Case Study - China Factory Location Analysis & Sourcing Example
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Transcript of Case Study - China Factory Location Analysis & Sourcing Example
Dragon Sourcing - 龙 源 Your Tailored Global Sourcing Approach
Dragon Sourcing Tel: +44 (0) 844 736 1432
China Factory Location Analysis & Sourcing Case Study
© 2011 Dragon Sourcing. All rights reserved. 1
© 2011 Dragon Sourcing. All rights reserved.
Case Study Agenda
1. Introduction & Approach
2. China Sourcing
3. Location Analysis
4. Business Case
2
Introduction & Approach
China sourcing
Location Analysis
Detailed cost modeling
Dev
elop
Bus
ines
s C
ase
Go-No Go decision
Phase 1:
Factory set up
Sourcing ramp up
Phase 2
Production Ramp-up
Phase 3
A Consumer Good company was looking to move production from Taiwan to China to deliver savings and scale production. The approach taken was split into 3 stages. This case study illustrates the Phase 1.
© 2011 Dragon Sourcing. All rights reserved. 3
© 2011 Dragon Sourcing. All rights reserved.
Case Study Agenda
1. Introduction & Approach
2. China Sourcing
3. Location Analysis
4. Business Case
4
© 2010 Dragon Sourcing. All rights reserved. 5 ��
Objectives: 1) To collect and challenge a detailed
and complete understanding of the spend requirements.
2) To build an extensive list of potential suppliers in selected target countries.
Objectives: 1) To pre-select suppliers in the
supplier list based on some pre-selection criteria
2) To eliminate suppliers that should not receive the RFI/RFQ
3) To verify the contact details in the supplier list and collect accurate contact details for each supplier
Objectives: 1) To develop a request for
information (RFI) and request for quotation (RFQ) document that includes all key supplier qualification criteria & quotation requirements
2) To develop a balanced scorecard based on your priorities that will be used to rank suppliers.
Objectives: 1) To administer the RFI/RFQ process
with identified suppliers to ensure as high a return rate as possible.
2) To analyze the responses to determine the most competitive and capable suppliers and recommend next steps.
Approach: 1) Collect all specifications 2) Collect volumes required 3) Collect other requirements (certifications, testing, delivery) 4) Collect samples 5) Refine requirements through questions 6) Research list of suppliers 7) Finalize and approve deliverables
Approach: 1) Contact all suppliers in the database 2) Verify basic questions with the suppliers: ü Do they make category? ü What materials, what purpose ? ü Do they have export license ? ü Trading or manufacturer ? 3) Request contact details for pre-qualified suppliers
Approach: 1) Draft RFI/RFQ document 2) Review & Update RFI/RFQ document 3) Draft Scorecard 4) Review & Update Scorecard 5) Finalize and approve deliverables
Approach: 1) Administer RFI/RFQ with suppliers 2) Chase for complete responses and field questions 2) Analyze responses against scorecard 3) Prepare DDP calculations based on quotes from forwarders 4) Prepare Final Report including recommendation 5) Prepare Supplier Profiles for top suppliers 6) Finalize and approved deliverables
Deliverables: 1) Detailed Requirements Document (approved) 2) Supplier List (approved)
Deliverables 1) Control sheet (updated weekly)
Deliverables: 1) RFI/RFQ document (approved) 2) RFI/RFQ scorecard (approved)
Deliverables: 1) RFI/RFQ analysis report (approved) 2) Supplier Profiles for top suppliers (approved)
5 5
China Sourcing Approach
1. Demand Analysis & Supplier Identification
3. Prepare RFI/RFQ & Supplier Scorecard
4. Administer & Analyse RFI/RFQ
2. Supplier telephone pre-screening
Completed Completed
Completed Completed
In the course of this phase we involved more than 350 suppliers in the RFI process resulting eventually in 23 RFP being retained for the analysis
No. Segments RFI Sent Replied RFI Participated to Event Retained RFP
1 Aluminum 80 21 10 5
2 Fabric 128 17 10 6
3 Plastic Injection 57 18 10 8
4 Stitching 93 17 7 4
Total 358 73 37 23
© 2011 Dragon Sourcing. All rights reserved. 6
RFQ Results Excluding the very low cost supplier, we have 2 suppliers with ranges of savings of 12-19% �
CIF Kaohsiang (Taiwan) Amount (K NTD) Model Model 1
Part name Component 1 Component
2 Component 3 Component
4 Component 5
Part # T50001 T50005 T50004 T50002 T50003
Annual Qty 107,270 107,270 107,270 214,540 429,080 Total Amount Savings Saving %
Current Supplier (Supplier 1) 15,769 10,083 9,976 9,869 9,440 61,550 � �
Supplier 2 17,326 9,540 9,751 10,394 10,213 64,105 2,555 4.15% Supplier 3 10,540 8,374 8,717 8,356 8,202 49,757 -11,794 -19.16% Supplier 4 7,374 6,739 6,169 6,932 5,800 37,278 -24,272 -39.43% Supplier 5 13,070 11,539 11,020 11,893 12,864 67,721 6,171 10.03% Supplier 6 10,291 8,824 8,459 14,757 6,520 54,135 -7,415 -12.05%
Min Amount excluding current supplier 7,374 6,739 6,169 6,932 5,800 37,278 -24,272 -39.43%
Max Saving per Parts 8,395 3,344 3,807 2,937 3,640 Max Saving Percentage per
Parts 53.24% 33.17% 38.17% 29.76% 38.56% Min Amount Supplier Supplier 4 Supplier 4 Supplier 4 Supplier 4 Supplier 4
© 2011 Dragon Sourcing. All rights reserved. 7
The big differences between suppliers are within the manufacturing value added�
Cost Analysis
26 21 23 27 25
3428
12
3928
010
20304050
6070
Jianxing Jiayun Jinlan Norinco Fen'an
Suppliers
Cos
t (M
NTD
)
Manufacturing cost (M NTD)Material cost (M NTD)
Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5
© 2011 Dragon Sourcing. All rights reserved. 8
The variability in price levels for plastic is driven by 4 major factors: (1) first and foremost by differences in hourly rates on the injection machines
Plastic Injection Machine Rates
390
252
91 94
756
178
300
80
0
100
200
300
400
500
600
700
800
900
Bey onics First Rate Hengda Lida Menshen Qingtai Shengguang Unimolding
Suppliers
Mac
hine
Tot
al H
ourly
Rat
e (N
TD)
Machine totalhourly rate(NTD)
Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 Supplier 8
© 2011 Dragon Sourcing. All rights reserved. 9
…(4) and finally by differences in margin levels
Margin
8%
15%
3%
20%
8%
15%
8%
40%
0%5%
10%15%20%25%30%35%40%45%
Beyonics First Rate Hengda Lida Menshen Qingtai Shengguang Unimolding
Suppliers
Mar
gin
Rat
e
% Margin Appliedto the Total Cost
Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 Supplier 8
© 2011 Dragon Sourcing. All rights reserved. 10
© 2011 Dragon Sourcing. All rights reserved.
Case Study Agenda
1. Introduction & Approach
2. China Sourcing
3. Location Analysis
4. Business Case
11
© 2011 Dragon Sourcing. All rights reserved.
Location Analysis
1. Introduction and Approach
2. Cost comparison
3. Convenience comparison
4. Conclusions and recommendations
12
© 2011 Dragon Sourcing. All rights reserved. 13
TAIWAN
FUJIAN
GUANGDONG
The analysis focused on the 2 pre-selected cities, Xiamen and Shenzhen, with the objective to establish a preference among these 2 options
Client Preliminary
Considerations
• Development of the area • Direct sea access
• Air Access from Europe • Proximity and access to
Taiwan
Xiamen
Shenzhen
Client Pre-selected Cities
• Xiamen • Shenzhen
People Republic of China
© 2011 Dragon Sourcing. All rights reserved. 14
Information from multiple sources were used to analyze each of the 2 options in terms of cost and convenience
• Shenzhen bureau of trade & industry information center • Shenzhen council for the promotion of International
investment • Shenzhen Administrative bureau of free trade zones
• Administrative of local taxation of Shenzhen municipality • Guangdong province price information website
Information Sources
• Xiamen Foreign Investment Bureau • China council for the promotion of
International trade – Xiamen office • Xiamen Price bureau website
• Interviews with General Managers of western companies already located in Shenzhen or Xiamen • Various others (Sea shipment companies and sea forwarders, Airlines schedule, etc.)
COST RELATED CRITERIA • Existing building rent / Land cost
• Labor cost • Shipment cost • Utilities costs
• Taxes
CONVENIENCE RELATED CRITERIA • Infrastructure / Ease to get around
• Safety • Local authorities attitude
• Utilities supply quality • Labor "manageability"
• Air access to/from The Netherlands & Taiwan • Seaport convenience
© 2011 Dragon Sourcing. All rights reserved.
Location Analysis
1. Introduction and Approach
2. Cost comparison
3. Convenience comparison
4. Conclusions and recommendations
15
© 2011 Dragon Sourcing. All rights reserved. 16
Cost related criteria
CRITERIA INDICATOR / PRACTICAL MEASURE
Building cost Rental cost/m² Land cost
Labor cost
Minimum wages level set by local government
Actual average wages for the typical worker profile
Other employment related costs: insurances and other charges, allowance, etc…
Sea shipment cost Freight cost to respectively Rotterdam and Los Angeles Utilities Utilities cost Taxes Local taxes
© 2011 Dragon Sourcing. All rights reserved. 17
Both Shenzhen and Xiamen are big cities encompassing multiple districts and offering a very large range of prices for land and buildings
~85 km
~30
km
~45 km
~50
km
Shenzhen (1952 km² ) Xiamen (1565 km²)
SHENZHEN XIAMEN
Building rent (RMB/m2/month) 4 – 150 7 - 30
Land cost (RMB/m2 for 50 years) 130 – 720 80 - 700
© 2011 Dragon Sourcing. All rights reserved. 18
Shenzhen has specific industry oriented or dedicated areas: High-Tech, Advanced Manufactures in the north, Modern Services in the south.
Shenzhen Industry Layout
© 2011 Dragon Sourcing. All rights reserved. 19
In Xiamen, 16 industrial areas are spread across 5 of the 6 districts, several of them with either an industry or investment origin specificity
District Area industrial area name
Huli (Island)
3 Free trade zone 10 Torch High-tech area 14 Aviation industrial area
Haicang 2 Export processing zone 7 Haicang taiwanese investment area
Jimei 8 Xinglin taiwanese investment area
13 Machinery & Electric Industrial area 6 Jimei taiwanese company investment area
Tongan
11 Torch Tongji high-tech industrial park 4 Tongan south industrial area 5 Tongan east industrial area
15 Light industry & food stuff industrial area 16 Yinlu Foodstuff industrial area 17 Rock material industrial area
Xiangan 9 Xiangbei industrial area
12 Torch East industrial area
© 2011 Dragon Sourcing. All rights reserved. 20
In Shenzhen, industrial building rental costs are in the range of 4 to 150 RMB/m²/month, and land to build costs between 130 and 720 RMB
Baoan District Building: 5 – 14 RMB(1)
Hi-tech area: Land: 130 – 170 RMB (2)
(1) All building cost are in RMB/m²/month. (2) All Land cost are in RMB/m² for 50 years (3) Passage between SZ and HK
Yantian District Building: 8– 60 RMB(1)
Land: 366 – 556 RMB(2)
Shatoujiao bonded zone: Building: 20– 36 RMB(1)
Yantian port bonded area Building: 48– 60 RMB(1)
Nanshan District Building: 12 – 60 RMB(1)
Land: 303 – 720 RMB (2)
Longgang District Building: 4 – 17 RMB(1)
Land: 186 – 376 RMB(2)
Export processing zone Building: ~17 RMB(1)
Land: 222 – 236 RMB(2)
Futian District Building: 15 – 150 RMB(1)
Land: 348 – 676 RMB(2)
Futian bonded zone Building: 28 – 44 RMB(1)
Luohu District Building: 8 – 18 RMB(1)
Land: 308 – 700 RMB(2)
Luohu Inspection station(3) See Appendix I for precise prices in
the industrial areas
© 2011 Dragon Sourcing. All rights reserved. 21
Similarly in Xiamen, industrial building rental costs are in the range of 7 to 30 RMB/m²/month, and land to build costs between 80 and 700 RMB.
~40 km (1) All building cost are in RMB/m²/month. (2) All Land cost are in RMB/m² for 50 years
Out of the Island, other than Haicang
(Jimei, Tongan & Xiangan district)
Building: 7 – 12 RMB(1)
Land: 80 – 250 RMB (2)
On the Island: (Huli district)
Building: 8 – 30 RMB(1)
Land: ~700 RMB (2)
Haicang district: Amoy export processing zone
Building: 11-26RMB(1)
Land: ~300 RMB(2)
Land:
Dongfu industrial park: ~150 RMB (2)
South industrial park: ~230 RMB(2)
Xinyang industrial park: ~200RMB(2)
~60
km
Tongan district: Tongan industrial area: Land: 100-150 RMB (2)
Huli district: Xiamen free trade zone: Building: 20-30 RMB (1)
© 2011 Dragon Sourcing. All rights reserved. 22
Export processing, bonded or free trade zones could be interesting options to investigate; both Shenzhen and Xiamen offer these types of zones
Being located in one these zones may have several impacts: • Imported material and production equipment can be exempted of import
duties • EDI systems with computer network linking between customs and company
are more easily applied • More flexibility in the settlement of exchanges for companies' income in
foreign currency • Possibility to open foreign currency accounts • On the other hand, goods produced in these zones must pay "import taxes" to
be sold in China
See appendix III for more details through: • Preference policy of Xiamen Amoy export processing zone • Policy advantage of Shenzhen Bonded area
© 2011 Dragon Sourcing. All rights reserved. 23
In summary, buildings in the "downtown" districts are cheaper in Xiamen; this advantage melts down when moving toward the "suburban" zones
City / Area
"Downtown" "Suburban"
SHENZHEN Modern Service
Industry Area
XIAMEN On Island
(/ Haicang)
SHENZHEN Northern Industry
zones
XIAMEN Outside Island
(Jimei, Tongan, Xiagan)
Building rent RMB/m²/month 8 - 150 8 – 30
(/ 11 – 26) 4 - 17 7 - 12
Land cost RMB/m²
for 50 years 303 -720 700
(/150 – 300) 130 - 236 80 - 250
In "downtown" areas, Xiamen could represent around 310k€ of savings assuming • Need of 13 000 m²
• Price of 50 RMB/m²/month in Shenzhen vs. 30 in Xiamen
© 2011 Dragon Sourcing. All rights reserved. 24
Labor cost are slightly cheaper in Xiamen than in Shenzhen, without being significant
(1) See appendix for details of Insurance & Charges
Siming & Huli districts
Jimei & Haicang districts
Tong an & Xiang’an districts
within SEZ (special
economic zone) Outside SEZ
650 600 550 810 700
Local resident
Non-local resident 12.9%(up to 14.4%)
Local resident
Non-local resident 1 355
Min. wages (RMB/month)
34.8% 16.54%(up to 32.54%)
City Xiamen Shenzhen
District
1 6181 331
10.9%(up to 12.4%)
9.54%(up to 10.54 %)
Actual average wages (RMB/month)
Insurances & charges (1)
(% of salary)
1 200 1 400Common workers
Total paid by company: Salary + Insurance & charges
1 6321 534
© 2011 Dragon Sourcing. All rights reserved. 25
Container (FCL) shipping rates are in average cheaper departing from Shenzhen
All figures in USD Shenzhen Xiamen Difference
to Rotterdam 20' FCL 1 033 1 307 +27%
40' FCL 2 048 2 549 +24%
to Los Angeles 20' FCL 1 335 1 397 +5%
40' FCL 1 771 1 916 +8%
(1) BAF & CAF included. Calculated based on multiple quotations from sea shipping companies and forwarders.
(2) See appendix for detailed list of quotations considered
Container average shipping rates(1)(2)
© 2011 Dragon Sourcing. All rights reserved. 26
Electricity costs are comparable across the 2 cities, with however cheaper rates in Xiamen during peak hours of the day
Utility description Cost (RMB)
Xiamen Shenzhen
Industry Electricity supply rate ( RMB/kWh )
101 to 3000kVA, according to transformer capacity Power consumption above 250 kW*h 10 kV high supply with low calculation (380V/220V calculation)
Basic charge/month 20 24
Peak hours ( 8:30 – 11:30;14:30-17:30
19:00-21:00) 0.956 1.005
(+5%)
Normal hours (7:00-8:30;
11:30-14:30;17:30-19:00 ; 21:00-23:00)
0.643 0.625 (-3%)
Off-peak hours (23:00-7:00)
0.330 0.290 (-12%)
Average over 24h 0.643 0.640 (-1%)
See Appendix for complete rate tables
© 2011 Dragon Sourcing. All rights reserved. 27
Water and gas are cheaper respectively in Shenzhen and Xiamen, with significant differences
Utility description Cost (RMB)
Xiamen Shenzhen
Industry Water supply rate ( RMB/m3 )
Industrial water consumption 2.80 2.26
Sewage treatment 1.20 1.05
Total 4.00 3.31 (-17%)
See Appendix for complete rate tables
Utility description Cost (RMB)
Xiamen Shenzhen
Gas supply rate (RMB/m3) Piped air-mixed gas 7.35 16.50 (+124%)
© 2011 Dragon Sourcing. All rights reserved. 28
On the Tax side, we didn't find any difference between Xiamen and Shenzhen
• Same tax schedule • Same "tax holiday" for Foreign Investment Companies
– 100% during 2 years – 50% during following 3 years (i.e. 7.5% instead of 15%) – Normal after 5th year
© 2011 Dragon Sourcing. All rights reserved. 29
In summary, the cost difference between the 2 cities can at this stage be estimated between -230k€ and +80k€
Shenzhen Xiamen Difference / Comment
Building / Land Potentially -310k€
in "downtown" areas
Could represent around 310k€/year [50-30] x 13 000 x 12 = 3 120 000 RMB = 310 k€
Labor Insignificant difference
Container shipping +80k€ 30 containers/month (45% Rotterdam, 35% LA)
Utilities
Electricity +5% during peak hours -1% over 24 hours
Water -17% We may need to clarify the importance of water and gas consumption Gas +124%
Taxes No difference
© 2011 Dragon Sourcing. All rights reserved.
Location Analysis
1. Introduction and Approach
2. Cost comparison
3. Convenience comparison
4. Conclusions and recommendations
30
© 2011 Dragon Sourcing. All rights reserved. 31
Convenience related criteria
CONVENIENCE RELATED CRITERIA
• Infrastructure / Ease to get around
• Safety
• Local authorities attitude
• Utilities supply quality
• Labor "manageability"
• Air access to/from The Netherlands & Taiwan
• Seaport convenience
© 2011 Dragon Sourcing. All rights reserved. 32
We surveyed 13 GMs of Western companies with factories in Shenzhen or Xiamen to assess convenience criteria and complete unavailable information
37 General Managers from Western
companies with a factory located either in
Shenzhen or Xiamen invited to respond to the questionnaire through a
phone interview
23 questions survey covering:
• Road Infrastructure • Safety
• Local Authorities • Utilities supply
• Labor
• 13 participants to the survey
• 7 from Shenzhen • 6 from Xiamen
• 30-45 minutes phone interview with each of them for comments on
their answers
• Statistical assessment of soft criteria through
the satisfaction level of people in these 2
locations
• Complement when no available information
© 2011 Dragon Sourcing. All rights reserved. 33
Road Infrastructure & Traffic
Questions SHENZEN - 63% XIAMEN – 82%
Well served area (highways, access to the sea port)
Road traffic jams penalize company activity
Personally bothered by traffic jams
Average
Comments
• Congested highways, too much truck traffic
• Truck drivers penalized for their deliveries • Infrastructure hasn't been developed to
support the actual growth of activity
• More and more private cars. Currently a lot of works cause additional problem, but they will improve the traffic in the longer term
• New bridge + tunnel under construction
Very Good Good Fair Bad Very Bad
© 2011 Dragon Sourcing. All rights reserved. 34
Safety
Questions SHENZEN – 88% XIAMEN – 94%
Area safe for the workers
Area safe for the Management team
Area safe for the company
Average
Comments
• Fuyong seems to be an area to avoid: 50+ attacks (factory & personnel) over last 3 year. Only 1 policeman for 10.000 people in factory village
• Attacks are common on the streets; slightly safer for Westerners, but we also heard about several bad stories
• 2 km between factory and downtown Pingfu. People sometimes robbed on their way
• Tongan less safe than other districts, poor people, operators sometimes locked on their way home (2 shifts either starting at 6:00 or finishing at 23:30)
• Haicang is safer with ~1 incident per year (snatching)
• Xiamen island should be considered as one of the safest area (controlled access through the 2 bridges, with a lot of cameras…)
Very Good Good Fair Bad Very Bad
© 2011 Dragon Sourcing. All rights reserved. 35
Local Authorities - scores
Questions SHENZEN – 72% XIAMEN – 78% Local Administration offers subsidies to encourage foreign investments
No Basis
Frequency of the visits by the local Authorities
Local Administration overall supportive of the companies Special treatment from the local authorities for the foreign companies
Local authorities level of corruption No Answer
Local authorities priority given to enforcing SCR compliance
Easiness of getting of company license
Local administration overall efficiency (e.g.,customs)
Average
Comments • See next page • See next page
Very Good Good Fair Bad Very Bad
© 2011 Dragon Sourcing. All rights reserved. 36
Local Authorities - comments
SHENZEN – 72% XIAMEN – 78% • In Baoan district, local authorities provided a building in Gongmin zone as well as
helped to hire somebody to take care of all government related issues. Always come with solution in case of problem, very helpful. Very friendly people, new generation 30-40 years old, usually well educated. Corruption definitely not eliminated. Highest efficiency among Chinese cities.
• Some subsidies for companies with a lot of R&D • Until 2005 some local companies were not paying overtime; this is now enforced
by local govt. But housing funds, medical insurance… not enforced. • PR fees can help lower the level of SCR compliance • Very open and very easy to deal with customs office in some cases, very difficult in
others • Customs, tax authorities, safety bureau not here to be helpful. They follow the
rules without interpretation. Very black & white • They watch at us to obey the local regulation more than the local companies. No
problem because laws are reasonable • Local authorities visit our factory only when they want a free lunch or a pay-off • Tolerable amount of money, but very frequent. 2-3 times more frequent than in
Taiwan. Annual total also higher than in Taiwan, but not 2-3 times higher • Corruption not eliminated, but considered not to be any worse that anywhere else
by some. Others consider that it's worse than in Guanzhou, better than North China (Shandong)
• Main corruption issue with Customs; can easily block import or export… impossible to avoid. You need good relationship with Customs. Even if you try to follow the rules (but you can't make money if you follow the rules; you need to know what is important) money under the table is needed to solve some issues. Except if you are a westerner, they can be a bit more reluctant to ask… no hesitation with Taiwanese.
• Subsidies depend on project. In an example, relocation cost were even absorbed. • More generally, foreign investment no longer encouraged… polluting business are
even asked to move to center provinces • Open and supportive attitude to western company. Network is important. Neither
strong support, nor strong barrier • Foreign Invest Bureau (FIB) organize monthly meetings with GM of foreign
companies… opportunities to raise issues to the authorities. Usually good support from FIB, especially when talking about investment
• The "large employer" companies get better support (issues related to policies). Otherwise, operational issues (customs,…) have to be handled by the company
• New project launched last year. All authorizations obtained in 30 days! Keen not to be an obstacle
• Usually visits 2-4 times a year, because business is changing. Authorities want to understand the change. Or to control safety. Not bothering
• Request on environmental issue, unprofessional… not supportive, but still threatened to close the factory
• Interested in waste handling, progress on energy, health & safety compliance • Govt watch out quite carefully: insurances, indiv. Tax. All has to be legal • Don't enforce limit of 36 extra hours/month, not keen to enforce labor unions • Tough customs and strict degree of enforcement of Handbook; However, Custom
organization considered to be very efficient with eHandbook: bonded warehouse management over internet. 24h customs clearance in case of emergency (Otherwise only 48h)
• Another respondent ever had any trouble with customs. Has special connection • PR funds are needed, but overall negligeable
© 2011 Dragon Sourcing. All rights reserved. 37
Utilities supply
Questions SHENZEN – 58% XIAMEN – 97%
Electricity power shortage and control
Quality of electricity supply
Quality of water supply
Average
Comments
• In summer (8 months!), 2 days per week without electricity. Sometimes unannounced. Companies runs their own generators.
• Can negotiate the day of power cut; some succeeded(!) to get it on Saturday.
• "Voluntary" day off during the week which can be exchanged with week-end work
• Some heard that this electricity problem could be solved by end of 2007
• No problem in Shika district which is powered by HK
• From time to time, water shortage during 2-3 days between April and July. Tank for water storage, holes in the ground to pump water (not sure if legal).
• Two power cut in 2004, no problem since then
• In 2004, local government made a good job to manage the issue (information)
Very Good Good Fair Bad Very Bad
© 2011 Dragon Sourcing. All rights reserved. 38
Labor
Questions SHENZEN – 48% XIAMEN – 75%
Easiness to find common workers (>1 year exp.)
Workers native from local area
Dormitories needed
Canteen needed
Workers stability in the area
Average
Comments
• Most workers come from surrounding Southern provinces (Yunnan, Guangxi, Jiangxi, Sichuan)
• People come for short term (2-5 years). Then go back home, marry and don't come back. A lot of people to replace after CNY
• 2 month before CNY and 1.5 month after is a difficult time to find people
• Need to have dormitories or to be in a zone that have some.
• A lot of migrants prefer to go Shanghai or Suzhou. Shenzhen not as attractive as it used to be
• 30-50% annual employee turnover. Higher when no AC in factory/dormitories. Up to 100 to 200% for a company that doesn't follow the salary spiral!!
• Majority of workers from Fujian. 0 to 40% from other province
• Can have some problems finding people depending on how company take care of employees
• Much easier if you pay good salary, everything is legal, smart environment
• Preferable to have dormitories, otherwise 100RMB allowance per month
• 5-50% annual employee turnover • Canteen preferable, otherwise vendors in
the street.
39
In summary, if you had to choose today a location for your factory…
Questions SHENZEN – 58% XIAMEN – 97% If you had to pick today a location for your factory, would you choose your current area
Average
Comments 2nd choice and why
• Chengdu for labor intensive industry. Then truck to seaport or airfreight
• Zhuhai. No power/water shortage, plenty of incentive programs, also SEZ, special rate on lands for Foreign companies, help with construction, local authorities have a special bureau for company license, custom contract, etc. Deep water port, good communication with HK
• Shanghai, to be close to our customers • Guanzhou, because less corruption • Suzhou, still a bit underdeveloped with good
infrastructure and a big boom expected + important customer base
• We're now used to this area, but we're hearing only good comments on Xiamen
• Suzhou, Wuxi or Ningbo. Less polluted, less people, better traffic, better educated people, more cultural. Also, too many Taiwanese companies in Xiamen
• Not Shanghai! • Recently made complete analysis for new
investment (SEZ, energy,..) And Xiamen came 1st (Wuxi was 2nd choice)
• Xiamen is one the best city in China. Major difference between Xiamen & Shenzhen: 2mio people with 600 to 700 years of history vs. 5-6mio and only 30-40 years for Shenzhen. Operation cost lower also lower then Shenzhen. More developed university in Xiamen
Very Good Good Fair Bad Very Bad © 2011 Dragon Sourcing. All rights reserved.
40
Air access: Shenzhen benefits from the proximity of Hong Kong airport, in addition to its own one
v
See appendix for detailed flight timetables
Air access Shenzhen Xiamen
To / From The Netherlands (Amsterdam)
Direct
• Daily direct flight to HK (~ 12 hours) + 2 hours car drive from HK to Shenzhen Travel time: ~ 14 hours
• No direct flight
1 stop
• Also 1 stop daily flight to Shenzhen airport Via (Beijing, Shanghai, Chengdu.) Travel time: ~ 15 to 17 hours
• 1 stop daily flight to Xiamen via Beijing (~ 9.5 hours + 2.5 hours)
Travel time: ~14 – 15 hours
To / From Taiwan (Kaohsiung)
Direct
• Daily direct to/from Hong Kong (1.5 hours) + Car drive to/from Shenzhen (2 hours)
Travel time: ~ 3.5 hours
• No direct flight, except around CNY period
1 stop
• Daily 1 stop flight between Shenzhen and Kaohsiung Via Macau. Travel time: 3.5 to 6 hours (stop at Macao for 1.5-4 hours)
• Daily flight between Xiamen and Kaohsiung Via Macao or HongKong. Travel time: 4.5 to 11 hours
© 2011 Dragon Sourcing. All rights reserved.
41
Convenience for sea shipment: lead-time to Europe is better from Shenzhen
See appendix for details
v Convenience for sea shipment Xiamen Shenzhen
Line to EU (Rotterdam)
Direct line ? Y Y
shipment lead-time of direct line 22-28 18-25
Weekly Frequency at least 4 (Tue. Thur. Fri. Sun.)
at least 5 (Tue. Wed. Thur. Sat. Sun.)
Line to US (Los angeles)
Direct line ? Y Y
shipment lead-time of direct line 12 - 16. 11-18.
Weekly Frequency at least 3 (Tue. Thur. Fri.)
at least 5 (Mon. Tue. Wed. Sat. Sun.)
© 2011 Dragon Sourcing. All rights reserved.
42
Despite Shenzhen slightly better sea shipping and air travel services, Xiamen is clearly a better place to be than Shenzhen, from a convenience point of view
Shenzhen Xiamen Difference / Comment
Infrastructure / Ease to get around Clear advantage to Xiamen
Safety Responses to the survey don't reflect the danger often associate to Shenzhen
Local authorities attitude Small difference on the average, but significant on support to companies, efficiency and corruption
Utilities supply quality Clear advantage to Xiamen
Labor "manageability" Clear advantage to Xiamen, mostly due to the higher weight of "local" workers
Air access Benefit from Hong Kong proximity
Seaport convenience Mostly due to shorter lead-time to Europe
© 2011 Dragon Sourcing. All rights reserved.
© 2011 Dragon Sourcing. All rights reserved.
Location Analysis
1. Introduction and Approach
2. Cost comparison
3. Convenience comparison
4. Conclusions and recommendations
43
44
In conclusion, Xiamen appears to most likely be a better option for an assembly plant in China
Shenzhen Xiamen Comment
Cost + + + • Only certainty on sea shipping (~80k€/year)
• Building would actually be cheaper in Xiamen should client decide to pick a "downtown" location (estimated ~310k€/year)
Convenience + + • Sea shipping and air travel services are Xiamen only identified weaknesses
Considering: • The importance given by client to most of the convenience criteria
• The cost difference that can either be in favor of Xiamen, or represent in the worst case ~80k€ per year
We consider Xiamen is most likely a better option for client © 2011 Dragon Sourcing. All rights reserved.
© 2011 Dragon Sourcing. All rights reserved.
Case Study Agenda
1. Introduction & Approach
2. China Sourcing
3. Location Analysis
4. Business Case
45
Based on the RFP results, we have laid out at set of assumptions that drive the business case modelling
• For each of the categories we have made three scenario: – Worst, average, best case
• Additionally, we have built a detailed cost model of the current factory operations in order to be able to model the « to-be » situation in China
• Finally, we have made assumptions about the cost and time it would take to migrate production from the current factory to the new factory in China, again with: – Worst, medium and best case scenarios
• The following pages describe both all the assumptions made and the financial outcome of the business model in terms of: – Unit cost per product – Investments required – Total cash flows over 5 years – Risk analysis
© 2011 Dragon Sourcing. All rights reserved.
Sourcing and localization of the factory in China could reduce total unit product cost by a range of 15 to 27%
Total Unit Cost - Stroller
46,637,2 33,2
26,5
17,5
15,613,2
11,7
16,9
15,614,0
12,9
16,6
12,1
12,7
9,3
6,3
6,37,3
7,3
4,9
4,4
1,5
1,4
12,4
4,09,2
3,0
5,8
4,85,8
4,8
0,0
20,0
40,0
60,0
80,0
100,0
120,0
140,0
Current Target Current Target
Cameleon EU Gecko EU
€
Operating costPersonnel costPackagingPlastic (DSM)Plastic injectionAluminiumOtherStitching
Cogs
Factory Cost
126,9
100,1
96,7
76,892,7
107,3
82,3
71,1
Product 1 Product 2
Total Unit Cost
© 2011 Dragon Sourcing. All rights reserved.
The benefits are split pretty much 50/50 between China Sourcing and localising the factory in China
Unit Cost - Savings - Cameleon EU
14,317,5
8,4
1,0
0,0
5,0
10,0
15,0
20,0
25,0
30,0
Sourcing In China Sourcing & Set up factory in China
€
Operating costPersonnel cotsCogs
14,3
26,8
Product 1
© 2011 Dragon Sourcing. All rights reserved.
The incremental sourcing savings associated with locating the factory in China come from reduced transportation and packaging costs
Ratio of total cost to Shenzhen vs Taiwan
95%
98%
94% 94%
90%
92%
94%
96%
98%
100%
Aluminum Fabric Plastic Stitching
Category
Perc
enta
ge
Further « softer » savings can be expected on injection and stitching from the Co-localisation principle
© 2011 Dragon Sourcing. All rights reserved.
Unit Cost - Cameleon EU - CoGs
46,639,6 41,9 37,2
17,5
15,616,2
15,0
16,9
15,616,1
15,2
16,6
12,913,8
12,1
6,3
6,36,3
6,3
4,9
4,44,7
4,2
0,0
20,0
40,0
60,0
80,0
100,0
120,0
Current Average Worst Best
€
PackagingPlastic (DSM)Plastic injectionAluminiumOtherStitching
On the sourcing side alone, the savings are mostly generated by stitching and plastic injection
108,7
94,4 98.9
90,0
Savings hypothesis on CoGsCategory Average Min Max
Packaging 10,0% 5,0% 15,0%Plastic (DSM) 0,0% 0,0% 0,0%Plastic injection 22,0% 17,0% 27,0%Aluminium 7,5% 5,0% 10,0%Other (*) 10,9% 7,4% 14,4%Stitching (including Fabric) 15,0% 10,0% 20,0%Fabric 0% 3% 6%(*) Average of all categories
Product 1 - COGS
© 2011 Dragon Sourcing. All rights reserved.
Setting up the factory in China under the co-location vision generates significant personnel savings while improving the sourcing economics
Current Average Worst BestSenior manager 106 224 29 400 35 280 21 560Manager 74 847 21 560 27 440 17 640Assistant manager 47 798 15 680 17 640 9 800Supervisor 38 248 12 740 15 680 6 860Deputy Supervisor 31 992 8 820 13 720 5 880Senior staff 27 389 6 860 11 760 4 900Staff 23 457 4 312 4 508 3 136Benefits 17% 41% 44% 32%Savings on operating cost 10% 0% 20%
Salaries in NTD per month
Additionnal savings on CoGs - Unit Cost
2,31,4
3,3
0,8
0,5
1,2
0,0
1,0
2,0
3,0
4,0
5,0
Average Worst Best
€
Plastic injectionStitching
Unit Cost - Personnel and Operating Cost - Cameleon EU
12,4
4,0 5,02,9
5,8
4,85,3
4,3
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
18,0
20,0
Current Average Worst Best
€
Operating Cost
Personnel Cost
Category Average Min MaxPlastic injection 5,0% 3,0% 7,0%Stitching (including Fabric) 5,0% 3,0% 7,0%
Savings on CoGs
Product 1
Product 1
© 2011 Dragon Sourcing. All rights reserved.
Taking into account the expected increase in production over the next 4 years, total yearly savings would amount to €14M in 2010 (in the average scenario)
Total Cost and Production Forecast
29,7
38,2
45,5
49,9
21,6
26,1
33,6
40,0
43,8
23,6
30,5
36,4
39,9
0,0
10,0
20,0
30,0
40,0
50,0
60,0
2006 2007 2008 2009 2010
M €
0
50000
100000
150000
200000
250000
300000
350000# strollers
CurrentSourcing in ChinaSet Up Factory in ChinaProduction forecast
• Based on average savings hypothesis © 2011 Dragon Sourcing. All rights reserved.
Investments
0
500
1 000
1 500
2 000
2 500
3 000
Best Medium Worst
K€
Other cost (moving - stock of f inished goods)
Redundancy cost
Factory set up
Travel
Housing
Salaries to management during factory set up
Moving from Taiwan to China will require investments ranging from €0.5M to €3M
549
1 203
Management relocation costs
Rellocate Management hypothesis Best Medium WorstPeriod (months) 6 12 18Incentive vs current salary in Taiwan 50% 80% 100%Number of Managers 5 10 15Housing (per month/per head) 800 1250 1600Air ticket (total/per head) 2 6 18
2 583
© 2011 Dragon Sourcing. All rights reserved.
Return on Investments
2 4823 087
3 569 3 831
-1 203-2 000
-1 000
0
1 000
2 000
3 000
4 000
5 000
2006 2007 2008 2009 2010
K €
The ROI of the factory move is still positive even in the worst case scenario
Additional savings due to set up factory in China
Investments due to set up factory in China
Net Present Value : 33,1 M € based on :
• Average hypothesis on Cogs – Personnel and Operating Costs
• Average hypothesis on investments
• 5% discount rate
• Exit Value
33,1 M€ 78,4 M€ 0,3 M€ Net Present Value:
Worst Case on
• Savings
• Investments
Average Case on
• Savings
• Investments
Best Case on
• Savings
• Investments
© 2011 Dragon Sourcing. All rights reserved.
Finally, it would take significant degradation of several of the key risk factors for the business case to be invalidated
Taiwan vs China Personnel Cost
0
1
2
3
4
5
6
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
3% Increase- Taiwan15% Increase - China
Impact of Productivy level in China vs Taiwan
5 0007 0009 000
11 00013 000
15 00017 00019 00021 00023 000
100% 110% 120% 130% 140% 150% 160% 170% 180% 190% 200%
China vs Taiwan
Net Present Value (K €)
Impact of Yuan vs Euro
5 0007 0009 000
11 00013 00015 00017 00019 00021 00023 000
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Yearly currency increase Yuan vs Euro
Net Present Value
200%means :
• Working time to built Model 1 : 1.74 hour in China vs 0,87 hour in Taiwan
• Management needed : 1 Senior staff per 4 Staff in China vs 1 Senior staff per 8 staff in Taiwan
5 %means :
• Yearly Increase of Yuan vs uro
Composite scenario :
• Yearly increase of salaries : 9%
• Yearly increase of Yuan vs Euro : 7%
• Productivity : 150% in China vs Taiwan
• Average cogs savings
NPV: 13,7 M €
© 2011 Dragon Sourcing. All rights reserved.