asian sourcing boom 080630bostonstrategies.com/images/asian_sourcing_boom_080630.pdf · this report...

The Asian Sourcing Boom

WebcastWebcastJanuary 2008

www.bostonstrategies.com

© 2008 Boston Strategies International, Inc.6/30/2008

www.bostonstrategies.com(1) (781) 250‐8150

This report has been prepared by Boston Strategies International at the request of CLIENT for the purpose of establishing its operating strategies. It may not be appropriate for other purposes or audiences. This report contains forward-looking statements andprojections with respect to anticipated future performance of CLIENT, suppliers, customers, and/or general or specific economic conditions and factors that are based on Boston Strategies International’s analysis of market trends and external data. Forward-lookingstatements and projections are not guarantees of future performance and involve significant business, economic and competitive risks, contingencies and uncertainties, which are difficult to predict. Accordingly, these projections and forward-looking statements may

not be realized and actual results may vary up or down. This report may not be reproduced or distributed without express written approval from Boston Strategies International.

Global Supply Chain Economists™

IndustryResearch

Cost and Pricing Analysis

StrategyConsultingResearch Analysis Consulting

®


Summary• The obvious

• Large labor cost differentials• Structural underpinnings• Declining communications costs

• Study results• 3rd State of Strategic Sourcing Study

• Low-cost sourcing a top priority• Sharply rising emphasis• Offshoring of production• …Which is driving more imports• Business process outsourcing

3 State of Strategic Sourcing Study• Study background• Participating companies• Extent of LCCS today

S i li dp g

• The view to 2050• Major demographic shift• Too much retirement• Excess liquidity

Shift f i th t A i

• Savings realized• The learning curve• Distribution of savings• Investment in LCCS

• Shift of economic growth to Asia• Transfer of know-how

• Implications• Ask the right questions• Mill Rolls 2006

• LCCS in 5 years (2011)• China, China, China• Industry in China, by region• Largest challenges

• Manage innovation• Leverage connections• Build the capacity you need• Protect your interests

• Largest challenges• Largest risks


The ObviousThe Obvious


Large Labor Cost Differentials

0 5 10 15 20 25 30 35U.S. $ / Hour

Hourly Labor Costs by Country

Germany

Belgium

US

UK

Ireland

Italy

Israel

New Zealand

Korea

Singapore

Taiwan

Hong Kong

Czech Republic

India

Brazil

Mexico

China


China

Sources: Bureau of Labor Statistics, Computerworld

Structural Underpinnings• Standard of living• Age

5 8 7 2U S

National Expenditure on Health as a Percent of GDP

• Health costs• Human rights• Legal protections

5.8

7.8

7.2

6 8

7.2

2.5

2.3

2 5

U.S.

Germany

France

Canada• Legal protections• Environmental values• Plus:

6.8

5.9

6

6 2

2.5

2.6

2

1 8

Canada

Australia

Italy

New Zealand

• Exchange rates6.2

6.6

5.7

5 9

1.8

1.3

1.6

1 4

New Zealand

Sweden

Japan

U K 5.9 1.4

0 5 10 15

U.K.

Public Private


Source: U.K. Committee on Public Accounts

Declining Communications Costs

• Internet, webcast, etc.• Phone ratesPhone rates• Travel

International Calling Rates: OECD Countries to any other OECD Country

$1.20

$1.60

$0.40

$0.80$US/

Minute

$0.001993 1998 2003 2008

Source: OECD Boston Logistics Group analysis


Source: OECD, Boston Logistics Group analysis

Low-Cost Sourcing a Top Priority“Which business drivers are likely to have the most influence on your company’s purchasing strategies in the next 10 years?”

• GlobalizationDrivers– Low-cost country

sourcing– Growth markets

• Cost leadership

Globalization

Costleadership

49%

41%

Cost leadership– A bid qualifier, not an

order winner– Even the high-endService

Innovation

Outsourcing

29%

25%

• Innovation– Shorter product lifecycles– Technology / R&D

O t i

focus

Industryconsolidation

Regulatorycompliance

18%

12%

11% • Outsourcing– Core competency– Faster time to market0 10 20 30 40 50

compliance

Customerintimacy

11%

9%


Source: Economist Intelligence Unit data, April 2005

Percent of Respondents

Sharply Rising Emphasis

• 37% increase in CPO interest

CPO E h i Gl b l S i

5.0CPO Emphasis on Global Sourcing

2 7

3.7

3 0

4.0=37%

2.7

2.0

3.0

1.02000 2004 2005 2008


2000-2004 2005-2008

Offshoring of Production

Share of World ProductionShare of World Consumption

20%

25%

10%

12%

10%

15%6%

8%

0%

5%

10%

0%

2%

4%

0%China U.S.

2005 2006 2007 2008 2009

0%China U.S.

2005 2006 2007 2008 2009


Source: Economist Intelligence Unit

…Which is Driving More Imports

3000U.S. Imports

2000

2500=500%

=40%

2005-2010

7% CAGR

1500

2000

$US B

1980-2005

7% CAGR

500

1000

01980 1985 1990 1995 2000 2005 2010


Sources: EIU WorldData

Business Process Outsourcing

Traditional outsourcing• Call Centers BPO in India

Increasing the amount of external spend

Call Centers • Logistics• Manufacturing• I.T. 1000

1200

Emerging off-shoring models• Research & Development• Diagnostic testing

L b i600

800

Jobs

• Lab services• Procurement

“This transforms Purchasing’s job 200

400

This transforms Purchasing s job from transacting orders to running virtual factories”– Barbara Kux, CPO Royal Philips

02002 2004 2006 2008 2010 2012


Sources: EIU, Nasscom

© Boston Logistics Group, Inc. 2005

The View to 2050The View to 2050


Major Demographic Shift

10

6

8US

Population

4

Population (millions of

people)

0

2

0-4 15-19 30-34 45-49 60-64 75-79 90-94

2005 2050


2005 2050Source: The Future for Investors, Jeremy Siegel

Too Much Retirement

10

12

8

10

4

6Workers per

RetireeUS

Japan

2

4

01950 1970 1990 2010 2030 2050


Source: The Future for Investors, Jeremy Siegel

Excess Liquidity

4.04.5

2 53.03.5Incremental

Population in 2050 vs

1 01.52.02.5in 2050 vs.

2005 (millions of

l )

0.00.51.0people)

0-4 15-19 30-34 45-49 60-64 75-79 90-94

Age


Source: The Future for Investors, Jeremy Siegel

Shift of Economic Growth to Asia

10%GDP Growth

6%

8%

4%

6%%/Year

2%

0%U.S China India Korea ASEAN

2004 2008 2030Source: Economist Intelligence Unit Notes: ASEAN includes Indonesia, Malaysia,

Philippines, Singapore, Thailand, and Vietnam.


2004 2008 2030

Transfer of Know-How• China graduating 3 times as many Engineers as the

U.S. (44% of undergraduates vs. 2% in the US)C 3 3 /• Chinese population growth: 3.3M/year

• US engineering graduates declining by 1%/year

U.S. vs. Chinese Engineering Graduates

200,000

250,000

100,000

150,000

200,000

Sources: National Science Foundation, CIA Factbook, Boston Logistics Group

l i f UN d t

-

50,000

1999 2005 2011 2017 2023 2029 2035 2041 2047

US China


analysis of UN data US China

Study ResultsStudy Results


3rd State of Strategic Sourcing Study


Study Background

• 92 respondents• 14 countries

Respondents by Supply Chain Type™14 countries

• Supply chain & procurement focus

50% i t

Physical Distribution

Pure Services

• 50% in procurement• 47% in supply chain• 3% other C-level

Mfg - Continuous

Flow

• Broad representation • $3.7 billion average

revenue

Mfg - Discrete or

BatchMfg -

Design to Order• Mix of small, medium and

large enterprises• Interviews

Order


Participating Companies

• Aerospace & Defense• Avionics manufacturer• Shipbuilder

• Chemicals & Plastics• Plastics company• Agribusiness manufacturer• Shipbuilder

• Aircraft parts manufacturer• Automotive & Transport

Equipment

• Agribusiness manufacturer• Smelting and recycling company

• Consumer Products• Spirits producer

• Automaker• Tire manufacturer• Power transmission

manufacturer

• Processed food manufacturer• Home accessories company

• Distribution & Wholesaling• MRO distribution companymanufacturer

• Contract manufacturing• Contract electronics

manufacturerC t ti

• MRO distribution company• Wholesale grocer• Logistics company

• Electrical & Electronics• Construction company• Electro-coating company

• Instrument manufacturer• Consumer electronics company• Lighting and wiring manufacturer


Participating Companies

• Machinery & Equipment• Semiconductor equipment mfr.• Electronic circuit machinery mfr

• Pharmaceutical & Life Sciences• Pharmaceutical manufacturer• Biopharmaceutical research firm• Electronic circuit machinery mfr.

• Printing press manufacturer• Instrumentation & Devices

• Particle analysis equipment mfr.

• Biopharmaceutical research firm• Drug dispenser solution

company• Professional Services

• Spectrometer manufacturer• Lab equipment manufacturer

• Paper, Pulp, and Packaging• Paper manufacturer

• Financial services company• Insurance company• I.T. outsourcing firm

• Retail• Paper manufacturer• Lumber products distributor• Office supplies manufacturer

Retail• Multinational grocery chain• Wireless technology retailer• Department store holding

companycompany


Extent of LCCS Today• 54% are seriously engaged• A way of life for about 30%

Percent of Spend in Low-Cost Percent of Respondents

Extent of LCCS

CountriesMore than 50% 6%

40-50% 5%40 50% 5%30-40% 8%20-30% 9%10-20% 23%0-10% 46%

Average 20%


Average 20%

Savings Realized• 13% average net savings• 50% “experience premium”

20%

Average Savings Realized from LCCS

15%Percent

Savings vs

5%

10%Savings vs. Traditional

Sources

0%Average Heavy Users


The Learning Curve• Accessing real-time information• Setting realistic goals and objectives• Controlling goods in the pipeline

Western Firms Chinese Carriers Chinese 3PLsAPL HTB China China China Overseas

Logistics Providers Serving China

APLBAXDanzasDHLExel

HTBK&NMaerskPanalpinaS h k

China Materials Storage and Transportation Co.China Post

China ShippingCOSCOCRECRMLSi t

China Overseas LogisticsEASHurry TopJiuchuan LogisticsPGLExpeditor

sFedEx

SchenkerTNTUPS

China Resources

Sinotrans PGLSt-Anda

Sources: Boston Logistics Group, China Warehousing Association, China Logistics Market Demand and Supply Analysis Report.


Distribution of Savings• Wide range of savings• Little correlation by industry or commodity

60%

Distribution of Savings from LCCS

40%

50%

20%

30%Percentof Companies

0%

10%

0-10% 10-20% 20-30% >30%


Percent Savings

Investment in LCCS• Few are investing in LCCS• However, 2.3x investment for those sourcing 20% or

f CCSmore from LCCS today

I t t i LCCS

Percent of Respondents Investment66% 0-1x

Investment in LCCS

66% 0-1x20% 1-2x11% 3-5x11% 3 5x0% 6-10x4% >10x


LCCS in 5 Years (2011)• 14% more spend going to LCCS by 2011• Few companies “half-pregnant”

30%

40%

20%

30%

% of Respondents

0%

10%

N t t 50% 25% +/ 10% 25% >50%Not atall

50%Less

25%Less

+/- 10% 25%More

>50%

Incremental Percent of Spend in Low-Cost Countries in 2011


China, China, China

China

Vietnam

India

Mexico

Korea

Indonesia

Other

Taiwan

Mexico

0% 10% 20% 30% 40% 50% 60%

Percent of Respondents Identifying the Country as Most Attractive


Industry in China, by Region

• Northeast• Beijing

Qi d

Provincial Divisions

• Qingdao• Dalian• Tianjin

• Central• Central• Shanghai• Nanjing• SuzhouSuzhou• Hangzhou

• South• GuangzhouGuangzhou• Shenzhen• Hong Kong


Largest Challenges

1. Developing a global sourcing process and staff2. Managing the communication, culture, or geographic2. Managing the communication, culture, or geographic

knowledge gap3. Ensuring product or service quality4 M i t i i i ibilit d t l l i ti d4. Maintaining visibility and control over logistics and

inventory


Largest Risks

1. Late or no delivery2. Loss of intellectual property2. Loss of intellectual property3. Supplier failure to meet agreed standards4. Unfavorable economic or currency shifts


ImplicationsImplications


Ask the Right Questions

• Capacity (Utilization)Leadtime (Availability)

• Best suppliersBest contract term

Supply Market Outlook Sourcing Decisions

• Leadtime (Availability)• Costs (Prices)• Supplier concentration

• Best contract term• Right price• Optimal supplier splitpp p pp p

Analytical LogicIdeal contract term?Ideal contract term?Current price $10/unit, 3-year contract $8/unitDemand projection = 100 units/yearSales, profit margin, & supplier costs +/- 10% per yearRight price?g pYear 1: +5%, Year 2: + 3%, Year 3: -2%Best supplier split?Supplier A $9/unit, supplier B $11/unitBoth supplier’s availability = 97% + / - 2%


pp y1-year testing period to test a new supplier’s products

Manage Innovation

• Don’t sacrifice the innovation engine for lowinnovation engine for low cost!

E t bli h li litEstablish a supplier split that optimizes the risk-reward trade-offreward trade-off.


Leverage Connections• Use partnerships,

mergers, and i iti t dd

Make-to-Stock Manufacturing

Overseas Supply Chain

acquisitions to address the whole supply chain. Batch

ManufacturingTrucking Manufacturer’s

WarehouseTrucking to

Port

• Master the relationship building (“guanxi”) before contracting

Distribution

Trucking to Distributor’s Trucking Distributor’s Shipping to Customs before contracting. Re-Selling

gDistribution

CenterCentral

Warehouse

gSatellite

Warehouse

pp gUnited States Clearance

Transport to Store

Presentation at Store

Final Delivery by Consumer

Your House


Build the Capability You Need

• Identify and qualify suppliers• Screen• Qualify• Check

• Develop latent capabilities• Train• Build• Educate


Protect Your Interests

• Don’t assume that the written word is the definitive authority. y

• Build intellectual property protection into the business process.


Global Supply Chain Economists™Boston Strategies International helps supply chain executives make critical supply chain decisions that involve investment and risk by forecasting the evolution of supply markets and technologies. Our mission is to help our clients develop globally competitive supply networks that maximize Supply Chain Value.™ Our products and services include:

Industry Research that helps investors and policy makers identify emerging issues that affect their supply chains and• Industry Research that helps investors and policy makers identify emerging issues that affect their supply chains, and quantify the impact that they will have

• Cost and Pricing Analysis that helps financial and operational managers plan and budget by providing benchmark, best practice, and forecast data tailored to their companies' supply chains

• Strategy Consulting that helps supply chain leaders make high-stakes decisions related to mergers & acquisitions, market entr capital in estments o tso rcing off shoring and make or bentry, capital investments, outsourcing, off-shoring, and make-or-buy

David Jacoby: djacoby@bostonstrategies com

Boston, MA, USA445 Washington St

Wellesley, MA 02482 USA

Dubai, UAEExecutive Suite

P.O. Box 121601Sharjah, United Arab Emirates (U.A.E.)

Shanghai, China31F Jin Mao Tower88 Shi Ji Avenue

Shanghai 200120, China


David Jacoby: [email protected]

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