)

44 China Sourcing Survey 3. Energy industry The surveyed enterprises in the energy industry demonstrated strong sourcing performance management ability and fairly stable relationship with key suppliers. Moreover, most enterprises regarded performance assessment of their respective sourcing department as an important mechanism to closely monitor the state of their sourcing department at all times and make improvements if necessary. On the other hand, to control sourcing cost, many enterprises adopted a combined sourcing approach, i.e. using both centralized sourcing and decentralized sourcing strategies. The energy industry also took the lead in the application of information system in sourcing activities. 4. IT industry Most of the surveyed enterprises in the IT industry viewed the reduction of sourcing cost as the primary objective of sourcing performance management and thus set very high cost control targets. They were particularly aware of the supply stability of goods and services. In general, the overall level of sourcing management of the surveyed enterprises was fairly high, and they were relatively advanced in terms of the use of various sourcing methods and deployment of information system in sourcing activities. 5. Machinery and equipment industry In the machinery and equipment industry, the role of sourcing department was relatively more significant than in other industries. The surveyed enterprises generally have larger sourcing department than in other industries. The industry as a whole was very quality-oriented, but was weak in terms of inventory management. Having said that, since the machinery and equipment industry consists of many sub-industries such as general-purpose machinery, special machinery, etc., each sub-industry may vary largely from each other in terms of sourcing performance; hence, further studies are needed to establish thorough understanding of sourcing activities in the industry. Li & Fung Research Centre 43

45 Appendix 1 Summary of key survey results by industry Automotive Communications Energy IT Machinery Sourcing Performance Frequency of conducting sourcing performance evaluation Monthly 32% 32% 33% 33% 43% Quarterly 9% 16% 19% 28% 21% Semi-annually 23% 32% 19% 17% 19% Annually 36% 20% 29% 22% 17% Indicators of sourcing performance evaluation Price/ cost 91% 96% 87% 94% 98% Inventory turnover 30% 44% 30% 61% 48% Product quality 43% 56% 52% 50% 73% Delivery lead time 74% 96% 91% 83% 91% Continuity of supply 39% 60% 52% 56% 41% Execution of sourcing management 43% 32% 65% 44% 45% Supplier development 57% 48% 61% 39% 63% Customer satisfaction 22% 24% 61% 56% 21% Introduction of technology and new products 17% 20% 22% 33% 18% Delivery lead time 20 days 27 days 51 days 24 days 36 days Percentage of suppliers with on-time delivery rate at 80% or above 91% 88% 82% 100% 74% Percentage of emergency purchases/ total expenditure 12% 14% 8% 6% 14% Sourcing Management Percentage of sourcing staff/ total staff 5.3% 2.6% 6.9% 4.1% 5.4% Top management responsible for sourcing activities CEOs 17% 13% 13% 28% 7% COOs 0% 13% 9% 17% 14% Vice presidents 39% 46% 39% 39% 19% General managers 35% 29% 17% 11% 51% Major duties of sourcing department Seeking suppliers 96% 88% 96% 94% 98% Contract and order management 83% 96% 83% 78% 91% Sourcing information management 57% 92% 65% 72% 67% Supplier quality management 61% 64% 74% 72% 76% Introduction of new product development 83% 84% 48% 67% 74% 44 China Purchasing Development Report (2012)

46 China Sourcing Survey Automotive Communications Energy IT Machinery Sourcing plans generated by information system 69% 81% 64% 73% 78% Supplier Management Departments involved in seeking suppliers Sourcing department <20% 8% 18% 17% <25% Cross-functional team >80% 92% 82% 83% >75% Frequency of conducting supplier performance evaluation Monthly 48% 29% 17% 17% 33% Quarterly 17% 42% 30% 44% 33% Semi-annually 13% 29% 13% 11% 17% Annually 22% 0% 39% 28% 17% Supplier quality control Incoming quality control system 65% 88% 73% 38% 81% Manufacturing process control system 74% 60% 77% 81% 53% Outgoing quality control system 17% 56% 41% 44% 26% Percentage of suppliers fulfilling 80% of orders of the surveyed enterprises 18% 23% 20% 17% 21% Sourcing Cost Control Composition of sourcing cost Direct sourcing (Bill of materials) 68% 59% 55% 53% 69% Maintenance, repair & operations 17% 11% 18% 11% 14% Services (non-manufacturing) 8% 17% 13% 28% 11% Expenses channeled through sourcing department 69% 61% 65% 70% 72% Sourcing cost reduction targets 4.6% 10.4% 5.8% 5.7% 5.3% Application of total cost of ownership analysis Price 95% 96% 95% 94% 100% Logistics cost 86% 84% 90% 78% 95% Cost of quality 77% 84% 71% 78% 70% Management cost 73% 76% 81% 61% 65% Inventory cost 77% 72% 76% 78% 83% Methods of inventory management Vendor managed inventory 43% 64% 29% 65% 38% Just-in-time production 43% 48% 14% 59% 45% Consignment 35% 32% 18% 35% 17% Li & Fung Research Centre 45

47 Chapter 2 An Analysis of Purchasing Activities and Sourcing Situations with PMI I. Manufacturing sector The CFLP China Manufacturing Purchasing Managers Index (PMI), which was launched in January 2005, provides an early indicator each month of economic activities in the Chinese manufacturing sector. It is jointly published by China Federation of Logistics & Purchasing (CFLP) and the National Bureau of Statistics (NBS). Every month questionnaires on their purchasing activities and supply situations are sent to over 800 manufacturing enterprises all over China. There are 11 indicators in the survey: Output, New Orders, New Export Orders, Backlogs of Orders, Stocks of Finished Goods, Purchases of Inputs, Imports, Input Prices, Stocks of Major Inputs, Employment and Suppliers Delivery Time. An index reading above 50 indicates an overall positive change in that variable; below 50, an overall negative change. The PMI is a composite index based on the seasonally adjusted diffusion indices for five of the indicators with varying weights: New Orders 30%; Output 25%; Employment 20%; Suppliers Delivery Time 15%; and Stocks of Major Inputs 10%. A PMI reading above 50 indicates an overall expansion in the manufacturing sector; below 50, an overall contraction. 1. Headline PMI indicates growth deceleration in China s manufacturing sector Driven mainly by weakening domestic and export demand, China s manufacturing PMI declined all the way from 51.2 in September 2011 to the recent low of 49.0 in November Afterwards, with central banks in major economies easing their monetary policies, the PMI started an upward trend in December 2011, and rose all the way to 53.3 in April Nevertheless, the index then slid by 2.9 points to 50.4 in May, and further edged down to 50.2 in June, only marginally above the critical 50-mark (see Exhibit 1). 46 China Purchasing Development Report (2012)

48 An Analysis of Purchasing Activities and Sourcing Situations with PMI Exhibit 1: Headline PMI, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics The recent decline in the PMI indicates weak growth momentum of China s manufacturing sector and the economy in general. The first and most obvious reason for the manufacturing slowdown is the sluggish external demand, especially from the crisis-hit Europe and the US. Chinese manufacturers were also hurt by factors such as the cumulative effects of policy tightening, restricted access to credit, rising labour cost and greater environmental compliance cost. Among the sectors surveyed, specialized machinery and textiles were in the contractionary zone in at least nine months during July 2011 to June On the contrary, electrical machinery & equipment and garments, footwear & related products stayed in the expansionary zone in at least ten months during the same period. It is also important to point out that, in recent months, sectors which witnessed relatively strong growth include electrical machinery & equipment, metal products, tobacco, food, liquor & refined tea, etc. China s manufacturing PMI has so far done a satisfactory job in predicting economic growth. Exhibit 2 plots the quarterly real GDP yoy growth rates versus the monthly PMIs since its inception. It could be seen that the PMI demonstrates a fairly good track record of forecasting the growth trend of the economy at least over the next few months. Based on this chart we may project that the real GDP growth will stabilize at around 7.5%-8.0% yoy in 2H12. Li & Fung Research Centre 47

49 Exhibit 2: Headline PMI and real GDP growth, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 2. Output growth has slowed down sharply The output index, which reflects the overall production activities of the manufacturing sector, went down from 52.7 in September 2011 to 50.9 in November However, it reversed the downtrend in December 2011, and continued to rise in the following months. As a result of weak orders, output growth has decelerated significantly in the past few months. The output index fell markedly from 57.2 in April 2012 to 52.9 in May and 52.0 in June (see Exhibit 3). Among the sectors surveyed, communications, IT & electronic equipment & instruments, electrical machinery & equipment, garments, footwear & related products and general machinery recorded expansion of output in at least ten months during July 2011 to June In particular, electrical machinery & equipment and metal products showed strong output growth in recent months. In contrast, several sectors, including chemical fibres, rubber & plastics, papermaking, printing, stationery & sporting goods, pharmaceuticals and specialized machinery and automobiles, showed negative mom growth of output throughout May to June. 48 China Purchasing Development Report (2012)

50 An Analysis of Purchasing Activities and Sourcing Situations with PMI Exhibit 3: Output index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 4 demonstrates the correlation (with some lags) between the output index and the yoy growth of value-added of industrial output (VAIO). The VAIO growth has largely trended downward since June Looking ahead, we expect the VAIO growth to be around 9%-10% yoy in 3Q12, bolstered mainly by accelerated public housing and infrastructure construction by the government, but still constrained by the weak external demand and falling private property investment. Exhibit 4: Output index and industrial production growth, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Li & Fung Research Centre 49

51 3. Domestic demand and external demand have weakened The new orders index, which covers both domestic and external demand, dropped all the way from 51.3 in September 2011 to 47.8 in November Afterwards, the new orders index showed a strong rebound in the following months, and reached 55.1 in March Since then, demand has weakened again. The new orders index fell to 54.5 in April, and then plunged to 49.8 and 49.2 in May and June respectively (see Exhibit 5). The new export orders index was lower than the new orders index in ten of the last twelve months, suggesting that external demand generally grew slower than domestic demand during the period. 1 After dropping all the way from 50.9 in September 2011 to 45.6 in November 2011, the new export orders index was generally on an upward trend until April Afterwards, the index dropped to 50.4 in May, and further fell below the critical level of 50 in June, indicating the contraction in new export orders in the month (see Exhibit 5). Exhibit 5: New orders index and new export orders index, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Among the industries surveyed, communications, IT & electronic equipment & instruments, electrical machinery & equipment and garments, footwear & related products recorded rising new orders in at least nine months during July 2011 to June In particular, growth of new orders in electrical machinery & equipment has been quite strong in recent months. On the other hand, sectors such as chemical fibres, rubber & plastics, chemicals, smelting of ferrous 1 We have received a number of enquiries on this point. The new orders index covers both domestic orders and export orders. That is to say, the manufacturers are not asked to differentiate between domestic orders and export orders when filing in the questionnaires. 50 China Purchasing Development Report (2012)

52 An Analysis of Purchasing Activities and Sourcing Situations with PMI metals and textiles faced rapidly deteriorating new orders situation in at least nine months during July 2011 to June Among the sectors surveyed, garments, footwear & related products, general machinery and tobacco reported expansion of new export orders in at least nine months during July 2011 to June On the contrary, some sectors recorded contraction in new export orders in at least ten months during the past twelve months, including chemical fibres, rubber & plastics, smelting of ferrous metals and textiles. Exhibit 6 shows that the new orders index generally leads industrial production by about 2 to 3 months. The new orders index suggests decelerating growth of industrial production in coming months. Exhibit 6: New orders index and industrial production growth, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 7 plots the new export orders index against the yoy growth rates of China s exports. The correlation between the two is fairly high, with the new export orders index leading the export yoy growth rate by about 3 months. As the new export orders index has been falling in recent months, we have become more conservative in our export outlook. Besides, from exhibit 8 we can see that the new export orders index has been strongly correlated to the external economies, especially the developed economies. Having peaked at in March 2012, the OECD Li & Fung Research Centre 51

53 composite leading indicator 2 softened to in April and in May. Overall, we think China s export growth will be below 10% yoy in 3Q12. Export orders in the coming months may fall drastically if the sovereign debt crisis and economic slowdown in the EU and the US turn out to be much worse than expected, although China s exports will continue to be cushioned by orders from emerging markets. Exhibit 7: New export orders index and export growth, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics, China Customs 2 The OECD composite leading indicator, compiled by the Organization for Economic Cooperation and Development, is designed to provide early signals of turning points (peaks and troughs) between expansions and slowdowns of economic activity, and covers Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden, Switzerland, Turkey, United Kingdom, and United States. 52 China Purchasing Development Report (2012)

54 An Analysis of Purchasing Activities and Sourcing Situations with PMI Exhibit 8: New export orders index and OECD composite leading indicator, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics, Organization for Economic Cooperation and Development 4. Backlogs of orders have continued to shrink The backlogs of orders index gained 1.1 points to reach 50.5 in March, piercing through the 50- mark. However, the index quickly dipped into the contractionary zone again in April (48.4), and slid further to 43.6 in May and 43.3 in June (see Exhibit 9). We expect it to stay below 50 in the near future, as indicated by the apparently very high correlation between the sub-index and the headline PMI, together with the downward trend of the headline PMI (see Exhibit 10). Only electrical machinery & equipment and garments, footwear & related products recorded increasing backlogs of orders throughout April to June. In contrast, fourteen industries reported declining backlogs of orders throughout the same period, including chemical fibres, rubber & plastics, chemicals, communications, IT & electronic equipment & instruments, general machinery, oil refining & coking, papermaking, printing, stationery & sporting goods, pharmaceuticals, specialized machinery, textiles, tobacco, wood processing & furniture, automobiles, non-staple food processing and railway, ships, aircrafts, aerospace and other transportation equipment. Li & Fung Research Centre 53

55 Exhibit 9: Backlogs of orders index, Jul Jun Jul 10 Sep Nov Jan 11 Mar May Jul Sep Nov Jan 12 Mar May PMI: Backlogs of orders Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 10: Backlogs of orders index and headline PMI, Jan Jun Jan 05 Apr Jul Oct Jan 06 Apr Jul Oct Jan 07 Apr Jul Oct Jan 08 Apr Jul Oct Jan 09 Apr Jul Oct Jan 10 Apr Jul Oct Jan 11 Apr Jul Oct Jan 12 Apr PMI: Backlogs of orders PMI: Overall Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 5. Manufacturers were piling up inventories of finished goods but reducing their stocks of inputs The stocks of finished goods index went up by 0.3 points to 50.8 in March. Although the index dipped to 49.5 in April, it then quickly rebounded to 52.2 in May and 52.3 in June, the highest this year. We believe that manufacturers were piling up inventories of finished goods due to slowing sales, and they are likely to cut production and start a new round of destocking cycle soon (see Exhibit 11). 54 China Purchasing Development Report (2012)

56 An Analysis of Purchasing Activities and Sourcing Situations with PMI The stocks of major inputs index continued to stay below 50 in the past twelve months. The index fell from 49.5 in March to 48.5 in April and 45.1 in May, before rebounding to 48.2 in June (see Exhibit 11). Inventories of raw materials held by Chinese manufacturers have continued to shrink, but at a slower rate. In our view, the destocking activities were attributable to the lack of business confidence and weak international commodity prices, which lowered the incentives for manufacturers to hoard raw materials. Exhibit 11: Stocks of finished goods index and stocks of major inputs index, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 6. Input prices have fallen After dropping markedly during September to November 2011, the input prices index was on an upward trend in the following months. Largely driven by the surge in oil prices amid Middle East tensions, the input prices index moved up from 50.0 in January to 55.9 in March Afterwards, as oil prices started to decline in April, so did the input prices index. The index fell below 50 in May and stayed in the contractionary zone in June, indicating the falling input prices (see Exhibit 12). In our view, this implies moderating inflationary expectations for downstream prices in the near and medium term. Li & Fung Research Centre 55

57 Exhibit 12: Input prices index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Among the sectors surveyed, tobacco and wood processing & furniture consistently indicated rising input prices in at least eleven months during July 2011 to June Meanwhile, sectors which witnessed decline in input prices in more than eight months during the same period include general machinery and smelting of non-ferrous metals. Exhibit 13 shows that the input prices index is useful as a leading indicator of upstream prices. The input prices index generally leads the yoy growth of the purchaser price index of industrial products 3 by about 2 to 4 months. To show the association between the input prices index and midstream prices, we plot the input prices index against the yoy growth of the producer price index (PPI) 4 in exhibit 14. The yoy growth rates of the purchaser price index and the PPI have both moderated significantly since August last year, and have turned negative since April and March this year respectively. Inflation has been under control. We forecast the CPI growth to trend down further to around 1%-2% yoy in 3Q12, before rebounding a bit in 4Q12 as the economy gradually recovers. 3 The purchasing price index for raw material, fuel and power was renamed the purchaser price index of industrial products, effective from January The price index, compiled by the National Bureau of Statistics of China, measures the prices of production inputs such as raw materials, fuels and power, purchased by industrial enterprises. 4 The producer price index of industrial goods (PPI), compiled by China National Bureau of Statistics, measures the prices of industrial products when they are sold for the first time after production. 56 China Purchasing Development Report (2012)

58 An Analysis of Purchasing Activities and Sourcing Situations with PMI Exhibit 13: Input prices index and purchaser price index of industrial products, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Exhibit 14: Input prices index and producer price index, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Li & Fung Research Centre 57

59 7. Import demand from Chinese manufacturers has slowed The imports index was below the critical level of 50 throughout October 2011 to January It climbed above 50 in February 2012, and then stayed in the expansionary zone in March and April. Afterwards, the index dropped below 50 again in May, and fell further to 46.5 in June (see Exhibit 15). The decline in the index was attributable to the slowdown in import demand from Chinese manufacturers. Exhibit 15: Imports index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Sectors which recorded contraction in imports in at least nine months during July 2011 to June 2012 include pharmaceuticals, textiles and wood processing & furniture. Particularly noteworthy is that, among the sectors surveyed, textiles recorded the sharpest contraction in imports throughout May to June. In contrast, metal products reported the strongest import growth during the same period. Exhibit 16 shows that the imports index is highly correlated to the import yoy growth rate (with some lags). We expect import growth to be at around 5%-10% in 3Q12. Exhibit 17 illustrates the strong association between the imports index and the purchases of inputs index as currently more than a quarter of China s imports are under the category of processing trade 5. Besides, China is a major importer of oil, iron ore and other raw materials. Finally, to see how heavily China s imports, or mainly imports of inputs, are affected by world commodity prices, we plot 5 Processing trade refers to the business activity of importing all or part of the raw and auxiliary materials, parts and components, accessories, and packaging materials from abroad, and re-exporting the finished products after processing or assembling by enterprises within the Chinese Mainland. 58 China Purchasing Development Report (2012)

60 An Analysis of Purchasing Activities and Sourcing Situations with PMI the imports index against the Thomson Reuters/ Jefferies CRB index. It is found that the imports index is positively related to, and generally leads, global commodity prices (see Exhibit 18). Exhibit 16: Imports index and import growth, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics, China Customs Exhibit 17: Imports and purchases of inputs, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Li & Fung Research Centre 59

61 Exhibit 18: Imports index and Thomson Reuters/ Jefferies CRB Index, Jan Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics, Thomson Reuters 8. Employment has decreased After having stayed below 50 for five consecutive months since October last year, the employment index went up by 1.5 points in March 2012 to enter the expansionary zone again. The index stayed flat at 51.0 in April, but then dropped to 50.5 in May. Afterwards, in June, it fell to 49.7, indicating the decrease in employment in the month (see Exhibit 19). Among the industries surveyed, garments, footwear & related products, non-metal minerals and railway, ships, aircrafts, aerospace and other transportation equipment witnessed the biggest improvement in employment situation throughout April to June; whereas specialized machinery, textiles and wood processing & furniture reported the biggest decline in employment during the same period. 60 China Purchasing Development Report (2012)

62 An Analysis of Purchasing Activities and Sourcing Situations with PMI Exhibit 19: Employment index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 9. Suppliers delivery has continued to slow down The suppliers delivery time index slid from 50.3 in February to 48.9 in March, and has stayed in the decelerating zone since then. The index fluctuated within the narrow range of 49.0 to 49.6 throughout April to June. Among the industries surveyed, only pharmaceuticals and specialized machinery reported accelerating suppliers delivery throughout April to June; while electrical machinery & equipment, papermaking, printing, stationery & sporting goods, textiles, tobacco and automobiles experienced slowing suppliers delivery during the same period. Exhibit 20: Suppliers delivery time index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics Li & Fung Research Centre 61

63 II. Policy outlook The recent readings of China s PMI and the sub-indices show that the manufacturing sector has expanded at a slower pace, amid the weak domestic and external demand. Looking ahead, we expect the Chinese government to take the following actions in the coming future, which will in turn benefit the manufacturing sector. 1. To boost domestic demand According to official statistics, the growth of China s fixed-asset investment (FAI) and exports have both decelerated in recent months. Against this backdrop, the new orders index has been on a downward trend since April 2012, indicating weakening demand for industrial products. Looking ahead, we believe that the Chinese government will boost investment as one of the ways to prevent a sharp economic slowdown. The government is expected to accelerate the approvals of infrastructure projects and SOE-led investments, and reduce investment barriers for private enterprises in various sectors such as railway, finance, energy, telecom, education and healthcare. Meanwhile, China s central bank cut the benchmark interest rates on 8 June and 6 July, and is expected to further lower the rates soon. It is hoped that the reduction in financing costs can encourage enterprises to borrow money to make investments. Nevertheless, the government is unlikely to stimulate investment in sectors with overcapacity such as steel, cement, shipbuilding, etc. The massive fiscal stimulus introduced by the government during the financial tsunami had already exacerbated the problem of overcapacity in these sectors. We also expect that the government will continue its efforts to increase the domestic consumption demand. According to the government work report delivered by Premier Wen Jiabao in early March 2012, the major policy directions include: i. To increase income of low- and middle-income households. ii. To support the development of the service sector in areas such as services for the elderly, household services, healthcare services, etc. iii. iv. To boost consumer spending in areas such as travelling, cultural activities, etc. To promote the consumption of energy-saving and environmentally friendly products. v. To foster the development of the distribution sector. Some supportive measures have been implemented in recent months. For example, on 1 June, the government launched a subsidy scheme for the purchases of energy-saving home 62 China Purchasing Development Report (2012)

64 An Analysis of Purchasing Activities and Sourcing Situations with PMI appliances, including qualified air conditioners, flat screen television sets, refrigerators, washing machines and water heaters. It is expected that more policies will be introduced in the coming months. 2. To keep inflation under control China experienced high inflation in 2010 and In response, the Chinese government took a series of measures to cool down prices. However, some of these measures negatively impacted the Chinese enterprises. For example, the central bank tightened the credit conditions in China during 1Q10 to 3Q11, causing a sharp rise in financing costs on enterprises, especially the small- and medium-sized enterprises (SMEs). Some enterprises could only obtain loans from underground lenders with sky-high interest rates (as high as an annualized 60%). Since late 2011, China s inflation has gone down gradually, and the central bank has eased its monetary policy, thereby leading to a reduction in financing costs on enterprises. Nevertheless, if China s inflation rate rebounds, the central bank will be under pressure to tighten its monetary policy again, which may in turn constrain domestic demand. The government will continue its efforts to keep inflation under control. According to the government work report released in early March 2012, the government will continue to adopt measures such as boosting the production of major agricultural produce, reducing distribution costs, curbing hoarding and speculation in commodities, as well as better managing inflationary expectations. 3. To improve business environment for small-sized enterprises The business environment for enterprises, especially the small-sized enterprises, in China has been tough in the past few years, given the weakening demand as well as the rapid rise in costs of raw materials and labour. According to the media reports, many enterprises have suffered losses, some of which are even under threat of survival. If the business environment further deteriorates, we expect to see widespread factory closures. The government has strengthened its efforts to improve the business environment. On 19 April 2012, the State Council released the opinions on supporting the healthy development of the small- and micro-sized enterprises. 6 The document lists a number of measures for helping enterprises. The key takeaways are: 6 Li & Fung Research Centre 63

65 i. To increase the minimum thresholds for value-added-tax (VAT) and business tax (BT) on small- and micro-sized enterprises. ii. To extend the tax breaks for low-profit enterprises to iii. iv. To increase funding to support small- and micro-sized enterprises. To reduce government fees on enterprises. v. To increase credit support to small- and micro-sized enterprises. vi. vii. To expand financing channels for small- and micro-sized enterprises. To support the development of small financial institutions. Going forward, we expect that the government will strive to implement these measures in coming future. 4. To promote industrial upgrade Although China has made significant achievements in terms of GDP growth in the past decades, the single-minded pursuit of economic growth has resulted in problems such as pollution and uneven income distribution, etc. One of the main reasons is that many manufacturers in China are only able to produce low value-added products which are sold at low prices. To save costs, these manufacturers pay low wages, or even conduct production activities that cause environmental pollution. Looking forward, we expect that, to support Chinese manufacturers to move up the value ladder, the government will intensify its efforts to promote industrial upgrade. The policy directions are likely to include: i. To promote the upgrade of traditional manufacturing industries; to increase funding to support manufacturers for technological advancement. ii. To control the output growth of industries with excess capacity such as steel, shipbuilding, cement, etc.; to encourage enterprises to produce high value-added and high quality products; to promote industry consolidation for improving economies of scale. iii. To foster the development of the strategic emerging industries, which include energysaving, environmental protection, new-generation information technology, biotechnology, medicine, alternative energy, advanced materials, alternative fuel cars and high-end equipment manufacturing, etc. 64 China Purchasing Development Report (2012)

66 An Analysis of Purchasing Activities and Sourcing Situations with PMI 5. To foster the development of the logistics industry Recently, the Chinese government has increased its efforts to foster the development of the logistics industry, which could help reduce the logistic costs on manufacturers. Logistics costs in China are high. According to the China Federation of Logistics & Purchasing, the ratio of the total logistics cost to China s GDP was 17.8% in 2011, almost twice the ratios in many developed countries. 7 It is widely believed that the high logistics costs can be attributed to the heavy tax burden on logistics enterprises, high toll fees, as well as low operational efficiency due to a relative lack of advanced facilities and modern management knowledge. On the other hand, the high logistics costs imply that there is still plenty of room for lowering the logistics costs in China. On 1 January 2012, the Chinese government launched the pilot program for replacing business tax (BT) with value-added tax (VAT) in several selected service sectors in Shanghai, and later decided to progressively expand the program to cover Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen between 1 August and 31 December The purpose of the reform is to ease the tax burden through eliminating the double taxation on enterprises in these sectors. It was expected that logistics enterprises would benefit from the reform. However, according to the recent media reports, the tax burden on some logistics enterprises in Shanghai have actually increased under the pilot program. We therefore expect the government to revise the program to reduce the tax burden on logistics enterprises, in order to better accomplish the purpose of the reform. Furthermore, the government is likely to continue its efforts to halt illegal collection of toll fees, strengthen logistics infrastructure, launch logistics information sharing platform, promote the use of cold chain logistics systems, and standardize the industry practice. These moves are expected to improve the operational efficiency of logistics enterprises in China. 7 Li & Fung Research Centre 65

67 Recent signs show that the government is more willing to tolerate slower economic growth, while making efforts to transform the pattern of economic development, the primary goal of the 12 th Five-year Plan. According to the 12 th Five-year Plan, the Chinese government will strive to adjust China s economic structure, promote scientific and technological innovation, improve people s livelihood, build a resource-saving and environmental-friendly society and deepen reform in the medium- to long-term. In our view, this will lead to a dramatic change in the business environment in China, and Chinese manufacturers will need to reposition themselves and revise their business strategies in a bid to respond to the new challenges. 66 China Purchasing Development Report (2012)

68 An Analysis of China s Non-Manufacturing Sector with NMI Chapter 3 An Analysis of China s Non-Manufacturing Sector with NMI I. Non-manufacturing sector China Non-Manufacturing Purchasing Managers Index (NMI) serves as an early indicator of economic activities in China s non-manufacturing sector. Every month, questionnaires are sent to 1,200 non-manufacturing enterprises in twenty-seven industries, which are categorized into the tertiary industry and the construction industry. There are 10 indicators in the survey: Business Activity, New Orders, New Export Orders, Backlogs of Orders, Stocks, Input Prices, Prices Charged, Employment, Suppliers Delivery Time and Business Expectation. Survey responses reflect the change in each indicator, if any, in the current month compared to the previous month. Unlike the PMI, there is no composite index for China s NMI, and the business activity index of every month is quoted as the NMI of the month. A NMI reading above 50 indicates an overall expansion in the non-manufacturing sector; below 50, an overall contraction. The NMI was launched in January The NBS and the CFLP have started releasing the seasonally adjusted data since March The expansion of the non-manufacturing sector has quickened again Amid the moderation in demand, China s business activity index, which is quoted as the nonmanufacturing purchasing managers index (NMI), dropped all the way from 57.3 in July 2011 to 55.5 in October Afterwards, the business activity index trended upward in the following months, along with the recovery in demand. It reached the peak of 58.0 in March 2012, fell to 56.1 in April and 55.2 in May, but then rebounded to 56.7 in June (see Exhibit 1). These figures suggest that the expansion of the non-manufacturing sector has quickened again. Considering that the downward trend of China s PMI indicates growth deceleration in the manufacturing sector, the non-manufacturing sector has fared relatively well. Among the industries surveyed, the business activity index of the tertiary industry rose by 2.1 points from the previous month to reach 56.3 in June. In contrast, the construction industry recorded moderate mom decline, the business activity index of which fell by 1.1 points from the previous month to 58.1 in June. Li & Fung Research Centre 67

69 Exhibit 1: Business activity index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 2. Demand has fluctuated in recent months The new orders index dropped markedly in September 2011, but then trended upward throughout October 2011 to March We believe that the recovery in demand during the period was associated with the improvement in credit conditions in China, given that China s central bank has started to ease its monetary policy since late Afterwards, the new orders index fell from 53.5 in March to 52.7 in April and 52.5 in May, and then rebounded to 53.7 in June, indicating fluctuations in demand (see Exhibit 2). Amid the deepening of the European debt crisis, the new export orders index was generally on a downward trend throughout August to December The index reversed the downtrend in January 2012, and rose all the way to 52.7 in April. However, it then dropped to 50.5 in May and in June, indicating that the foreign demand has moderated again (see Exhibit 2). 1 Covering both domestic and foreign demand, the new orders index reflects the total demand for services, while the new export orders index covers foreign demand only. 68 China Purchasing Development Report (2012)

70 An Analysis of China s Non-Manufacturing Sector with NMI Exhibit 2: New orders index and new export orders index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 3. Service charges fell with easing cost pressure After fluctuating wildly throughout August 2011 to March 2012, the input prices index was on a downward trend in the following months. The input prices index fell all the way from 60.2 in March to 52.1 in June. 2 The marked drop in the index implies that input costs have been rising at a much slower pace (see Exhibit 3). However, enterprises have been facing reduced profit margins, due to the decrease in their service charges. The prices charged index has dipped into the contractionary zone since May 2012 (see Exhibit 3). 3 2 The input prices index indicates the changes in input costs incurred by the enterprises surveyed. 3 The prices charged index shows the changes in prices charged by enterprises when they sell their services. Li & Fung Research Centre 69

71 Exhibit 3: Input prices index and prices charged index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 4. The business expectation index stayed high in the past year The business expectation index stayed well above the critical 50-mark in the past year, fluctuating within the range of 63.2 to In June 2012, the index was as high as 65.5, indicating that purchasing managers in the non-manufacturing sector have remained optimistic about the future development of their respective sectors, despite the moderation in the Chinese economy in recent quarters (see Exhibit 4). Exhibit 4: Business expectation index, Jul Jun 2012 Source: China Federation of Logistics & Purchasing, China National Bureau of Statistics 70 China Purchasing Development Report (2012)

72 An Analysis of China s Non-Manufacturing Sector with NMI II. Policy Outlook Several indicators point to a weakening economy in China. For example, China s real GDP growth slowed from 8.1% yoy in 1Q12 to 7.6% yoy in 2Q12, the lowest since 2Q09. That being said, we remain optimistic about the medium to long-term development of the nonmanufacturing sector in China, which will greatly benefit from the government s actions to stimulate the domestic consumption demand. For many years, the Chinese economy has been export-oriented and investment-led. Comparatively, consumption has played a less important role in driving China s economic growth. However, it is hard for China to continue to rely on export and investment for growth in the coming future, as the global demand is set to remain weak and many sectors in China are already facing serious problem of overcapacity. The Chinese policymakers are well aware of these issues, and have been intensifying their efforts to stimulate the domestic consumption. Looking ahead, the policy directions are likely to include: 1. To achieve rapid rise in household income China s consumption rate is low, as compared to the world s average, indicating the problem of under-consumption in China. 4 One of the major reasons behind the low consumption rate is that many Chinese households have low income and thus have little money to spend. 5 In view of this, we expect that the government will continue its efforts to boost household income. The government targets that the annual real growth rates of the per capita disposable income of urban households and the per capita net income of rural households will exceed 7% during the 12 th Five-year Plan period ( ). One of the major moves to achieve the target is to increase the minimum wages considerably. The government targets to raise the minimum wage levels by at least 13% per annum during , implying that the minimum wage levels will be adjusted upward by at least 84% overall in these five years. Moreover, we expect that the local governments in various provinces/ municipalities will continue to issue new guidelines on 4 In 2011, the household consumption rate in China, defined as the ratio of the total household consumption expenditure to the GDP, was 34.9%. In comparison, according to the World Development Indicators 2012 published by the World Bank, the household consumption rates for the world, the low and middle income economies, and the high income economies were 62%, 56% and 63% respectively in A large proportion of the Chinese population earns below-average income, as indicated by the high Gini coefficient. Many economists now estimate that China s Gini coefficient has already exceeded 0.5, well above the international warning line of 0.4. See, for example, Li & Fung Research Centre 71

73 salary rise in coming years. 6 Although these guidelines are not mandatory for employers to follow, they will affect workers expectations of salary rise, and thus employers will be under stronger pressure to raise wages of their workers. It is noteworthy that the penetration rates of major consumer durables in urban areas are already high. Among every 100 urban households, 97.2 owned refrigerators, owned airconditioners and 97.1 owned washing machines in These figures indicate that much of the demand for consumer durables from urban households has already been satisfied. With rising income, urban households are expected to greatly increase their expenditures on services. 2. To boost sales of consumer goods In , the government introduced a number of policies in a bid to stimulate consumption. Major policies included the rural subsidy scheme for home appliance purchases, the old-fornew (trade in) subsidy scheme for car purchases, etc. These policies either have been ended or are scheduled to end soon. Since late last year, the growth of China s retail sales of consumer goods has decelerated, indicating the moderation in consumption demand. The urge to stimulate sales of consumer goods has thus become stronger. On 16 May 2012, the Chinese government announced to allot 26.5 billion yuan to subsidize households for their purchases of energy-saving home appliances, including qualified air conditioners, flat screen television sets, refrigerators, washing machines and water heaters. The subsidy scheme has started on 1 June 2012 and is scheduled to end on 31 May It indicates that the government has stayed committed to boosting domestic consumption. We expect the government to introduce more measures to boost sales of consumer goods in the foreseeable future, which will in turn benefit sectors such as retailing, distribution and logistics. 6 For example, enterprises in Beijing are recommended to follow the guideline on the pay rise benchmark, which is set at 11.5% in Enterprises with worsening performance should consider raising the salaries of their workers by at least 4.5%, the lower limit of the pay rise benchmark; while enterprises with good performance are recommended to offer pay rise of at most 16.5% to their workers in China Purchasing Development Report (2012)

74 An Analysis of China s Non-Manufacturing Sector with NMI 3. To accelerate the expansion of the pilot program for replacing business tax (BT) with value-added tax (VAT) The tax burden on Chinese enterprises in the tertiary industry is high, which has in turn led to higher prices of products and services and constrained China s consumption. To foster the development of the tertiary industry, the Chinese government launched the pilot program for replacing business tax (BT) with value-added tax (VAT) in several selected service sectors in Shanghai on 1 January 2012, and later decided to progressively expand the program to cover Beijing, Tianjin, Jiangsu, Zhejiang, Anhui, Fujian, Hubei, Guangdong, Xiamen and Shenzhen between 1 August and 31 December The purpose of the program is to ease tax burden on enterprises in these sectors through eliminating the double taxation. In the future, it is expected that the program will be extended to cover more service sectors and more provinces. Li & Fung Research Centre 73

75 Chapter 4 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Part One: Major Price Indicators 1. China s CPI growth has decelerated The year-on-year (yoy) growth rate of China s consumer price index (CPI) 1 decelerated from 6.5% yoy in July 2011 to 2.2% yoy in June The drop in the CPI growth was due largely to the moderation in food inflation. The CPI growth of the food component fell from 14.8% yoy in July 2011 to 3.8% yoy in June 2012 (see Exhibits 1 & 2). Looking ahead, we expect China s CPI growth to stay low in the near term, owing to the softening consumption demand, as well as the recent decline in commodity prices. Upside risks, however, come mainly from further increases in wages, the acceleration of the reform of the resource pricing mechanisms and adverse weather conditions. It is noteworthy that food makes up around one third of the CPI basket. Any deterioration in weather conditions and disrupted agricultural production can easily drive up food prices and thus China s CPI. Exhibit 1: China s CPI growth, Jul Jun 2012 Jul % Aug 6.2% Sep 6.1% Oct 5.5% Nov 4.2% Dec 4.1% Jan % Feb 3.2% Mar 3.6% Apr 3.4% May 3.0% Jun 2.2% Source: National Bureau of Statistics, PRC 1 The CPI, compiled by the National Bureau of Statistics of China, measures the price of a basket of goods and services that a typical household purchases. 74 China Purchasing Development Report (2012)

76 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Exhibit 2: China s CPI growth by selected commodity, Jan - Jun 2012 Jan 12 Feb Mar Apr May Jun yoy growth (%) Clothing Household services, maintenance and renovation Recreational, educational products & services Source: National Bureau of Statistics, PRC 2. China s PPI growth has turned negative since March The yoy growth rate of China s producer price index of industrial products (PPI) 2 fell all the way from 7.5% yoy in July 2011 to -2.1% yoy in June On a mom basis, the PPI posted negative growth of -0.4% and -0.7% in May and June respectively, after rising by 0.2% in April These figures indicate that China s ex-factory prices of industrial products have been falling. In our view, the recent decline in prices of industrial products was highly associated with the sluggish downstream demand, as well as the decrease in prices of raw materials (see exhibits 3 & 4). Looking ahead, we expect China s PPI to trend upward again later this year, driven by increasing labour costs. Chinese manufacturers will continue to suffer from rising wages, owing to the upward adjustments in minimum wages. 3 2 The PPI, compiled by the National Bureau of Statistics of China, measures the prices of industrial products when they are sold for the first time after production. 3 According to the 12th Five-year Plan, the minimum wage is targeted to increase by at least 13% per annum in 2011 to 2015, and local governments in many provinces are widely expected to raise the minimum wage levels in their jurisdictions this year. Li & Fung Research Centre 75

77 Exhibit 3: China s PPI growth, Jul Jun 2012 Jul % Aug 7.3% Sep 6.5% Oct 5.0% Nov 2.7% Dec 1.7% Jan % Feb 0.0% Mar -0.3% Apr -0.7% May -1.4% Jun -2.1% Source: National Bureau of Statistics, PRC Exhibit 4: China s PPI growth by selected industry, Jan - Jun 2012 Jan 12 Feb Mar Apr May Jun yoy growth (%) Textile industry Textile, clothing and footwear production Leather, furs, down and related products Timber processing & wood, bamboo, cane, palm fiber and straw products Source: National Bureau of Statistics, PRC Part Two: Raw Material Prices 1. The purchaser price index of industrial products has recorded negative yoy growth in recent months Against the backdrop of weakening commodity prices, the yoy growth rate of the purchaser price index of industrial products 4 decelerated all the way from 11.0% yoy in July 2011 to -2.5% yoy in June 2012 (see Exhibits 5 & 6). 4 The purchaser price index of industrial products, compiled by the National Bureau of Statistics of China, measures the prices of production inputs such as raw materials, fuels and power purchased by industrial enterprises. 76 China Purchasing Development Report (2012)

78 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Looking ahead, the future movements of the domestic prices of production inputs largely depend on the movements of global commodity prices. If the European debt crisis deteriorates, global commodity prices are likely to drop further. Exhibit 5: The purchaser price index of industrial products, Jul Jun 2012 (% yoy growth) Jul % Aug 10.6% Sep 10.0% Oct 8.0% Nov 5.1% Dec 3.5% Jan % Feb 1.0% Mar 0.1% Apr -0.8% May -1.6% Jun -2.5% Source: National Bureau of Statistics, PRC Exhibit 6: The purchaser price index of industrial products by selected commodity, Jan - Jun 2012 Jan 12 Feb Mar Apr May Jun yoy growth (%) Fuel & power Non-ferrous metals Raw materials for the chemical industry Timber and paper pulp Textile raw materials Source: National Bureau of Statistics, PRC 2. China s cotton price indices trended downward throughout late February to early July Driven mainly by the slowing downstream demand and the sharp decline in the global cotton Li & Fung Research Centre 77

79 prices, China s cotton price indices 5 trended downward throughout late June 2011 to mid-august Afterwards, China s cotton prices showed a rebound in in mid-august to late September 2011, and then fluctuated within narrow ranges in the following months. Against the backdrop of the weakening downstream demand, the cotton price indices were generally on a downward trend throughout late February to early July 2012, and have stayed relatively stable since then (see Exhibit 7). Looking ahead, the global cotton supply is likely to be abundant in the near term. The International Cotton Advisory Committee (ICAC) predicts that the global cotton stocks will increase by 9% to 14.5 million tons in 2012/13, 6 equivalent to 61% of global consumption in 2012/13. Besides, the Chinese government has announced that it will implement the stockpiling scheme again during September 2012 to March We believe this will continue to support the prices of domestic cotton and encourage farmers to maintain their cotton output, thereby ensuring the future supply of domestic cotton. We therefore expect the prices of domestic cotton to stay relatively stable in coming future. Exhibit 7: China s cotton price indices, Jul Jul 2012 Source: China Cotton Association 5 The indices, compiled by the China Cotton Association, track cotton prices quoted from two hundred textile enterprises According to the scheme, the government will buy cotton for its state reserve, if the market prices of cotton drop below the specific levels set by the policymakers. 78 China Purchasing Development Report (2012)

80 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook 3. The Nanjing Wool Market Composite Index trended downward throughout March to May The Nanjing Wool Market Composite Index 8, one of the major wool price indices in China, was on a decreasing trend in 2H11, due largely to the weakening demand and the depreciation of the Australian dollar against the RMB. It is noteworthy that wool prices in China are significantly affected by the exchange rate movements of the currencies of Australia and New Zealand, as China imports a large amount of wool from these two countries, the major wool exporters in the world. The wool price index rebounded in the first two months of 2012, and then trended downward throughout March to May. It dropped to yuan per kg at end-may 2012, the lowest since March In our view, the fall in wool prices was the result of the depreciation of the Australian dollar against the RMB, the drop in global wool prices, as well as the sluggish downstream demand (see Exhibit 8). Looking ahead, we expect wool prices to trend downward in the near term, given the market expectation of the fall in wool prices. Exhibit 8: Nanjing Wool Market Composite Index, Jun May 2012 Jun 11 Jul Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Month-end index (yuan/kg) Source: The Nanjing Wool Market 4. Price indices of polyester have shown a strong rebound since late June The price indices of polyester 9 dropped markedly throughout mid-september to late November 2011, owing to the drop in upstream prices and the weakening downstream demand. Afterwards, the price indices bottomed out in early December and trended upward in the following months (see Exhibit 9) The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). Li & Fung Research Centre 79

81 As upstream prices fell and downstream demand softened, the polyester prices declined again throughout mid-february to late March, and then stayed relatively stable till mid-may. In the following months, however, the polyester prices continued to trend downward. Triggered by the sharp decline in the global prices of crude, a major raw material of polyester, the price index of polyester FDY, for example, fell from 12,550 on 15 May to 11,300 on 15 June, the lowest since late October Since late June, with upstream prices rising again, the price indices of polyester have rebounded strongly. Looking ahead, as the downstream demand is likely to remain weak, we do not expect polyester prices to go up much in coming months. Exhibit 9: Price indices of polyester, Jul Jul 2012 Source: China Chemical & Fiber Economic Information Network 5. Price index of acrylic staple fiber trended downward throughout mid- April to late June Driven mainly by the weakening downstream demand and the decrease in prices of acrylonitrile, a major raw material of acrylic staple fiber, the price index of acrylic staple fiber 10 dropped all the way from 25,600 on 21 June 2011 to 18,500 on 16 November Afterwards, it stayed relatively stable in the following month. 10 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 80 China Purchasing Development Report (2012)

82 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook The price index of acrylic staple fiber trended upward throughout late December 2011 to late February 2012, as a result of the rise in upstream prices and tight supply. It then stabilized at 21,800 in the following months. Triggered by the decrease in prices of acrylonitrile, the price index of acrylic staple fiber fell sharply from 21,800 on 10 April to 15,400 on 26 June. It then stayed stable until mid-july, when it rebounded slightly to 15,700 (see Exhibit 10). According to the local media, in response to high inventory levels, many producers of acrylic staple fiber have reduced their output lately. This will help support the prices of acrylic staple fiber. Nevertheless, the downstream demand has remained weak. Overall, we expect the prices of acrylic staple fiber to stay flat or trend slightly downward in the near future. Exhibit 10: Price indices of acrylic, Jul Jul 2012 Source: China Chemical & Fiber Economic Information Network 6. Price indices of nylon have trended downward since early March The price indices of nylon 11 dropped markedly throughout late October 2011 to mid-december 2011, due largely to the fall in prices of caprolactam, one of the major raw materials of nylon. Afterwards, with a rebound in the prices of caprolactam, the price indices of nylon bottomed out in late December and trended upward in the following months. 11 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). Li & Fung Research Centre 81

83 The price index of nylon-chip declined throughout late February to late April; and the price indices of nylon DTY, nylon FDY and nylon POY trended downward throughout early March to late April. The fall in nylon prices could be attributed to the decline in upstream prices, the slowing downstream demand, as well as the abundant supply of nylon. The price indices of nylon had then stayed stable until mid-may, when it started to fall again due to the drop in prices of caprolactam (see Exhibit 11). Looking ahead, we expect nylon prices to soften further in the near term, with the downstream demand remaining sluggish. According to the local media, many downstream manufacturers have been cautious about placing orders for nylon. Exhibit 11: Price indices of nylon, Jul Jul 2012 Source: China Chemical & Fiber Economic Information Network 7. Price index of viscose staple fiber has shown a slight rebound since late June Triggered by the slowdown in downstream demand, the price index of viscose staple fiber 12 plunged in late September 2011 to early December Afterwards, helped by the improvement in demand, the prices of viscose staple fiber showed a rebound in the following months. 12 The index is compiled by the China Chemical & Fiber Economic Information Network (CCFEI). 82 China Purchasing Development Report (2012)

84 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook The price index of viscose staple fiber trended downward again throughout mid-february to late March 2012, due mainly to the weakening downstream demand. It then stabilized in the following weeks, before rising slightly in mid- to late April. In mid-may to mid-june, the price index of viscose staple fiber declined again, corresponding to the fall in cotton prices. As viscose staple fiber is commonly used as a substitute for cotton and cotton pulp is the major raw material of viscose, the price movement of viscose staple fiber has been significantly affected by cotton prices. Since late June, the prices of viscose staple fiber have shown a slight rebound (see Exhibit 12). Looking ahead, as downstream demand remains weak, we do not expect the prices of viscose staple fiber to start a strong upward trend in the near term. Exhibit 12: Price indices of viscose, Jul Jul 2012 Source: China Chemical & Fiber Economic Information Network 8. Price index of ABS resin declined in 2Q12 The price index of ABS resin 13 was on a decreasing trend throughout September to December 2011, amid the sluggish downstream demand. It then showed a rebound in 1Q12, before 13 The index is compiled by the China Federation of Logistics & Purchasing (CFLP), which is the first logistics and purchasing industry association approved by the State Council. One of the CFLP s missions is to push forward the circulation of factors of production in China. Li & Fung Research Centre 83

85 trending downward again in 2Q12. We believe that the recent drop in the prices of ABS resin was mainly driven by the decrease in upstream prices (see Exhibit 13). Looking ahead, we expect ABS resin prices to go down further in the near term, given the weak downstream demand. According to the local media, domestic petrochemical enterprises have been under great pressure to cut prices of their products lately. Exhibit 13: Price index of ABS resin, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun ABS resin (mom growth %) ABS resin (yoy growth %) Source: China Federation of Logistics & Purchasing 9. Price index of PP fell in May and June The price index of polypropylene (PP) 14 was on a downward trend throughout August 2011 to January A major reason was that the domestic petrochemical manufacturers continued to reduce the prices of their products, against the backdrop of the sluggish downstream demand. Afterwards, triggered by the increase in the prices of crude, a major raw material of PP, the price index of PP rose by 1.3% mom, 2.5% mom and 2.4% mom in February, March and April respectively. In May, the price index of PP fell again by 1.8% mom, and dropped further by 1.3% mom in June. According to the local media, in response to the drop in upstream prices and the weakening downstream demand, the domestic petrochemical manufacturers have cut prices of PP (see Exhibit 14). Looking ahead, PP prices are unlikely to drop much in the near team, as the prices of crude have rebounded recently. 14 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 84 China Purchasing Development Report (2012)

86 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Exhibit 14: Price index of PP, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun PP (mom growth %) PP (yoy growth %) Source: China Federation of Logistics & Purchasing 10. Price index of natural rubber dropped in 2Q12 The price index of natural rubber 15 fell sharply in May to November 2011, due mainly to the deterioration in auto sales in China, as well as the increase in the supply of natural rubber. Afterwards, it stayed relative stable in the following months, before showing a strong rebound in February and March In April, the price index of natural rubber fell by 1.3% mom, and then dropped sharply by 5.6% mom and 9.7% mom in May and June respectively. The decline in the natural rubber prices was highly associated with the seasonal rise in the supply of natural rubber and the weakening downstream demand (see Exhibit 15). Looking ahead, we predict that the natural rubber prices will soften further in the near term, in the expectation of slower growth of auto sales in China. Exhibit 15: Price index of natural rubber, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun Natural rubber (mom growth %) Natural rubber (yoy growth %) Source: China Federation of Logistics & Purchasing 15 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). Li & Fung Research Centre 85

87 11. Prices of various types of non-ferrous metals have trended downward in recent months The price indices of various types of non-ferrous metals such as copper, lead, zinc, etc. were generally on a downward trend throughout August 2011 to January 2012, against the backdrop of the slackening global demand. 16 Afterwards, the price indices of copper, lead and zinc showed a strong rebound in February, but then trended downward in the following months. For example, the price index of lead dropped by 0.8% mom, 1.3% mom, 1.1% mom and 2.9% mom in March, April, May and June respectively. On the other hand, the price index of aluminum edged up by 0.1% mom, 0.1% mom and 0.2% mom in March, April and May respectively, before falling by 1.5% mom in June (see Exhibits 16, 17, 18, 19 & 20). Looking ahead, against the backdrop of growth moderation, the domestic demand for nonferrous metals is likely to continue to weaken. We expect the prices of non-ferrous metals to stay soft in the foreseeable future. Exhibit 16: Price index of non-ferrous metals, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun Non-ferrous metals (mom growth %) Non-ferrous metals (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 17: Price index of copper, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun Copper (mom growth %) Copper (yoy growth %) Source: China Federation of Logistics & Purchasing 16 The indices are compiled by the China Federation of Logistics & Purchasing (CFLP). 86 China Purchasing Development Report (2012)

88 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Exhibit 18: Price index of aluminum, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun Aluminum (mom growth %) Aluminum (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 19: Price index of lead, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun Lead (mom growth %) Lead (yoy growth %) Source: China Federation of Logistics & Purchasing Exhibit 20: Price index of zinc, Jul Jun 2012 Jul 11 Aug Sep Oct Nov Dec Jan 12 Feb Mar Apr May Jun Zinc (mom growth %) Zinc (yoy growth %) Source: China Federation of Logistics & Purchasing Part Three: Other Costs of Production (Energy, Transportation and Labour) and Exchange Rate 1. China s crude prices have shown a strong rebound since late June In line with the movement of global crude prices, China s crude prices fluctuated widely throughout late July to mid-december Afterwards, the domestic crude prices were on a strong upward trend until early April, when they started to fall. 17 From the year 2000 onwards, China s crude prices were determined with reference to global crude prices. Li & Fung Research Centre 87

89 The domestic crude prices declined more rapidly in early May to late June For example, the Daqing 18 crude price fell from US$ per barrel on 2 May to US$ per barrel on 22 June. Since then, the Daqing crude price has shown a strong rebound, reaching US$ per barrel on 19 July (see Exhibit 21). Looking ahead, we expect the crude prices to depend mainly on the global crude oil supply and the world economic situations. It is noteworthy that, in mid-june 2012, the Organization of the Petroleum Exporting Countries (OPEC), whose members supply about 40% of the world s crude oil, announced to maintain the current production level of 30.0 million barrels a day. Nevertheless, we still believe that crude prices will continue to trend downward if the European debt crisis deteriorates. Exhibit 21: China s crude prices, Jul Jul 2012 Source: ifeng.com 2. Wholesale price index of refined oil products dropped in May and June Affected by the demand fluctuations, the wholesale price index of refined oil products 19 dropped by 0.5% mom, 1.3% mom and 0.6% mom in June, July and August 2011 respectively, before edging up by 0.4% mom in September. 18 Daqing Field ( 大慶油田 ) is the largest oil field in China. 19 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 88 China Purchasing Development Report (2012)

90 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook On 9 October 2011, the government reduced the maximum retail and wholesale prices of gasoline and diesel. As a result, the wholesale price index of refined oil products dropped by 1.4% mom in October. Afterwards, it fluctuated within a narrow range throughout November 2011 to January 2012, given that the government did not adjust the fuel prices during the same period. Triggered by the strong rise in the global crude prices, the government raised the maximum retail and wholesale prices of gasoline and diesel on 8 February and 20 March Consequently, the wholesale price index of refined oil products gained 2.2% mom, 3.9% mom and 2.4% mom in February, March and April respectively. Afterwards, the government reduced the maximum retail and wholesale prices of gasoline and diesel on 10 May and 9 June. Correspondingly, the wholesale price index of refined oil products dropped by 3.0% mom and 6.5% mom in May and June respectively (see Exhibit 22). Looking ahead, the future movement of the wholesale prices of refined oil products will depend mainly on the movement of global crude prices. According to the refined oil pricing mechanism, the government officials would consider adjusting the fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. Exhibit 22: China s wholesale price indices of refined oil products, Jul Jun 2012 Li & Fung Research Centre 89

91 Source: China Federation of Logistics & Purchasing 3. The benchmark Qinhuangdao coal prices have been on a strong downward trend since early May The benchmark Qinhuangdao coal prices trended slightly upward in early September to late October 2011, due mainly to tight supply. Afterwards, driven by the slowdown in domestic and export demand, the coal prices reversed its earlier trend and declined throughout mid-november 2011 to late February The benchmark Qinhuangdao coal prices showed a slight rebound in the following months (see Exhibit 23). It is noteworthy that the maintenance of the Daqin railway in April caused tight supply of coal. 20 Since early May, the domestic coal prices have been on a strong downward trend, due largely to the sharp fall in global coal prices and the weakening demand from domestic power producers. For example, the price of coal with calorific value of 5,800 kcal/kg dropped markedly from 835 yuan per tonne on 7 May to 695 yuan per tonne on 16 July. According to the local media, Chinese enterprises have increased their imports of coal from other countries recently, as the global prices of coal have become lower than the domestic prices of coal. Since April this year, the global prices of coal have dropped markedly. In response, the domestic coal mining enterprises have been lowering the domestic coal prices. 20 The Daqin railway is the railway which connects the major coal-producing region with the largest coal shipping port in the country. 90 China Purchasing Development Report (2012)

92 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Looking ahead, the domestic coal prices are unlikely to rebound strongly in the near term, given the high stockpiles of coal. Exhibit 23: Qinhuangdao coal prices, Jul Jul 2012 Source: Cqcoal.com 4. The China Containerized Freight Index has trended slightly downward since mid-may Against the backdrop of weak export demand, the China Containerized Freight Index (CCFI) 21 continued to decline throughout mid-september to late December Afterwards, the freight Index showed a strong rebound in January to early February 2012, and then softened in the following weeks. The freight index soared throughout early March to mid-may, rising all the way to the recent peak of 1, on 18 May. One main reason was that the major shipping companies continued to raise the container freight rates during the period. Since mid-may, however, the freight index has 21 The index, compiled by the Shanghai Shipping Exchange, measures the freight rates of eleven freight routes. The destinations of these routes include Hong Kong, Korea, Japan, Southeast Asia, Australia and New Zealand, the Mediterranean, Europe, East and West Africa, America West, America East, South Africa and South America. The freight rates data are collected from the major shipping companies in the market, such as CMA-CGM, COSCO Container Lines, China Shipping Container Lines, Hanjin Shipping, Hapag-Lloyd, Kline, Maersk, MOL, NYK, OOCL, P&O Nedlloyd, PIL, Shanghai Hai Hua Shipping, Shanghai Jin Jiang Shipping, Sinotrans Container Lines, SITC Container Lines, etc. Li & Fung Research Centre 91

93 trended slightly downward. According to the local media, the major shipping companies have started to increase the active capacities of their carriers recently (see Exhibit 24). Looking forward, we expect the container freight rates to drop further in the near term, against the backdrop of weak export demand. Exhibit 24: China Containerized Freight Index, Jul Jul 2012 Source: Shanghai Shipping Exchange 5. Labour costs (i) Average annual wage of employees in urban private units increased by 18.3% in 2011 The average annual wage of employees in urban private units increased to 24,556 yuan in The yearly growth rate accelerated from 14.1% in 2010 to 18.3% in Among various regions, the average annual wage of employees in urban private units in the eastern region reached 26,800 yuan in 2011, much higher than those in the central region (20,677 yuan), the western region (22,313 yuan) and the northeastern region (22,020 yuan). All of the four regions witnessed double-digit growth, ranging from 18.0% to 19.9% (see Exhibit 25) China Purchasing Development Report (2012)

94 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Exhibit 25: Average wages of employees in urban private units, Average wage yoy growth Average wage yoy growth (RMB) (%) (RMB) (%) China (overall) 20, , Of which: Manufacturing sector 20, , Eastern region 22, , Central region 17, , Western region 18, , Northeastern region 18, , Source: National Bureau of Statistics, PRC (ii) Average annual wage of employees in urban non-private units grew by 14.3% in The average annual wage of employees in urban non-private units reached 42,452 yuan in The yearly growth rate was 14.3% yoy in 2011, lower than that of urban private units (18.3% yoy). Among regions in the country, the central region registered the fastest growth of 15.7% in 2011, whilst the northeastern region saw the slowest growth of 12.9% yoy (see Exhibit 26). Exhibit 26: Average wages of employees in urban non-private units in China, Average wage yoy growth Average yoy growth (RMB) (%) (RMB) (%) China (overall) 37, , Of which: Manufacturing sector 30, , Eastern region 42, , Central region 31, , Western region 33, , Northeastern region 31, , Source: National Bureau of Statistics, PRC 23 The non-private units category covers state-owned units, urban collective-owned units, cooperative units, jointownership units, limited liability corporations, shareholding corporations Ltd. and foreign-funded units (including units funded by Hong Kong, Macau, and Taiwan), but does not cover private units Li & Fung Research Centre 93

95 6. The RMB has depreciated against the US dollar in recent months The RMB appreciated against the US dollar in 2H11. The nominal RMB/ USD exchange rate advanced from on 30 June 2011 to on 30 December Afterwards, the nominal RMB/ USD exchange rate fluctuated within the range of to throughout January to early May It is noteworthy that the nominal RMB/ USD exchange rate advanced to on 2 May, the highest level since the introduction of the reform of the RMB exchange rate regime in late July Since then, the RMB has been on a depreciation trend. The nominal RMB/ USD exchange rate fell to on 14 August. On the other hand, the RMB appreciated by 14.7% against the Euro in 2H11. So far in 2012, the nominal RMB/Euro exchange rate has been fluctuating (as of 14 August). The exchange rate declined from the peak of on 16 January to on 29 February, but then rebounded to on 25 July, before depreciating again to on 14 August. As of 14 August, the RMB has appreciated by 4.3% against the Euro so far this year (see Exhibit 27). According to the Bank for International Settlements, the real effective exchange rate (REER) of the RMB was in June Compared to the same month of the previous year, the RMB appreciated by 8.3% in real terms against its trading partners (see Exhibit 28). In view of the slowing export demand, we expect the RMB to continue to fluctuate, or even depreciate slightly against the US dollar in the near term. However, in the medium to long term, the RMB is likely to appreciate at a slow and gradual pace against the US dollar. David Lipton, the First Deputy Managing Director of International Monetary Fund (IMF), said in early June that the RMB was only moderately undervalued, due to the sharp reduction in China s current account surplus in recent years. Before that, the IMF had stated that the RMB was substantially undervalued. In our view, the recent change in its stance on the RMB could help ease the international pressure for RMB appreciation. 25 The Bank for International Settlements (BIS) calculates effective exchange rate (EER) indices for a total of 61 economies (including individual euro area countries and, separately, the euro area as an entity). Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. The weighting pattern is time-varying, and the most recent weights are based on trade in China Purchasing Development Report (2012)

96 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Exhibit 27: RMB/USD and RMB/Euro, Aug Aug 2012 Source: State Administration of Foreign Exchange Exhibit 28: RMB REER, Jul Jun 2012 Source: Bank for International Settlements Li & Fung Research Centre 95

97 Part Four: Highlights 1. The minimum wage levels in many provinces/ municipalities have been adjusted upward In the past year, the local governments in many provinces/ municipalities raised the minimum wage levels in their jurisdictions. See below for more details: Henan province On 1 October 2011, the minimum wage levels in Henan province were adjusted upward to 1,080 yuan, 950 and 820 yuan respectively, up from the previous levels of 800 yuan, 700 yuan and 600 yuan respectively. 26 Hubei province On 1 December 2011, the Hubei provincial government raised the levels of minimum monthly wage in various districts within the province to 1,100 yuan, 900 yuan and 750 yuan respectively. 27 Qinghai province On 1 December 2011, the levels of minimum monthly wage in various districts within Qinghai province were raised to 920 yuan, 910 yuan and 900 yuan respectively, up from the previous levels of 770 yuan, 760 yuan and 750 yuan respectively. 28 Shaanxi province On 1 January 2012, the minimum wage levels in various districts in Shaanxi province were adjusted upward to 1,000 yuan, 910 yuan, 850 yuan and 790 yuan respectively. 29 Jiangxi province On 1 January 2012, the Jiangxi provincial government raised the levels of minimum monthly wage by 21.5% on average China Purchasing Development Report (2012)

98 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Sichuan province On 1 January 2012, the minimum wage levels in various districts within Sichuan province were increased to 800 yuan, 880 yuan, 960 yuan and 1,050 yuan respectively, up by % from the previous levels. 31 Beijing The minimum monthly wage in Beijing was raised from the previous level of 1,160 yuan to 1,260 yuan on 1 January Guangxi Zhuang autonomous region In January 2012, the minimum wage levels in various districts within the Guangxi Zhuang autonomous region were adjusted upward to 1,000 yuan, 850 yuan, 780 yuan and 690 yuan. 33 Shenzhen On 1 February 2012, the Shenzhen municipal government raised the minimum monthly wage in its jurisdiction from the previous level of 1,320 yuan to 1,500 yuan. 34 Shandong province On 1 March 2012, the minimum wage levels in various districts within Shandong province were increased to 1,240 yuan, 1,100 yuan and 950 yuan respectively, up by %. 35 Tianjin On 1 April 2012, the minimum monthly wage in Tianjin was adjusted to 1,310 yuan, up from the previous level of 1,160 yuan. 36 Shanghai On 1 April 2012, the minimum monthly wage in Shanghai was raised to 1,450 yuan, up by 13.3% from the previous level Li & Fung Research Centre 97

99 Gansu province On 1 April 2012, the minimum wage levels in various districts within the province were increased to 980 yuan, 940 yuan, 900 yuan and 860 yuan, up by %. 38 Shanxi province On 1 April 2012, the minimum wage levels in various regions within Shanxi province were raised to 1,125 yuan, 1,035 yuan, 945 yuan and 855 yuan, up from the previous levels of 980 yuan, 900 yuan, 820 yuan and 740 yuan respectively. 39 Ningxia Hui autonomous region On 1 April 2012, the minimum wage levels in various districts within the Ningxia Hui autonomous region were increased to 1,100 yuan, 1,020 yuan and 950 yuan, up by %. 40 Chongqing The minimum wage levels in various districts within Chongqing were adjusted upward to 1,050 yuan and 950 yuan on 1 May Yunnan province On 1 May 2012, the minimum wage levels in various districts within Yunnan province were increased by %. 42 For example, the minimum wage level in the class I districts was raised to 1,100 yuan, up from the previous level of 950 yuan. This was the second time in a year that the provincial government adjusted the minimum wage levels. The previous adjustment was made on 1 September Jiangsu province On 1 June 2012, the Jiangsu provincial government raised the minimum wage levels in various districts within the province by %. 43 After the adjustment, the minimum wage levels in various districts within the province reached 1,320 yuan, 1,100 yuan and 950 yuan China Purchasing Development Report (2012)

100 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Xinjiang Uygur autonomous region On 1 June 2012, the levels of minimum monthly wage in the region were raised by 16.6% on average. 44 The Chinese government plans to continue to increase the minimum wage levels in coming years. According to the 12th Five-year Plan, the minimum wage levels in China are targeted to increase by at least 13% per annum during We therefore expect the local governments in other provinces to also raise the minimum wage levels in the rest of the year. 2. New guidelines on salary rise were issued in a number of provinces/ municipalities in the past year In the past year, the local governments in a number of provinces/ municipalities such as Sichuan, Guangdong, Beijing, etc. issued new guidelines on salary rise (see Exhibit 29). For example, according to the media reports, enterprises in Beijing are recommended to follow the guideline on the pay rise benchmark, which is set at 11.5% in Enterprises with worsening performance should consider raising the salaries of their workers by at least 4.5%, the lower limit of the pay rise benchmark; while enterprises with good performance are recommended to offer pay rise of at most 16.5% to their workers in Although these guidelines are not mandatory for employers to follow, they will affect workers expectations of salary rise and are thus regarded as an important reference Li & Fung Research Centre 99

101 Exhibit 29: Guidelines on salary rise issued by local governments in the past year Province/ municipality Upper limit Benchmark Lower limit Issue date Inner Mongolia 21% 16% 5% 27 September 2011 Guangdong 20% 15% 5% 12 October 2011 Hunan 20% 15% 6% 13 October 2011 Henan - 16% 4% 18 October 2011 Guangxi 23% 13% 0 25 October 2011 Chengdu 20% 15% 6% 10 November 2011 Shandong 22% 15% 6% 29 February 2012 Sichuan 20% 13% 5% 30 March 2012 Xinjiang 20% 16% 6% 7 April 2012 Ningxia 17% 14% zero growth or 10 April 2012 negative growth Tianjin 22% 16% 7% 16 April 2012 Shanxi 22% 15% 4% 20 April 2012 Shaanxi 19% 15% 5% 4 May 2012 Shanghai 16% 12% 5% 21 May 2012 Hebei 23% 15% 5.5% 23 May 2012 Beijing 16.5% 11.5% 4.5% 14 June 2012 Qinghai 19% 12% 5% 14 June 2012 Jiangxi 18% 13% 6% 26 June 2012 Yunnan 20% 13% 4% 12 July 2012 Gansu 19% 15% 7% 7 August 2012 Source: Announcements by various local governments 3. The Chinese government reduced the fuel prices on 10 May, 9 June and 11 July, and then raised the prices on 10 August To reflect the movement in global crude prices between late March and early August, the Chinese government lowered the maximum retail prices of gasoline and diesel on 10 May, 9 June and 11 July, and then raised the prices on 10 August. Overall, the maximum retail prices of gasoline and diesel were reduced by % from early May to early August. The decline in fuel prices would lower transportation costs, as well as energy costs for manufacturers who run their own electrical generators in China. It is noteworthy that the fuel prices have been adjusted more frequently in recent months, due largely to the sharp fluctuations in global crude prices. According to the refined oil pricing mechanism, the government official would consider adjusting fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. 100 China Purchasing Development Report (2012)

102 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook 4. The Chinese government raised the retail power tariffs for nonresidential users on 1 December 2011 Triggered by the upward adjustments in the midstream on-grid power tariffs, the Chinese government raised the retail power tariffs for non-residential users by 0.03 yuan per kilowatthour on average in all provinces on 1 December (Note that the retail power tariffs for residential users remained unchanged.) In fact, this was the second time in 2011 that the Chinese government adjusted the retail power tariffs for non-residential users. On 1 June 2011, the retail power tariffs for non-residential users in fifteen provinces were increased by yuan per kilowatt-hour on average. The impact of the upward adjustments in power tariffs on enterprises depends on their power consumption. Enterprises in energy-intensive industries such as ferrous metals, non-ferrous metals, cement, etc. have suffered more from the rise in energy costs. 5. The US prices index for imports from China posted mom drop in March and in April According to the US Department of Labour, the US prices index for imports from China continued its upward trend in 2H11 and Jan-Feb 2012, driven by the appreciation of the RMB against the US dollar and the higher labour costs. The prices index went down to in March 2012, the first mom drop since July 2010, and then fell further to in April. This could be attributed to the weakening of the RMB against the US dollar and the slight decline in the prices of Chinese products in RMB terms. Afterwards, the prices index stayed unchanged at in May and in June. Compared with the same month of the previous year, the prices index gained 1.3 points in June 2012 (see Exhibit 30) Li & Fung Research Centre 101

103 Exhibit 30: US prices index for imports from China, Jul Jun 2012 Source: US Department of Labour 6. China s export growth decelerated in 1H12 Due largely to the slowdown in export demand, China s export growth decelerated to 9.2% yoy in 1H12, compared to the growth of 20.3% yoy in FY11 (see Exhibits 31, 32 and 33). In 1H12, China s exports to the US and some major emerging economies such as the Association of South East Asian Nations (ASEAN) and Russia recorded double digit growth, while exports to the European Union (EU) posted negative growth. China s exports to the US increased by 13.6% yoy in 1H12, higher than China s total export growth during the period (9.2% yoy). These figures show that the demand from the US was relatively strong. In contrast, China s exports to the EU dropped by 0.8% yoy in 1H12, down from the 14.4% yoy positive growth recorded in FY11. Meanwhile, China s export growth to ASEAN, Brazil and Russia decelerated to 16.8% yoy, 6.5% yoy and 14.9% yoy respectively in 1H12, compared to the growth of 23.1% yoy, 30.2% yoy and 31.4% yoy respectively in FY11. Also noteworthy is that exports from some major exporting provinces in the eastern region of China posted weak growth in the first five months of For example, the growth rates of exports from Jiangsu and Shanghai were as low as 2.0% yoy and 3.1% yoy respectively in January-May 2012, while exports from Shandong registered negative growth of -0.5% yoy during the same period. On the contrary, exports from Chongqing, Henan, Sichuan and Jiangxi soared by 2.3 times, 1.1 times, 78.7% yoy and 57.2% yoy respectively in January-May In our view, 102 China Purchasing Development Report (2012)

104 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook the robust growth of exports from these central and western provinces could be associated with the relocation of factories from the eastern provinces. With China s exports growing more rapidly than imports, China s trade surplus amounted to US$ 68.9 billion in 1H12, much higher than US$ 44.1 billion in 1H11. Exhibit 34 plots the new export orders sub-index of China s manufacturing PMI against the yoy growth rates of China s exports. The correlation between the two is fairly high, with the new export orders index leading the export yoy growth rate by about 3 months. As the new export orders sub-index has dropped for two consecutive months, we have become more conservative in our export outlook. Overall, we think China s export growth will be around 10%-12% yoy or even lower in 3Q12. Export orders in the coming months may fall drastically if the sovereign debt crisis and economic slowdown in the EU and the US turn out to be much worse than expected, although China s exports will continue to be cushioned by orders from emerging markets. Exhibit 31: China s quarterly foreign trade data, 3Q11-2Q12 Exports Imports Trade Balance USD billion (yoy growth) FY11 1,898.6 (20.3%) 1,743.5 (24.9%) Q (20.5%) (24.8%) Q (14.3%) (20.1%) Q (7.6%) (6.9%) 0.6 2Q (10.5%) (6.5%) 68.9 Source: China Customs Li & Fung Research Centre 103

105 Exhibit 32: China s monthly foreign trade data, Jul Jun 2012 Exports Imports Trade Balance USD billion (yoy growth) Jul (20.4%) (23.9%) 30.4 Aug (24.4%) (30.1%) 17.8 Sep (17.0%) (20.8%) 14.5 Oct (15.8%) (28.6%) 17.1 Nov (13.8%) (22.0%) 14.6 Dec (13.4%) (11.8%) 16.5 Jan (-0.5%) (-15.3%) 27.3 Feb (18.4%) (39.6%) Mar (8.9%) (5.3%) 5.3 Apr (4.9%) (0.3%) 18.4 May (15.3%) (12.7%) 18.7 Jun (11.3%) (6.3%) 31.7 Source: China Customs Exhibit 33: Growth rates of exports and imports, Jul Jun 2012 Source: China Customs 104 China Purchasing Development Report (2012)

106 Sourcing Light-Manufactured Consumer Products in China: Cost Trends and Outlook Exhibit 34: New export orders index and export growth, Jul Jun 2012 Source: China Customs, China Federation of Logistics & Purchasing, National Bureau of Statistics, PRC Li & Fung Research Centre 105

107 Chapter 5 China s Current Development in Global Sourcing Activities and Sourcing Strategies for Enterprises In the past, sourcing was seen as a necessary component of multinational corporations but its strategic importance has often been overlooked. Businesses often only focused on cost reduction when formulating its sourcing strategy. Today, corporations operate in a highly competitive globalised environment. In order to compete successfully, businesses need to look beyond cost reduction and shift their focus to optimizing the entire supply chain when formulating their sourcing strategy. In this article, we will first take a look at the distinctive features of buyer-driven and producerdriven industries and how they affect companies in their selection of sourcing bases. We will also discuss the role China plays in global sourcing activities and provide an overview of the current development of China sourcing. A section concerning sourcing strategies at the enterprise level is also included. Selection of sourcing bases Generally speaking, industries can be classified into two main categories, producer-driven and buyer-driven. Producer-driven industries usually require intensive capital and technology investments, such as the automobile and computer industries. Enterprises in these industries usually have established large, transnational plants and usually play a key role in driving the upstream and downstream production networks. Volkswagen, a German automobile manufacturer offers a classic illustration. After setting up its own plants in China, suppliers of other auto-parts automatically followed suit and established over a hundred plants across China. Establishment and/or relocation of sourcing bases for producer-driven industries generally depend on a number of factors, including market outlook, production and logistics costs, land supply, labour quality, relationship with upstream and downstream partners, government support, etc. As producer-driven industries typically demand extensive support along the supply chain, total cost involved in establishing or relocating sourcing bases is relatively high. 106 China Purchasing Development Report (2012)

108 China s Current Development in Global Sourcing Activities and Sourcing Strategies for Enterprises On the other hand, buyer-driven industries tend to be those in which large retailers, branded marketers or trading companies play a key role in setting up production networks. Firms usually do not own factories but instead source their products from a network of suppliers and typically have sourcing networks scattered in a number of countries. In this connection, buyer-driven industries are generally more flexible when establishing and/or relocating sourcing bases (see Exhibit 1). For instance, ZARA, one of the leading international fashion retailers, has production lines in Spain, but it also sources through a network of suppliers in Portugal, Morocco, Turkey and China. Exhibit 1 Differences between Producer-Driven Industries and Buyer-Driven Industries Producer-driven industries Buyer-driven industries Core competencies R&D; production Design; marketing; branding Ownership of Large transnational firms Local firms, mainly in developing manufacturing firms countries Main industries Investment-based Trade-based, e.g. sales centres Predominant network Vertical integration, based Horizontal model, alliance structure on economies of scale with supplier Economic sectors Consumer durables; Consumer non-durables intermediate goods; capital goods Typical industries Automobiles; computers; Apparel; footwear; toys aircraft It is interesting to note that many multinational enterprises, whether producer- or buyerdriven, have been sourcing from China. The following section will further elaborate the current development of China sourcing and the role of China in global sourcing activities. I. China s Role in Global Sourcing Activities 1. Challenges of sourcing in China China has long been a favourite sourcing base for multinational corporations. Its comprehensive infrastructure, availability of mature industrial clusters, abundant supply of low-cost skilled labour and favorable government incentives has made it one of the most competitive sourcing bases in the world. Li & Fung Research Centre 107

109 However, in the past few years, companies which have traditionally been sourcing from China have revealed that they are increasingly encountering significant challenges, both internal and external, as the sourcing environment in China starts changing. The substantial surge in labor and production costs, appreciation of the RMB, inflation, amongst other factors have made sourcing in China increasingly a tough challenge. In order to address those challenges, companies have started devising effective global sourcing strategies to better control costs and optimize value chain efficiency. One popular strategy that multinational corporations are pursuing is the China-plus-one strategy. Indeed, we have observed a number of companies which have traditionally been sourcing in China, starting to relocate part of its production lines to other low-cost regions. We will take a closer look at this strategy in the next section. 2. China-plus-one Strategy A China-plus-one strategy basically refers to the practice of multinational corporations who have established active sourcing bases in China, supplementing their sourcing strategy by expanding their sourcing bases in other low-cost regions, such as Vietnam, Indonesia, Thailand, Cambodia, etc. As mentioned, an effective sourcing strategy goes beyond lowering production costs. When pursuing a China-plus-one strategy, there are a few things companies need to consider. Factors such as the availability of infrastructure services and support, labour quality, and the political environment of the region also need to be taken into account. For example, higher logistics costs may be involved for sourcing activities conducted in India due to inadequate infrastructure and logistics facilities. Meanwhile, the size and quality of the labour force in countries such as Vietnam, Indonesia and Cambodia still lag behind that of China. These countries may not yet be able to handle high-volume or complex orders. In order to optimize the China-plus-one strategy, enterprises may choose to keep China as their major sourcing base for high-value added products, while using other low-cost regions to manufacture low-end components that are less skill intensive. By doing so, corporations can ensure product quality and reduce cost at the same time. 108 China Purchasing Development Report (2012)

110 China s Current Development in Global Sourcing Activities and Sourcing Strategies for Enterprises 3. China s role in global sourcing activities Following from the previous section, we observe that China still remains the primary sourcing base for many multinational corporations which adopt the China-plus-one strategy. According to a research report prepared by KPMG in 2011, one of the main responses top management of multinational corporations cited regarding the benefits of China sourcing was that the quality of goods produced in China are of higher quality compared to those produced in other low-cost countries. The opinion collected from a survey conducted by the Hong Kong Trade Development Council earlier in the year also supported the fact that China sourcing still plays a major role in a company s global sourcing activities. Companies currently sourcing from China s Pearl River Delta region were asked how they plan to deal with the increasing labour and production costs in the region. Survey results indicated that 71% of the respondents would shift their cost burden to customers; 24% of the respondents would cut production, whereas merely 10% of the respondents acknowledged that they would consider relocating their production bases to other low-cost regions. As a case in point, Li & Fung Limited (Li & Fung), a Hong Kong based multinational corporation indicated that China is still their top pick when it comes to sourcing high-value added products. Indeed, China-sourced products made up 58% of the company s overall sourcing value in In the following sections, we will discuss some of the key developments and competitive advantages that China offers which explains why the country is still one of the most favourable sourcing bases in the world. 4. The Rise of Sourcing Bases in Inland China In recent years, due to the hike in labour and production costs, especially in the coastal areas of China, an increasing number of enterprises have started migrating their factories from coastal areas to inland provinces. Some of these inland sourcing bases are quite competitive as we can see from the following example. Unilever, the world s second largest consumer goods manufacturer decided to relocate seven of its existing plants from Shanghai to Hefei of Anhui Province after carefully accessing the features of a number of inland sourcing bases in China. During its study, it found that Hefei city possessed a number of advantages, including ample supply of land, good infrastructure facilities, Li & Fung Research Centre 109

111 close proximity to ports, and most importantly, a skilled labour force which could match that of Shanghai but at a reduced cost. Consequently, Unilever decided to make Hefei its largest global sourcing base. Meanwhile, a number of industrial parks have also been set up in Central and Western China to facilitate the industrial migration of sourcing bases in certain industries. For example, the Chongqing Apparel and Creative Technology Industrial Park set up in Hechuan of Chongqing aims to encourage leading apparel brands in Eastern China to move their production base inland. To cater to the needs of its customers, the park is comprised of different zones, including a branded-apparel processing zone, a fabric trading zone and a research & development zone. It is the first garment industrial park in China with zero emission. In addition, a new railway connecting Chongqing, Xinjiang and Europe has started running in March 2012 which stops right next to the park making the park even more attractive as a sourcing base for apparel brands. Another trend that we have observed is that when certain industry leaders relocated to industrial parks in inland provinces, both their upstream and downstream partners tend to follow suit. These enterprises are often closely interrelated with each other; therefore the relocation of the entire production chain can often help enhance the overall competitiveness of the industry. For example, the Administration Committee of the Western China Footwear Park in Bishan of Chongqing, convinced Aokang, a leading footwear enterprise in China to relocate their production base to the park. With its outstanding reputation and expertise in the industry, Aokang has in turn attracted a number of other footwear companies and related upstream and downstream partners to migrate with them which resulted in a vertical shift of the entire production chain. 5. China s Burgeoning Domestic Market Boosting domestic consumption is one of the key themes of China s 12th Five-year plan. Over the past years, total retail sales of consumer goods have recorded double-digit growth, reaching RMB 18 trillion in Indeed a lot of multinational corporations are trying to cash in on China s growing domestic market. The American Chamber of Commerce in China conducted a survey which was published in the 2012 American Business in China White Paper. A total of 390 American companies with operations in China were surveyed, in which 66% of the respondents (up from 61% in the previous year) listed producing goods or services for the China market as their primary China strategy. 110 China Purchasing Development Report (2012)

112 China s Current Development in Global Sourcing Activities and Sourcing Strategies for Enterprises Unilever, which relocated seven of its plants from Shanghai to Hefei, offers another example. Besides seeing Hefei as an important production and sourcing hub, the company has also set its eyes on the burgeoning domestic market. Retail sales of Unilever products such as Lipton s tea, Pond s skincare products, and Omo s washing powder in Hefei city have continuously risen in the past years. The company is confident that the purchasing power of Chinese consumers will continue to strengthen as wages rise. Besides reaping the benefits from cost savings and economies of scale, multinational corporations sourcing in China can at the same time gain a better understanding of the local market, consumer spending behaviors and establish local networks which are beneficial assets for serving China s domestic market. 6. Government Support and Policies Governments at all levels often put forward a series of favorable financial, tax and land policies in order to attract investment. For instance, to encourage the migration of sourcing bases from coastal to inland areas, a number of local governments in the inland provinces will offer favorable polices to companies. The case of Samsung Electronics provides a good illustration. Samsung announced in April 2012 that it would build a memory chip plant in Xian with a total investment exceeding US$30 billion. With a monthly production capacity of 100,000 chips, the project is expected to create 1,200 jobs in Xian. The Xian government has reportedly offered Samsung various financial and administrative benefits in support of its project. Specific incentives apparently include providing land and taking care of construction expenses for building the plant; subsidizing part of the water, electricity, environmental and logistics expenses incurred by the company; and building infrastructure such as highways and subways around the plant. Details of the actual incentives however have not been formally revealed by Samsung or the Xian government. 1 Favourable policies and incentives have also been offered by the Chinese government to encourage the transformation and upgrade of specific industries. The famous toy cluster in Chenghai District of Shantou in Guangdong Province is a good example. 1 Li & Fung Research Centre 111

113 To enhance the competitiveness of the toy industry, the local government has set aside funds for helping companies perform free product testings as well as funds for sponsoring the research and development of new products and projects on opening up new markets. Meanwhile, the growth of the global animation industry has also opened up new markets for toys aimed at teens and adults. Special funds have also been offered by the Chenghai government to support companies in this sector. Apart from the financial incentives mentioned above, government authorities have also provided a series of non-financial benefits to help support companies operating in the toy industry. For example, the Shantou Customs have shortened the time required for clearance of imported toys to around 2.5 hours, which has significantly helped reduce the company s logistic costs. Regulatory wise, the government is working together with the Toy Industry Association in exploring ways to simplify the process and shorten the time required for obtaining the China Compulsory Certification (3C) mark, which is currently required for toys sold in the Chinese market. Hence, companies who are considering locating or migrating their sourcing base in China should have a good understanding of different polices and incentives offered by the local governments in order to achieve a competitive edge over those that fail to take this important information into account. II. Sourcing Strategies at the Enterprise Level 1. A Market-Oriented Approach Companies are increasingly shifting towards adopting a market-oriented approach to sourcing. This approach requires companies to understand precisely the needs of its customers in different markets and fulfill their needs by designing and sourcing appropriate products. Take the fashion industry as an example. When deciding the design and the kind of fabric for a particular item to be sold in a specific market, companies need to consider the local climate and the style preferences of that market. A designer of ZARA observed that the fit and color preferences differ between markets. For instance, Americans generally prefer a looser fit while Chinese tend to favor slim fits. Meanwhile, Europeans prefer stronger colors while Chinese prefer pastels. 112 China Purchasing Development Report (2012)

114 China s Current Development in Global Sourcing Activities and Sourcing Strategies for Enterprises Companies therefore need to be mindful of consumer preferences when sourcing products for different markets. Poor understanding of the market and demand forecasting may result in large amount of obsolete inventory and increased logistics costs which could hamper the company s operation. 2. Optimization of Supplier Management In the past, the most straightforward approach that companies used to cut costs was to squeeze its suppliers, but product quality was often compromised in the process. Supplier squeezing also led to tension between the parties involved and as a result, companies found it difficult to cultivate relationships with quality suppliers. Today, successful companies appreciate the importance of supplier management. Buyers realize that establishing mutual beneficial partnerships with key suppliers actually enables both parties to achieve a win-win situation. In this connection, buyers should first work on selecting quality suppliers to form a core supplier base. Once a quality supplier base is formed, companies can then work on maintaining good supplier relationships and also develop their suppliers so that they can continue to improve and expand their capabilities. To achieve this, effective communication channels should be set up and companies should regularly meet with their suppliers to share market information and best practices, particularly with staff at the operational level. This practice is mutually beneficial to both parties. Working as collaborative partners, both parties are in a better position to meet market demands. Suppliers benefit from reduced transaction costs, whilst improved performance and capabilities of the suppliers also means better product quality, reduced cost and increased profitability for the buyers. Another important aspect of supplier management is that companies need to set up effective mechanisms to assess suppliers performance. Regular audits and appraisals should be conducted in this regard. Finally, as a company s business grows, the number of suppliers it works with tends to increase. A large supplier base may become increasingly complex and difficult for the company s sourcing team to manage. To fix this issue, companies may consider rationalizing the supplier base, which involves determining the optimal number of suppliers and the right suppliers to work with. Optimizing the supplier base on a continual basis is beneficial for companies as it allows for better product quality control and management of suppliers, as well as lowers operational and administrative costs. Li & Fung Research Centre 113

115 It is clear from the above discussion that identifying and selecting capable suppliers and optimizing the supplier base are critical elements of supplier management. Below, we will take a look at some of the criteria that should be taken into consideration when it comes to selecting the right suppliers. In general, companies should choose suppliers based on how closely the products or services offered by a particular supplier match the specifications of the company, and whether they are able to provide value for money. Hence, in determining whether a certain supplier should be selected, a company needs to balance factors such as capability, quality, reliability and cost. Moreover, a company would also want to know whether a particular supplier possesses sufficient capacity and resources to process and deliver ad-hoc orders on time. Suppliers that are able to provide value-added services and help streamline business processes and improve overall operational efficiency will generally be favored. On the other hand, companies should also take into account whether suppliers have appropriate corporate social responsibility policies in place. Companies should steer clear away from suppliers who provide workers with poor and inhumane working conditions in factories, pay low wages, deny workers overtime payment, etc.; working with these suppliers could directly put a company s reputation at risk. 3. Outsourcing Sourcing Functions When it comes to performing sourcing activities, some companies have chosen to set up their own local sourcing offices and directly source their products to gain better control of the supply chain and squeeze out inefficiencies. Meanwhile, others prefer to focus and devote their resources on their core business, and outsource the sourcing function to professional third party specialists to achieve higher operating efficiency and lower costs. Professional sourcing agents are typically large, possess substantial resources and have access to a global network of suppliers. These sourcing agents often hold a strong position in the market and wield considerable bargaining power over suppliers. They add value to both ends of the supply chain by matching requests from clients with the most appropriate suppliers in a timely fashion at a competitive cost. 114 China Purchasing Development Report (2012)

116 China s Current Development in Global Sourcing Activities and Sourcing Strategies for Enterprises The Coca-Cola example below provides a good example of the benefits of outsourcing for a company. With the objectives of achieving better focus and higher efficiency, Coca-Cola appointed Li & Fung, a global sourcing specialist as its international buyer for promotional items. As Coca-Cola s sourcing agent, Li & Fung was responsible for ensuring that the products sourced for Coca-Cola complied with relevant quality, safety and ethical standards. Besides sourcing products for Coca-Cola, Li & Fung also helped the company perform a range of value-added activities, including performing market research, helping with product design and development, and providing logistics services to the company. One specific sourcing exercise that Li & Fung received from Coca-Cola was to help design and produce an item for use in Coca-Cola s Christmas promotional campaign in Latin America which would help boost softdrink sales. After a preliminary discussion with Coca-Cola on its requirements, the product development team from Li & Fung came up with a final product which included a 10-inch tall plastic Christmas tree, several ornaments and a tree trunk. The idea behind the design was that customers would need to purchase certain cans/bottles of coke in order to collect the Christmas ornaments, the tree and the trunk, which when fitted together would light up, rotate and play music. Coca-Cola loved the idea and placed a large order for the trees. The size of the order however meant that the trees could not be manufactured by a single supplier and delivered to the market in time. A total of four suppliers were therefore engaged to manufacture the Christmas trees concurrently. To ensure that the trees produced by different factories were identical, Li & Fung sent in staff to each of the four factories to closely monitor the production process. It only took Li & Fung a total of ten weeks to design, produce and deliver 700 containers full of identical Christmas trees to the Latin American market. Meanwhile, the campaign itself was a huge success, soft-drink sales soared during the period as customers were eager to redeem the tree. This case provides a good illustration of the benefits of outsourcing as it allowed for Coca-Cola to focus on its core competencies, whilst outsourcing its sourcing function allowed the company to leverage on the strong design and sourcing capabilities of Li & Fung. Li & Fung Research Centre 115

The Accenture 2011 High Performance Finance Study. Redefining High Performance in the Insurance Finance Function

The Accenture 2011 High Performance Finance Study. Redefining High Performance in the Insurance Finance Function The Accenture 2011 High Performance Finance Study Redefining High Performance in the Insurance Finance Function Contents Introduction Introduction 03 Delivering greater value to the enterprise 09 Dealing

More information

Supply Chain Management Gestão da Cadeia de Suprimentos

Supply Chain Management Gestão da Cadeia de Suprimentos Supply Chain Management Gestão da Cadeia de Suprimentos Bachelor major and graduate programs on Industrial Engineering and Mechanical Engineering www.feg.unesp.br/scm Prof. Valerio Salomon www.feg.unesp.br/salomon

More information

Strategic Sourcing Manager: Academic Services and Equipment

Strategic Sourcing Manager: Academic Services and Equipment Strategic Sourcing Manager: Academic Services and Equipment Position Number 00022192 Department: Campus: Strategic Procurement Services SWS Date of Issue: August 2013 I. Primary Purpose of Position The

More information

China Sourcing Update

China Sourcing Update China Sourcing Update December 20, 2018 Energy Costs 1. Crude prices plunge in November In line with the movement of global crude prices, China s crude prices plunged in November. 1 For instance, the Daqing

More information

CICPA Guiding Opinions on Reinforcing Cultivation of Professional Talents

CICPA Guiding Opinions on Reinforcing Cultivation of Professional Talents CICPA Guiding Opinions on Reinforcing Cultivation of Professional Talents (Released by CICPA on June 8, 2005) Development of the Chinese accountancy profession and the quality of such development are critical

More information

HR Connect Asia Pacific

HR Connect Asia Pacific China and Hong Kong Compensation Trends and Outlook By Peter Zhang, Vice-President, Aon Hewitt China and Tzeitel Fernandes, Principal and Broad Based Rewards and Executive Compensation Leader, Aon Hewitt

More information

Lowe s 2016 Investor Meeting: Never Stop Improving

Lowe s 2016 Investor Meeting: Never Stop Improving Lowe s 2016 Investor Meeting: Never Stop Improving 1) Lowe s held an investor meeting on December 7, two years after its last investor meeting. The major themes of the meeting were steady evolution to

More information

BUSINESSOUTLOOKSURVEY THIRD QUARTER 2013

BUSINESSOUTLOOKSURVEY THIRD QUARTER 2013 BUSINESSOUTLOOKSURVEY THIRD QUARTER 2013 1 CONTENT 2 4 6 8 9 10 11 12 14 15 16 Key Takeaways Economic outlook: Reversal of fortune Company prospects: Not all is lost Slower sales and earnings Cost-cutting

More information

The State of Performance Management

The State of Performance Management A WorldatWork Survey Brief The State of Performance Management Survey of WorldatWork Members August 2004 Conducted by WorldatWork, Sibson and Synygy About WorldatWork and WorldatWork Membership Surveys

More information

The Hackett Group 2008 Supplier Diversity Study Results: Insights into Program Performance and Practices

The Hackett Group 2008 Supplier Diversity Study Results: Insights into Program Performance and Practices The Hackett Group : Insights into Program Performance and Practices Kurt Albertson Director of Advisory Services January 09, 2009 Results for Participating Organizations Statement of Confidentiality and

More information

The Superstar CFO. Optimizing an increasingly complex role. A research brief prepared in collaboration with SAP

The Superstar CFO. Optimizing an increasingly complex role. A research brief prepared in collaboration with SAP The Superstar CFO Optimizing an increasingly complex role A research brief prepared in collaboration with SAP The Superstar CFO Optimizing an increasingly complex role A research brief prepared in collaboration

More information

And thanks to the support of the Government of Hong Kong Special Administrative Region (HKSAR) to the work of the IFPSM and IPSHK!

And thanks to the support of the Government of Hong Kong Special Administrative Region (HKSAR) to the work of the IFPSM and IPSHK! Keynote Speech: The Status and Trends of Global Purchasing Development and the Development of the Belt and Road Speaker: Mr. He Liming President of International Federation of Purchasing and Supply Management

More information

2.1 Overview by industry type Overview by managerial level Overview by international comparisons Overview by index comparisons 4

2.1 Overview by industry type Overview by managerial level Overview by international comparisons Overview by index comparisons 4 Macau Management Capability Index (MMCI) 2017 Contents 1 Executive Summary 2 2 Key findings 3 2.1 Overview by industry type 3 2.2 Overview by managerial level 3 2.3 Overview by international comparisons

More information

Research on the logistics distribution model of RT Mart supermarket chain

Research on the logistics distribution model of RT Mart supermarket chain International Symposium on Computers & Informatics (ISCI 2015) Research on the logistics distribution model of RT Mart supermarket chain Liu Yan 1, Xie Lijie 2, Zhao Hu 3 1 Beijing Wuzi University Logistics

More information

During strategy implementation, the organization follows through on the chosen strategy

During strategy implementation, the organization follows through on the chosen strategy Human Resources Chapter 2: Strategic Human Resource Management The goal of strategic management in an organization is to deploy and allocate resources in a way that gives it a competitive advantage. Resources

More information

SPONSORED BY EHS & SUSTAINABILITY SALARY REPORT

SPONSORED BY EHS & SUSTAINABILITY SALARY REPORT SPONSORED BY 2017 EHS & SUSTAINABILITY SALARY REPORT Letter from the Executive Director The responsibilities of those managing the environment, health and safety, and sustainability (EHS&S) function in

More information

Pitfalls, considerations and the latest regulations for Processing Trade in China

Pitfalls, considerations and the latest regulations for Processing Trade in China Pitfalls, considerations and the latest regulations for Processing Trade in China [27 February, 2009 Issues 4] China's processing trade has gone through many development stages during its 30 year history,

More information

Georgia Economic Prosperity Initiative (EPI) July 16, 2014

Georgia Economic Prosperity Initiative (EPI) July 16, 2014 Supply Chain Benchmarking Survey Private Sector Competitiveness Georgia Economic Prosperity Initiative (EPI) July 16, 2014 Contents Introduction 2 Scope 4 Findings 11 Questions 28 1 Introduction Outcomes

More information

2014 Employee Intentions Report

2014 Employee Intentions Report Finding the Right Role Employee Trends Job Security Overseas Opportunities SALARY Australia 2014 www.pagepersonnel.com.au contents executive overview 3 attracting new talent 4 retaining top performers

More information

The secrets of successful low-costcountry

The secrets of successful low-costcountry Supply Chain Management The secrets of successful low-costcountry sourcing By Kris Timmermans For many industries, the proportion of overall procurement needs sourced from low-cost countries will double

More information

CENTRALIZED, DECENTRALIZED OR SOMEWHERE IN THE MIDDLE?

CENTRALIZED, DECENTRALIZED OR SOMEWHERE IN THE MIDDLE? HR STRUCTURES TODAY By Mercer s Karen Shellenback HOW IS HR STRUCTURED TODAY? How is HR structured across the globe in 2017? What HR service delivery models and practices drive the most value? At the end

More information

ASIAN INFRASTRUCTURE INVESTMENT BANK

ASIAN INFRASTRUCTURE INVESTMENT BANK ASIAN INFRASTRUCTURE INVESTMENT BANK Annual Corporate Procurement Report 2016 Corporate Procurement Division April 2017 Abbreviations Bank CPD CPP CSC GC GSC UD Asian Infrastructure Investment Bank Corporate

More information

LI & FUNG LIMITED ANNUAL REPORT 2016

LI & FUNG LIMITED ANNUAL REPORT 2016 52 Our approach to risk management We maintain a sound and effective system of risk management and internal controls to support us in achieving high standards of corporate governance. Our approach to risk

More information

Current State of Enterprise Risk Oversight:

Current State of Enterprise Risk Oversight: Current State of Enterprise Risk Oversight: Progress is Occurring but Opportunities for Improvement Remain July 2012 Mark Beasley Bruce Branson Bonnie Hancock Deloitte Professor of ERM Associate Director,

More information

Economic Outlook Survey

Economic Outlook Survey Economic Outlook Survey 4th quarter executive summary The CPA Outlook Index The CPA Outlook Index (CPAOI) is a broad-based indicator of the strength of U.S. business activity and economic direction that

More information

Fueling growth through data monetization

Fueling growth through data monetization Fueling growth through data monetization A new survey finds that many companies are launching data-focused businesses. But few have achieved significant financial impact, which requires the right combination

More information

SugarHouse Casino Diversity Plan

SugarHouse Casino Diversity Plan SugarHouse Casino Diversity Plan Updated August 2014 WINNING THROUGH DIVERSITY Sugarhouse HSP Gaming, LP Diversity Plan Sugarhouse HSP Gaming, LP (d/b/a SugarHouse Casino ) is committed to the principle

More information

COM M. Halpern

COM M. Halpern M. Halpern Research Note 31 October 2003 Commentary Using a PLM Framework to Structure Software Diversity Implementing a five-layer framework can enable you to deploy and manage the broad array of diverse

More information

Business Planning and Governance for Corporate Training

Business Planning and Governance for Corporate Training Business Planning and Governance for Corporate Training Josh Bersin Principal Analyst May 2008 This report has been excerpted from The High-Impact Learning Organization: WhatWorks in the Management, Governance

More information

Case Study: Minerva Implements Senior Flexonics Czech's ERP

Case Study: Minerva Implements Senior Flexonics Czech's ERP Case Study: Minerva Implements Senior Flexonics Czech's ERP P E R S P E C T I V E # C E M A 1 9 5 5 4 Jan Petruj Craig Simpson Global Headquarters: 5 Speen Street Framingham, MA 01701 USA P.508.988.7900

More information

CHINA. Corporate Real Estate Leading at the Speed of Change. China Corporate Real Estate Trends 2015

CHINA. Corporate Real Estate Leading at the Speed of Change. China Corporate Real Estate Trends 2015 0 CHINA Corporate Real Estate Leading at the Speed of Change China Corporate Real Estate Trends 2015 The third biennial JLL Global CRE Survey Americas 20% 544 total respondents 44% Asia Pacific 36 countries

More information

Creating value through Advanced Logistics

Creating value through Advanced Logistics Creating value through Advanced Logistics The Li & Fung Management Book Series Winnie Lo, Quentin Cheung November 2015 1 The evolving concept of logistics Addition of efficient and tailor made service

More information

II. SME Informatization Policies and Approaches of APEC Member Economies

II. SME Informatization Policies and Approaches of APEC Member Economies II. SME Informatization Policies and Approaches of APEC Member Economies 1. Policies and Approaches for SME Informatization in APEC Member Economies 2. Comparison of Intermediaries for SME Informatization

More information

GCC talent attraction and retention survey

GCC talent attraction and retention survey GCC talent attraction and retention survey 011-01 GCC talent attraction and retention survey 011-01 Contents Executive summary Overview of participants 4 Risk and growth 7 Growth strategy and focus 8 Attraction

More information

2016 EMPLOYEE SURVEY RESULTS AND ANALYSIS

2016 EMPLOYEE SURVEY RESULTS AND ANALYSIS 2016 EMPLOYEE SURVEY RESULTS AND ANALYSIS JULY 2016 Survey Administered by the Institutional Effectiveness Committee March-June 2016 Report Prepared by the Office of Institutional Advancement Data Support

More information

CORPORATE GOVERNANCE GUIDELINES

CORPORATE GOVERNANCE GUIDELINES CORPORATE GOVERNANCE GUIDELINES [Translation] Chapter 1 General Provisions Article 1 Purpose These Guidelines set forth the Company s basic views and systems regarding corporate governance in order to

More information

Assessing reward effectiveness: A survey of reward, HR, and line executives

Assessing reward effectiveness: A survey of reward, HR, and line executives Loyola University Chicago From the SelectedWorks of Dow Scott 2014 Assessing reward effectiveness: A survey of reward, HR, and line executives Dow K. Scott, Loyola University Chicago T. McMullen Available

More information

Chapter 4 Fuzzy Analytic Hierarchy Process of Green Supply Chain Management in the Pharmaceutical Industry

Chapter 4 Fuzzy Analytic Hierarchy Process of Green Supply Chain Management in the Pharmaceutical Industry Chapter 4 Fuzzy Analytic Hierarchy Process of Green Supply Chain Management in the Pharmaceutical Industry 4.1 Introduction During the past decade with increasing environmental concerns, a consensus, the

More information

2013/14 EMPLOYEE INTENTIONS REPORT. Michael Page hong kong

2013/14 EMPLOYEE INTENTIONS REPORT. Michael Page hong kong 2013/14 EMPLOYEE INTENTIONS REPORT Michael Page hong kong Key Findings The resilient economy in Hong Kong has continued to provide a favourable environment for business development and the level of business

More information

China Sourcing Update

China Sourcing Update Fung Business Intelligence Centre Global Sourcing 0 China Sourcing Update February 1, 2016 Energy Costs 1. Crude prices drop further in early to mid-january In line with the movement of global crude prices,

More information

The future CFO role. Preliminary research results from an ACCA

The future CFO role. Preliminary research results from an ACCA The future CFO role. Preliminary research results from an ACCA and IMA study November 2014 This short excerpt provides preliminary results based on a survey of 1631 ACCA and IMA members in 2014 on the

More information

LexisNexis Corporate Information Professional Update ISSUE 3. It s a small world after all... Recent additions:

LexisNexis Corporate Information Professional Update ISSUE 3. It s a small world after all... Recent additions: LexisNexis Corporate Information Professional Update The newsletter designed for nexis.com power users ISSUE 3 THIRD QUARTER It s a small world after all... by Nancy Gallenson, Manager, LexisNexis Business

More information

Appointment of the Inspector General and Director of Oversight Office

Appointment of the Inspector General and Director of Oversight Office Executive Board Annual Session Rome, 12 16 June 2017 Distribution: General Date: 13 June 2017 Original: English Agenda Item 10 WFP/EB.A/2017/10-F Administrative and Managerial Matters For approval Executive

More information

The International Conference. For Internal Auditors. Dubai

The International Conference. For Internal Auditors. Dubai The International Conference For Internal Auditors Dubai 6 9 May 2018 Preface The Supreme Audit Institutions (SAIs) exert enormous efforts to strengthen and enhance the internal audit within the entities

More information

CIMA salary survey 2012

CIMA salary survey 2012 CIMA salary survey 2012 South Africa 1 Foreword Despite the global economic downturn, CIMA s members and students are in demand. Our 2012 salary survey shows that chartered management accountants are commanding

More information

June 2016 Issue 05/2016

June 2016 Issue 05/2016 CBOK 2015: THE TOP 7 SKILLS CAEs WANT Building the right mix of talent for your organisation This report is part of the 2015 Global Internal Audit Common Body of Knowledge (CBOK) Practitioner Study series.

More information

The third party logistics development present situation and restricting factors

The third party logistics development present situation and restricting factors International Conference on Mechatronics, Control and Electronic Engineering (MCE 2014) The third party logistics development present situation and restricting factors Zhang Xiaolei School of Economic

More information

AUDIT COMMITTEE CHARTER APRIL 30, 2018

AUDIT COMMITTEE CHARTER APRIL 30, 2018 AUDIT COMMITTEE CHARTER APRIL 30, 2018 I. Purpose The Audit Committee ( Committee ) is appointed by the Board of Directors ( Board ) to assist the Board in its oversight responsibilities relating to: the

More information

Global Supplier Diversity & Inclusion Reaching the Gold Standard

Global Supplier Diversity & Inclusion Reaching the Gold Standard Global Supplier Diversity & Inclusion Reaching the Gold Standard As a WEConnect International member, you understand the value of supplier diversity and inclusion. We have developed a Gold Standard Checklist

More information

ROBERT WALTERS GREATER CHINA CFO REPORT FILLING THE SKILLS GAP IN THE FINANCE FUNCTION

ROBERT WALTERS GREATER CHINA CFO REPORT FILLING THE SKILLS GAP IN THE FINANCE FUNCTION ROBERT WALTERS GREATER CHINA CFO REPORT FILLING THE SKILLS GAP IN THE FINANCE FUNCTION INTRODUCTION Today s finance function is expected to perform a much broader role and support strategic decision-making

More information

2013 FROST & SULLIVAN GREATER CHINA GROWTH EXCELLENCE AWARD IN IP-VPN MARKET. Greater China Growth Excellence Award IP-VPN Market

2013 FROST & SULLIVAN GREATER CHINA GROWTH EXCELLENCE AWARD IN IP-VPN MARKET. Greater China Growth Excellence Award IP-VPN Market 2013 Greater China Growth Excellence Award IP-VPN Market 2013 FROST & SULLIVAN GREATER CHINA GROWTH EXCELLENCE AWARD IN IP-VPN MARKET FROST & SULLIVAN S GLOBAL RESEARCH PLATFORM Frost & Sullivan s Global

More information

Prepared by: Fritz Chiu, Derek Poon Hong Kong Productivity Council (HKPC) Special thanks to TID SDF Project D Sub-committee and Amanda Chu

Prepared by: Fritz Chiu, Derek Poon Hong Kong Productivity Council (HKPC) Special thanks to TID SDF Project D Sub-committee and Amanda Chu Prepared by: Fritz Chiu, Derek Poon Hong Kong Productivity Council (HKPC) Special thanks to TID SDF Project D06 004 006 Sub-committee and Amanda Chu For any enquiries regarding this report, please contact

More information

Ten Highlights of China s Commercial Sector 2017: Executive Summary

Ten Highlights of China s Commercial Sector 2017: Executive Summary Ten Highlights of China s Commercial Sector 2017: Executive Summary January 2017 10 Highlights of China s Commercial Sector 2017 Consumer market continues steady growth; strengthening role of 01consumption

More information

Compliance Risk Siemens

Compliance Risk Siemens International In-house Counsel Journal Vol. 6, No. 24, Summer 2013, 1 Compliance Risk Assessment @ Siemens JAN HANSEN Head of Compliance Remediation & Risk Prevention, Siemens, Germany 1. Introduction

More information

Employment Practices of Multinational Companies in Denmark. Supplementary Report

Employment Practices of Multinational Companies in Denmark. Supplementary Report Employment Practices of Multinational Companies in Denmark Fall 11 Employment Practices of Multinational Companies in Denmark Supplementary Report Appendix I: Questionnaires Appendix II: Frequencies Dana

More information

China Sourcing Update

China Sourcing Update China Sourcing Update August 18, 2017 Energy Costs 1. Crude prices soar during mid-july to early August In line with the movement of global crude prices, China s crude prices rose sharply during mid-july

More information

COSCO (H.K.) SHIPPING CO., LIMITED

COSCO (H.K.) SHIPPING CO., LIMITED COSCO (H.K.) SHIPPING CO., LIMITED EF!"# COSCO (H.K.) SHIPPING CO., LIMITED (CHS), as one of the core enterprises of the COSCO (HONG KONG) GROUP LIMITED, is the biggest specialized company pursuing global

More information

Employers Guide to New Apprenticeships and the Levy

Employers Guide to New Apprenticeships and the Levy Employers Guide to New Apprenticeships and the Levy 1. 2. WELCOME TO YOUR COMPREHENSIVE GUIDE ON THE APPRENTICESHIP LEVY, WRITTEN AND CURATED BY CONTENTS 04. INTRODUCTION 05. DECODING THE LEVY - 05. THE

More information

aetna HSBC KPMG Guangzhou SSOA GENPACT RE:SOURCES CONCENTRIX Event Date - Friday September 12th, 2014 Participants

aetna HSBC KPMG Guangzhou SSOA GENPACT RE:SOURCES CONCENTRIX Event Date - Friday September 12th, 2014 Participants Guangzhou SSOA Roundtable Discussion Event Date - Friday September 12th, 2014 Participants HSBC aetna CONCENTRIX RE:SOURCES GENPACT KPMG Setting the Stage KPMG is kicking off a series of Shared Services

More information

Transforming HR Systems and Mindsets at Lenovo

Transforming HR Systems and Mindsets at Lenovo Transforming HR Systems and Mindsets at Lenovo At a Glance Challenge Integrate the HR operations of Lenovo China with those of the global Lenovo organization to improve operational excellence and prepare

More information

Microsoft REJ Framework: Step by Step

Microsoft REJ Framework: Step by Step Microsoft REJ Framework: Step by Step Quantifying the Business Value of Information Technology (IT) Investments Abstract IT managers today face challenges of delivering products to markets faster, making

More information

SaaS 2.0: Software-as-a-Service as Next-Gen Business Platform. Executive Summary

SaaS 2.0: Software-as-a-Service as Next-Gen Business Platform. Executive Summary SaaS 2.0: Software-as-a-Service as Next-Gen Business Platform Executive Summary TABLE OF CONTENTS Introduction: SaaS at the Tipping Point 1 Key Research Insights Saugatuck Planning Positions Defining SaaS

More information

The definition of a deficiency is also set forth in the attached Appendix I.

The definition of a deficiency is also set forth in the attached Appendix I. Deloitte & Touche LLP 361 South Marine Corps Drive Tamuning, GU 96913-3973 USA Tel: (671)646-3884 Fax: (671)649-4932 www.deloitte.com May 26, 2014 Mr. David Paul General Manager Marshalls Energy Company,

More information

INDONESIA PACKAGING MACHINERY MARKET ASSESSMENT. An Analysis of Market Opportunities for Packaging Machinery Manufacturers

INDONESIA PACKAGING MACHINERY MARKET ASSESSMENT. An Analysis of Market Opportunities for Packaging Machinery Manufacturers 2016 INDONESIA PACKAGING MACHINERY MARKET ASSESSMENT An Analysis of Market Opportunities for Packaging Machinery Manufacturers PRODUCED BY PMMI 11911 Freedom Drive Suite 600 Reston, VA 20190 USA 2016

More information

Strategic Thinking on the Development of Agricultural Science and Technology Periodicals in China

Strategic Thinking on the Development of Agricultural Science and Technology Periodicals in China Canadian Social Science Vol. 11, No. 12, 2015, pp. 99-103 DOI:10.3968/8010 ISSN 1712-8056[Print] ISSN 1923-6697[Online] www.cscanada.net www.cscanada.org Strategic Thinking on the Development of Agricultural

More information

LMIwise Data Interpretation Guide. 10/7/2014 MNSCU System Office Academic Programs Unit

LMIwise Data Interpretation Guide. 10/7/2014 MNSCU System Office Academic Programs Unit LMIwise Data Interpretation Guide 10/7/2014 MNSCU System Office Academic Programs Unit INTERPRETATION OF LMIWISE SUPPLY AND DEMAND DATA FOR [OCCUPATION PROGRAM SET NAME GOES HERE] PURPOSE This document

More information

Chapter 4. Development of Global purchasing in China

Chapter 4. Development of Global purchasing in China Chapter 4 Development of Global purchasing in China 4.1 China s strategy to Global Purchasing 4.1.1 The status quo of global purchasing in China As technology continues to progress and the continuous development

More information

INTERNAL CONTROL REVIEW AND FOLLOW-UP INTERNAL CONTROL REVIEW REPORT

INTERNAL CONTROL REVIEW AND FOLLOW-UP INTERNAL CONTROL REVIEW REPORT Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness

More information

Analysis of the Application of Statistics to Economic Management

Analysis of the Application of Statistics to Economic Management Management Science and Engineering Vol. 10, No. 3, 2016, pp. 13-17 DOI:10.3968/8665 ISSN 1913-0341 [Print] ISSN 1913-035X [Online] www.cscanada.net www.cscanada.org Analysis of the Application of Statistics

More information

The definition of a deficiency is also set forth in the attached Appendix I.

The definition of a deficiency is also set forth in the attached Appendix I. Deloitte & Touche LLP 361 South Marine Corps Drive Tamuning, GU 96913-3911 USA September 22, 2015 Tel: (671)646-3884 Fax: (671)649-4932 www.deloitte.com Mr. David Paul General Manager Marshalls Energy

More information

4TH MEMBERSHIP SURVEY. (14 November to 15 December 2016)

4TH MEMBERSHIP SURVEY. (14 November to 15 December 2016) 4TH MEMBERSHIP SURVEY (14 November to 15 December 2016) Foreword Dear members, The Institute is keen to listen to you. As members of Hong Kong s sole statutory accounting licensing institute and the largest

More information

Solution Manual for Auditing and Assurance Services 14th Edition by Arens

Solution Manual for Auditing and Assurance Services 14th Edition by Arens Chapter 1 Solution Manual for Auditing and Assurance Services 14th Edition by Arens Link download full: https://testbankservice.com/download/solutionmanual-for-auditing-and-assurance-services-14th-edition-by-arens/

More information

State of Sustainable Business Survey October 2013

State of Sustainable Business Survey October 2013 State of Sustainable Business Survey 2013 October 2013 About BSR BSR works with its global network of more than 250 member companies to build a just and sustainable world. From its offices in Asia, Europe,

More information

U.S. Construction Industry Talent Development Report

U.S. Construction Industry Talent Development Report U.S. Construction Industry Talent Development Report Agenda Survey Respondent Data Preparing for a Changing Workforce Finding and Retaining the Best Talent Ethical Compliance Training Budgets and Expenditures

More information

Opinions on Promoting More Competitive and Larger Chinese Accounting Firms

Opinions on Promoting More Competitive and Larger Chinese Accounting Firms Opinions on Promoting More Competitive and Larger Chinese Accounting Firms (Released by CICPA on May 26 th, 2007) Since its restoration and re-construction, CICPA has been continuously making pioneering

More information

Index shows high Corporate Social Responsibility level in Hong Kong for 2nd year

Index shows high Corporate Social Responsibility level in Hong Kong for 2nd year PRESS RELEASE Index shows high Corporate Social Responsibility level in Hong Kong for 2nd year (HONG KONG 26 November, 2010) The Hong Kong Quality Assurance Agency held today the HKQAA Symposium 2010,

More information

Global Forum on Competition

Global Forum on Competition Unclassified DAF/COMP/GF/WD(2014)51 DAF/COMP/GF/WD(2014)51 Unclassified Organisation de Coopération et de Développement Économiques Organisation for Economic Co-operation and Development 14-Feb-2014 English

More information

Index. P Supply chain: logistics and barriers P Conclusions: highlights and insights

Index. P Supply chain: logistics and barriers P Conclusions: highlights and insights 2017 Index P.01 1. General Overview P.03 2. Main Findings P.04 2.1 Propensity (i.e., willingness) to import by country P.07 2.2 Digital behavior P.10 2.3 Main attributes other than price and product quality

More information

B2B Online Purchasing and Payment Trends: How Small Businesses Buy and Pay Online

B2B Online Purchasing and Payment Trends: How Small Businesses Buy and Pay Online B2B Online Purchasing and Payment Trends: How Small Businesses Buy and Pay Online A Market Platform Dynamics White Paper October 2007 In 2007, Market Platform Dynamics undertook a study to better understand

More information

Executive Vice President, Member Networks Washington, D.C.

Executive Vice President, Member Networks Washington, D.C. , Executive Vice President, Member Networks Washington, D.C. About ULI The Urban Land Institute is the preeminent multidisciplinary real estate organization, facilitating the open exchange of ideas, knowledge

More information

Enabling SMEs and Developing Economies to Plug Into GVCs: Practice and Thoughts

Enabling SMEs and Developing Economies to Plug Into GVCs: Practice and Thoughts 2014/SOM2/CTI/DIA3/019 Enabling SMEs and Developing Economies to Plug Into GVCs: Practice and Thoughts Submitted by: Fung Group Public-Private Dialogue on Building Asia Pacific Partnership Through Global

More information

BOARDS HIGH- PERFORMING WHAT MAKES. Executive Summary. BETH GAZLEY, PhD and ASHLEY BOWERS

BOARDS HIGH- PERFORMING WHAT MAKES. Executive Summary. BETH GAZLEY, PhD and ASHLEY BOWERS ASAE FOUNDATION RESEARCH SERIES WHAT MAKES HIGH- PERFORMING BOARDS Effective governance practices in MEMBER-SERVING ORGANIZATIONS Executive Summary BETH GAZLEY, PhD and ASHLEY BOWERS What Makes High-Performing

More information

S23 - Hallmarks of a Strong Audit Function Lilian Fong and Marta O'Shea

S23 - Hallmarks of a Strong Audit Function Lilian Fong and Marta O'Shea S23 - Hallmarks of a Strong Audit Function Lilian Fong and Marta O'Shea Hallmarks of a Strong Audit Function Agenda I. Internal Audit s Role, Mission and Charter II. III. IV. Internal Audit Reporting Structure

More information

In-company Situation and Development Strategy for Chinese Domestic Third-Party Logistics Providers (3PLPs) YU LIU

In-company Situation and Development Strategy for Chinese Domestic Third-Party Logistics Providers (3PLPs) YU LIU 2017 3rd International Symposium on Mechatronics and Industrial Informatics (ISMII 2017) ISBN: 978-1-60595-501-8 In-company Situation and Development Strategy for Chinese Domestic Third-Party Logistics

More information

Procurement & Sourcing: Moving From Tactical to Strategic ISM Survey of Procurement Executives

Procurement & Sourcing: Moving From Tactical to Strategic ISM Survey of Procurement Executives 0 Procurement & Sourcing: Moving From Tactical to Strategic 2013 ISM Survey of Procurement Executives Moving From Tactical to Strategic: 2013 ISM Survey of Procurement Executives 1 Table of Contents Introduction

More information

Government delivers multiple policies to support distribution sector development; due implementation is crucial

Government delivers multiple policies to support distribution sector development; due implementation is crucial Ten China Commercial Highlights 2016 series: Government delivers multiple policies to support distribution sector development; due implementation is crucial Fung Business Intelligence Centre Government

More information

The Reporting Exchange: An overview of sustainability and corporate reporting in China

The Reporting Exchange: An overview of sustainability and corporate reporting in China The Reporting Exchange: An overview of sustainability and corporate reporting in China The Reporting Exchange In 2017, the World Business Council for Sustainable Development (WBCSD), in partnership with

More information

Opinions on Promoting More Competitive and Bigger Chinese Accounting Firms

Opinions on Promoting More Competitive and Bigger Chinese Accounting Firms Opinions on Promoting More Competitive and Bigger Chinese Accounting Firms (Released by CICPA on May 26, 2007) Since its restoration and re-construction, CICPA has been continuously making pioneering innovations

More information

William Phillips Resume

William Phillips Resume William Phillips Resume EXECUTIVE PROFILE Senior executive with expertise in Sales, Marketing, Operations, Engineering and Manufacturing, has strengths in identifying markets for penetration, acquiring

More information

CIPS POSITIONS ON PRACTICE PURCHASING & SUPPLY MANAGEMENT: SUPPLY CHAIN MANAGEMENT

CIPS POSITIONS ON PRACTICE PURCHASING & SUPPLY MANAGEMENT: SUPPLY CHAIN MANAGEMENT CIPS POSITIONS ON PRACTICE PURCHASING & SUPPLY MANAGEMENT: SUPPLY CHAIN MANAGEMENT INTRODUCTION The CIPS' practice documents are written as a statement in time. They are a collection of views on good practice

More information

OVERVIEW OF BUDGET RESPONSE TEAM IMPLEMENTATION STR ATEGIES REV. OCTOBER 17, 2017

OVERVIEW OF BUDGET RESPONSE TEAM IMPLEMENTATION STR ATEGIES REV. OCTOBER 17, 2017 OVERVIEW OF BUDGET RESPONSE TEAM IMPLEMENTATION STR ATEGIES REV. OCTOBER 17, 2017 OVERVIEW AND COST-SAVINGS Background and Overview of Budget Response Teams The University is facing a $49 million recurring

More information

Impact Measurement Case Study

Impact Measurement Case Study This publication is part of a series of case studies on BCtA Impact Measurement Services (BIMS), a Business Call to Action (BCtA) initiative that demonstrates how inclusive businesses can measure and apply

More information

DOES IT HAVE TO BE DIFFICULT?

DOES IT HAVE TO BE DIFFICULT? SUPPLIER DIVERSITY DOES IT HAVE TO BE DIFFICULT? Triangle Chapter ISM - CV February 21, 2012 Presented by: Jackie LaJoie, Vice President, Corporate Development Carolinas Minority Supplier Development Council

More information

Regional Office Vientiane, c/o Mekong River Commission Secretariat P.O. Box: 3802, Vientiane Capital, Lao PDR, Tel/Fax: (856 21) ext 4402

Regional Office Vientiane, c/o Mekong River Commission Secretariat P.O. Box: 3802, Vientiane Capital, Lao PDR, Tel/Fax: (856 21) ext 4402 Regional Office Vientiane, c/o Mekong River Commission Secretariat P.O. Box: 3802, Vientiane Capital, Lao PDR, Tel/Fax: (856 21) 263263 ext 4402 Terms of Reference for International Consultant Support

More information

[International] Source of Value-Creating Capability: Diversifying the Portfolio on a Global Basis

[International] Source of Value-Creating Capability: Diversifying the Portfolio on a Global Basis [International] Source of Value-Creating Capability: Diversifying the Portfolio on a Global Basis Diversifying the portfolio on a global basis Progress and future strategy Tim Andree Director and Executive

More information

Index. P Supply chain: logistics and barriers P Conclusions: highlights and insights

Index. P Supply chain: logistics and barriers P Conclusions: highlights and insights 2017 Index P.01 1. General Overview P.03 2. Main Findings P.04 2.1 Propensity (i.e., willingness) to import by country P.07 2.2 Digital behavior P.10 2.3 Main attributes other than price and product quality

More information

Driving Global Change Through Process Discipline 2011 APQC Member Meeting, November 7-11, 2011

Driving Global Change Through Process Discipline 2011 APQC Member Meeting, November 7-11, 2011 Driving Global Change Through Process Discipline 2011 APQC Member Meeting, November 7-11, 2011 Ken Dechert Manager, Enterprise Facilities Engineering Services Sean Riley Vice President, Kelley Management

More information

El Dorado. Roberto Cigolini Department of Management, Economics and Industrial Engineering Politecnico di Milano

El Dorado. Roberto Cigolini Department of Management, Economics and Industrial Engineering Politecnico di Milano El Dorado Roberto Cigolini roberto.cigolini@polimi.it Department of Management, Economics and Industrial Engineering Politecnico di Milano El Dorado Context El Dorado Company is the Spanish subsidiary

More information

Chapter 1 The Demand for Audit and Other Assurance Services Review Questions

Chapter 1 The Demand for Audit and Other Assurance Services Review Questions Solution Manual for Auditing and Assurance Services 14th Edition by Arens Elder and Beasley Link download full: https://digitalcontentmarket.org/download/solution-manual-forauditing-and-asurance-14th-edition-by-arens-elder-and-beasley/

More information

Company Overview THE LEADER IN CLOUD-BASED GLOBAL TRADE MANAGEMENT

Company Overview THE LEADER IN CLOUD-BASED GLOBAL TRADE MANAGEMENT Company Overview THE LEADER IN CLOUD-BASED GLOBAL TRADE MANAGEMENT Global Trade is Fast The world of global trade is fast-paced, ever-changing, always evolving. In order to keep pace, your supply chain

More information