CONECT: Northeast Trade & Transportation Conference New Trends in Overseas Sourcing: Sourcing from China March 11, 2010 Prepared by The JLJ Group Solutions for China Entry & Growth 1
DISCUSSION COVERS 3 KEY AREAS IN REGARDS TO SOURCING FROM CHINA Infrastructure Country Factors Logistics & Transportation Sourcing Method Direct Indirect China advantages Other Considerations China sourcing trends Actual sourcing decision should consider all factors and be based on company specific needs 2
Country Factors CHINA IS MORE A CONTINENT THAN A COUNTRY Category Description Area Population GDP 1 ( 08) US$ 6.73 Mil sq. miles (slightly smaller than the U.S.) 1.34 B (1/5 of world s pop.) $4.2 Trillion GDP / capita US$ ( 08) $3,134 ~2,170 miles Administration 33 (+1) administrative areas (656 cities, 48,000 districts) 22 Provinces (not including Taiwan) 2 Special Administrative Regions Hong Kong, Macau 5 Autonomous Regions Guangxi, Inner Mongolia, Ningxia, Tibet, Xinjiang 4 Municipalities Beijing Chongqing, Shanghai, Tianjin ~3,100 miles Language Mandarin Chinese+ 7 major dialects and 80+ minority languages Most FDI and industry concentrated along coastal areas 3 Key economic centers: Bohai Bay, Yangtze Delta, Pearl Delta 1) GDP - Gross Domestic Product based on current exchange rate, does not take into account purchasing power parity. 3
Country Factors INFRASTRUCTURE AN IMPORTANT FACTOR Roadway Network Over 1 million km of roads, 30% of which are paved with multiple lanes Railway Network Extensive rail network; continuously expanding and is expected to exceed 120,000 km of track by 2020 River ways & Seaports Airports 110,000 km of inland passageways and some of the largest sea ports in the world (e.g. Grand Canal; YanShan Deep Water Port) 150+ domestic authorized airports; 20+ international airports China infrastructure one of the best in Asia Pacific Central government continues to improve & expand infrastructure network 4
Country Factors DOMESTIC LOGISTICS A KEY CONSIDERATION ~25 billion tons of goods transported within China in 2008 (9% growth from 2007) Highly fragmented, with thousands of logistics companies in China Often difficult to find reliable logistics service providers due to absence of strict guidelines and lack of proper equipment (e.g. refrigerated trucks/containers) Goods are transported using a variety of means: Transportation mode % of total Truck 73% Train 13% Inland water Ocean 12% Description Short / medium distances (low quantity 1-2 containers/truck Long distance transportation (large quantity - multiple containers) Inland transportation using small-midsize ships Long distance/ Large amount; large ships along coast Products Primarily containers, although can be versatile Containers & liquids Typically bulk cargo, e.g. ore, grain and steel Liquid and containers Typically containerized cargo Air <1% High cost but fast High value / delicate / fresh goods Pipeline 2% Suitable for large goods with continuous delivery Gases, liquids, and solid powders Domestic logistics can be a bottleneck when sourcing from some parts of China 5
Sourcing Method THREE KEY DIRECT SOURCING OPTIONS FOR CHINA Sourcing Method 1. Original Manufacturer Pros Relatively easy to access information Typically price savings May be flexible to needs Cons Language / culture barrier likely exists No direct representation Possible quality inconsistency 2. Independently contact supplier / agent Usually saves time & easier to work with Pricing typically accurate Difficult to find qualified supplier / agent Potentially higher costs 3. Establish China Presence Typically provides maximum control over sourcing process May provide option for local distribution and China entry Higher investment required in terms of both time & money Not suitable for all companies Key to monitor quality & consistency of goods sourced Important to understand total price, including VAT, tariffs, etc. 6
Sourcing Method TWO KEY INDIRECT SOURCING OPTIONS FOR CHINA Sourcing Method Pros Cons 1. Use Sourcing Agent / Trading Company Relatively flexible Typically no minimum goods for goods ordered Most will handle any export licenses Original manufacturer usually unknown Possible barrier to strategic sourcing 1 Requires careful selection 2. Other Professional Service Provider Can provide variety of turnkey tailored solutions Can serve as own sourcing team in China Can be phased out after familiarity with China grows Need to fully understand services provided Will require upfront costs Important to conduct due diligence on any sourcing partners Also key to understand total price, including VAT, tariffs, etc. 1) Strategic sourcing refers to buyer and supplier working together for new product development, new market development, etc. 7
Other Considerations GOODS MADE IN CHINA IMPROVING China Sourcing Trends Low to high value Labor intensive goods shifting to Thailand and Vietnam (and inland China) China producing products with higher technology levels Increased Costs Transportation and labor costs increasing Gradual reduction of favorable VAT rebates Increased quality: Suppliers beginning to implementing control mechanisms and systems; however, important for sourcing company to confirm quality General increase in the talent pool However, still important to independently verify quality and spot check upon receipt 8
Other Considerations SEVERAL ADVANTAGES SOURCING FROM CHINA Typically lower overall costs; however costs are rising: Labor average wage for manufacturing is $200-300 per month Production costs Tooling costs only 30-50% less than in the US Tax & customs VAT rebate offered on some export products Logistics & transportation network developed and continuously improving Largest manufacturer in the world likely able to source whatever is needed Currently exchange rate is stable RMB ~6.83 : 1 USD; however, pressure on China to revaluate However, important to understand all pros and cons when sourcing from China 9
Other Considerations IMPORTANT TO CHOOSE PARTNERS CAREFULLY 1. Developing trust with Chinese partners is extremely important 2. Ensure any business partner is a legitimate & reputable business before remitting payment 3. Important to independently check quality of goods received 4. Use common sense If something sounds too good to be true, it probably is 10
THANK YOU Q & A 11
Sourcing Method KEY TO UNDERSTAND BEST OPTION FOR YOU Discussion & Mini Case Study Available Options A New England company that finished carbon tipped saw blades is interested in the possibility of purchasing saw blanks from China. What are the pros and cons of each sourcing option? A. Finding a manufacturer of saw blanks on their own Taking risk on single manufacturer; dependent on single source - uncertain about pricing or quality B. Use independent supplier / agent Potentially good option; again dependant on single source C. Establish a presence in China Significant risk, not suitable for company s needs D. Sourcing agent / trading company Potential good option; paying price premium for services; uncertain about product origin E. Other Professional Service Provider Able to scan market find company meeting quality and pricing needs; facilitate meeting between companies; upfront cost for services Option chosen depends on company needs, budget constraints, etc. 12
** APPENDIX ** 13
Appendix CHINA RANKS HIGH IN LOGISTICS FOR EAST ASIA Logistics Performance Index Indicators China Asia Pacific China vs. Asia Pacific LPI* Infrastructure 5 Customs 3.16 2.41 Infrastructure 3.54 2.46 Customs International Shipments International Shipments 3.31 2.79 0 Logistics Competence Tracking & Tracing 3.49 2.58 3.55 2.74 Timeliness Logistics Competence Timeliness 3.91 3.33 Overall 3.49 2.73 Tracking & Tracing China East Asia & Pacific Singapore, Japan, Taiwan, South Korea rang higher; although do not face the same challenges in terms of size Source: World Bank * Logistics Performance Index 14
Appendix EXPORTS SUBJECT TO REGULATIONS Regulation Category Key Regulations for Exports Non-tax Export quota & license regulation- most agricultural products need export license Prohibited export goods- mainly natural resources, e.g. silica sand, certain types of natural wood, opium Tax Value-added tax (VAT) - applied at each stage of domestic production chain VAT rebates - preferential tax policies to encourage exports Consumption tax - exemption Also important that companies understand import regulations from U.S. side Source: JLJ analysis on multiple sources including General Administration of Quality Supervision, Inspection and Quarantine 15
Appendix NUMEROUS SOURCING OPTIONS FOR U.S. COMPANIES B2B websites such as Alibaba and TradeKey Independently contact manufacturers and suppliers directly Pro: Lowest cost Con: No guarantee on quality of product and timeliness of delivery Hire sourcing agent or source from Hong Kong Outsource service: sourcing, inspection, factory audits, etc. Pro: Easy Con: Higher cost Setup legal entity (Joint Venture, Wholly Foreign Owned Enterprise) Direct involvement in the manufacturing process Pro: Greatest degree of control Con: Higher investment and setup 16
Appendix SPECIAL ECONOMIC ZONES TO PROMOTE PROCESSING TRADE Zone Type Business functions VAT refund policy Administration Free Trade Zones (FTZs) Manufacturing and processing Warehousing and logistics Exhibitions VAT refunds for domestically purchased goods (only available when goods exit China) Total enclosure Usually in operation 8 hours/day Export Processing Zones (EPZs) Only for export processing Warehousing and logistics VAT refunds for domestically purchased goods available upon delivery from the seller Total enclosure Usually in operation 24 hours/day Bonded Logistics Parks (BLPs) Warehousing and logistics Only simple processing allowed VAT refunds for domestically purchased goods available upon entry into BLP Total enclosure Usually in operation 8 hours/day Processing trade is a key part of China s total exports 17