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Dragon Sourcing - 龙 源 Your Tailored Global Sourcing Approach Dragon Sourcing Tel: +44 (0) 844 736 1432 [email protected] China Factory Location Analysis & Sourcing Case Study © 2011 Dragon Sourcing. All rights reserved. 1
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Page 1: Case Study-China Factory Location Analysis and Sourcing

Dragon Sourcing - 龙 源 Your Tailored Global Sourcing Approach

Dragon Sourcing Tel: +44 (0) 844 736 1432

[email protected]

China Factory Location Analysis & Sourcing Case Study

© 2011 Dragon Sourcing. All rights reserved. 1

Page 2: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Case Study Agenda

1.   Introduction & Approach

2.  China Sourcing

3.  Location Analysis

4.  Business Case

2

Page 3: Case Study-China Factory Location Analysis and Sourcing

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

Page 4: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Case Study Agenda

1.  Introduction & Approach

2.   China Sourcing

3.  Location Analysis

4.  Business Case

4

Page 5: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 6: Case Study-China Factory Location Analysis and Sourcing

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

Page 7: Case Study-China Factory Location Analysis and Sourcing

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

Page 8: Case Study-China Factory Location Analysis and Sourcing

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

Page 9: Case Study-China Factory Location Analysis and Sourcing

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

Page 10: Case Study-China Factory Location Analysis and Sourcing

…(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

Page 11: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Case Study Agenda

1.  Introduction & Approach

2.  China Sourcing

3.   Location Analysis

4.  Business Case

11

Page 12: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Location Analysis

1.   Introduction and Approach

2.  Cost comparison

3.  Convenience comparison

4.  Conclusions and recommendations

12

Page 13: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 14: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 15: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Location Analysis

1.  Introduction and Approach

2.   Cost comparison

3.  Convenience comparison

4.  Conclusions and recommendations

15

Page 16: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 17: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 18: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 19: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 20: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 21: Case Study-China Factory Location Analysis and Sourcing

© 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)

Page 22: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 23: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 24: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 25: Case Study-China Factory Location Analysis and Sourcing

© 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)

Page 26: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 27: Case Study-China Factory Location Analysis and Sourcing

© 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%)

Page 28: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 29: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 30: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Location Analysis

1.  Introduction and Approach

2.  Cost comparison

3.   Convenience comparison

4.  Conclusions and recommendations

30

Page 31: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 32: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 33: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 34: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 35: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 36: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 37: Case Study-China Factory Location Analysis and Sourcing

© 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

Page 38: Case Study-China Factory Location Analysis and Sourcing

© 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.

Page 39: Case Study-China Factory Location Analysis and Sourcing

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.

Page 40: Case Study-China Factory Location Analysis and Sourcing

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.

Page 41: Case Study-China Factory Location Analysis and Sourcing

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.

Page 42: Case Study-China Factory Location Analysis and Sourcing

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.

Page 43: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Location Analysis

1.  Introduction and Approach

2.  Cost comparison

3.  Convenience comparison

4.   Conclusions and recommendations

43

Page 44: Case Study-China Factory Location Analysis and Sourcing

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.

Page 45: Case Study-China Factory Location Analysis and Sourcing

© 2011 Dragon Sourcing. All rights reserved.

Case Study Agenda

1.  Introduction & Approach

2.  China Sourcing

3.  Location Analysis

4.   Business Case

45

Page 46: Case Study-China Factory Location Analysis and Sourcing

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.

Page 47: Case Study-China Factory Location Analysis and Sourcing

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.

Page 48: Case Study-China Factory Location Analysis and Sourcing

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.

Page 49: Case Study-China Factory Location Analysis and Sourcing

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.

Page 50: Case Study-China Factory Location Analysis and Sourcing

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.

Page 51: Case Study-China Factory Location Analysis and Sourcing

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.

Page 52: Case Study-China Factory Location Analysis and Sourcing

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.

Page 53: Case Study-China Factory Location Analysis and Sourcing

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.

Page 54: Case Study-China Factory Location Analysis and Sourcing

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.

Page 55: Case Study-China Factory Location Analysis and Sourcing

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.


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