TBA on China Procurement 25 FEB 2013

www.thebeijingaxis.com
Procurement Roundtable
Perth, 25 February 2013
China’s Transformation and the Future
Merits of China Procurement
- Why, What and How?
Kobus van der Wath
Founder and Group Managing Director
The Beijing Axis
kobus@thebeijingaxis.com
China-focused
International Advisory and Procurement
The Beijing Axis 1
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At the highest level, China is an attractive sourcing destination for various
products. Nevertheless, three key questions require a thorough
understanding – Why? What? and How?
Source: The Beijing Axis Analysis
Why? What?
How?
China
Procurement
• Several factors, such
as a developed
infrastructure and a low
price/quality ratio,
enable China to have a
competitive advantage
in regards to global
sourcing
• Successful sourcing from
China is complex and
requires a thorough and
thought-out process
• China has the capability to
supply a number of high
value-added products that
meet international
standards at a competitive
price
Compendium…
Manufactured trailers
Grinding mills
Magnesium
Electric Mining ShovelGensets
Compendium…
Superheaters
Grinding Media
Boiler Shells
Interpass Absorption
Thickeners
Pumps

Compendium…
Pipes
Round bars
Angle steel
Flat barsHollow bars
Rails
The Beijing Axis 7Source: The Beijing Axis Analysis
Girth Gear
Kiln Support Roller Shaft
Kiln Shell
Mill HeadKiln Shell
Support Roller
Compendium…
Why source from China?
Source: The Beijing Axis Analysis The Beijing Axis 9
What to source from China?
How to source from China?
0
2
4
6
8
10
12
14
Q1 Q1 Q1 Q1 Q1
China’s Quarterly Y-o-Y GDP Growth Rate (%, 2009-
2013F)
Source: National Bureau Statistics of China; World Bank; IMF; The Beijing Axis Analysis
Contribution to China’s GDP (%, 1998-2012)
Following a soft landing, the long-term trend of China’s economy will now be
one characterised by more moderate and sustainable growth
-40
-20
0
20
40
60
80
100
120
140
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Net Exports of Goods and Services
Gross Capital Formation
Final Consumption Expenditure (Household + Government)
Falling net exports
contribution
Effect from stimulus
package
Gross capital formation became
smaller in size than consumption
2009 2010 2011
3-year
(2009-2011)
average:
9.4%
Government stimulus
package (USD 586 bn)
2011 y-o-y GDP:
9.2%
2012
2012 y-o-y
GDP: 7.8%
Policy easing
to engineer
soft landing
Q4 2012 y-o-y
GDP: 7.9%
Q1 2013 y-o-y
GDP forecast:
8.1%
2013F

Agenda
1. Looking Ahead - the case for a China focus in future LCC sourcing
2. Best Practice: category focus, getting it right, overcoming the challenges and managing
the many risks
3. Selected Case Studies
4. Final Word
There is a dynamic global sourcing timeline. From Western-Europe to North
America in the 50’s, to Japan to NIEs, to new Dragons, to China, to India
and Vietnam … (and next Myanmar, Laos, Cambodia, Africa?)
Global Sourcing Migration (1940-2020)
Source: Dennis Arnold, ‘Textile & Apparel Sourcing: the complexity behind low cost labour in supply chains’
1940 1950 1960 1970 1980 1990 2000 2010 2020
North
America
to Japan
Japan to
HK,
Taiwan,
Singapore
and Korea
SE Asia
and
Mexico/Latin
America
China to
India and
Vietnam
Britain,
W-Europe
to
USA
Indo-China?
Africa?
PNG?
???
Latest LCC Era Next LCC Era
NIE’s
to China,
SE Asia,
and Sri
Lanka
Why
20,337
19,634
25,807
4,280
4,486
2,259
0
5
10
0% 5% 10% 15% 20% 25% 30% 35% 40%
Asia-Pacific
North America
Europe
Emerging economies are outperforming the developed world. The Asia-
Pacific region is expected to account for one third of world GDP by 2015
Regional GDP Comparison (2015F)
South America
Africa
Other Asia
A bubble this size represents
GDP = USD 1,000 bn
Developed economies
are expected to
continue to lose share
in world GDP in the
coming years
Asia-Pacific is expected to account
for the largest share of world GDP
(34%) by 2015F
2011 to 2015F
GDP Average Growth Rate (%, 2011-2015F)
Forecast
world average
GDP growth
until 2015F:
3.7%
% of World GDP (2015F)
Shaded bubbles represent 2011E
figures
Rising real incomes and
high commodity prices will
continue to drive growth
BRICS 2015F GDP(USD bn) 2011 Growth Rate (%) 2011 GDP Per Capita (USD)
China 10,904 9.2% 5,414
India 2,359 7.4% 1,389
Russia 1,926 4.1% 12,993
Brazil 2,547 2.7% 12,789
South Africa 426 3.1% 8,066 2011 to 2015F
Note: Other Asia includes Bangladesh, Sri Lanka, Nepal, Pakistan, Bhutan, Burma, North Korea, Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan.
Source: IMF; The Beijing Axis Analysis
Why
0%
5%
10%
15%
20%
25%
30%
0 20 40 60 80 100 120 140 160 180 200
China is both the world’s largest and fastest-growing exporter
World’s Top 25 Exporters (USD bn, 2011)
Source: UN Comtrade; The Beijing Axis Analysis
US
Exports CAGR (2001-2011)
Exports as % GDP (2011)
Brazil
France
Poland
Mexico
Thailand
Sweden
Czech Republic
UK
Australia
Switzerland
China surpassed Germany
in 2009 to become the
world’s largest exporter
Korea
Norway
Malaysia
India
Indonesia
China
Singapore
Hong Kong
Belgium
Russia
GermanyItaly
Japan
Canada
Bubble Size: Value of Exports (USD bn, 2011)
Why
China is steadily increasing its share of mid-range capital goods exports –
the list goes on…
China’s Share of Global Exports (2000-2011)
0%
20%
40%
60%
80%
100%
2000 2011
0%
20%
40%
60%
80%
100%
2000 2011
0%
20%
40%
60%
80%
100%
2000 2011
Cranes Shipping
Containers
Excavators
China
ChinaGermany
Germany
US
US
Italy
Italy
Japan
JapanAustria
Austria
Others
Others
China
China
S. Korea
US
South Africa
South Africa
Others
Others
6%
24%
69%
85%
China 3%
Japan
Japan
Germany
Belgium
US
France
US
Germany
Belgium
France
Others
Others
ChinaChina 0.2%
China is
8th
China was
18th
Why
High Technology Exports (USD bn, 2001-2010)
Source: OECD STAN Bilateral Trade; China Customs; The Beijing Axis Analysis
High Technology Exports as a Share of
Manufacturing Exports (%, 2001-2010)
China is overtaking developed countries in the upgrading of its exports in
manufacturing towards more technology-intensive products
0
100
200
300
400
500
01 02 03 04 05 06 07 08 09 10
France Germany Japan
UK US China
0
5
10
15
20
25
30
35
40
45
01 02 03 04 05 06 07 08 09 10
France Germany Japan
UK US China
Why

The top 100 industrial clusters in China are scattered throughout the whole
country
Source: Li & Fung Research Centre; The Beijing Axis Analysis
Heilongjiang
Suihua: Linen products
Jilin
Tonghua: Pharmaceutical, Steel
Liaoning
Shenyang: Ceramic building materials
Yingkou: Magnesium products
Dandong: Measuring instruments
Shandong
Qingdao: Textile machinery
Yantai: Sweater, Wine
Weihai: Textile
Linqing: Axle bearing
Rizhao: Fisheries
Jinan: Transportation equipment
Dezhou: Solar water heater
Liaocheng: Steel pipe
Linyi: Crop protection machinery
Anhui
Hefei:
Household appliances
Jiangsu
Wuxi: Electric wires and cables, Environmental
protection equipment, Purple clay
teaware, Electrics, Photovoltaic
Suzhou: IT, Circuit board, Apparel, Silk textile
Zhenjiang: Eyewear
Taizhou: Ship building, Energy equipment
Xuzhou: Wood processing
Yangzhou: Leather shoes
Lianyungang: Silicone products
Shanghai
Jinshan: Chemicals
Zhejiang
Hangzhou: Steel structures, Boxboard
Wenzhou: Lighter, Locks, Medium and low voltage electrical appliances,
Valves, Plastic woven packaging
Jiaxing: Fur, Leather, Warp knitting, Opto-mechatronics
Ningbo: Mold, Household electronic appliances, Stationery
Jinhua: Small commodities, Hardware, Electric tools
Shaoxing: Textile, Dyeing, Socks, Pearls, Ties
Taizhou: Plastic shoes, Solid waste recycling
Huzhou: Bamboo products
Fujian
Quanzhou: Trainers, Zipper, Plumbing hardware, Snacks
Putian: Jade processing, Chinese classical furniture
Shishi: Children’s wear
Guangdong
Zhongshan: Machinery and electronics, Packaging, Lighting, Casual wear
Dongguan: Electronic products
Guangzhou: Denim clothing, Automobile
Shantou: Underclothing, Toys
Shenzhen: Electronic products
Yunfu: Stone, Kitchenware
Huizhou: Shoes
Guizhou
Zunyi: Chinese liquor
Hunan
Changsha: Fireworks and
firecrackers
Zhuzhou: Ceramics
Chongqing
Bishan: Motorcycle
Hubei
Yichang: Phosphorus chemicals
Xiantao: Nonwoven textile
Shaanxi
Baoji: Titanium products
Henan
Zhenzhou: Aluminum products, Refractory materials
Xinxiang: Cranes
Shanxi
Taiyuan: Stainless steel, Radiator
Xinzhou: Forging
Jinzhou: Coking
Hebei
Cangzhou: Insulation materials, Metal casting
Xingtai: Cashmere
Hengshui: Rubber (applied in engineering)
Langfang: Furniture
Handan: Fasteners
Xinjiang
Shihezi: Cotton textile
Cities with 1 Cluster
Cities with 2 Clusters
Why
Indeed, current government policies are moving China towards becoming a
high-tech economy. As a result, more R&D centres and hi-tech industrial
zones are being established throughout China
Relocation Trends of Regional Economic Structures
Source: BrainNet EAC; The Beijing Axis Analysis
West / Central China
• In the past, five of seven fastest growing
regions were located in western / central
China
• Shift of governmental investment from coastal
areas to inner regions
• Over 1995-2010 the number of economic
zones in west / central China increased from
18% to 49%
• Industrial focus (only central China )
• Automotive
• Motorcycle production
• Construction
• Furniture industry
• Metal processing / fabrication
North China
Industrial focus:
• Steel industry
• Automotive
• Ship building
• Chemical industry
• Machine building
• Aerospace
East China
Industrial focus:
• Automotive
• Chemical industry
• Plastic processing
No. of Econ. Zones:
West China
No. of hi-tech industrial zones
R&D / innovation center
1
158
1995 2010
No. of Econ. Zones:
Central China
5
618
1995 2010
No. of Econ. Zones:
Coastal area
27
808
1995 2010
6
9
11
13
15
South China
Industrial focus
• Automotive
• Plastic processing
• Electrical industry
Why
World R&D Spending and Employees (2010)
Note:Bubble size is the annual R&D spending by country
Source: 2012 Global R&D Funding Forecast; National Bureau of Statistics; The Beijing Axis Analysis
China’s Major R&D Indicators (2000-2010)
China ranks second in R&D spending, surpassing Japan and trailing only the
US, demonstrating its high growth in a range of major R&D indicators
0.62 mn
0.9%
The Total Value of Scientific
Equipment
USD 60 bn
USD 21.4 bn
2010
China’s Total R&D
Expenditure
USD 87 bn
2010
R&D Personnel in
Research Institutions
1.43 mn
2010
2010
The R&D to
GDP Ratio
1.7%
2000
2000
2000
2000
Annual Growth
23%
Scientists & Engineers/Million People
R&D as % of GDP
Finland
Japan
Sweden
US
S. Korea
Taiwan
China
India
Iceland
Singapore
Norway
Germany
Austria
Switzerland
Canada
France
UK
Belgium
Netherlands
Russia
Spain
Czech Rep.
Slovenia
Ireland
Italy
Brazil
South Africa
TurkeyRomania
Mexico
Hungary
Portugal
Poland
Greece
Slovak Rep.
New Zealand
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5
Israel
Americas
Asia
Europe
Others
Why
Note: (1) The result is based on a survey conducted by R&D Magazine
(2) Best innovation Idea survey was conducted by the Economist Intelligence Unit (EIU)
Source: R&D Magazine; Grant Thornton; EIU; The Beijing Axis Analysis
More innovators are increasingly coming from emerging markets,
particularly from Asia
4
8
6
10
12
26
29
42
64
79
7
7
7
9
17
29
35
39
69
85
0 20 40 60 80 100
Canada
UK
France
Russia
Brasil
Germany
Korea
Japan
India
China
2009 2008
6
6
16
17
20
31
24
30
31
43
48
5
7
16
17
22
26
27
33
33
35
41
0 10 20 30 40 50 60
Other
Outsourced R&D Team
Special Innovation Team
Sales
Other C-Level Employees
Business Partners and Suppliers
CEO
Inhouse R&D Team
General Employees
Head of Business Units
Customers
Global
Asia Pacific
North America
Western Europe
Source of Innovative Ideas across Markets (2)Largest Technology Gainers by 2014 (1)
Some countries in EM Asia are exhibiting
the fastest growth notably China, Korea,
India and Taiwan
Why
International Shipping Time (number of days)
Note*: TEU – Twenty foot Equivalent Unit
Source: AAPA World Port Rankings 2009; Inquiries to selected carriers; The Beijing Axis Analysis
World’s Top 10 Sea Ports by Container
Traffic (‘000 TEU*, 2010)
China is the world leader in seaborne freight traffic. Of the world’s ten busiest
container ports measured by container traffic, six are Chinese
South Korea
South Africa
China
25,866
25,002
20,983
18,250
11,954
11,190
11,124
10,502
10,260
9,743
Singapore
Shanghai
Hong Kong
Shenzhen
Busan
Guangzhou
Dubai
Ningbo
Qingdao
Rotterdam
1
2
3
4
5
7
8
6
10
9
1
2
34
5
6
7
8
9
10
Time from Shanghai port
to Durban: 21-24 days
Time from Busan port to
Durban: 29-31 days
Why
China is defying the ‘flying geese formation’ - As Japan outgrew a certain
industry, it was passed on to Hong Kong, Taiwan, Singapore and Korea. Once
these economies went up market, lower-end industries were passed on to the
likes of Indonesia, Malaysia and Thailand…and China?
Japan
Emergence of China
CHINA
Hong Kong Taiwan Korea
Thailand Philippines Malaysia Indonesia
Labour intensive Value Chain
CHINA
CHINA
Vietnam
Singapore
Why

Various factors underpin China’s attractiveness as a global sourcing
destination
*Note: Degree of importance in making China as an attractive sourcing country; Sustainability represents the time horizon that China will hold its current position
Low
Advantage
High
Advantage
Low Sustainability
• Diversified supply base/
industrial clusters
• Products of all ranges and
different sizes
• Narrowing cost advantage
due to rise in labour cost
• Costs vary across product
categories and regions
within China
Bubble size: Degree of importance*High Sustainability
• Developed and yet growing
investment in the
infrastructure sector
• Increase in cost offset by
improving quality standards
• Opportunity to source high
quality products at
competitive prices
Requires Action
Requires Awareness
Labour
Cost
Productivity Supplier
Base
Ease of
Doing Business
R&D Large-Scale
Economy
Infrastructure
• Qualified labour force
including scientists,
researchers and engineers
• Growing R&D expenditure
leading to higher innovation
capacity
Currency
Valuation
• Second-largest economy
and the largest exporter
• Economies of scale
Price/Quality
Ratio
Why
There is a clear potential to reduce procurement costs when sourcing from
China
China Sourcing – Value Proposition & Anticipated Savings (%)
Source: Beijing Axis Procurement (BAP) RFQ Data
(1) Insurance, including duties and other charges
(2) Management, including risk management, consultants, QA/QC, trips, time and related 3rd parties expenses
(3) TCC = Total Cost to the Company
Labour
Materials
Tooling Transport
Ins.(1)
Mgmt.(2)
70%
45%
Local Country Cost
(Traditional SA sources)
Low Cost Country Price (China
sources)
Final Cost from China or
TCC(3)
100%
Financing
30%Savings
This assessment is based on BAP’s experience in the last 12-24 months
Why
The savings are particularly substantial for heavy machinery and equipment
Range of Expected Savings on Products Sourced from China (%)
Source: Leading China Sourcing Practices; Beijing Axis Procurement (BAP) RFQ Data
 Metal parts
̵ Forging and machining
̵ Casting and machining
̵ Stamping and machining
̵ Powder metallurgy
̵ Machining
̵ Extrusion
 Electrical equipment and parts
̵ Passive components
̵ Motors
 Electronics
̵ Printed circuit boards and printed circuit-board
assemblies
̵ Electronic manufacturing systems
 Capital expenditures
̵ Tooling
̵ Machinery
0 10 20 30 40 50 60
This assessment is based on BAP’s experience in the last 12-24 months
Why
-27-
0
5
10
15
20
25
30
35
40
45
Material
price
increases
Reduced
demand in
home
country
Wage
increases
RMB
appreciation
Shortages
of qualified
personnel
Concerns
over IP
protection
Poor
employee
retention
Sluggish
product
launch
readiness
Product
quality
Difficulties
to find
adequate
suppliers
Issue with the third highest impact
Issue with the second highest impact
Issue with the highest impact
Source: Booz & Co. China Manufacturing Competitiveness Study; The Beijing Axis Analysis
No. of Votes
Major Issues in Terms of Impact on Foreign Companies in China (2009-2010 survey)
Price / Quality Ratio
Labour shortages are forcing
companies to boost wages
These used to be a major
concern – not anymore
RMB appreciation and
shortage of qualified personnel
are becoming an issue
IP is becoming less of an
issue
Growing
concerns
• Leading mining and engineering players have transformed or are transforming their supply chains – China and
other low-cost centres in Asia now form an integral part of their businesses
• Companies without global procurement strategies, will lose competitiveness over time
• China's manufacturing environment is undergoing a major shift from low-end high-labour content to high-value
added manufacturing
• Integrating China into a CAPEX project or the MRO supply chain has its challenges but the benefits are real
• In selected categories new markets are emerging that will challenge China’s supply position
The upshot
Agenda
2. Best Practice: category focus, getting it right, overcoming the challenges and
managing the many risks
4. Final Word

0
500
1,000
1,500
2,000
2001 2011
Machinery and Electrical Equipment
Textile and Textile Articles
Base Metals
Transport Equipment
Miscellaneous Manufactured Articles
Chemical Products
Others
32%
43%
Exports of Commodities Produced in China (USD
bn, 2001-2011)
*Note: Based on HS 2-digit codes
China’s Top 10 Export Commodities and % Share of
World’s Total Exports (HS 2007 2-digits, 2011)
China is the leading exporter of many categories of goods, mainly electrical
equipment and machinery – expect the trend to continue
46.2%
38.8%
34.1%
25.1%
23.5%
19.5%
18.9%
12.8%
9.7%
4.3%
Articles of apparel, accessories, knit or crochet
Articles of apparel, accessories, not knit or
crochet
Furniture, lighting, signs, prefabricated buildings
Ships, boats and other floating structures
Electrical, electronic equipment
Articles of iron or steel
Nuclear reactors, boilers, machinery, etc
Optical, photo, technical, medical, etc apparatus
Plastics and articles thereof
Vehicles other than railway, tramway
Global Rank
1
1
1
2
1
1
1
3
3
8
China exports
approximately one-
quarter of the world’s
electronic equipment
China is world’s largest exporter
What
Supply chain shifts that underpin industrial development in Asia are still
evolving. Over the past decade, machinery exports’ share has increased in
China and India, whereas Japan and South Korea saw a decline
Export Growth of Commodities Produced by Top Asian Countries (USD bn, 2001-2010)
0
600
1,200
1,800
2001 2010
Machinery and Electrical Equipment Textile and Textile Articles Base Metals
Transport Equipment Miscellaneous Manufactured Articles Chemical Products
Others
32%
44%
China
7%
8%
0
100
200
300
2001 2010
0
200
400
600
2001 2010
43%
37%
0
300
600
900
2001 2010
South Korea
India Japan
41%
34%Increasing export
share
Increasing export
share
Decreasing export
share
Decreasing export
share
What
World’s Major Exporters of Heavy Equipment (USD bn, 2011)
*Note: Bubble size is measured by the share of world total exports; For the purpose of this report 10 product categories and 12 HS codes with 4 digits were selected. These are Grinding Mills (8459,
8460), Kilns (8417), High Pressure Grinding Rolls (8455), Gyratory Crushers (8474), Hoists (8425, 8428), Derricks and Cranes (8426), Bulldozers (8429) Earth Movers, Borers, Pile-Drivers (8430),
Forklifts (8427), Parts for Lifting and Moving Machinery (8431)
China has experienced the world’s fastest export growth of heavy
equipment in the last decade
0
5
10
15
20
25
30
35
40
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Exports (USD bn, 2010 )
CAGR (2000-2011)
US
Germany
China
Italy
France
Singapore
UK
Norway
Czech Republic
Australia
Denmark Mexico
Finland
SwedenCanada
Belgium
Switzerland
Countries with high
export volume and
yet low growth rate
High export volume
and high growth
rate
Countries with low
export volume and
low growth rate
Japan
Brazil
Bubble Size*: Share of World Exports (%, 1
What
Kilns and high pressure grinding rolls are some of the fastest-growing items
exported from China. China is progressively increasing its world export
share for all the selected items
Growth and Share of Selected Heavy Equipment Exports from China (USD bn, 2000-2010)
0%
5%
10%
15%
20%
25%
30%
0% 10% 20% 30% 40% 50% 60%
Gyratory Crushers
Kilns
China as % of the World (2010)
China CAGR (2000-2010)
Derricks and Cranes
Grinding Mills
Hoists
Earth Movers, Borers, Pile-Drivers
High Pressure Grinding Rolls
Parts for Lifting and Moving Machinery
Forklifts
Bulldozers, etc.
% in
2000
Bubble Size: Value of Exports (USD bn, 2010)
What
Geographic Distribution of Top 500 Machinery
Companies (2006-2011)
Note: (1) includes foreign-owned firms with fully integrated manufacturing in China
Source: World Executive; World Machinery Summit; The Beijing Axis Analysis
Top 500 Machinery Companies Breakdown by Asian
Countries (2011)
Asia continues to dominate the machinery industry – Nearly half of the top
500 machinery companies are from the region
195 201 209 225 225 223
0
50
100
150
200
250
300
350
400
450
500
2006 2007 2008 2009 2010 2011
Rest of the World Asia
116
81
15
821
Japan
China
Korea
India
Singapore
Malaysia
53
60
69
74
77
81
0 30 60 90
2006
2007
2008
2009
2010
2011
No. of Chinese Companies in Top 500 (2006-2011)
Asian companies continue
their dominance in the global
machinery ranking
China had 53 companies
selected as “Top 500
Machinery Companies” in
2006, and this increased
to 81 in 2011
What
Based on our experience, several products and categories can be
competitively sourced from China in a systematic manner
*Note: 1) Only serves as a broad outline of products to source and should not restrict the consideration of other goods; Product assessment based on TBA’s experience, may change based on specs
and complexity; 2) Price: VC = Very Competitive, C = Competitive, NC = Not Competitive; Quality: H = High, M = Medium, L = Low
Additional
opportunities
considered
Material
Handling
Equipment
Material
Handling
Equipment
Selected Products1
• Conveyors, conveyor parts & accessories
• Train loading and unloading systems
• Cranes and hoists
• Mining trucks and vehicles
CommentsPrice2Categories
• Crushers and spares
• Grinding mills and spares
• Flotation cells and spares
• Magnetic separators
• Electrical wires & cables
• Electrical equipment and components
• Generator sets
• Motors
• Blowers
• Boilers
• Compressors and air systems
• Valves
• Pipe fittings
• Chemicals
• Steel cable and wire/ rope
• Safety items
• Prices almost 30% less than European prices
• Very competitive prices and int’l quality standards
• Largest producer has 70% domestic market share
• Comparable to international standards
• High quality at a competitive price
• Competitive price and int’l standards
• China's strength lies in the mid-low end of market
• Agitators
• Furnaces
• Heat exchangers
• Structural steelwork
• Competitive prices and high quality standards
• Competitive prices and int’l standards
• Valve producers occupy lower end of the market
Quality2
Ore Dressing
Machinery
Ore Dressing
Machinery
Electrical
Equipment
Electrical
Equipment
Mechanical
Equipment
Mechanical
Equipment
Steel Vessels
and Structures
Steel Vessels
and Structures
Mine
Consumables
Mine
Consumables
1
2
3
6
4
5
VC C NC H M L
• Int’l standards at a competitive price
• Competitive price and international standards
• Readily available with international standards
• No availability concerns; competitive price
• Similar to European and American standards
• Low-tech consumables with a large local market
• China's strength lies in the mid-low end of market
• Int’l quality standards, lead times may vary
• Competitive prices and international standards
• JV with world’s largest mining truck supplier
What

China stands out and can be targeted for most procurement packages. For
other Asian countries the sourcing potential is limited to a few select
packages
Japan
Primary Secondary
• Transformers
• Switchgear
• Stacker and
reclaimers
• Steel pipes
• Variable speed drives
• Grinding mills and crushers
• Conveyors
• Flotation cells and magnetic
separators
South Korea
Primary Secondary
• Transformers
• Switchgear
• Steel pipes
• Conveyors
• Stackers and reclaimers
• Structural steel and plate work
Malaysia
Primary Secondary
• Switchgear
• Conveyors
Indonesia
Primary Secondary
• Transformers
• Switchgear
• Structural steel and
plate work
China
Primary* Secondary
• Transformers
• Switchgear
• Grinding mills and crushers
• Conveyors
• Structural steel and plate work
• Pre-fabricated housing
• Steel pipes
• Flotation cells and magnetic
separators
• Grinding media
• Stacker and
reclaimers
India
Primary Secondary
• Grinding media • Switchgear
• Steel pipes
• Flotation cells and
magnetic separators
Thailand
Primary Secondary
• Structural steel and
plate work
• Grinding media
• Transformers
• Pre-fabricated housing
What
*Note: Primary relates to a country’s sourcing potential for each procurement package
Beijing Axis Procurement has a tried and tested service delivery platform &
methodology for sourcing
SupplyChain
Management&
Support
Procurement
needs analysis
and China
procurement
competitive
analysis
Supplier
pre-qualification,
due diligence
& final
selection
Transaction
monitoring
Systematic
industry
search
& supplier
identification
Commercial
process,
contracting
& contract
management
Negotiation,
tender
evaluation
Quality mgmt.
(QA/QC),
Expediting &
3rd party
mgmt.
Logistics
1 2 4
875
Analysis
Initial scoping, supplier
evaluation, due diligence and
final selection
Supplier Engagement
Supplier engagement,
client visits, testing, application of
detailed filters and negotiation
Supplier Process Management
Transaction monitoring, quality
assurance, expediting, 3rd party
management and logistics
Strategic Sourcing
SupplyChain
Management&
Support
6
11109
Coordination &
assistance on site
(material mgmt.,
commissioning,
etc.)
12
Supplier
evaluation by
application
of high level
filters
3
Site
inspections,
sample
testing &
standards
Supplier
engagement,
RFQ &
tendering
(SOI, RFP)
• Overall Project Management
• Holistic Risk Management
• Strategic Relationship Management
Service Delivery Platform & Methodology
OperationalProcurementProcessAnalysis
How
1
2
3
5
6
4
Contract
Negotiation
Supply Chain
Integration
Quality
Management
Supplier
Readiness
Key
Challenges
Various challenges and risks arise when sourcing from China
DescriptionKey Risks
• Wrong currency movement projections can seriously damage the
project performance by increasing the project costs
• While many Asian companies already have the capability to
manufacture mining and construction equipment in accordance with
international quality standards, they still often lag behind industry
leaders in terms of after-sales service
• Gaps in communication between suppliers' different departments,
especially in large state-owned enterprises are a common issue
• Companies procuring from Asia must take into account reoccurring
problems with documentation quality and timeliness in regards to
suppliers
Insufficient level of
project documentation
• Companies procuring from Asia must be prepared to deal with a
certain level of inferiority in product quality
• Firms procuring from Asia, sometimes do not attach enough
importance to stringent supplier management
Lack of communication
and work coordination
Quality issues
Supplier non-
performance
Contract risk
Currency risks
Lacking transportation &
logistics arrangements
Insufficient after-sales
service
• The procurement process is not over once the products are
manufactured. Transportation and delivery of manufactured
products can be a huge risk if not planned properly
How
1
8
7
6
5
4
3
2
Technical /
Standards
Doing
Business
in China
Issues
• Technical details not specified clearly as well as the governing
language of the contract. Suppliers may insist the local language
as the governing language
However, these challenges can be overcome and the risks mitigated
•Since Asian suppliers are often unaware of Australian/International quality standards, it is highly advised
to coach them on these issues to make sure they understand all the details
•During the contract stage and throughout the entire manufacturing process, a client should be as specific
and meticulous as possible
•Any design changes made after the engineering/design part is finalised can have a substantial impact on
the project schedule
•It is essential to acquire sufficient and comprehensive market intelligence that can influence the country’s
export competitiveness
•Dedicated internal project team must be created to coordinate the process from the project owner’s side
and facilitate interaction with suppliers, contractors and third-party service provider
Create an internal project
team
•In order to adequately select and efficiently supervise suppliers, it is critical to have a presence in a
sourcing country
•It is critical to perform a meticulous due diligence on a supplier before signing a contract and placing an
order
Gather market
intelligence
Establish local presence
(directly or indirectly)
Conduct proper supplier
due diligence
Provide and demand as
many details as possible
Educate and coach
suppliers
Be flexible and ready to
adapt where possible
•While a high level of stringency and meticulousness are needed to manage suppliers in Asia, excessive
rigidness in pursuing contract terms and details can also prove to be counterproductive
Minimise design changes
How
Critical Success Factors Description
1
8
7
6
5
4
3
2
However, these challenges can be overcome and the risks mitigated (2)
•Early feedback to suppliers’ manufacturing schedule, inspection, testing plans as well as overall delivery
plans
•3rd parties augment Chinese suppliers’ capabilities and have a rich experience servicing international
procurement out of China
•Working towards diminishing the impact of cultural differences in regard to ways of doing business
•Change in mindset from end users – business units, production engineers, project managers, etc.
•Clear understanding of the strengths of Chinese suppliers, e.g. Chinese vs. international standards,
flexible terms, etc.
•Dedicated resource combining technical and commercial background at site or in shared services
End-user buy-in
(i.e. Engineering)
Clear understanding of
China’s entire SC
Dedicated personnel
Coordinated efforts of
professional 3rd parties
Early and detailed
involvement in supplier’s
post-PO planning
Involvement of China
supplier early in
project/spend planning
• Bringing China into equation during planning/ pre-feasibility stage
Appreciation and
adaption for culture
How
Critical Success Factors Description
Exercise control and
supervision on-site
• It is crucial to exercise stringent control over a supplier’s actions. In order to exercise this supervision, it
is necessary to have an on-site presence at the supplier’s premises, which can be done by deploying
expediting and QC engineers in tandem with third-party quality inspectors
9
16
15
14
13
12
11
10
International companies are using various ‘models and sourcing structures’
for China procurement – but one trend is clear: greater engagement
*Note: Conceptual framework
Direct
Indirect
Outsource
High
Low Cost / Commitment
Leading gold
producer
Leading
copper producer
Leading gold
producer
Leading
engineering firm
Large steel
manufacturer
Globally diversified miner
Globally
diversified miner
Leading engineering
company
Large gold
producer
Globally
diversified minerLeading platinum
producer
Large
steel firm
Leading gold
producer
Leading
international
contractor
Leading steel
producer
Model 1: Outsource
• Provides the lowest degree of
China presence, but requires
the least cost/commitment
• Examples: Outsourcing the
entire procurement operation in
China to a agent or trading
company
ChinaPresence
Model 3: Direct
• Provides the highest degree of
China presence, but requires the
most cost/commitment
• Examples: WOFE/FICE, JV
Model 2: Indirect
• China presence and
cost/commitment somewhere in
between outsource and direct
models
• Examples: Rep. office, Offshore
structure with China rep. office
High
Aluminium
producer
Globally diversified
retailer
Apparel retailer
Large diversified
retailer
Large
apparel retailer
miner
retailer
Leading
coal producer
Leading
apparel retailer
Representative Office
WOFE/FICE
Colors represent:
Shapes represent:
Retail Companies
Mining/Engineering Firms
China Procurement Models and Structures of Major International Mining, Engineering and Retail Firms
How

International mining companies are using various ‘models and sourcing
structures’ for China procurement
Various Sourcing Models in China
Note: (1) Also use EPCMs for projects
(2) Selected BAP clients
(3) FIFO: Fly-in-fly out
Source: Various; The Beijing Axis Analysis
No China SourcingNo China Sourcing Sourcing via AgentSourcing via Agent
Fly-in-fly out
(FIFO)
Fly-in-fly out
(FIFO)
via a Procurement
Service Provider
(PSP) (1)
via a Procurement
Service Provider
(PSP) (1)
Office in ChinaOffice in China
• No agents • High use of agents • Medium use of agents • Light use of agents • Very light use
of agents
• No fly-in-fly out (FIFO) • Light FIFO (3) • High FIFO • Medium FIFO • Medium FIFO
• No PSPs • Light use of PSPs • Medium use of PSPs • High use of PSPs • High use of
PSPs
• No Office • No Office • No Office • No Office • Small Office
• Examples:
Gold Fields,
Harmony (2)
Lonmin (2)
Impala
• Examples (2):
Xstrata Ferroalloys, ENRC,
Hulamin,
DCD, Lonmin, Trident,
Robor, Crosslands, CBH,
Lihir Gold (Newcrest)
• Examples:
Newmont,
Exxaro(2),
Peabody (2),
Bateman Eng.(2),
Xstrata Coal,
Anglo Gold (2),
Votorantim (2),
Aditya Birla,
Barick
FMG (2)
• Very light use of
agents
• Light FIFO
• Medium use of
PSPs
• Medium Office
• Examples:
Anglo PLC,
BHPBilliton,
Jindal Steel
• Very light use of
agents
• Light FIFO
• Light use of
PSPs
• Large Office
• Examples:
Rio Tinto,
Vale,
Essar
Small Medium Large
Level of Engagement and
Commitment
• Examples:
Newcrest
Kinross (2)
PrimaryandSecondaryChannels
How
Agenda
the many risks
4. Final Word
Case Study – Plant Equipment: Procurement of Heavy Rotating Equipment
Project Objectives
• Research and analyse Chinese market for kilns and
mills, assess feasibility of procuring in China, shortlist
suppliers, provide budget prices
• Organise and manage RFQ process in China with
shortlisted suppliers on behalf of the client
• Assist client in drafting contract, negotiating terms
and conditions and placing order
• Manage order and coordinate among multiple parties
to ensure timely, problem-free delivery
• TBA: 2 project managers (PM, GM), senior project advisor, on-site
supervising engineer, senior QA inspector, procurement specialists
as required
• Client’s PM office (no EPCM involvement), engineering consultants,
Chinese supplier and sub-suppliers, 3rd party inspection company,
3rd party logistics management company
• Design and specification changes management tackled by
systematic review meetings and document controls
• Poor supplier documentation management / control system – TBA
assisted in improving
• Suppliers lack experience of DDU delivery – TBA put together 3rd
party solution
• Quality and scheduling risks mitigated by on-site supervision
• Chinese suppliers offer 20-35% price advantage but hands-on
quality management and expediting is a must
• Good OEM supply base for international vendors, excellent facilities
and good design capabilities available
Ferrochrome Smelter • Order value over 13 million USD, 2 kilns and 2 mills
• Delivery to site 70% complete
• Over 30% savings achieved compared to alternative local offerings
Organisational
Setup
Key Risks and
Issues Addressed
Supplier
Competitiveness
2
3
4
Results
1
Case Study
Case Study – Industrial Consumables: Conveyor Belts
Project Objectives
• Research and analyse Chinese market for conveyor
belts, incl. heat resistant, steel cord, solid woven and
other belts
• Short-list 3-4 suppliers, assist client in conducting
RFQ process and pre-contract negotiations
• Assist client with placing trial orders and inspection
• Hand over relationships with suppliers to client for
ongoing orders
• TBA team: procurement specialist and assistant procurement
specialist, supported by procurement engineer as needed
• TBA coordinated inspection and reports by 3rd party inspector, as
well as all technical and commercial inquiries before and during trial
orders
• Client-appointed 3rd party inspection company unprofessional,
improper inspection lead to a conflict situation
• TBA able to resolve the conflict successfully, client was advised to
re-test product, product was finally accepted and client satisfied
• China is a leading producer and exporter of belts, has a good
supplier base with a wide variety of conveyor belting products
• Client achieved cost savings of 35-50% compared to similar
European products
Mining Supplies Company
• TBA shortlisted 3 suppliers capable of complying with client
specifications, 2 were selected for trial orders
• TBA assisted client with contracting suppliers for trial orders and
worked with 3rd party inspection company to ensure product quality
for trial orders
Organisational
Setup
Key Risks and
Issues Addressed
Supplier
Competitiveness
2
3
4
Results
1
Case Study
Case Study – HME Equipment: Rope Shovels
Project Objectives
• Assure quality and expedite 2 rope shovels 35
m3 each
• Establish quality risk control strategy for major capital
procurement project
• Assist client and supplier with compiling QCP and
final quality documentation pack
• Monitor and risk-manage manufacturing process on
site for quality-related issues
• TBA managed the project, assisted by 3rd party inspection company
and client involvement at critical hold points
• 1 full time TBA procurement engineer with support from GM, 3 full
time 3rd party quality inspectors
• Only client authorised to hold manufacturing
• Added inspection resources to ensure adequate quality of
component sources from sub-suppliers
• Added inspection resources to defect repair and proper corrosion
protection after discovering issues in these areas
• Only one internationally competitive supplier in China for equipment
of this size and technology level
• Chinese supplier is #1 manufacturer globally and with significant
cost advantage over major US rival (P&H)
Large Regional Coal Company
• The two rope shovels were delivered on time despite unexpected
increase in project complexity vs. initial estimates
• Equipment fully accepted by client in terms of quality of
manufacturing and packaging for shipment. Currently being installed
on site
Organisational
Setup
Key Risks and
Issues Addressed
Supplier
Competitiveness
2
3
4
Results
1
Case Study
Compendium…
Manufactured trailers
Grinding mills
Magnesium
Electric Mining ShovelGensets

Compendium…
Superheaters
Grinding Media
Boiler Shells
Interpass Absorption
Thickeners
Pumps
Compendium…
Pipes
Round bars
Angle steel
Flat barsHollow bars
Rails
Girth Gear
Kiln Support Roller Shaft
Kiln Shell
Mill HeadKiln Shell
Support Roller
Compendium…
Agenda
the many risks
4. Final Word
Final word
• The world is looking to source from LCCs – It’s a global phenomenon and its changing from ‘additional
competitive advantage’ to a prerequisite for survival and development
• Developing countries are becoming more important as new supply bases – This is truly an Asian story
• China ranks at the top of the LCC equation; India is still searching for its place in the global production
chain but is positioned in the flying geese formation (along with Vietnam, Malaysia, Thailand,
Indonesia etc.)
• Ignoring China (and India et al) is no longer possible or wise; Threat, opportunity; Must form part of a
‘global supply chain portfolio’
• Very complicated - many risks i.e. quality/safety, counterparty risk, financing, complexity, contracts,
language, trade protectionism, etc. – Watch out!
• Use information well – strategic intelligence is the main aid in risk mitigation
• Communicate well and often; manage engagements – Both with HQ at home and with Chinese
counterparties
• Good strategy, good implementation – Processes, systems and people (and partners across SC)
• Analysis, Engagement, Process
• Three key questions - Why? What? How?
• Learn from others!
www.thebeijingaxis.com
Beijing, China
Cheryl Tang
Director & GM, China
cheryl@thebeijingaxis.com
Shanghai, China
Julia Wang
Procurement Specialist
Hong Kong
TBA Secretary Corporate Office
3806 Central Plaza, 18 Harbour Rd
Wanchai, HK
Singapore
Andrew Kagoro, Finance & Projects
Penthouse & LV 42
Suntec Tower 3, 8 Temasek Blvd
Singapore
Perth, Australia
Kobus van der Wath
Founder & Group MD
Johannesburg, South Africa
Dirk Kotze
Director & GM, Africa
dirk@thebeijingaxis.com
London, UK/Europe
Matt Pieterse
Non-Executive Director
Russia Desk
Lilian Luca
Non-executive Director
Latin America Desk
Javier Cuñat (Beijing)
Associate Director
Yangon, Myanmar
Dr. Wong YF
Chief Representative
India Desk
Ankit Khaitan (Singapore)
Beijing Axis Strategy
Eastern Africa Desk
Walter Ruigu (Beijing)
Beijing Axis Strategy
COPYRIGHT© The Beijing Axis Ltd. 2012. No part of this publication may be reproduced or transmitted in any form or
by any means without prior written consent of The Beijing Axis.
China-focused
International Advisory and Procurement
Kobus van der Wath
Founder and Group Managing
Director, The Beijing Axis
THANK YOU!

TBA on China Procurement 25 FEB 2013

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TBA on China Procurement 25 FEB 2013