Survey

Sourcing in China Identification and Evaluation of Suppliers in China

1

>> Introduction

I am pleased to present you the main results of the survey „Sourcing in China“ which was

conducted in cooperation with the BME Office in Shanghai and the Chair of Global Supply

Chain Management at the Sino-German School of Postgraduate Studies at the Tongji

University in Shanghai.

Further, I want to thank all the participants for taking part in the Online Survey and for

the chance to conduct an interview in Shanghai.

The main goal of the survey was to get a cross-industry overview of the processes in order

to evaluate the key success factors within the scope of finding new suppliers in China.

Sebastian Weigel

(Master-Student - TU Darmstadt, Germany)

Sample

Participating companies

3

>> The participating companies

• The survey has been completely answered by 29 participants in the period from April

till May 2013.

• The greatest segment of companies are working in the areas Machinery Engineering,

Automotive – and Electrical Engineering.

• 62% of the participating companies have more than 5000 employees worldwide

• Most companies have a similar or comparable set up of the purchasing

organization like in the european headquarter

24%

35%

4%

0%

28%

0% 3%

3% 3%

Industrial Sector of the companies participating

Machinery Engineering

Automotive Industry

Chemical Industry

Aerospace

Electronics, electrical Industry

Consumer Goods

Building

Pharmaceutical

Others

22%

15%

19%

22%

22%

Number of Employees in China

1 - 50

51 - 500

501 - 1000

1001 - 5000

> 5000

0%

10%

14%

14% 62%

Number of Employees worldwide

N = 27 N = 29 N = 29

4

>> The participating companies

• The major part of the sample is actively

working in China for more than 9 years

and want to expand the market

presence in the future. They generate a

high total annual revenue.

• The most companies have mentioned

that they have 20 – 100 or 101 – 500

suppliers in China. A big amount of

these suppliers are SMEs.

• 23 companies are deliver to sites

outside China. Especially the export to

Europe, the NAFTA-region, Asia and

Brazil was stated.

0 5 10 15 20 25 30

< 1 Million USD

1 - 50 Million USD

50 - 75 Million USD

> 75 Million USD

Number participants

What is the achieved total annual

revenue of your company? (USD)

China

Worldwide

N = 27

N = 29

3

4

3

7

12

Since how many years is your

company actively working at the

Chinese market?

1 - 2 Years

3 - 5 Years

6 - 8 Years

9 - 12 Years

> 12 Years

5

>> The participating companies

21 12

10 2

12

2

1

3

2

1

1

1 3

1

1

Source of the map: www.d-maps.com

The main sourcing regions of the

companies participating are in the

area of the Yangtse – River Delta

near Shanghai und the Pearl-River-

Delta in the south.

(number of mentions)

Reasons for choosing a region

76 % Good cost basis 69 % Favourable logistics

52 % Local customers 3 % Local conditions N = 29

6

>> The participating companies

>> Are there any alternative markets for your sourcing activities in Asia?

Source of the map: www.d-maps.com

Japan: 41 %

South Korea: 55 %

Taiwan: 72 %

Indonesia: 17 %

Thailand: 48 %

India: 41 %

Malaysia: 31 %

Vietnam: 38 %

N = 29

Buying market China

>> Buying Market China

>> Culture

• Significant differences to western cultures

• Relationship-focused: The set up of a business relationship needs time, trust is very

important and good customers are often more relevant

• High power distance even in companies and loss of face: Difficulties to establish TQM

and JIT

• Short-term orientation and no long-term strategies in many companies

• Hollistic mentality: Flexibility in abide by an agreement.

• Problems regarding communication: A „Yes“ for example means often only that the

person is listining.

>> People

• Challenge to find and retain good workers

• Increasing wages

• Lack of high skilled workers in the future, graduates from universities are often

impractical

• Urbanisation: Movement of (mostly unskilled) workers to the cities

• Short-term orientation: High fluctuation in companies and lack of sense of

responsability

• Increasing competitiveness and know-how and great willingness to learn in many

chinese companies

• High influence of guanxi in the daily work

8

>> Buying Market China

>> Infrastructure

• No comprehensive expansion of the road- and rail networks across China

• Significant investments by the government in the last years (especially in the costal

areas)

• Local differences regarding logistic aspects (e.g. taxes) in most areas need to be

considered

>> Basic conditions in China

• China is a efficency driven country: A rising cost basis requires increasing efficency to be

competitive in the future

• Unclear and changing regulations and big differences in the regions are difficult to

handle

• Opaque bureaucrazy and corruption

• High influence of the state on the business environment (e.g. control of financial

market)

• No uniformed legal system and big local differences (no reliability)

• The protection of intellectual property remains incomplete

9

Risks on the procurement market in China

11

>> Risks on the procurement market in China

0

5

10

15

20

25

30

Nu

mber

of

an

swers

What are the main risks regarding sourcing in China?

Quality Reliability

Know-How spillover Logistics (e.g. delivery time, increasing costs, infrastructure)

Unreadiness for changes (Supplier) No reliable jurisdication

Staff turnover (Supplier) Adherence to delivery dates

Lack of data regarding products or company Financial circumstances in China (e.g. currency risks)

Cultural / verbal barriers Subcontracting

Lack of resources (Supplier) Difficulties towards customers (Quality from China)

Longterm existence /exit of an supplier Economic development of China

Longterm observance Time exposure for the partnership

N = 29

12

>> Risks on the procurement market in China

• Regardless the size of the company and the years in China the main risks regarding sourcing in

China are to ensure the quality of the products and the reliability of the supplier permanently.

There is a different understanding of quality in China and it takes time to introduce western

standards.

• The significance reliability as a risk is tending to decrease over the years in China (based on

experiences of those companies).

• Based on the results of the sample it becomes clear that especially companies which are recently

started working in China have problems regarding logistic aspects. Particularly companies which

source make-to-oder products quote the risk of timely delivery.

• Indeed Know-How spillover as a risk is mentioned mainly by companies that are working in China

for more than 5 years.

13

>> Risks on the procurement market in China

• The most participants mentioned that a specific supplier development is very important to reduce

the mentioned risks and to ensure the quality from the beginning of the partnership

• Eighteen participants have also noted that a dual sourcing strategy can be helpful to secure the

supply in case of problems especially with new suppliers (e.g. a supplier for european production

sites)

• A good and close cooperation with the supplier is often necessary to ensure the quality level

and the supply permanently. It also enables that that the supplier keep agreed arrangements and

respect set dates.

0 5 10 15 20 25 30

Number participants

Which are the most important strategies to minimize

these risks?

Specific supplier development

Dual sourcing strategy

Routine audits

Strict controls and directions

Presence by the supplier

Others

N = 29

14

>> Requirements significant in China

Permanent and stable quality control

Close partnership with the supplier

Localization of products

Personel relationships

Logistics

Reliable Suppliers

Tracking of processes

Precise definition of goals against the supplier

Sufficient Budget Good skilled employees Support from the headquarter

Considered Sourcing Strategy

Specific supplier development and process audits

Continuously development of the supplier

Be prepared for changes

Common unterstanding of (intern/extern) processes Presence at the supplier

High Order

Quantities

Cultural unterstanding

Product know-how Clear processes

Different way of negotiation

Confidentiality and ethics Local for local (Chinese staff)

Identification and Evaluation of Suppliers in China

16

>> Overall process evaluation

0 5 10 15 20 25

We have established good processes

There is need for improvements, no

fixed process has been established so

far

There is a need to gather more

experience regarding the Chinese

market. We frequently have

problems with suppliers

Process evaluation in the survey

0 5 10 15 20

No

Yes

Do you have problems to find a

suitable supplier? • Nearly half of the participants stated that

they have problems to find suitable suppliers

in China

• The main problems of the process are to

find suppliers which fullfill the requirements

of the own company and quality issues

• Some participants have quoted that rising

prices and low order quanitites are a

problem.

• Based on the sample the most companies

have established good processes, only some

participants mentioned that there is a need

for improvements and to gather more

informations of the chinese market.

17

>> Identification of new suppliers

• Most of the participants have mentioned that fairs and aswell the internet are important sources to

find new suppliers. In China there are numerous sourcing fairs throughout the year with a large number

of companies. A selective search and the verification of the current price level is an important

precondition to be successful.

• References are also very important to get satisfactory and trustful informations. Potential sources could

be colleagues in other sites of the own company, business contacts, local governments or aswell current

accepted suppliers.

• Because of the sample with a high amount of bigger companies external service providers are ranked

towards the other factors. Especially for companies which are starting to source in China and without

experiences on the spot it can be very helpful to get in touch with the market and to learn the differences.

27

24

21

16

15

13

8

5

6

Fairs

Internet

References / Business contacts

Organizations

Databases

Customers

Extern service providers

Publications

Others

Identification of new suppliers

N = 29

18

>> Identification of new suppliers

• From the results it can be seen, that quality aspects are playing an important role. Most of the

participants focus especially on the skills of the supplier and quality verifications. The actual sourcing

product and aswell the pricing are initially playing a secondary role.

• In the interviews with experts it has become apparent that it is important to define the criterias not too

restrictive in order to prevent that good suppliers will be disqualified in an early stage. Companies have

to adapt their strategy on the special requirements in China. Western standards are generally not directly

transferable.

• The most of the companies participating are using standardized forms for the first request. A preliminary

call with a supplier is important to ensure getting a feedback.

26

24

21

20

19

16

15

7

3

General data (e.g. revenue, size)

Quality certifications

Maufacturing skills and processes

References of other customers

Machinery

Pricing

Product-related data and used materials

International logistics and delivery experience

Others

Which data do you require about the supplier in the

first request?

N = 29

19

>> Auditing

• Nearly all participants mentioned that it is important to realize an pre-audit to obtain a first impression

of the potential supplier and to check the data of the first request.

• Especially in case of company-specific parts it is helpful to request a trial shipment and a quotation to

proof the skills and the price-level in an early stage.

• After a positive first impression an detailed audit with the participation of other departments will be

performed to test the final suitability of a supplier. Based on the data of the survey especially the Quality

Management is involved in the process-step.

• The clear focus of the audits are the process capability and stability, reliablity of the supplier and to

secure a constant quality level in case of a cooperation in the context of a new project in the future.

• In the whole process it is important that the auditor and the involved people have the necessary

experience especially in the chinese business environment. Furthermore the critical process steps have to

be definied in advance.

• The final decision is based on the results of the audits. A lot of participants have mentioned that the

quality and the delivery time are more important than the pricing but all in all especially in bigger

companies the price of the serial product plays a significant role (TCO is important).

20

>> Pricing

• Based on the results it can be seen that the

overall costs for the process are rated

nearly similar to western markets

• Especially the costs to ensure the quality

and for developing a supplier are

considerably higher than in western

markets.

• Companies in the area Automotive and

especially in the Machinery Engineering

are rating the costs for troubleshooting

very high.

• Based on the results it can be seen that a

detailed analysis of the supplier in an early

stage is very important in order to reduce

costs in a later collaboration.

Research of potential new suppliers on the

market

Pre-selection of possible suppliers for the

further analysis

Identification of a suitable supplier for the

sourcing process

Costs for the supplier development

regarding the needs of the company…

Costs of troubleshooting within the scope

of the collaboration

Negotiating the price range

Transportation and Logistics

Taxes

Quality costs

Warehousing

Compliance costs

1 2 3 4 5

Costs (1 higher --> 5 lower)

Costs in comparison to western marktes

Overall sample Machinery Engineering

Automotive Electronic industry

N = 29

21

>> Pricing

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Usually cheaper prices and cost benefits are feasible in China

The higher the price, the higher the quality of the product

The higher the price, the better the supplier`s equipment

The switching costs for a supplier within the scope of firm-

specific parts are higher than those regarding mass products

The additional costs regarding LCC sourcing often compensate

the expected cost benefits compared to Western markets

The price is not the key component of the sourcing decision

The offered price of the existing supplier determines the price

limit for new sourcing activities (Change of supplier)

I fully agree

I agree

Neutral

I disagree

I fully disagree

• More than 60% of the participants agree with the assumption that cheaper prices in China are feasible.

Furthermore it can be seen, that in the tendency the price is not the key component of the sourcing

decision in China as already mentioned before but the current pricing of an existing supplier based on

the sample seems to determine the price limit for new sourcing activities.

• Based on the results it is not possible to unambiguously conclude that the quality of the product or

supplier´s equipment is related to the price. Often suppliers with a better equipment can also realize a

better price due to increased efficiency.

• A significant proportion of participants disagree with the asumption that the additional costs for LCC-

Sourcing compensate the expected benefits.

N = 29

22

>> Strategic fit

Quality of work

Reliability

Willingness for supplier development

Supplier loyality (compliance with all contracts)

Security of supply and planning

Legal compliance (Contracts, legal form)

Suppliers (Quality of purchased materials)

Strategic importance of the collaboration for the supplier

Qualification measures of the supplier

Willingness to provide informations

Experiences withn the industry

Existing documentation of intern processes

Financial condition (turnover, profit, positive revenue grow)

Performance history

Distance of the supplier to the own sites

Skills to absorb knowledge (Know-How transfer)

Business model of the supplier

Size of the supplier (acceptable capacity)

Complementary resources

Investment acivity (based on own industry sector)

Focus on industry

Western customer base

Wide range of offered services / products

Willingness for joint investments

Year of foundation

1 2 3 4 5

(1 very mportant--> 5 unimportant)

Strategic fit of the supplier

Machinery engineering Automotive Electrical Engineering Overall sample

• As part of strategic reflections

especially the reliability and the

quality of work is very important. The

supplier has to garantee the security

of supply and planning and the

quality of purchased materials

• In this respect the willingness for a

supplier development and loyality

seems to be very important

• A closer cooperation including joint

investments is across the main

industries not important at the time

N = 28

23

>> Strategic fit

• All participants of the sample share the opinion that a specific supplier development is very important

in China. In this regard the major part mentioned that the possibilities for a development are closely

linked to the own Know-How of the product. Especially within the scope of unspecific and complex

mass products there is a tendency that the process in difficult (expect in the area of electrical

engineering). In the case of company-specific parts there is a high amount of cooperation needed.

• In general the participants quote that is not difficult to find suppliers which show the willingness for

changes within a supplier development

• As already mentioned it is very important for business relations with a supplier to be considered as a

good customer.

• Regarding the identification of new companies most of the participants in the area of machinery

engineering have mentioned that there are a lot of suppliers for mass production in China. In case of

firm specific parts there is no clear tendency visible. Most of the participants voted neutral. The same

trend can be seen within the scope of finding suppliers for batch production.

24

>> Strategic fit

A supplier development is an inherent part of our sourcing strategy in

China

It is very important to be considered as an important customer

Within the scope of firm-specific parts a high degree of cooperation is

necessary

There are a lot of suppliers for unspecific mass products

The higher the own know-how about the product, the higher the scope

for a development of suppliers

Small suppliers show more willingness for changes in their company

regarding collaboration

Small suppliers are more interested in collaborations (make-to-order)

There is a need for close collaboration within the scope of batch

production

Disclosing know-how to suppliers carries a high risk and is challenging

for the company

Usually there is a readiness for assimilation needed within the scope of a

good collaboration

Supplier development regarding unspecific and complex mass products is

usually difficult (limit of own capabilities, strong suppliers)

There are a lot of suppliers for firm-specific parts in China

Many companies are not interested in batch production (difficult

identification process because of few suppliers)

It is easier to find a supplier who is producing according to our

specifications (own R&D)

It is difficult to find suppliers which show the willingness for changes

(Supplier development) 1 2 3 4 5

1 "I fully agree" --> 5 "I fully disagree"

Machinery Engineering Automotive Electrical Engineering Overall sample

N = 28

25

>> Skills

Process reliability

Established quality management system

Knowledge of the staff (qualification / experiences)

Continuous process improvements

Organized logistics

Potential regarding solving problems

Facilities for proving and measurements

Management skills

Measurable manufacturing skills (e.g. certificates)

Securtity- and Environment standards

Corporate and Social Responsibility

Offered products and skills

Customer Relationship Management

Approval of Western norms and standards

Machinery equipment (e.g. type, build year)

Research & Development

Low fluctuations of employees

Availability of replacement parts

Knowledge of foreign languages (culture)

After-Sales Service / Sales network

Export (e.g. customs duties, payment processes)

Strategy of internationalization

1 2 3 4 5

(1 very mportant--> 5 unimportant)

Skills a supplier has to accomplish

Machinery industry Automotive Electrical Engineering Overall sample

• The clear focus is to guarantee the quality

of the products and the reliability

• This is closely tied to the skills of the staff

and the management especially regarding

process improvements and the competence

to solve problems efficient

• Export issues and a strategy of

internationalization is based on the sample

subordinated but organized logistics are

important within the chinese market.

N = 27

26

>> Skills

The lesser the skills of the supplier,

the higher are the costs for supplier

development

A permanent control of the supplieris necessary

The quality of the goods from

China is increasing permanently

Purchasing in China is particularlycheap for products with a big

amount of manual work

It is difficult to ensure the quality

of the products and the willingness

of the supplier permanently

Small suppliers are endowed with

less equipment and inferior QMS

The size and knowledge of the

supplier is related to the size of

order. (low volume productions… 1 2 3 4 5

1 “I fully agree" --> 5 “I disagree"

Asumptions

Machinery industry Automotive

Electrical industry Overall sample

• All participants agree that the costs for a

supplier development are related to the skills

of the supplier and a permanent control is

necessary.

• Especially in the machinery industry it is

difficult to ensure the quality permanently

because of the product range

• Most of the participants mentioned that the

quality - level in China is increasing

permanently and there is a tendency that a

higher proportion of manual work is an

important factor in order to purchase cheap

products

• On the basis of the overall sample it can`t be

agreed to the assumption that the size and

knowledge of the supplier is related to the

size of order.

N = 27

Summary

28

>> Summary

• Is is necessary to take into account that the chinese procurement market is different in comparison to

western markets. Especially the differences regarding culture need to be considered to understand the

requirements for a succesful sourcing decision.

• The major challenge is to ensure the quality of the products and the reliablity of the supplier

permanently. In this context a specific supplier development, a permanent and stable quality control and

a well thought out supplier strategy is very important. Qualified employees with experiences on the

chinese market are often crucial for success.

• Fairs, the internet and relationships are based on the sample the most important sources to identify new

suppliers in China. The subsequent evaluation-process clearly focus on quality aspects and the reliablity

as the main challenges in China. The pricing plays initially a secondary role within the results.

• Within the process a clear startegy and an understanding of the requirements regarding the purchased

parts are very important in order to evaluate suppliers and to provide additional expenses.

Contact

Technische Universität Darmstadt

Rechts- und Wirtschaftswissenschaften

Supply Chain- & Netzwerkmanagement

Prof. Dr. Dr. h.c. Hans-Christian Pfohl

Hochschulstr. 1

64289 Darmstadt

Sebastian Weigel

Mail: Sebastian.Weigel@me.com