TBA on China Procurement 25 FEB 2013

www.thebeijingaxis.com

Procurement RoundtablePerth, 25 February 2013

China’s Transformation and the Future Merits of China Procurement- Why, What and How?

Kobus van der WathFounder and Group Managing DirectorThe Beijing [email protected]

China-focused International Advisory and Procurement The Beijing Axis 1

Disclaimer

This document is issued by The Beijing Axis. While all reasonable care has been taken in the preparation of this document, no responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections and estimates are subject to change without notice. This document is for information purposes only, and solely for private circulation. The information contained here has been compiled from sources believed to be reliable. While every effort has been made to ensure that the information is correct and that the views are accurate, The Beijing Axis cannot be held responsible for any loss, irrespective of how it may arise. In addition, this document does not constitute any offer, recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy, nor does it constitute any prediction of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as rise. The Beijing Axis, and/or a connected company may have a position in any of the investments mentioned in this document. All concerned are advised to form their own independent judgement with respect to any matter contained in this document.

The Beijing Axis 2

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The Beijing Axis 3

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

The Beijing Axis 4

Compendium…

Manufactured trailers

Grinding mills

Magnesium

Electric Mining ShovelGensets

The Beijing Axis 5

Compendium…

Superheaters

Grinding Media

Boiler Shells

Interpass Absorption

Thickeners

Pumps

The Beijing Axis 6

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…

The Beijing Axis 8

Why source from China?

Source: The Beijing Axis Analysis The Beijing Axis 9

What to source from China?


The Beijing Axis 10

How to source from China?

Source: The Beijing Axis Analysis The Beijing Axis 11

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 ServicesGross Capital FormationFinal 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

The Beijing Axis 12

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

The Beijing Axis 13

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

NorthAmerica to Japan

Japan to HK,

Taiwan,Singaporeand Korea

SE Asia and

Mexico/Latin America

China to India and Vietnam

Britain, W-Europe

toUSA

Indo-China?Africa?PNG????

Latest LCC Era Next LCC Era

NIE’s to China, SE Asia, and Sri Lanka

Why

The Beijing Axis 14

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 AmericaAfrica

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

The Beijing Axis 15

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

KoreaNorway

Malaysia

India

Indonesia

China

Singapore

Hong KongBelgium

Russia

GermanyItalyJapan

Canada

Bubble Size: Value of Exports (USD bn, 2011)

Why

The Beijing Axis 16

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 20110%

20%

40%

60%

80%

100%

2000 20110%

20%

40%

60%

80%

100%

2000 2011

Cranes ShippingContainers

Excavators

China

ChinaGermany

GermanyUS

USItaly

Italy

JapanJapanAustria

Austria

OthersOthers

China

China

S. Korea

USSouth Africa

South AfricaOthers Others

6%

24%

69%

85%

China 3%

Japan

Japan

Germany

Belgium

US

France

US

GermanyBelgiumFrance

Others Others

ChinaChina 0.2%

China is 8th

China was 18th

Why

The Beijing Axis 17

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 JapanUK US China

0

5

10

15

20

25

30

35

40

45

01 02 03 04 05 06 07 08 09 10

France Germany JapanUK US China

Why

The Beijing Axis 18

The top 100 industrial clusters in China are scattered throughout the whole country

Source: Li & Fung Research Centre; The Beijing Axis Analysis

HeilongjiangSuihua: Linen products

JilinTonghua: Pharmaceutical, Steel

LiaoningShenyang: Ceramic building materialsYingkou: Magnesium productsDandong: Measuring instruments

ShandongQingdao: Textile machineryYantai: Sweater, WineWeihai: TextileLinqing: Axle bearingRizhao: FisheriesJinan: Transportation equipmentDezhou: Solar water heaterLiaocheng: Steel pipeLinyi: Crop protection machinery

AnhuiHefei:Household appliances

JiangsuWuxi: Electric wires and cables, Environmental

protection equipment, Purple clay teaware, Electrics, Photovoltaic

Suzhou: IT, Circuit board, Apparel, Silk textileZhenjiang: EyewearTaizhou: Ship building, Energy equipmentXuzhou: Wood processingYangzhou: Leather shoesLianyungang: Silicone products

ShanghaiJinshan: Chemicals

ZhejiangHangzhou: Steel structures, BoxboardWenzhou: Lighter, Locks, Medium and low voltage electrical appliances,

Valves, Plastic woven packagingJiaxing: Fur, Leather, Warp knitting, Opto-mechatronicsNingbo: Mold, Household electronic appliances, StationeryJinhua: Small commodities, Hardware, Electric toolsShaoxing: Textile, Dyeing, Socks, Pearls, TiesTaizhou: Plastic shoes, Solid waste recyclingHuzhou: Bamboo products

FujianQuanzhou: Trainers, Zipper, Plumbing hardware, SnacksPutian: Jade processing, Chinese classical furnitureShishi: Children’s wear

GuangdongZhongshan: Machinery and electronics, Packaging, Lighting, Casual wearDongguan: Electronic productsGuangzhou: Denim clothing, AutomobileShantou: Underclothing, ToysShenzhen: Electronic productsYunfu: Stone, KitchenwareHuizhou: Shoes

GuizhouZunyi: Chinese liquor

HunanChangsha: Fireworks and

firecrackersZhuzhou: Ceramics

ChongqingBishan: Motorcycle

HubeiYichang: Phosphorus chemicals

Xiantao: Nonwoven textile

ShaanxiBaoji: Titanium products

HenanZhenzhou: Aluminum products, Refractory materials

Xinxiang: Cranes

ShanxiTaiyuan: Stainless steel, Radiator

Xinzhou: ForgingJinzhou: Coking

HebeiCangzhou: Insulation materials, Metal castingXingtai: CashmereHengshui: Rubber (applied in engineering)Langfang: FurnitureHandan: Fasteners

XinjiangShihezi: Cotton textile

Cities with 1 ClusterCities with 2 ClustersCities with 3 ClustersCities with 4 ClustersCities with 5 ClustersCities with 6 Clusters

Why

The Beijing Axis 19

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 • Machine building• 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• Machine building • Electrical industry

Why

The Beijing Axis 20

World R&D Spending and Employees (2010)

Note: Bubble size is the annual R&D spending by countrySource: 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

2010China’s Total R&D

ExpenditureUSD 87 bn

2010

R&D Personnel in Research Institutions

1.43 mn

20102010

The R&D to GDP Ratio1.7%

2000

2000

20002000

Annual Growth23%

Scientists & Engineers/Million People

R&D as % of GDP

Finland

Japan

Sweden

US

S. KoreaTaiwan

China

India

Iceland

Singapore

Norway

Germany

Austria

Switzerland

Canada

France

UK

Belgium

Netherlands

Russia

Spain

Czech Rep.

SloveniaIreland

Italy

BrazilSouth Africa

TurkeyRomania

Mexico

Hungary

Portugal

PolandGreece

Slovak Rep.

New Zealand

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

00.5 1 1.5 2 2.5 3 3.5 4 4.5

Israel

Americas

Asia

Europe

Others

Why

The Beijing Axis 21

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

GlobalAsia PacificNorth AmericaWestern 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

The Beijing Axis 22

International Shipping Time (number of days)

Note*: TEU – Twenty foot Equivalent UnitSource: 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

234

5

67

89

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

The Beijing Axis 24

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 positionSource: The Beijing Axis Analysis

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 SupplierBase

Ease of Doing Business

R&D Large-ScaleEconomy

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 scalePrice/QualityRatio

Why

The Beijing Axis 25

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

MaterialsTooling 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 Beijing Axis 26

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

Materialprice

increases

Reduceddemand in

homecountry

Wageincreases

RMBappreciation

Shortagesof qualifiedpersonnel

Concernsover IP

protection

Pooremployeeretention

Sluggishproductlaunch

readiness

Productquality

Difficultiesto find

adequatesuppliers

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 issueIP is becoming less of an

issue

Growing concerns

The Beijing Axis 28

• 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

The Beijing Axis 29

Agenda


2. Best Practice: category focus, getting it right, overcoming the challenges and

managing the many risks


4. Final Word

The Beijing Axis 30

0

500

1,000

1,500

2,000

2001 2011

Machinery and Electrical EquipmentTextile and Textile ArticlesBase MetalsTransport EquipmentMiscellaneous Manufactured ArticlesChemical ProductsOthers

32%

43%

Exports of Commodities Produced in China (USD bn, 2001-2011)

*Note: Based on HS 2-digit codes Source: UN Comtrade; The Beijing Axis Analysis

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 orcrochet

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

The Beijing Axis 31

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 MetalsTransport Equipment Miscellaneous Manufactured Articles Chemical ProductsOthers

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

The Beijing Axis 32

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)Source: UN Comtrade; The Beijing Axis Analysis

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)

USGermany

China

Italy

FranceSingapore

UK

NorwayCzech Republic

Australia

Denmark MexicoFinlandSwedenCanada

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

The Beijing Axis 33

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

The Beijing Axis 34

Geographic Distribution of Top 500 Machinery Companies (2006-2011)

Note: (1) includes foreign-owned firms with fully integrated manufacturing in ChinaSource: 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

050

100150200250300350400450500

2006 2007 2008 2009 2010 2011

Rest of the World Asia

11681

15 821JapanChinaKoreaIndiaSingaporeMalaysia

5360

697477

81

0 30 60 90

200620072008200920102011

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

The Beijing Axis 35

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 = LowSource: The Beijing Axis Analysis

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• Comparable to international standards• Competitive price and int’l standards• China's strength lies in the mid-low end of market

• Agitators • Furnaces • Heat exchangers • Structural steelwork

• Comparable to international standards• 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 EquipmentMechanical 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• Comparable to international standards• Competitive price and international standards• Readily available with international standards

• No availability concerns; competitive price• Comparable to international standards• 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

The Beijing Axis 36

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

JapanPrimary Secondary• Transformers• Switchgear• Stacker and

reclaimers• Steel pipes• Variable speed drives

• Grinding mills and crushers• Conveyors• Flotation cells and magnetic

separators

South KoreaPrimary Secondary• Transformers• Switchgear• Steel pipes

• Conveyors• Stackers and reclaimers• Structural steel and plate work• Variable speed drives

MalaysiaPrimary Secondary

• Switchgear• Conveyors

IndonesiaPrimary Secondary

• Transformers• Switchgear• Structural steel and

plate work

ChinaPrimary* Secondary• Transformers• Switchgear• Grinding mills and crushers• Conveyors• Structural steel and plate work• Pre-fabricated housing• Steel pipes• Flotation cells and magnetic

separators• Variable speed drives• Grinding media

• Stacker and reclaimers

IndiaPrimary Secondary• Grinding media • Switchgear

• Steel pipes• Flotation cells and

magnetic separators• Variable speed drives

ThailandPrimary 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 packageSource: The Beijing Axis Analysis The Beijing Axis 37

Beijing Axis Procurement has a tried and tested service delivery platform & methodology for sourcing

Supply Chain Managem

ent & Support

Procurement needs analysis and China procurement competitive analysis

Supplierpre-qualification, due diligence & final selection

Transaction monitoring

Systematicindustrysearch& supplieridentification

Commercial process, contracting & contract management

Negotiation,tender evaluation

Quality mgmt. (QA/QC),Expediting & 3rd partymgmt.

Logistics

1 2 4

875

Analysis Initial scoping, supplier evaluation, due diligence and final selection

Supplier EngagementSupplier engagement, client visits, testing, application of detailed filters and negotiation

Supplier Process ManagementTransaction monitoring, quality assurance, expediting, 3rd party management and logistics

Strategic Sourcing

Supply Chain Managem

ent & Support

6

11109

Coordination & assistance on site (material mgmt., commissioning, etc.)

12

Supplier evaluation by applicationof high level filters

3

Siteinspections, sample testing &standards

Supplierengagement, RFQ & tendering (SOI, RFP)

• Overall Project Management• Holistic Risk Management• Strategic Relationship Management

Service Delivery Platform & Methodology

Oper

atio

nal P

rocu

rem

ent P

roce

ssAn

alysis


How

The Beijing Axis 38

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 Businessin 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

The Beijing Axis 39

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 Description1

8

7

6

5

4

3

2

The Beijing Axis 40

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 ofprofessional 3rd partiesEarly 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

The Beijing Axis 41

International companies are using various ‘models and sourcing structures’ for China procurement – but one trend is clear: greater engagement

*Note: Conceptual frameworkSource: The Beijing Axis Analysis

Direct

Indirect

Outsource

High

Low Cost / Commitment

Leading goldproducer

Leading copper producer

Leading gold producer

Leading engineering firm

Large steel manufacturer

Globally diversified miner

Globallydiversified miner

Leading engineering company

Large gold producer

Globally diversified minerLeading platinum

producer

Largesteel firm

Leading gold producer

Leading international

contractor

Leading steelproducer

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

China

Pre

senc

e

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

Aluminiumproducer

Globally diversified retailer

Apparel retailer

Large diversified retailer

Large apparel retailer

Globally diversified miner

Globally diversified retailer

Leadingcoal producer

Leadingapparel retailer

Representative OfficeWOFE/FICE

Colors represent:

Shapes represent:Retail CompaniesMining/Engineering Firms

China Procurement Models and Structures of Major International Mining, Engineering and Retail Firms

How

The Beijing Axis 42

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 outSource: 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,BarickFMG (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: NewcrestKinross (2)

Prim

ary a

nd S

econ

dary

Chan

nels

How

The Beijing Axis 43

Agenda



the many risks


4. Final Word

The Beijing Axis 44

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

OrganisationalSetup

Key Risks andIssues Addressed

Supplier Competitiveness

2

3

4

Results

1

Case Study

The Beijing Axis 45

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

OrganisationalSetup



2

3

4

Results

1

Case Study

The Beijing Axis 46

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

OrganisationalSetup



2

3

4

Results

1

Case Study

The Beijing Axis 47

Compendium…

Manufactured trailers

Grinding mills

Magnesium

Electric Mining ShovelGensets

The Beijing Axis 48

Compendium…

Superheaters

Grinding Media

Boiler Shells

Interpass Absorption

Thickeners

Pumps

The Beijing Axis 49

Compendium…

Pipes

Round bars

Angle steel

Flat barsHollow bars

Rails


Girth Gear

Kiln Support Roller Shaft

Kiln Shell

Mill HeadKiln Shell

Support Roller

Compendium…

The Beijing Axis 51

Agenda



the many risks


4. Final Word

The Beijing Axis 52

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, ChinaCheryl TangDirector & GM, [email protected]

Shanghai, ChinaJulia WangProcurement Specialist

Hong Kong TBA Secretary Corporate Office 3806 Central Plaza, 18 Harbour Rd Wanchai, HK

SingaporeAndrew Kagoro, Finance & ProjectsPenthouse & LV 42Suntec Tower 3, 8 Temasek Blvd Singapore

Perth, AustraliaKobus van der WathFounder & Group [email protected]

Johannesburg, South AfricaDirk KotzeDirector & GM, [email protected]

London, UK/EuropeMatt PieterseNon-Executive Director

Russia DeskLilian LucaNon-executive Director

Latin America DeskJavier Cuñat (Beijing)Associate Director

Yangon, MyanmarDr. Wong YFChief Representative

India DeskAnkit Khaitan (Singapore)Beijing Axis Strategy

Eastern Africa DeskWalter 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 WathFounder and Group Managing Director, The Beijing [email protected]

THANK YOU!

TBA on China Procurement 25 FEB 2013

Business

Transcript of TBA on China Procurement 25 FEB 2013