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CONECT: Northeast Trade &Transportation Conference
Copyright @ 2010 The JLJ Group. All rights reserved. March 2010
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New Trends in Overseas Sourcing:Sourcing from China
March 11, 2010
Prepared by The JLJ Group – Solutions for China Entr y & Growth
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DISCUSSION COVERS 3 KEY AREAS IN REGARDS TO SOURCING FROM CHINA
Country Factors
Sourcing Method
• Infrastructure
• Logistics & Transportation
• …
• Direct
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Actual sourcing decision should consider all factor s and be based on company specific needs
Other Considerations
• Indirect
• …
• China advantages
• China sourcing trends
• …
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CHINA IS MORE A CONTINENT THAN A COUNTRYCategory Description
Area6.73 Mil sq. miles (slightly smaller 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
Country Factors
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1) GDP - Gross Domestic Product based on current exchange rate, does not take into account purchasing power parity.
~3,100 miles
~2,170 miles
Administration• 2 Special Administrative
Regions – Hong Kong, Macau
• 5 Autonomous Regions –Guangxi, Inner Mongolia, Ningxia, Tibet, Xinjiang
• 4 Municipalities – Beijing Chongqing, Shanghai, Tianjin
LanguageMandarin Chinese+ 7 major dialects and 80+ minority languages
� Most FDI and industry concentrated along coastal ar eas� 3 Key economic centers: Bohai Bay, Yangtze Delta , Pearl Delta
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INFRASTRUCTURE AN IMPORTANT FACTOR
Roadway Network
• Over 1 million km of roads, 30% of which are paved w ith multiple lanes
Railway Network
• Extensive rail network; continuously expanding and is expected to exceed 120,000 km of track by 2020
River ways & Seaports
Country Factors
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• 110,000 km of inland passageways and some of the largest sea ports in the world (e.g. Grand Canal; YanShanDeep Water Port)
Airports
• 150+ domestic authorized airports; 20+ internationa l airports
� China infrastructure one of the best in Asia Pacifi c� Central government continues to improve & expand in frastructure network
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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 comp anies in China
• Often difficult to find reliable logistics service providers due to absence of strict guidelines and lack of proper equipment (e.g. refrigerated tru cks/containers)
• Goods are transported using a variety of means:
Transportation mode
% of total
Description Products
Truck 73%Short / medium distances
(low quantity – 1-2 containers/truck• Primarily containers, although can be
versatile
Train 13%Long distance transportation
(large quantity - multiple containers)• Containers & liquids
Country Factors
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Domestic logistics can be a bottleneck when sourcin g from some parts of China
Train 13%(large quantity - multiple containers)
• Containers & liquids
Inland water
12%
Inland transportationusing small-midsize ships
• Typically bulk cargo, e.g. ore, grain and steel• Liquid and containers
Ocean Long distance/ Large amount; large ships along coast
• 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
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Sourcing Method
THREE KEY DIRECT SOURCING OPTIONS FOR CHINA
Sourcing Method ConsPros
1. Original Manufacturer
2. Independently contact supplier
• Relatively easy to access information
• Typically price savings• May be flexible to needs
• Language / culture barrier likely exists
• No direct representation• Possible quality inconsistency
• Usually saves time & easier to work with
• Difficult to find qualified supplier / agent
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� Key to monitor quality & consistency of goods sourc ed� Important to understand total price, including VAT, tariffs, etc.
contact supplier / agent
3. Establish China Presence
to work with• Pricing typically accurate
supplier / agent • Potentially higher costs
• 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
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Sourcing Method
TWO KEY INDIRECT SOURCING OPTIONS FOR CHINA
Sourcing Method ConsPros
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
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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.
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GOODS MADE IN CHINA IMPROVINGChina Sourcing Trends
• Low to high value
� Labor intensive goods shifting to Thailand and Viet nam (and inland China)
� China producing products with higher technology lev els
• Increased Costs
� Transportation and labor costs increasing
� Gradual reduction of favorable VAT rebates
Other Considerations
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However, still important to independently verify qu ality and spot check upon receipt
� Gradual reduction of favorable VAT rebates
• Increased quality:
� Suppliers beginning to implementing control mechani sms and systems; however, important for sourcing company to confirm quality
� General increase in the talent pool
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• Typically lower overall costs; however costs are ri sing:
� 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 co ntinuously improving
SEVERAL ADVANTAGES SOURCING FROM CHINAOther Considerations
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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
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IMPORTANT TO CHOOSE PARTNERS CAREFULLY
1. Developing trust with Chinese partners is extremely important
2. Ensure any business partner is a legitimate & reput able business before remitting payment
Other Considerations
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If something sounds too good to be true, it probabl y is
3. Important to independently check quality of goods r eceived
4. Use common sense
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THANK YOU
Q & A
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Q & A
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KEY TO UNDERSTAND BEST OPTION FOR YOU Discussion & Mini Case Study – Available Options
Sourcing Method
A New England company that finished carbon tipped s aw 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 si ngle source - uncertain
about pricing or quality
B. Use independent supplier / agent• Potentially good option; again dependant on single source
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Option chosen depends on company needs, budget cons traints, etc.
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 ser vices; 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
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** APPENDIX **
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International Shipments
Customs
Infrastructure
China vs. Asia Pacific LPI*Logistics Performance Index
Indicators China Asia Pacific
Customs 3.16 2.41
Infrastructure 3.54 2.46
International Shipments
3.31 2.79
Logistics3.49 2.58
CHINA RANKS HIGH IN LOGISTICS FOR EAST ASIAAppendix
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Logistics Competence
Tracking & Tracing
Timeliness
China
East Asia & Pacific
* Logistics Performance Index
LogisticsCompetence
3.49 2.58
Tracking & Tracing
3.55 2.74
Timeliness 3.91 3.33
Overall 3.49 2.73
Singapore, Japan, Taiwan, South Korea rang higher; although do not face the same challenges in terms of size
Source: World Bank
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EXPORTS SUBJECT TO REGULATIONS
RegulationCategory
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
Appendix
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Also important that companies understand import reg ulations from U.S. side
Tax
• Value-added tax (VAT) - applied at each stage of dom estic production chain
• VAT rebates - preferential tax policies to encourage exports
• Consumption tax - exemption
Source: JLJ analysis on multiple sources including General Administration of Quality Supervision, Inspection and Quarantine
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NUMEROUS SOURCING OPTIONS FOR U.S. COMPANIES
• B2B websites such as Alibaba and TradeKey
� Independently contact manufacturers and suppliers d irectly
� Pro: Lowest cost
� Con: No guarantee on quality of product and timelin ess of delivery
• Hire sourcing agent or source from Hong Kong
� Outsource service: sourcing, inspection, factory au dits, etc.
Appendix
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� Outsource service: sourcing, inspection, factory au dits, etc.
� Pro: Easy
� Con: Higher cost
• Setup legal entity (Joint Venture, Wholly Foreign O wned Enterprise)
� Direct involvement in the manufacturing process
� Pro: Greatest degree of control
� Con: Higher investment and setup
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SPECIAL ECONOMIC ZONES TO PROMOTE PROCESSING TRADE
Zone Type Business functions VAT refund policy Adminis tration
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
• Only for export • VAT refunds for
Appendix
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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 exp orts