New Trends In Overseas Sourcing: China

An Expert's View about Business Support Services in China

Posted on: 16 Mar 2010

JLJ Presentation given at the Coalition of New England Companies for Trade (CONECT) - Northeast Trade & Transportation Conference

CONECT: Northeast Trade & Transportation Conference New Trends in Overseas Sourcing: Sourcing from China March 11, 2010 Prepared by The JLJ Group Solutions for China Entr y & Growth Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 1 DISCUSSION COVERS 3 KEY AREAS IN REGARDS TO SOURCING FROM CHINA Country Factors Infrastructure Logistics & Transportation Sourcing Method Direct Indirect Other Considerations China advantages China sourcing trends Actual sourcing decision should consider all factors and be based on company specific needs Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 2 Country Factors CHINA IS MORE A CONTINENT THAN A COUNTRY Category Description 6.73 Mil sq. miles (slightly smaller Area than the U.S.) Population 1.34 B (1/5 of world s pop.) GDP1 ( 08) US$ $4.2 Trillion GDP / capita US$ ( 08) $3,134 33 (+1) administrative areas (656 cities, 48,000 districts) 22 Provinces (not including Taiwan) 2 Special Administrative Administration Regions Hong Kong, Macau 5 Autonomous Regions ~2,170 miles Guangxi, Inner Mongolia, Ningxia, Tibet, Xinjiang 4 Municipalities Beijing Chongqing, Shanghai, Tianjin Mandarin Chinese+ 7 major Language dialects and 80+ minority languages ~3,100 miles  Most FDI and industry concentrated along coastal areas  3 Key economic centers: Bohai Bay, Yangtze Delta, Pearl Delta Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 1) GDP - Gross Domestic Product based on current exchange rate, does not take into account purchasing 3 power parity. 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 110,000 km of inland passageways and some of the largest sea ports in the world (e.g. Grand Canal; YanShan Deep Water Port) Airports 150+ domestic authorized airports; 20+ international airports  China infrastructure one of the best in Asia Pacific  Central government continues to improve & expand infrastructure network Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 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 % of mod Description Productse total T rimarily containers, although can be ruck 73% Short / medium distances P (low quantity 1-2 containers/truck versatile T rtationrain 13% Long distance transpo Containers & liquids (large quantity - multiple contain ers) Inland transportation Typically bulk cargo, e.g. ore, grain and steel Inland water using small-midsize ships Liquid and containers 12% Ocean Long distance/ Large amount; large ships along co Typically containerized cargoast Air <1% High cost but fast High value / delicate / fresh goods Pipeline 2% Suitable for large goods with Gases, liquids, and solid powders continuous delivery Domestic logistics can be a bottleneck when sourcing from some parts of China Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 5 Sourcing Method THREE KEY DIRECT SOURCING OPTIONS FOR CHINA Sourcing Method Pros Cons Relatively easy to access Language / culture barrier 1. Original information likely exists Manufacturer Typically price savings No direct representation May be flexible to needs Possible quality inconsistency 2. Independently Usually saves time & easier Difficult to find qualified contact to work with supplier / agent supplier Pricing typically accurate Potentially higher costs / agent Typically provides maximum Higher investment required 3. Establish China control over sourcing process in terms of both time & money Presence May provide option for local Not suitable for all companies distribution and China entry  Key to monitor quality & consistency of goods sourced  Important to understand total price, including VAT, tariffs, etc. Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 6 Sourcing Method TWO KEY INDIRECT SOURCING OPTIONS FOR CHINA Sourcing Method Pros Cons Relatively flexible Original manufacturer usually 1. Use Sourcing Typically no minimum goods unknown Agent / Trading for goods ordered Possible barrier to strategic Company Most will handle any export sourcing1 licenses Requires careful selection Can provide variety of Need to fully understand turnkey tailored solutions services provided 2. Other Professional Can serve as own sourcing Will require upfront costs Service Provider team in China Can be phased out after familiarity with China grows  Important to conduct due diligence on any sourcing partners  Also key to understand total price, including VAT, tariffs, etc. Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 1) Strategic sourcing refers to buyer and supplier working together for new product development, new market 7 development, etc. 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 Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 8 Other Considerations SEVERAL ADVANTAGES SOURCING FROM CHINA Typically lower overall costs; however costs are rising:  Labor average wage for manufacturing is $200-300 p er month  Production costs Tooling costs only 30-50% less th an in the US  Tax & customs VAT rebate offered on some export pr oducts Logistics & transportation network developed and continuously improving Largest manufacturer in the world likely able to s ource whatever is needed Currently exchange rate is stable RMB ~6.83 : 1 US D; however, pressure on China to revaluate However, important to understand all pros and cons when sourcing from China Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 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 Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 10 THANK YOU Q & A Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 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 a nd pricing needs; facilitate meeting between companies; upfront cost for services Option chosen depends on company needs, budget constraints, etc. Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 12 ** APPENDIX ** Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 13 Appendix CHINA RANKS HIGH IN LOGISTICS FOR EAST ASIA China vs. Asia Pacific LPI* Logistics Performance Index Infrastructure Indicators China Asia Pacific 5 Customs 3.16 2.41 Customs International Infrastructure 3.54 2.46 Shipments International Shipmen 3.31 2.79ts 0 Logistics Comp 3.49 2.58etence Logistics Tracking & T Competenceimeliness Tracing 3.55 2.74 Timeliness 3.91 3.33 Tracking & Tracing Overall 3.49 2.73 China East Asia & Pacific Singapore, Japan, Taiwan, South Korea rang higher; although do not face the same challenges in terms of size Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 Source: World Bank * Logistics Performance Index 14 Appendix EXPORTS SUBJECT TO REGULATIONS Regulation C Key Regulations for Exportsategory Export quota & license regulation- most agricultural products need export license Non-tax Prohibited export goods- mainly natural resources, e.g. silica sand, certain types of natural wood, opium Value-added tax (VAT) - applied at each stage of domestic production chain Tax VAT rebates - preferential tax policies to encourage exports Consumption tax - exemption Also important that companies understand import regulations from U.S. side Sou Copyright @ 2010 The JLJ Group. All rights reserved. March 2010rce: JLJ analysis on multiple sources including General Administration of Quality Supervision, 15 Inspection and Quarantine 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 Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 16 Appendix SPECIAL ECONOMIC ZONES TO PROMOTE PROCESSING TRADE Zone Type Business functions VAT refund policy Administration Manufacturing and VAT refunds for processing F ically Total enclosureree domest Trade Zones Warehousing and purchased goods (only Usually in operation 8 (FTZs) logistics available when goods hours/day Exhibitions exit China) Expo On VAT refunds for ly for export rt domestically Total enclosure P processingrocessing Zones purchased goods Usually in operation 24 Warehousing and (EPZs) available upon delivery hours/day logistics from the seller Warehousing and VAT refunds for Bonded domestically Total enclosure Logistics logistics P purchased goods a Usually in operation 8 rks (BLPs) Only simple available upon entry p hours/dayrocessing allowed into BLP Processing trade is a key part of China s total exports Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 17
Posted: 16 March 2010

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