Challenges in LCC Sourcing for Global E&C Projects. May 2013 l Leonardo Caroli and Mayank Agarwal l Global Sourcing Summit, Shanghai

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1 Challenges in LCC Sourcing for Global E&C Projects May 2013 l Leonardo Caroli and Mayank Agarwal l Global Sourcing Summit, Shanghai

2 The Air Liquide Group

3 The Air Liquide Group Present in 50, countries employees Revenue 15,3 billion

The World Leader in gases for Industry Health

for customers: Energy, metals, food, chemicals,

healthcare patients For hygiene and disinfection For

4 The World Leader in gases for Industry Health Environment For a wide range of industrial processes for customers: Energy, metals, food, chemicals, pharmaceuticals, automotive For hospitals For home healthcare patients For hygiene and disinfection For reducing polluting emissions For producing the energies of tomorrow

Unique expertise and skills Separating the components of the air to take advantage of their properties Producing molecules from natural resources of the Planet Air

5 Unique expertise and skills Separating the components of the air to take advantage of their properties Producing molecules from natural resources of the Planet Air Liquide technologies AIR Liquide technologies O 2 N OXYGEN 2 H 2 HYDROGEN He HELIUM Ar ARGON AND RARE GASES NITROGEN C 2 H 2 ACETYLENE SiH 4 SILANE CO CARBON MONOXYDE

6 Air Liquide World Business Lines Large Industries Air gases and hydrogen 15-year contracts Pipeline networks Industrial basins Industrial Merchant Bulk and cylinder gases 80 countries Wide variety of sectors and customer sizes Electronics Carrier gases Specialty gases Equipment and Installations Healthcare Hospitals Homecare Hygiene Other activities Welding & Cutting Diving Specialty chemicals Global E&C Solutions Design, Engineering & Construction of leading-edge processing facilities

7 Air Liquide Global E&C Solutions A premium strategic partner and a world leader in engineering & construction Able to meet constantly growing customer needs and to exceed their expectations Through creative, safe, reliable and competitive solutions Optimum balance of investment and operating cost Efficient Project Management Genuinely committed to innovation by constantly enhancing its comprehensive portfolio of proprietary technologies.

8 Global E&C solutions: Key figures 2012 Around 4,000 employees 15 Engineering centers worldwide 3 manufacturing workshops More than 1,600 patents 785 million revenue E&C 2-mins video

Global E&C Solutions Main Centers and Business offices Montreal Ennery Krakow Moscow Delhi Beijing Calgary Vitry /Seine Champigny /Marne Frankfurt Bussy-Saint-Georges Donetsk Shanghai Harima Houston

9 Global E&C Solutions Main Centers and Business offices Montreal Ennery Krakow Moscow Delhi Beijing Calgary Vitry /Seine Champigny /Marne Frankfurt Bussy-Saint-Georges Donetsk Shanghai Harima Houston Hangzhou Hyderabad Chennai Kuala Lumpur Singapore Ras Al Khaimah (under construction) Sao Paulo Johannesburg Dubai Riyadh Engineering centers Manufacturing workshops Business offices Cryogenic equipment centers

E&C Procurement Snapshot ~ 1 bnannual spends ~ 300 employees for Procurement function ~ 20 000 # POs / yr Geographically dispersed and diversified products USA Other France

10 E&C Procurement Snapshot ~ 1 bnannual spends ~ 300 employees for Procurement function ~ # POs / yr Geographically dispersed and diversified products USA Other France Subcontracts & Services Rotating Germany Spends per Buying Center Static & Fired Spends per Category Modules and Raw Materials China Logistics & Others Bulk and E&I 10 May 2013

11 Sourcing in Leading Competitive Countries Opportunitites Lower costs (TLC) Suppliers Availability & Customer Locations Increasing investments in technology and innovation but challenges Focussed on Huge Local Market (Technical / Capacity Limits) Trade Barries / Anti-dumping Diverse management systems Lower Productivity Packing Issues & Transportation Challenges Language barriers 11 May 2013

12 Potential risks of Global Sourcing Security / CSR Political uncertainty Corporate Social Resp. Evolving Trade Barriers Quality / Compliance Different standards of design / production / quality / packing.. Over-selling of capacity Ensure Sustainable Benefits Monitoring/Hidden costs Increasing labour costs Currency volatility Intellectual Property Proprietary knowledge exposure 12 May 2013

13 Internal & External Challenges Regional buying habits Innovation & evolving Technologies Engineers Preferences Sourcing in Leading Competitive Countries Vendors capability Diverse project geography End Customer acceptance 13 May 2013

Regional buying habits Is the effort really worth it?

deadlines to try new supplier Limited info about suppliers in LCC Different Commercial Terms

) Cultural differences in Negotiations Estimation of possible additional costs for Engg., Inspn.

14 Regional buying habits Is the effort really worth it? Using previous Projects as Reference Using traditional suppliers as Reference Shorter project deadlines to try new supplier Limited info about suppliers in LCC Different Commercial Terms (Insurances, Payment methods, Legal, etc.) Cultural differences in Negotiations Estimation of possible additional costs for Engg., Inspn., Exped., Logistics, Taxes, Services, etc. Share suppliers info / capabilities / issues across organization Sourcing Platforms to ease Cultural issues Share successes in LCCS to Buyers to repeat for same Category 14 May 2013

15 Technical Preferences Do they know what we want? Risks of suppliers with no references in non-lcc Low cost could mean low quality Different Standards & specifications Difficulty in communication for technical part. Additional time and effort to review documents from a new supplier. Commissioining & Construction Support Getting Engineers involved in suppliers selection at an early step. Continuous / real time sharing of references and supplier cababilities Local buyers & technicians to assist in communication issues 15 May 2013

16 Diverse Project Geographies How will we manage? Regulatory Costs (tariffs, quotas, barriers) Cross-border / Customs procedures Packing and Transportation costs / limits Different certiifcations (PED / CE, GOST, KGS, ) Language for final Documentation Delays due to Political disputes Vendor s service capabilities in other regions Thorough analysis of TLC / TCO (Total Landed Cost & Total Cost of Ownership) Study of possible export benefits / barries Helping suppliers to foresee key issues (standards / certifications / language /.. ) 16 May 2013

Service philosophy Rate Contracts with existing suppliers Hidden costs during

17 End Customer acceptance What else do we get? Customer s Standards Operators willingness to accept new supplier Spare part and Service philosophy Rate Contracts with existing suppliers Hidden costs during operation TVA Comparisons for end-customer Vendor Lists for Proposals & Projects Vendor Capabilities for spares & services 17 May 2013

Considering the huge domestic market, their willingness to adapt to out of LCC customers?

18 Vendors Are they overselling? English speaking sales & designers Compliance to Corporate Social Responsibility Assessing real supplier cababilities Considering the huge domestic market, their willingness to adapt to out of LCC customers? Project Documentation Shop loading / availability References / Key Customers Frequent vendor visits using local teams Clarify suppliers internal strategy Telecon / Video-conferences before Orders Global supplier groups with LCC presence Assess Real After Sales Needs 18 May 2013

19 Evolving technologies Can they keep up with us? Suppliers technical skills and R&D limitations Respect for Intellectual Property Rights Extension to newer technologies Willingness to spend on innovations / improvements Gain confidence from simpler technologies and extend in next step Possible Patent Infringements Co-development Understand costs for significant tests Confidentiality Agreements 19 May 2013

20 Key Success Factors to implement LCCS Strategies Coordinated decision-making (Tech., Buyer, Project, Customer, Legal,Sales, R&D) Real-time Information sharing tools Qualified personnel to asses potential risks in LCC proposition Vendor Communication using local resources in LCC Proactively finding Synergies (Product Devp., technologies, geographies,.. ) Understand taxation / duty refunds / FTZs / export benefits / trade barriers Dedicated LCC Sourcing Platforms to accelerate learnings and ensure Continuous Improvement 20 May 2013

21 End of presentation Thank you for your attention

NITROGEN REJECTION UNITS NATURAL GAS TREATMENT TECHNOLOGIES

NITROGEN REJECTION UNITS NATURAL GAS TREATMENT TECHNOLOGIES Air Liquide Group Air Liquide Engineering & Construction The world leader in gases, technologies and services for Industry and Health Air Liquide