China Purchasing Development Report - IberglobalLi & Fung Research Centre of the Li & Fung Group is...

China Purchasing Development Report

(2010)

For more information

Li & Fung Research CentreMember of Li & Fung Group11/F, LiFung Tower,

868 Cheung Sha Wan Road,

Hong Kong

Tel : (852) 2300 2470

Fax : (852) 2635 1598

Email : [email protected]

Website : www.lifunggroup.com

China Federation of Logistics & PurchasingThe Specialized Committee for Purchasing andSupply China ManagementRm 1515 Henghua International Business Centre,

26 Yuetan Beijie, Beijing, China 100045

Phone : (010) 5856 6588 -191 / -195 / -183

Fax : (010) 5856 6579

Website : www.chinawuliu.com.cn

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The Report

In view of the growing importance of sourcing in China, the China Federation of Logistics and

Purchasing (CFLP), the most authoritative industry organization in areas of sourcing, logistics

and supply chain management in China, published the !rst and second annual China Purchasing

Development Reports1 in 2008 and 2009. The reports give a comprehensive account of the

latest development of sourcing activities in China, and were well received by the academia and

practitioners. The CFLP publishes the third report in 2010.

Li & Fung Research Centre of the Li & Fung Group is delighted to work jointly with the CFLP

in the China Purchasing Development Report project, and is solely responsible for the content

of the English version of the report. This English version summarizes the key takeaways of the

full report in Chinese. We hope our readers can get an overview of the sourcing environment in

China.

1 The English version of the 2008 and 2009 reports can be found here: http://www.lifunggroup.com/research/pdf/ChinaPurchasingDevelopmentReport08.pdf (2008) and http://www.lifunggroup.com/research/pdf/ChinaPurchasingDevelopmentReport09.pdf (2009).

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! ! Table of Content

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About the organizations

China Federation of Logistics & Purchasing (CFLP) is the !rst logistics and purchasing

industry association approved by the State Council. CFLP’s mission is to promote the

development of the logistics industry and the sourcing businesses of both government and

enterprises, as well as to facilitate the circulation of factors of production in China. The CFLP is

also China’s representative in the Asian-Paci!c Logistics Federation (APLF) and the International

Federation of Purchasing and Materials Management (IFPMM).

China Society of Logistics is a non-pro!t making academic organization comprising experts,

academia and practitioners in the logistics sector in China, with special focuses on logistics

theories, management science of logistics and modernization of logistics technology. The

Society endeavors to channel members’ opinions to relevant government departments, organize

activities for exchanging knowledge and experiences, nurture talents for the sector, and publish

logistics publications and information.

The Li & Fung Group is a Hong Kong-based multinational company with three distinct core

businesses: export trading, distribution and retailing. Founded in Guangzhou in 1906, the Li &

Fung Group achieved an annual turnover exceeding US$16 billion in 2009. Today, the Li & Fung

Group operates in some 40 countries and regions and employs over 35,500 people worldwide.

One of its core competencies is supply chain management.

In 2009, the Li & Fung Group’s revenue in China exceeded USD 8 billion. The extensive sourcing

network of Li & Fung Limited, the export trading arm of the Li & Fung Group, covers over 10,000

suppliers through more than 20 of!ces in China. China has become Li & Fung Limited’s most

important market in global sourcing. In 2009, 54% of its global sourcing was from China.

The Li & Fung Research Centre serves as a knowledge bank for the Li & Fung Group on

China’s economy, industries, logistics and the distribution sector, with its research scope

spanning the entire supply chain, from ideas, production, distribution, retailing to end-

consumers.

The Centre has been actively promoting the application of supply chain management. In

2003, the Centre published the book “Li & Fung: the Orchestrator of Global Supply Chain

Management”. The book is now regarded as a very useful reference among businessmen and

academics in China. The revised and expanded edition was published in August 2009.

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China sourcing survey

The CFLP conducted its !rst annual survey on sourcing activities of enterprises in China in 2008

in order to have a systematic review and analysis of China’s sourcing environment. The 2010

survey is the third exercise. This year, the CFLP expanded the scope of the survey to cover new

aspects such as green sourcing. A total of 204 valid responses were collected. The sampled

enterprises are broadly representative, in terms of industry, ownership structure and size. More

information on the pro!le of the respondents is provided in exhibits 1 to 4.

Several trends are observed. First, during the post-crisis period, the majority of the surveyed

enterprises witnessed growth in sales income. However, unreliable suppliers, increasing

operation costs and on-time delivery to clients were named the biggest challenges for them.

Second, the recognition of importance of sourcing is improving. About 60% of the sourcing

departments of the respondents directly reported to either the general manager or the vice

president overseeing sourcing. 76% of the respondents agreed that the top management had

paid more attention to the development of the sourcing department. The sourcing department

also had in"uences over other departments especially the production department and the

logistics & transportation department. Nonetheless, professional training for sourcing personnel

was inadequate, and the proportion of sourcing staff with formal training was below 50%.

Third, the application of modern management skills, approaches or systems in sourcing received

more attention, but there is still room for improvement. 67.8% of the surveyed enterprises

ful!lled or even outperformed their sourcing plans, showing signi!cant improvement from the

previous year (below 30%). 51.7% of the respondents said the sourcing performance evaluation

was closely integrated with their operational objectives, improving from 49.8% of last year. In

terms of informatization, still, less than 50% of the surveyed enterprises adopted the bar code

system across various businesses and operational units within the enterprises. Also, apart from

Enterprise Resource Planning (ERP), the adoption rate of other information systems such as

Management Information System (MIS) and Decision Support System (DSS) remained low.

Fourth, better supplier management was observed. 51.3% of the respondents thought that their

execution of the supplier evaluation system had been good or very good. 64.2% of the surveyed

enterprises managed to maintain stable relationship with over 50% of their suppliers this year, up

from 48.4% of last year.

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Finally, green sourcing and corporate social responsibility are gaining attention among the

surveyed enterprises. 75.5% of the suppliers of the surveyed enterprises provided products

meeting national green standards. 68.1% of the surveyed enterprises required their suppliers to

comply with certain corporate social responsibility requirements. If their suppliers fail to do so,

the majority of the respondents would require them to make improvements.

1. Pro!le of the surveyed enterprises

Exhibit 1 shows the types of enterprises covered in the 2010 survey. They were mainly from the

manufacturing sector, which accounted for 82.9% of the total. 31.4% engaged in mechanical

equipment, and enterprises engaging in the light industry and electronic communications

equipment accounted for 17.2% and 14.7% respectively (see exhibit 2).

Exhibit 1: Types of Enterprises

SECTOR SHARE OF TOTAL

Manufacturing 82.9%

Services 7.8%

Others (e.g. construction) 9.3%

Exhibit 2: Breakdown of industries of manufacturing sector

INDUSTRY SHARE OF TOTAL

Mechanical equipment 31.4%

Light Industry 17.2%

Electronic communications equipment 14.7%

Metal & non-metal processing 10.8%

Petrochemical (including chemical !bres, 8.8%

rubber, plastics & pharmaceuticals)

Among the surveyed enterprises, 48.0% were private enterprises (PEs); 36.8% were foreign-

invested enterprises (FIEs), which included the Hong Kong- and Taiwan-invested enterprises; and

state-owned enterprises (SOEs) accounted for 9.8% of the total (see exhibit 3).

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Exhibit 3: Forms of ownership of enterprises

Among the respondents, 44.1% were large-sized enterprises, 35.8% were medium-sized

enterprises and 20.1% were small-sized enterprises.1 More information can be found in exhibit 4.

Exhibit 4: Size of enterprises

1 In this survey, enterprises with sales volume over 300 million are classi!ed as “large-sized enterprises”; those with sales volume over 30 million and below 300 million are classi!ed as “medium-sized enterprises”; and with sales volume below 30 million, “small-sized enterprises”.

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2. Sourcing in the post-crisis period

i. Sales income and sourcing volume

The majority of the surveyed enterprises (87.8%) had witnessed growth in sales income in

2009, and the average growth rate was 20.8%. However, not many enterprises recorded large

increases in sales income. Only 5.5% of the enterprises achieved a growth rate of over 50%,

while 64.2% of the enterprises had positive sales growth below 25%. (see exhibit 5). Among

those with zero or negative sales growth, 76% were FIEs.

Exhibit 5: Growth in sales income

Among the different forms of ownership of enterprises, the growth rate of PEs was the highest

(23.1%), while that of FIEs was the lowest (17.8%) (see exhibit 6). On the other hand, the small-

sized enterprises outperformed the other enterprises. They achieved 31.6% of sales income

growth, while the growth rates for the medium- and large-sized enterprises were both 18.0% (see

exhibit 7).

Looking at the growth in sales income by industry, energy production and distribution (35%),

mechanical equipment (31%) and services (22%) were the best performers. See exhibit 8 for

more details.

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Exhibit 6: Average growth in sales income by form of ownership of enterprises

Exhibit 7: Average growth in sales income by size of enterprises

Exhibit 8: Average growth in sales income by industry

In terms of sourcing volume, the majority of the surveyed enterprises (88.2%) saw an increase,

and they recorded an average increase of 18.2%. However, not many enterprises had remarkable

growth in sourcing volume. Over 70% of the enterprises reported that their increases in sourcing

volume were lower than 25% (see exhibit 9). Among those with zero or negative growth, 80%

were FIEs.

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Exhibit 9: Growth in sourcing volume

Among different forms of ownership of enterprises, PEs had the biggest increase in sourcing

volume (24.9%), while that of FIEs was the smallest (9.5%) (see exhibit 10). Among the different

sizes of enterprises, the small-sized enterprises outperformed their counterparts. They achieved

a volume increase of 36.0%, compared to 10.8% volume increase of the large-sized enterprises

(see exhibit 11). Among different industries, mechanical equipment (25%) and electronic

communications equipment (24%) were the best performers (see exhibit 12).

Exhibit 10: Average growth in sourcing volume by form of ownership of enterprises

Exhibit 11: Average growth in sourcing volume by size of enterprises

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Exhibit 12: Average growth in sourcing volume by industry

ii. Major challenges of sourcing management

When asked about the greatest challenge, 51.0% of the respondents named unreliable suppliers.

Increasing operational costs (46.6%) and on-time delivery to clients (44.6%) were also major

challenges faced by the enterprises. Exhibit 13 gives you more information.

Exhibit 13: Major challenges of sourcing management

Note: Multiple responses allowed

Looking at different forms of ownership of enterprises, unreliable suppliers (50.0%), increasing

operational costs (50.0%) and risk management (50.0%) were the biggest challenges for SOEs.

Only 20.0% of SOEs regarded on-time delivery to clients as a major challenge. As for FIEs, their

pressure came mainly from unreliable suppliers (49.3%), on-time delivery to clients (49.3%) and

stiff competition (46.7%). PEs suffered most from unreliable suppliers (51.0%), on-time delivery

to clients (49.3%) and increasing operational costs (49.0%) (see exhibit 14).

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Exhibit 14: Major challenges of sourcing management by form of ownership of enterprises


iii. Measures to overcome challenges

As most enterprises considered “unreliable suppliers” their biggest challenge, various measures

were taken to overcome it. Maintaining long term and stable relationship with suppliers (83.3%)

and developing new suppliers (77.3%) were the most commonly named measures. Exhibit 15

gives more information.

Exhibit 15: Measures to overcome challenges

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3. Strategic importance of sourcing within enterprises

i. Head of the sourcing department

Results revealed that the importance of sourcing was well recognized among the surveyed

enterprises. As shown in exhibit 16, nearly 60% of the sourcing departments of the respondents

reported directly to either the general managers or the vice presidents who oversee sourcing.

Only 9% of the sourcing department of the surveyed enterprises reported to chief procurement

of!cers, chief executive of!cers or chief supply chain of!cers. Also, most of the SOEs did not

have a chief operation of!cer or chief procurement of!cer. It re"ects that sourcing has yet to

develop as a specialized division, especially for SOEs (see exhibit 16).

Exhibit 16: Head of sourcing department

ii. Importance of the sourcing department

In terms of involvement in other business functions, the sourcing department did show its

in"uences over other departments’ decision making, especially the production and logistics &

transportation departments. The proportions of sourcing department having high and medium

involvement in the aforesaid departments were 71.6% and 67.7% respectively (see exhibit 17).

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Exhibit 17: Involvement of sourcing departments in other business functions


Among different forms of ownership of enterprises, the sourcing departments in SOEs involved

signi!cantly less in other business functions, when compared with their counterparts in FIEs and

PEs (see exhibit 18). On the other hand, the sourcing departments in small-sized enterprises had

much lower involvement in strategic planning when compared with their counterparts in medium-

and large-sized enterprises. (see exhibit 19).

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Exhibit 18: Involvement of sourcing departments in other business functions by form of

ownership of enterprises

Other business functions Levels of involvement SOEs PEs FIEs

Information technology High 15.0% 17.3% 6.7%

Medium 50.0% 34.7% 36.0%

Low 10.0% 22.4% 29.3%

No involvement 25.0% 25.5% 28.0%

Logistics & transportation High 30.0% 32.7% 38.7%

Medium 30.0% 33.7% 32.0%

Low 10.0% 16.3% 17.3%


Non-production operation High 0.0% 8.2% 8.0%

Medium 35.0% 27.6% 28.0%

Low 25.0% 23.5% 38.7%


Production High 40.0% 40.8% 48.0%

Medium 25.0% 27.6% 28.0%

Low 10.0% 13.3% 14.7%


Customer support High 15.0% 12.2% 16.0%

Medium 25.0% 32.7% 22.7%

Low 15.0% 26.5% 26.7%


Marketing & advertising High 0.0% 4.1% 1.3%

Medium 10.0% 17.3% 13.3%

Low 30.0% 30.6% 29.3%


Sales & business development High 10.0% 22.4% 5.3%

Medium 10.0% 25.5% 34.7%

Low 35.0% 20.4% 24.0%


Product & service development High 15.0% 23.5% 16.0%

Medium 35.0% 26.5% 42.7%

Low 25.0% 28.6% 26.7%


Research & development High 15.0% 24.5% 25.3%

Medium 15.0% 22.4% 29.3%

Low 45.0% 28.6% 26.7%


Strategic planning High 10.0% 16.3% 17.6%

Medium 45.0% 42.9% 39.2%

Low 10.0% 17.3% 25.7%


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Exhibit 19: Involvement of sourcing departments in other business functions by size of

enterprises

Other business Levels of Large-sized Medium-sized Small-sized

functions involvement enterprises enterprises enterprises

Information technology High 13.3% 11.0% 14.6% Medium 34.4% 53.4% 14.6% Low 28.9% 20.5% 17.1% No involvement 23.3% 15.1% 53.7%Logistics & transportation High 31.1% 45.2% 26.8% Medium 35.6% 28.8% 31.7% Low 16.7% 15.1% 12.2% No involvement 16.7% 11.0% 29.3%Non-production operation High 6.7% 9.6% 2.4% Medium 26.7% 39.7% 14.6% Low 38.9% 21.9% 19.5% No involvement 27.8% 28.8% 63.4%Production High 47.8% 49.3% 29.3% Medium 27.8% 26.0% 26.8% Low 12.2% 12.3% 14.6% No involvement 12.2% 12.3% 29.3%Customer support High 14.4% 16.4% 7.3% Medium 25.6% 34.2% 26.8% Low 25.6% 23.3% 24.4% No involvement 34.4% 26.0% 41.5%Marketing & advertising High 4.4% 1.4% 0.0% Medium 13.3% 16.4% 19.5% Low 34.4% 28.8% 17.1% No involvement 47.8% 53.4% 63.4%Sales & business development High 13.3% 12.3% 19.5% Medium 25.6% 34.2% 22.0% Low 27.8% 24.7% 12.2% No involvement 33.3% 28.8% 46.3%Product & service development High 22.2% 21.9% 14.6% Medium 30.0% 42.5% 26.8% Low 30.0% 23.3% 24.4% No involvement 17.8% 12.3% 34.1%Research & development High 25.6% 28.8% 19.5% Medium 26.7% 19.2% 26.8% Low 30.0% 28.8% 22.0% No involvement 17.8% 23.3% 31.7%Strategic planning High 14.4% 13.9% 31.7% Medium 43.3% 44.4% 26.8% Low 23.3% 19.4% 12.2% No involvement 18.9% 22.2% 29.3%

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In general, the importance of the sourcing department has grown signi!cantly in recent years.

It can be proved by the fact that 76% of the respondents agreed that the top management had

paid more attention to the development of the sourcing department.

iii. Contribution of the sourcing department to enterprises

According to the survey, the most important contribution of the sourcing department to

enterprises lay in cost control, followed by quality improvement and risk management.

4. Sourcing Performance

I. Criteria of sourcing performance evaluation

i. Implementation of sourcing plan

67.8% of the surveyed enterprises ful!lled or even outperformed their sourcing plans. However,

32.2% of respondents were not sure if they had ful!lled their sourcing plans (see exhibit 20).

Among different forms of ownership of enterprises, FIEs did better than other enterprises, with

78.9% of FIEs ful!lled or outperformed their sourcing plans (see exhibit 21). Large- and medium-

sized enterprises also had a higher implementation rate of their sourcing plans (see exhibit 22).

Exhibit 20: Implementation rate of sourcing plan

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Exhibit 21: Implementation rate of sourcing plan by form of ownership of enterprises

Exhibit 22: Implementation rate of sourcing plan by size of enterprises

ii. Accuracy of order processing

Exhibit 23 demonstrates the accuracy rate of order processing of the surveyed enterprises. In

overall terms, 86.1% of orders were processed accurately. Among different forms of ownership of

enterprises, FIEs again outperformed SOEs and PEs (see exhibit 23). When it comes to different

size of enterprises, small-sized enterprises noticeably lagged behind their counterparts (see

exhibit 24).

Exhibit 23: Accuracy rate of order processing by form of ownership of enterprises

Exhibit 24: Accuracy rate of order processing by size of enterprises

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II. Sourcing performance management

i. Indicators for sourcing performance evaluation

When asked about the indicators for sourcing performance evaluation, most respondents of all

forms of ownership chose price/cost: FIEs (98.6%), PEs (94.9%) and SOEs (100%). Product

quality, inventory and continuity of supply were also important. By contrast, technology,

innovation and introduction of new products was the least chosen indicator by the respondents

(see exhibit 25).

Exhibit 25: Indicators for sourcing performance evaluation by form of ownership of

enterprises


ii. Integration between sourcing performance evaluation and the overall

operational objectives

Integrating sourcing performance evaluation with the overall operational objectives is another

important sourcing management strategy. About half of the surveyed enterprises said the

sourcing performance evaluation was closely integrated with their operational objectives. Exhibit

26 gives a more detailed picture. Among different forms of ownership and sizes of enterprises,

FIEs again outperformed PEs and SOEs (see exhibit 27), while large-sized enterprises did better

than medium- and small-sized enterprises (see exhibit 28).

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Exhibit 26: Integration between sourcing performance evaluation and the overall operational

objectives


objectives by form of ownership of enterprises


objectives by size of enterprises

iii. Transparency of sourcing performance evaluation

Transparency is essential in evaluating an enterprise’s sourcing performance. As shown in exhibit

29, 76.4% of respondents reported that their sourcing performance evaluation was open and

transparent. FIEs showed the highest level of transparency (81.1%) among different forms of

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ownership of enterprises (see exhibit 30). According to the survey, the larger the enterprise, the

higher level of transparency was observed (see exhibit 31).

Exhibit 29: Transparency of sourcing performance evaluation

Exhibit 30: Transparency of sourcing performance evaluation by form of ownership of

enterprises

Exhibit 31: Transparency of sourcing performance evaluation by size of enterprises

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5. Sourcing management

i. Degree of centralization of sourcing activities

Exhibit 32 gives a brief picture on the degree of centralization of sourcing activities within

the enterprises surveyed. Most of them (63.7%) adopted both centralized and decentralized

approaches. It is believed that enterprises opted for more "exible sourcing approaches to

cope with the challenging business environment. Besides, SOEs have the highest tendency to

implement centralized sourcing, which could be explained by their larger size.

Exhibit 32: Degree of centralization of sourcing activities

ii. Sourcing network

The majority of the surveyed enterprises (74.3%) sourced within China. About half of the

respondents adopted internal sourcing (sourcing from the factories owned by the enterprises).

Among various forms of ownership of enterprises, it is not surprising that FIEs practised global

sourcing the most given their global network and relevant experience. Large-sized enterprises

were also more active in global sourcing than medium- and small-sized enterprises (see exhibits

33 and 34).

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Exhibit 33: Sourcing network

Exhibit 34: Sourcing network by size of enterprises

iii. The key processes in sourcing

Most respondents agreed that shopping around and comparing prices (93.6%), selecting

suppliers (93.1%) and bargaining (92.2%) were the key sourcing processes. Exhibit 35 gives

more information.

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Exhibit 35: The key processes in sourcing


iv. Means of cost control in sourcing

Cost control is always the top priority in sourcing, especially at times of economic turbulence.

Same as last year’s results, the traditional way of shopping around and sorting out the most

competitive offer was the most common way of cost control in sourcing for nearly all sizes and

forms of ownerships of enterprises. Forming strategic alliance with reliable suppliers came

second, with 74.4% of respondents chose it as a means of cost control. Exhibits 36 and 37

present a more detailed picture.

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Exhibit 36: Means of cost control by form of ownership of enterprises


Exhibit 37: Means of cost control by size of enterprises


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v. Outsourcing sourcing functions

45.8% of the surveyed enterprises did outsource their sourcing functions. FIEs were more

receptive to the concept of outsourcing, which was less welcomed by PEs (see exhibit 38).

Exhibit 38: Outsourcing sourcing functions

vi. Implementation of standard procedures for sourcing

The standard procedures for sourcing can be divided into four stages: “from application

to approval”, “from approval to placing order”, ‘from placing order to delivery” and “from

delivery to payment”. In general, the surveyed enterprises did not do a good job in following

the standard procedures of sourcing. The situation was even worse when they were asked

about the contingency measures in the face of problems such as delivery of !nal products with

substandard quality. Enterprises are advised to enhance the implementation of the standard

procedures for sourcing, especially developing contingency plans for different sourcing stages

(see exhibits 39 and 40).

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Exhibit 39: Implementation of standard procedures for sourcing by form of ownership of

enterprises

Overall SOEs PEs FIEs

From application Product quality examination 67.3% 65.0% 72.4% 61.4%

to approval Supplier audit 59.8% 65.0% 53.1% 70.0%

Budgeting 67.3% 65.0% 64.3% 70.0%

Feasible contingency plan 31.2% 45.0% 30.6% 28.6%

From approval to Placing order 94.4% 95.0% 93.8% 95.6%

placing order Con!rming order by supplier 64.3% 65.0% 59.8% 72.1%

From placing order Notice of delivery by supplier 66.8% 85.0% 71.4% 60.6%

to delivery Checking the procured products 57.8% 65.0% 54.1% 66.2%

Payment approval 62.3% 65.0% 56.1% 67.6%

Informing related staff of the 49.2% 55.0% 56.1% 40.8%

problems of the procured

products, if any

Looking for alternative suppliers, 38.2% 40.0% 36.7% 39.4%

if the procured products are

found not up to standard

From delivery Arranging payment 88.8% 90.0% 85.6% 93.0%

to payment Mediating disputes, if any 41.1% 40.0% 40.2% 43.7%

Feasible contingency plan 32.5% 40.0% 28.9% 35.2%

Rectifying problems by 27.4% 25.0% 25.8% 31.0%

supplier, if any

Notifying supplier after 43.1% 50.0% 46.4% 39.4%

payment

Keeping record of supplier’s 26.4% 20.0% 25.8% 28.2%

performance

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Exhibit 40: Implementation of standard procedures for sourcing by size of enterprises

Large-sized Medium-sized Small-sized

enterprises enterprises enterprises

From application Product quality examination 60.5% 69.4% 78.0%

to approval Supplier audit 66.3% 59.7% 46.3%

Budgeting 62.8% 68.1% 75.6%

Feasible contingency plan 40.7% 26.4% 19.5%

From approval to Placing order 94.0% 93.1% 97.6%

placing order Con!rming order by supplier 68.7% 61.1% 61.0%

From placing order Notice of delivery 69.4% 61.6% 70.7%

to delivery by supplier

Checking the procured products 61.2% 53.4% 58.5%

Payment approval 64.7% 58.9% 63.4%

Informing related staff of 45.9% 46.6% 61.0%

the problems of the procured

products, if any

Looking for alternative suppliers, 41.2% 27.4% 51.2%

if the procured products are

found not up to standard

From delivery Arranging payment 85.7% 87.5% 97.6%

to payment Mediating disputes, if any 42.9% 40.3% 39.0%

Feasible contingency plan 36.9% 29.2% 29.3%

Rectifying problems by 32.1% 25.0% 22.0%

supplier, if any

Notifying supplier after 44.0% 36.1% 53.7%

payment

Keeping record of supplier’s 33.3% 18.1% 26.8%

performance

6. Human resources management

i. Qualifications and experiences of sourcing personnel

Among the surveyed enterprises, sourcing staff with more than 3 years of experience in sourcing

accounted for 51.4% of the total sourcing staff, up by 10.2 percentage points from the previous

year.

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=;C

Among different forms of enterprises, PEs had fewer professional sourcing personnel than FIEs

and SOEs. And so did the smaller enterprises. This is probably due to the fact that they had

fewer resources for manpower training and development (see exhibits 41 and 42).

Exhibit 41: Qualifications and experience of soucing personnel by form of ownership of

enterprises

Exhibit 42: Quali!cations and experience of sourcing personnel by size of enterprises

ii. Manpower training awareness

Professional training for sourcing staff was not popular among the surveyed enterprises. Still,

21.6% of them provided no training to their staff, similar to last year’s !gure. PEs and smaller

enterprises allocated relatively fewer resources to their sourcing staff (see exhibits 43 and 44).

Exhibit 43: Proportions of enterprises which provide no training to sourcing staff by form of


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Exhibit 44: Proportions of enterprises which provide no training to sourcing staff by size of

enterprises

Among the surveyed enterprises, less than half of them had their sourcing staff formally trained.

Again, PEs and smaller enterprises were equipped with the smallest number of formally trained

staff. Exhibits 45 and 46 show more details.

Exhibit 45: Proportions of staff attended formal training by form of ownership of enterprises

Exhibit 46: Proportions of staff attended formal training by size of enterprises

The average training hours per staff of all surveyed enterprises were 41.7 last year. Staff from

SOEs and large-sized enterprises received the most training. Exhibits 47 and 48 give more

information.

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Exhibit 47: Annual training hours per staff by form of ownership of enterprises

Exhibit 48: Annual training hours per staff by size of enterprises

When asked about the need for training, almost 60% of the respondents thought that there was

no need or no urgent need for their staff to get trained. Among different forms of ownership of

enterprises, SOEs showed the least awareness of the need to train for their sourcing staff (see

exhibits 49 and 50).

Exhibit 49: Perceived need for training

!"#$#%&'(#)*+*,-./#0*'1-* >2


Exhibit 50: Perceived need for training by form of ownership of enterprises

iii. Methods of training for sourcing staff

Among the enterprises who provided training to their staff, 65.8% of them opted for

internationally recognized qualifications including Certified Purchasing Manager (CPM) and

Certi!ed Professional in Supply Management (CPSM), almost a double of last year’s !gure. It

re"ected that the international quali!cations of sourcing were gaining popularity among the

Chinese enterprises. Another common way of training among respondents was internal training

(59.3%). Exhibit 51 presents more details.

Exhibit 51: Method of training for sourcing staff

7. Supplier management

I. Supplier evaluation system

i. Scope of supplier evaluation system and performance indicators of suppliers

As discussed above, supplier management is decisive to the success of sourcing among

most surveyed enterprises. Exhibit 52 shows the surveyed enterprises’ preferred scope of

supplier evaluation system. We can see that the respondents thought that quality (95.0%),

delivery (88.1%) and cost (81.1%) were the major areas of concern when evaluating suppliers.

Enterprises of different forms of ownership and sizes showed the similar tendency (see exhibits

52 and 53).

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=>;

Exhibit 52: Scope of supplier evaluation system by form of ownership of enterprises


Exhibit 53: Scope of supplier evaluation system by size of enterprises


When it comes to the performance indicators, more than 90% of the respondents regarded

on-time delivery as the key performance indicators when evaluating suppliers (see exhibit 54).

76.4% of the surveyed enterprises thought cost reduction was an important indicator. Enterprises

of various forms of ownership and sizes showed similar preferences (see exhibits 54 and 55).

!"#$#%&'(#)*+*,-./#0*'1-* >>


Exhibit 54: Performance indicators of suppliers by form of ownership of enterprises


Exhibit 55: Performance indicators of suppliers by size of enterprises


ii. Execution of supplier evaluation system

Selecting right suppliers and monitoring their ongoing performance greatly rely on the evaluation

system for suppliers. And execution of such system is the key to the effectiveness. According to

the survey, 51.3% of respondents thought that the execution of evaluation system was good or

very good (see exhibit 56). However, the level of execution in SOEs was noteworthy: Over 60% of

respondents from SOEs thought that the execution was poor or just fair. This suggests that more

efforts should be put in boosting their execution power.

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Exhibit 56: Execution of supplier evaluation system by form of ownership of enterprises

iii. Departments or other parties involved in monitoring supplier performance

According to the survey, besides sourcing department, R&D/ engineering design and production/

manufacturing departments also participated in supplier evaluation in most surveyed enterprises.

Enterprises of various forms of ownership and sizes also showed similar pattern except for

SOEs. As for the case of SOEs, clients played a more signi!cant role in supplier monitoring.

Exhibits 57 and 58 give more information.

Exhibit 57: Departments or other parties involved in monitoring supplier performance by

form of ownership of enterprises


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Exhibit 58: Departments or other parties involved in monitoring supplier performance by

size of enterprises


II. Supplier performance

i. Relationship between enterprises and suppliers

A signi!cant proportion of supplier with stable relationship is one of the indicators re"ecting

whether the sourcing process is well-developed. Last year’s survey suggested that about 48.4%

of the surveyed enterprises had established stable relationships with more than half of their

suppliers. This year, the percentage rose 15.8 percentage points to 64.2%. Moreover, only 12.7%

of the respondents said that they had established stable relationships with less than 10% of their

suppliers, improving greatly from last year (44%). Overall, FIEs and large-sized enterprises did a

better job than their counterparts. Exhibits 59 and 60 give more details.

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=>A

Exhibit 59: Proportion of suppliers with stable relationship by form of ownership of

enterprises

Exhibit 60: Proportion of suppliers with stable relationship by size of enterprises

Proportion of principal suppliers is another important indicator contributing to the success of

enterprises. According to the survey, 14.4% of the surveyed enterprises indicated the proportion

of their principal suppliers increased last year. Among different forms of enterprises, SOEs

performed slightly better than their counterparts. Please see exhibit 61 for more information.

!"#$#%&'(#)*+*,-./#0*'1-* >B


Exhibit 61: Proportion of principal suppliers increased last year

ii. Degree of participation by suppliers in R&D

The degree of cooperation with suppliers in R&D is also important for an enterprise. According

to the survey, over 60% of the respondents reported that the involvement of their suppliers in

the early stage of R&D was none or little, suggesting that most enterprises was yet to recognize

the importance of cooperating with suppliers in the area of R&D. Overall, FIEs and large-sized

enterprises involved suppliers in early stage of R&D in a more actively manner (see exhibits 62

and 63).

Exhibit 62: Degree of participation by suppliers in the early stage of research and

development by form of ownership of enterprises

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Exhibit 63: Degree of participation by suppliers in the early stage of research and

development by size of enterprises

8. Informatization

i. Adoption of bar code system

Among the surveyed enterprises, 72% of them adopted bar code systems for their raw materials.

However, less than half of them admitted that the usage of bar code was fully incorporated into

all business and operational units. As shown in exhibit 64, in general, the larger the enterprises,

the more widely adoption of bar code system across the enterprises.

Exhibit 64: Adoption of bar code system across various business and operational units

within the enterprise

ii. Use of information technology

Exhibits 65 and 66 show the application of information system of the surveyed enterprises.

The mostly used information system among the surveyed enterprises was Enterprise Resource

Planning (ERP), with 76.4% of respondents had it already in place. Data Warehouse and Data

Mining came second, with 32.2% of application among the respondents.

!"#$#%&'(#)*+*,-./#0*'1-* >D


For most applications, FIEs and large–sized enterprises had an edge over their counterparts.

Small-sized enterprises tended to use those relatively low-cost systems such as online sourcing.

Exhibit 65: Information system adoped by the surveyed enterprises by form of ownership of

enterprises

Overall SOEs PEs FIEs

Already in place

Supervisory Control And Data Acquisition (SCADA) 15.6% 20.0% 17.0% 12.2%

Management Information System (MIS) 26.1% 40.0% 20.2% 28.4%

Decision Support (DSS) 8.5% 15.0% 6.4% 9.5%

Enterprise Resource Planning (ERP) 76.4% 75.0% 68.1% 85.1%

Data Warehouse and Data Mining 32.2% 45.0% 30.9% 31.1%

Online Sourcing 28.6% 25.0% 30.9% 29.7%

Online Auction 9.0% 5.0% 11.7% 6.8%

Directory Management Tool 25.1% 35.0% 23.4% 23.0%

Planning to establish

Supervisory Control And Data Acquisition (SCADA) 20.1% 31.6% 25.5% 12.7%

Management Information System (MIS) 21.6% 36.8% 21.3% 15.5%

Decision Support (DSS) 13.4% 15.8% 12.8% 14.1%

Enterprise Resource Planning (ERP) 55.2% 36.8% 59.6% 52.1%

Data Warehouse and Data Mining 27.3% 21.1% 29.8% 26.8%

Online Sourcing 32.5% 47.4% 28.7% 36.6%

Online Auction 7.7% 15.8% 8.5% 5.6%

Directory Management Tool 16.5% 26.3% 13.8% 18.3%

Others 11.9% 5.3% 17.0% 8.5%


0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=?<

Exhibit 66: Information system adopted by the surveyed enterprises by size of enterprises

Large-sized Medium-sized Small-sized

enterprises enterprises enterprises

Already in place

Supervisory Control And Data Acquisition (SCADA) 14.4% 14.3% 20.5%

Management Information System (MIS) 25.6% 27.1% 25.6%

Decision Support (DSS) 5.6% 11.4% 10.3%

Enterprise Resource Planning (ERP) 87.8% 70.0% 61.5%

Data Warehouse and Data Mining 23.3% 38.6% 41.0%

Online Sourcing 25.6% 28.6% 35.9%

Online Auction 8.9% 7.1% 12.8%

Directory Management Tool 16.7% 25.7% 43.6%

Planning to establish

Supervisory Control And Data Acquisition (SCADA) 18.8% 18.8% 25.0%

Management Information System (MIS) 17.6% 17.4% 37.5%

Decision Support (DSS) 12.9% 10.1% 20.0%

Enterprise Resource Planning (ERP) 51.8% 58.0% 57.5%

Data Warehouse and Data Mining 17.6% 31.9% 40.0%

Online Sourcing 29.4% 36.2% 32.5%

Online Auction 8.2% 5.8% 10.0%

Directory Management Tool 9.4% 23.2% 20.0%

Others 7.1% 15.9% 15.0%


In general, adoption of online sourcing and online auction were not common among the surveyed

enterprises. In terms of online sourcing and online auction costs, it accounted for 27.6%

and 9.5% of the total sourcing costs respectively for the enterprises. SOEs and small-sized

enterprises spent the most on online sourcing. As for online auction, FIEs and small-sized were

more receptive with this approach. Exhibits 67 and 68 present a more detailed picture.

!"#$#%&'(#)*+*,-./#0*'1-* ?2


Exhibit 67: Share of total sourcing costs by online sourcing and online auction by form of


Exhibit 68: Share of total sourcing costs by online sourcing and online auction by size of

enterprises

Overall, 27.4% of the surveyed enterprises said their principal suppliers were capable of online

sourcing. In general, more principal suppliers of SOEs and small-sized enterprises were capable

of online sourcing (see exhibits 69 and 70).

Exhibit 69: Prinicpal suppliers with online sourcing capability by form of ownership of

enterprises

Exhibit 70: Prinicpal suppliers with online sourcing capability by size of enterprises

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Many enterprises are aware of the important role of informatization in modernizing the sourcing

activities. However, many challenges have to be overcome before they apply these IT systems. The

survey revealed that the major obstacles barring enterprises were lack of talents who know both

business and IT business well (48.8%), dif!culty in identifying appropriate partners for informatization

(43.8%) and inaccurate data (40.4%). The problem of lack of talents was utmost serious among SOEs

and small-sized enterprises. Exhibits 71 and 72 show more details.

Exhibit 71: Major obstacles for infomatization by form of ownership of enterprises


Exhibit 72: Major obstacles for infomatization by size of enterprises


!"#$#%&'(#)*+*,-./#0*'1-* ?>


9. Green sourcing

i. Products meeting national green standards

Green sourcing is gaining attention among enterprises as consumers are becoming more and

more conscious of green issues. And the Chinese government has been actively promoting

environmental protection as well as sustainable development. According to the survey, more

than half of the respondents said their products met the national green standards. As shown in

exhibits 73 and 74, a larger proportion of SOEs and large-sized enterprises said their products

met the national green standards. 75.5% of the suppliers of the surveyed enterprises provided

products meeting national green standards. FIEs and large-sized enterprises took the lead in

having more suppliers providing products meeting national green standards. Exhibits 75 and 76

give more details.

Exhibit 73: Products meeting national green standards by form of ownership of enterprises

Exhibit 74: Products meeting national green standards by size of enterprises

Exhibit 75: Proportion of suppliers providing products meeting national green standards by

form of ownership of enterprises

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Exhibit 76: Proportion of suppliers providing products meeting national green standards by

size of enterprises

ii. Factors affecting practising green sourcing

The three major factors affecting green sourcing practice were cost (68.5%), new sources of raw

materials (65.0%) and technology and process innovation (61.0%) respectively. Cost was the

core factor of green sourcing adoption across all sizes and forms of ownership of enterprises.

Please see exhibits 77 and 78 for more details.

Exhibit 77: Factors affecting practising green sourcing by form of ownership of enterprises

!"#$#%&'(#)*+*,-./#0*'1-* ?@


Exhibit 78: Factors affecting practising green sourcing by size of enterprises

iii. Awareness on environmental protection of enterprises

73% of the surveyed enterprises said they had complied with laws and regulations in toxic

waste disposal. The compliance rate was higher for FIEs, SOEs and large-sized enterprises (see

exhibits 79 and 80).

Exhibit 79: Compliance with laws and regulations in toxic waste disposal by form of


Exhibit 80: Compliance with laws and regulations in toxic waste disposal by size of

enterprises

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iv. Corporate social responsibility (CSR) requirements for suppliers

68.1% of the surveyed enterprises required their suppliers to comply with certain CSR

requirements. If suppliers failed to do so, 78.4% of respondents would require their suppliers to

make improvement within a certain period, while 10.8% would simply terminate their business

relationship with the suppliers. In general, large-sized enterprises, SOEs and FIEs were more

concerned about the CSR compliance of their suppliers. More information can be found in

exhibits 81-84.

Exhibit 81: Corporate Social Responsibility requirements for suppliers by form of ownership

of enterprises

Exhibit 82: Corporate Social Responsibility requirements for suppliers by size of enterprises

Exhibit 83: Action taken when suppliers fail to meet Corporate Social Responsibility

requirements by form of ownership of enterprises

!"#$#%&'(#)*+*,-./#0*'1-* ?B


Exhibit 84: Action taken when suppliers fail to meet Corporate Social Responsibility

requirements by size of enterprises

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XKTR!'<3!GFW!/<3

CY!#RV!ZGFOMGQTOPKFS!JVQTLP

The CFLP China Manufacturing Purchasing Managers’ Index (PMI) provides an early indicator

each month of economic activities in the Chinese manufacturing sector. It is compiled by the

China Federation of Logistics & Purchasing (CFLP) and the China Logistics Information Centre

(CLIC), based on data collected by the National Bureau of Statistics (NBS). The PMI was

launched in January 2005.

Every month questionnaires on their purchasing activities and supply situations are sent to over

800 manufacturing enterprises all over China. There are 11 indicators in the survey: Output, New

Orders, New Export Orders, Backlogs of Orders, Stocks of Finished Goods, Purchases of Inputs,

Imports, Input Prices, Stocks of Major Inputs, Employment and Suppliers’ Delivery Time. An

index reading above 50% indicates an overall positive change in that variable; below 50%, an

overall negative change.

The PMI is a composite index based on the seasonally adjusted diffusion indices for !ve of

the indicators with varying weights: New Orders – 30%; Output – 25%; Employment – 20%;

Suppliers’ Delivery Times – 15%; and Stocks of Major Inputs – 10%. A PMI reading above 50%

indicates an overall expansion in the manufacturing sector; below 50, an overall contraction.

The post-crisis recovery is well on track, yet recent PMI readings indicate

growth moderation in the manufacturing sector

The headline PMI has stayed above the “expansionary 50-mark” for 18 consecutive months,

showing that the post-crisis recovery is suf!ciently solid and self-sustaining (see exhibit 1).

However, the headline PMI has trended downward since April 2010, indicating growth

moderation in the manufacturing sector. Though the headline PMI rebounded from 51.2% in July

to 51.7% in August, the July reading and the August reading were still the lowest and the second

lowest since March 2009. The moderation in industrial activity was attributable to government

tightening on the property sector and local government borrowing, as well as mandatory

requirement to shut down energy-inef!cient factories.

!"#$#%&'(#)*+*,-./#0*'1-* ?D

*F!GFGHIJKJ!LM!NOPQRGJKFS!GQTKUKTKVJ!GFW!JLOPQKFS!JKTOGTKLFJ!XKTR!'<3!GFW!/<3

The modest rebound in the August PMI suggests that the Chinese economy will not slide into

recession. Looking forward, we expect the headline PMI to "uctuate between 52-54 in 4Q10.

Industrial activities will be boosted by Beijing’s accelerated efforts to build public housing. The

improving auto market may become another favourable factor, if the improvement continues in

the coming months. Downside risks, however, include the extent of the slowdown in property

investment by real estate developers, the uncertainties about the global economy and China’s

export growth, as well as the policy intensity to get rid of backward production capacities,

energy-intensive and highly-polluting industries.

We believe the government will keep its ‘neutral’ monetary policy stance unchanged for the rest

of the year. It will continue to regulate local government !nancing vehicles, but is unlikely to raise

interest rate or reserve requirement ratio (RRR). Neither do we think the government will ease its

crackdown measures on real estate speculation, as housing prices have barely gone down this

year. However, to avoid a sharp slowdown in growth, Beijing will increase investment spending

on public housing. We also believe the government will be persistent in pushing forward

structural reforms.

Exhibit 1: Monthly PMI, Jan 2009 – Aug 2010

Source: China Federation of Logistics & Purchasing

The output index re"ects overall production activities of the manufacturing sector. The index has

stayed above the critical level of 50% since February 2009, indicating continuous expansion of

output of the manufacturing sector (see exhibit 2).

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=@<

Exhibit 2: Output index, Jan 2009 – Aug 2010


Domestic demand recovered earlier and grew faster than foreign demand

The new orders index, which covers both domestic and foreign demand, has stayed above 50%

since February 2009 for 19 months.

The new export orders index has stayed above 50% since May 2009 for 16 months. The two

indices show that both domestic and foreign demand for Chinese manufactured products have

been on the rise (see exhibit 3).

The new orders index rose above the 50%-line earlier than the new export orders index,

implying that domestic demand recovered earlier than foreign demand, boosted by the Chinese

government’s stimulus package to support domestic demand in late 2008. One should also note

that the new orders index was higher than the new export orders index throughout February 2009

to August 2010, indicating that domestic demand grew faster than foreign demand.

!"#$#%&'(#)*+*,-./#0*'1-* @2


Exhibit 3: New orders index and new export orders index, Jan 2009 – Aug 2010


Chinese manufacturers have faced mounting cost pressure

The input prices index re"ects changes in manufacturers’ production cost. Chinese manufacturers

have faced increasing cost pressure since April 2009 (see exhibit 4). In particular, prices of major

inputs rose at an accelerated pace in December 2009 and January 2010, when the input price index

registered the highest readings since August 2008. Although the index eased a bit in February 2010,

it quickly rebounded in March and then jumped to reach another peak in April 2010. The index

moderated to 58.9% in May and further dropped to 50.4% in July 2010. However, it surged by 10.1

percentage points to 60.5% in August 2010. The latest index reading raises renewed concern about

the problems of production cost pressure and squeezed producers’ margins, as well as suggests

stronger in"ationary pressure on downstream prices in the near and medium term. !

Exhibit 4: Input prices index, Jan 2009 – Aug 2010


0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=@;

2. The non-manufacturing sector

The CFLP China Non-Manufacturing Index (NMI) serves as an early indicator of economic activities

in China’s non-manufacturing sector. Every month, questionnaires are sent to non-manufacturing

enterprises in 20 industries, which are categorized into producer services, consumer services and

construction business. There are 10 indicators in the survey: Business Activity, New Orders, New

Export Orders, Backlogs of Orders, Stocks, Input Prices, Prices Charged, Employment, Suppliers’

Delivery Time and Business Activity Forecast. Survey responses re"ect the change of each indicator,

if any, in the current month compared to the previous month. Unlike the PMI, there is no composite

index for China’s NMI, and the business activity index of every month is quoted as the NMI of the

month. An NMI reading above 50% indicates an overall expansion in the non-manufacturing sector;

below 50%, an overall contraction. Data have been collected since January 2007 and the !rst NMI

was published in January 2008.

Recent NMI readings showed steady recovery of the non-manufacturing sector

Exhibit 5 demonstrates the NMI readings from January 2009 to August 2010. The NMI stayed

above 50% throughout the period (except in February 2009 and February 2010 - the Chinese

New Year - when many businesses were not operating during the holiday), indicating that the

non-manufacturing sector kept expanding.

The NMI has been, in general, higher than the PMI for the past 20 months, denoting a stronger

recovery in the non-manufacturing sector than in the manufacturing sector. !

Exhibit 5: Business activity index, Jan 2009 – Aug 2010


!"#$#%&'(#)*+*,-./#0*'1-* @>


Domestic demand showed stronger recovery than foreign demand

The new orders index re"ects the overall demand for services, including both domestic and

foreign demand, while the new export orders index covers demand from foreign clients only.

The new orders index averaged at 52.6% in year 2009, showing that demand was growing

steadily. The index peaked in April 2010 (58.7%). It moderated in the following two months, but

then rebounded to 55.8% in July 2010 and further to 56.2% in August 2010 (see exhibit 6).

The new export orders index averaged at 47.2% in 2009, indicating an overall contraction in

orders from foreign clients in the year. The situation has improved this year. The index has stayed

above 50% for six consecutive months since March 2010, con!rming the recovery of foreign

demand for services (see also exhibit 6).

Throughout January 2009 to August 2010, the new orders index has generally been higher than

the new export orders index, indicating that domestic demand has been growing faster than

foreign demand. This is largely a result of the government policy to boost domestic demand.

Exhibit 6: New orders and new export orders indices, Jan 2009 – Aug 2010


Increasing cost pressure for enterprises in the non-manufacturing sector

The input prices index re"ects the changes in the cost of inputs incurred by the enterprises

surveyed, while the prices charged index re"ects the prices charged when enterprises sell their

services. As shown in exhibit 7, the input prices index was always higher than the prices charged

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=@?

index throughout 2009, indicating that service providers were unable to fully pass through the

higher costs to downstream users.

In 2010, the operating costs climbed even further. Cost increases in raw materials, energy and

labour have greatly reduced pro!ts of many enterprises.

Exhibit 7: Input prices and prices charged indices, Jan – Dec 2009


The Chinese government attaches great importance to the development of the

service sector

In the third session of the 11th National People’s Congress (NPC) held in March 2010, the

Chinese government reiterated that one of the major objectives of macroeconomic policies was

to accelerate the change of development mode, and to promote the upgrading of economic

structure. To achieve this objective, the government will speed up the development of the service

sector, including !nance, logistics, information, R&D, industrial design, commercial services,

energy conservation and environmental protection services, public utilities, real estate and

property management services, community services, etc in next few years.

!"#$#%&'(#)*+*,-./#0*'1-* @@


Sourcing light-manufactured consumer products in China: cost trends and outlook

Part One: Major Price Indicators

1. China’s CPI growth reached 3.5% yoy in August, the highest in twenty-

two months

The yoy growth rate of China’s consumer price index (CPI)1 softened from 2.7% in February to

2.4% in March, and has been on an upward trend since then. The CPI growth rose to 3.3% yoy

in July and further reached 3.5% yoy in August, the highest in twenty-two months, due largely to

higher prices of vegetables and meat triggered by the recent rainstorms, "oods and hot weather

in China. The price index of food, which weighs 33.2% in the CPI accounting, rose by 7.5% yoy,

whilst that of non-food grew by 1.5% yoy in August. (See exhibit 1 & 2)

Particularly noteworthy is that the month-on-month (mom) growth of CPI has rebounded since

July. The price index registered positive mom growth of 0.4% and 0.6% in July and August

respectively, after dropping by 0.1% mom and 0.6% mom in May and June respectively.

Looking ahead, China’s CPI will be supported by factors such as rising labour costs, pass-

through of upstream price pressures, strengthening domestic demand, the buildup of in"ationary

expectations, tighter food supply due to natural disasters, as well as speculation in agricultural

commodities. It is likely that food prices will go down and the CPI growth will slow, if weather

conditions in China improve. We expect the CPI growth in FY10 to exceed the government target

of 3.0% and hit 4%.

1 The CPI, compiled by the National Bureau of Statistics of China, measures the price of a basket of 600-700 goods and services that a typical household purchases.

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=@A

2 The PPI, compiled by the National Bureau of Statistics of China, measures the prices of industrial products when they are sold for the !rst time after production.

Exhibit 1: China’s CPI growth, Sep 2008 - Aug 2010

Source: National Bureau of Statistics, PRC

Exhibit 2: China’s CPI growth by selected commodity, Mar - Aug 2010

Mar Apr May Jun Jul Aug

yoy growth (%)

Clothing -1.1 -1.3 -1.2 -1.0 -0.8 -1.2

Household services, maintenance and -0.7 -0.5 -0.3 0.0 0.2 0.4

renovation

Recreational, educational products & 0.3 0.4 0.6 0.9 1.1 1.2

services


2. PPI growth peaked in May 2010, and has been on a downward trend

since then

The growth rate of China’s producer price index (PPI)2 rose from 5.9% yoy in March to 6.8% yoy

in April, and peaked at 7.1% yoy in May. Afterwards, it softened to 6.4% yoy in June, 4.8% yoy in

July and 4.3% yoy in August. (See exhibit 3)

Sep-09 -0.8%

Oct -0.5%

Nov 0.6%

Dec 1.9%

Jan-10 1.5%

Feb 2.7%

Mar 2.4%

Apr 2.8%

May 3.1%

Jun 2.9%

Jul 3.3%

Aug 3.5%

!"#$#%&'(#)*+*,-./#0*'1-* @B


Despite the recent decline in PPI growth, we believe ex-factory prices will stay !rm in the near

future, bolstered by improving domestic and export demand, pass-through of upstream price

pressures, and mounting labour costs. It is noteworthy that, as of 10 September 2010, the

minimum wage levels in 28 provinces/municipalities in China have been revised upward. Besides,

there have been a number of strikes in coastal provinces recently, with workers asking for salary

increase. Many employers have offered considerable pay-rise to settle labour disputes. Detailed

discussion can be found in Part four.

Exhibit 3: China’s PPI growth, Sep 2008 - Aug 2010


Exhibit 4: China’s PPI growth by selected industry, Mar - Aug 2010


yoy growth (%)

Textile industry 5.3 6.6 7.5 8.2 8.2 8.6

Textile, clothing and footwear production 1.7 1.6 1.8 1.6 1.9 1.3

Leather, furs, down and related products 0.8 1.1 1.6 1.6 2.2 1.9

Timber processing & wood, bamboo, cane, 0.6 1.2 1.7 1.8 1.9 1.9

palm !ber and straw products


Sep-09 -7.0%

Oct -5.8%

Nov 2.1%

Dec 1.7%

Jan-10 4.3%

Feb 5.4%

Mar 5.9%

Apr 6.8%

May 7.1%

Jun 6.4%

Jul 4.8%

Aug 4.3%

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=@C

Part Two: Raw Material Prices

1. The growth rate of China’s purchasing price index of raw material, fuel

and power has declined since May

The yoy growth rate of China’s purchasing price index of raw material, fuel and power3 picked up

from 10.3% in February to 11.5% in March, and then reached 12.0% in April and 12.2% in May,

the highest in twenty months, before declining all the way to 7.5% in August. (See exhibit 5 & 6)

The positive growth of the price index re"ected the increase in prices of production inputs,

underlining the problems of production cost pressure and squeezed margins for Chinese

manufacturers. It also suggests stronger in"ationary pressure on downstream prices in the near

and medium term.

Looking ahead, we do not expect the yoy growth rate of this index to fall much in the near

future, despite the higher comparison base in 4Q09. Some price indicators show that prices

of production inputs have picked up again. For example, the input prices sub-index of China’s

manufacturing PMI rebounded strongly from the recent low of 50.4 in July to 60.5 in August.

Another index indicating input prices compiled by the Ministry of Commerce shows that input

prices have started an upward trend again since mid July and reached the recent peak in late

August, the highest level since late May.

3 The purchasing price index for raw material, fuel and power, compiled by the National Bureau of Statistics of China, measures the prices of production inputs such as raw materials, fuels and power purchased by industrial enterprises.

!"#$#%&'(#)*+*,-./#0*'1-* @D


Exhibit 5: China’s purchasing price index of raw material, fuel and power, Sep 2008 - Aug

2010 (% yoy growth)


Exhibit 6: China’s purchasing price index of raw material, fuel and power by selected

commodity, Mar - Aug 2010


yoy growth (%)

Fuel & power 25.6 24.0 23.4 19.5 12.0 10.2

Non-ferrous metals 32.8 29.1 26.0 21.1 19.5 16.6

Raw materials for chemical industry 6.9 7.4 7.8 7.2 6.7 5.9

Timber and paper pulp 1.4 2.7 4.0 3.4 2.7 4.1

Textile raw materials 4.5 5.5 5.7 5.9 6.3 6.1


(i) Purchasing price index of fuel & power

The growth rate of the purchasing price index of fuel & power has been on a downward trend,

declining all the way from 25.6% yoy in March to 10.2% yoy in August. (See exhibit 6)

(ii) Purchasing price index of non-ferrous metals

The growth rate of the purchasing price index of non-ferrous metals came in at 16.6% yoy in

August, having declined for !ve consecutive months. (See exhibit 6)

Sep-09 -10.1%

Oct -8.4%

Nov -3.6%

Dec 3.0%

Jan-10 8.0%

Feb 10.3%

Mar 11.5%

Apr 12.0%

May 12.2%

Jun 10.8%

Jul 8.5%

Aug 7.5%

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=A<

(iii) Purchasing price index of raw materials for chemical industry

The growth rate of purchasing price index of raw materials for chemical industry was on an

upward trend, rising all the way from 5.4% yoy in February to 7.8% yoy in May. Afterwards, the

growth rate of the index fell all the way to 5.9% yoy in August.(See exhibit 6)

(iv) Purchasing price index of timber and paper pulp

The growth rate of the purchasing price index of timber and paper pulp turned positive in March,

and then "uctuated within the range of 2.7-4.1% yoy throughout April to August 2010. (See

exhibit 6)

(v) Purchasing price index of textile raw materials

The growth rate of the purchasing price index of textile raw materials increased all the way from

1.1% yoy in Dec 2009 to 6.3% yoy in July 2010, before edging down to 6.1% yoy in August. (See

exhibit 6)

2. China’s cotton price indices trended upward throughout mid February to

early July, and have softened since then

After plateauing in January and early February, China’s cotton price indices4 were on an

increasing trend throughout mid February to early July. Since then, the price indices have

moderated. The CC Index 328, for example, climbed from 14912 on 21 February to the recent

peak of 18419 on 9 July, and then moderated to 18005 on 31 August. Overall, the prices of this

type of cotton increased by about 21% in the !rst eight months of 2010. (See exhibit 7)

The sharp rise in domestic cotton prices was driven by strong downstream demand from both

China and foreign countries, falling supply of cotton, as well as increasing global cotton prices.

Due to poor weather and reduction in planting area, China’s cotton output declined by 14.6% yoy

in 2009. The decline is widely expected to continue in 2010.

Global cotton prices have also recorded strong rise so far this year, due largely to the reduction

in global output of cotton, as well as improving demand. The Cotlook A index, one of the major

global price indices of cotton, went up from 78.45 on 4 January 2010 to 94.20 on 31 August.

4 The indices, compiled by the China Cotton Association, track cotton prices quoted from two hundred textile enterprises.

http://www.china-cotton.org/

!"#$#%&'(#)*+*,-./#0*'1-* A2


While China’s cotton output cannot meet the domestic demand, China has continued to import

large amounts of cotton from other countries in recent years. Besides, to increase supply in the

domestic cotton market, the Chinese government raised import quotas of cotton in May and has

released part of the state reserve since early August. It seems that such efforts have contributed

to the recent moderation of cotton prices.

Looking ahead, we do not expect cotton prices to fall much for the rest of the year, especially as

domestic cotton output is set to decrease due to the severe weather conditions.

Exhibit 7: China’s cotton price indices, Sep 2009 - Aug 2010

Source: China Cotton Association

3. Nanjing Wool Market Composite Index rebounded in June, and then

moderated a bit in July

The Nanjing Wool Market Composite Index5, one of the major wool price indices in China, stayed

at high level throughout late January to April 2010. Afterwards, the price index declined from

58.37 yuan per kg at end-April to 55.94 yuan per kg at end-May, but then rebounded to 57.59

yuan per kg at end-June. (See exhibit 8)

5 http://www.woolmarket.com.cn/

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=A;

Note that the Nanjing Wool Market Composite Index would be signi!cantly affected by the

exchange rate movements of the currencies of Australia and New Zealand, the major wool

exporters. The drop in the wool price index in May was largely attributable to the depreciation

of the Australian dollar against the RMB in May. The decline in the Australian Wool Exchange

(AWEX) Eastern market indicator, one of the major wool price indices in Australia, was

comparatively slight in Australia dollar terms.

In July, the Australian dollar appreciated strongly by more than 6% against the RMB, thereby

putting upward pressure on wool prices in RMB terms. However, such impact was offset by the

weak demand from textile manufacturers in the month, traditionally the low season. The wool

price index softened by 0.3% from the previous month to 57.42 yuan per kg at end-July.

Supported by growing downstream demand from advanced economies and tight supply, wool

prices are expected to stay !rm in the short to medium term. Both Australia and New Zealand

have witnessed reduction in wool production in recent years. One major cause is that many wool

producers have switched to meat production in response to higher meat prices.

Exhibit 8: Nanjing Wool Market Composite Index, Aug 2009 - Jul 2010

Aug-09 Sep Oct Nov Dec Jan-10 Feb Mar Apr May Jun Jul

Month-end 48.73 51.20 54.34 54.64 55.36 58.14 57.65 58.14 58.37 55.94 57.59 57.42

index

(yuan/kg)

Source: The Nanjing Wool Market

4. Price indices of polyester moderated in the second half of August

After trending upward in Apr 2010, the price indices of polyester6 moderated in May, due to the

drop in puri!ed terephthalic acid (PTA)7 prices (which in turn was due to the decrease in crude

oil prices). The indices picked up again in the second half of June, as a result of the market

expectation of falling supply of polyester in China, as well as the rebound in crude prices. (See

exhibit 9)

6 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI).7 Puri!ed terephthalic acid (PTA) is a commodity chemical used primarily in polyester production.

!"#$#%&'(#)*+*,-./#0*'1-* A>


On 13 June 2010, the Zhejiang provincial government, one of the major polyester producing

provinces in China, announced to limit power consumption of enterprises in energy-intensive

industries in the province during the period of 1 July to 13 September 2010. Polyester

manufacturers in Zhejiang province thus reduced their output.

The trends of the prices of different types of polyester materials diverged throughout late June

to mid August. For example, the price indices of both polyester DTY and polyester POY stayed

relatively "at during the period, while the price index of polyester FDY continued its upward trend

and peaked in mid August. In the second half of August, however, the price indices moderated,

driven by the decline in crude oil prices. (Note that the Brent crude price dropped sharply from

the recent peak of US$ 83.8 per barrel on 3 August to US$ 71.3 per barrel on 24 August, before

rebounding a bit to US$ 75.6 per barrel on 31 August.)

Looking ahead, we expect polyester prices to stabilize, supported by improving downstream

demand, tight supply, as well as higher crude prices. It is widely expected that, if crude prices

drop below US$ 70 per barrel, the Organization of the Petroleum Exporting Countries (OPEC),

whose members supply about 40% of the world’s crude oil, will lower its output level in order to

support crude prices. Detailed discussion can be found in Part Three.

Exhibit 9: Price indices of polyester, Sep 2009 - Aug 2010

Source: China Chemical & Fiber Economic Information Network

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=A?

5. Price index of acrylic staple !ber stayed stable throughout April to mid

June and has started a downward trend since early July

After rising rapidly in late February and early March, the price index of acrylic staple !ber8 stayed

stable at 22800 throughout April to mid June. Since early July, the price index has started a

downward trend, and moderated to 20700 on 27 August, due largely to the relatively weak

downstream demand, the market expectation of falling acrylic staple !ber prices, as well as

the decline in prices of acrylonitrile, a major raw material of acrylic staple !ber. The supply of

acrylonitrile has increased recently, as many acrylonitrile plants have resumed production after

being shut down for regular maintenance in early 2010. (See exhibit 10)

Note that the downstream demand has improved a bit in recent weeks, according to the local

media. It is expected that prices of acrylic staple !ber will not continue to go down in the near

term.

Exhibit 10: Price indices of acrylic, Sep 2009 - Aug 2010


8 The index is complied by the China Chemical & Fiber Economic Information Network (CCFEI).

!"#$#%&'(#)*+*,-./#0*'1-* A@


6. Price indices of nylon have trended upward again since late July

Driven by the increase in prices of caprolactam, one of the major materials of nylon, as well as

restocking activities, the price indices of nylon9 had trended upward since late February, until

they plateaued in the second half of May. The indices were on a downward trend throughout late

May to late July, along with the moderation of upstream prices. (See exhibit 11)

Besides, it is observed that, in view of high nylon prices, downstream producers tend to be

cautious about placing orders for nylon, and some producers have even switched to use other

!bres as substitutes for nylon.

Boosted by the rise in prices of caprolactam, nylon prices have trended upward again since late

July.

However, we do not expect the upward trend of the price indices of nylon to continue in the near

future, unless downstream demand recovers.

Exhibit 11: Price indices of nylon, Sep 2009 - Aug 2010


9 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI).

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=AA

7. Price index of viscose staple !ber rebounded in early August

Boosted by the rise in prices of cotton pulp, the major raw material of viscose, the price index

of viscose staple !ber10 had trended upward since late January 2010, until it reached the recent

high of 20300 in late March to early April. Nevertheless, the price index declined throughout mid

April to early August to as low as 17200 on 3 August, due largely to weakening downstream

demand. According to the local media, downstream producers were cautious about placing

orders for viscose staple !ber. (See exhibit 12)

The mounting upstream cost pressure and the decreasing prices of viscose staple fiber

indicated that producers of viscose staple !ber were unable to pass through the higher cost

to downstream users then. To avoid making losses, viscose staple !ber producers reduced

production, thereby lowering the inventory level of viscose staple !ber.

Since early August, however, the price index of viscose staple !ber has started to rebound, as

manufacturers have collaborated to raise the ex-factory prices of viscose staple !ber.

Looking ahead, prices of viscose staple !ber are likely to go up further, bolstered by the low

inventory level, high prices of cotton pulp, as well as stronger downstream demand in the coming

months, traditionally the high season.

Exhibit 12: Price indices of viscose, Sep 2009 - Aug 2010


10 The index is complied by the China Chemical & Fiber Economic Information Network (CCFEI).

!"#$#%&'(#)*+*,-./#0*'1-* AB


8. Price index of ABS resin gained 3.6% mom in August, boosted by the

rise in prices of styrene

Although the high ABS resin prices have curbed demand from downstream manufacturers, the

price index of ABS resin11 registered positive mom growth of 6.4% and 4.0% in March and April

respectively, supported by the rise in prices of crude oil, a major raw material of ABS resin. The

price index further increased by 1.7% mom in May, despite the marked decline in global crude

prices in the month. One of the main reasons was that domestic petrochemical enterprises

opted not to reduce the ex-factory prices of ABS resin then. Afterwards, as downstream demand

remained weak, domestic petrochemical enterprises lowered ABS resin prices. The price index

moderated a bit by 2.2% mom and 0.9% mom in June and July respectively. In August, the price

index of ABS resin rose by 3.6% mom, boosted by the increase in prices of styrene, a major raw

material of ABS resin. (See exhibit 13)

We think the upward trend of ABS resin prices is unlikely to continue in the near future, against

the backdrop of weak downstream demand.

Exhibit 13: Price index of ABS resin, Sep 2009 - Aug 2010

Sep-09 Oct Nov Dec Jan-10 Feb Mar Apr May Jun Jul Aug

ABS resin -0.1 -0.1 2.6 3.2 3.4 1.7 6.4 4.0 1.7 -2.2 -0.9 3.6

(mom

growth %)

ABS resin -23.7 -19.6 0.8 22.1 41.9 39.6 38.3 32.4 38.9 30.2 26.8 25.6

(yoy growth

%)


9. Price index of PP softened in May to July, after having risen for two

consecutive months

In response to the increase in global crude prices, domestic petrochemical enterprises raised

ex-factory prices of polypropylene (PP). The price index of PP12 gained by 1.3% mom and

11 The index is compiled by the China Federation of Logistics & Purchasing (CFLP), which is the first logistics and purchasing industry association approved by the State Council. One of the CFLP’s missions is to push forward the circulation of factors of production in China.

12 The index is compiled by the China Federation of Logistics & Purchasing (CFLP).

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=AC

3.5% mom in March and April respectively. The index then softened a bit by 0.9% mom in May,

corresponding to the sharp decline in global crude prices in the month. Though crude prices

did not fall further in June and July, the price index of PP continued to drop by 4.4% mom and

3.3% mom in June and July respectively. In response to weak downstream demand for PP,

some domestic petrochemical enterprises reduced ex-factory prices of PP in order to lower their

inventory levels.

In early August, domestic petrochemical enterprises raised ex-factory prices of PP again, against

the backdrop of the strong rebound in global crude prices then. Although global crude prices

started a downward trend soon afterwards, petrochemical enterprises did not reduce PP prices.

Therefore, the price index of PP gained 3.1% mom in the month. (See exhibit 14)

In view of the sluggish downstream demand, we do not expect PP prices to rise much in the near

future.

Exhibit 14: Price index of PP, Sep 2009 - Aug 2010


PP (mom -2.0 -1.2 1.7 3.7 6.7 -2.3 1.3 3.5 -0.9 -4.4 -3.3 3.1

growth %)

PP (yoy -25.2 -4.7 32.7 38.9 46.9 33.2 34.4 19.8 16.6 9.6 5.2 5.4

growth %)


10. Price index of natural rubber showed positive mom growth again in

August

Bolstered by strong domestic demand for automobiles, the price index of natural rubber13 rose by

2.4% mom and 3.5% mom in March and April respectively. Afterward, the price index decreased

by 4.7% mom in May, and stayed unchanged in June.

The decline in natural rubber prices in May was due to both demand-side and supply-side

factors. On the demand-side, the domestic output of both auto and tire showed negative mom

growth in May, thereby reducing demand for natural rubber. On the supply side, many harvest

activities have resumed in major rubber producing regions since mid-April. (There is a seasonal

decline in harvest activities in major rubber producing regions every Dec-Apr.)

13 The index is compiled by the China Federation of Logistics & Purchasing (CFLP).

!"#$#%&'(#)*+*,-./#0*'1-* AD


After staying "at in June, the price index of natural rubber moderated by 1.7% mom in July,

corresponding to softening auto sales in China, as well as rising rubber supply due to a seasonal

increase in harvest activities in the summer.

In August, the price index gained 3.1% mom, as auto sales in China rebounded and the severe

weather conditions had caused the reduction in natural rubber output in the major rubber

producing countries in Southeast Asia. (See exhibit 15)

Looking forward, with the expectation of increasing auto sales in China in the coming months,

the high season of car sales, natural rubber prices are set to trend upward again.

Exhibit 15: Price index of natural rubber, Sep 2009 - Aug 2010


Natural rubber 1.4 1.9 6.9 11.0 14.4 -0.7 2.4 3.5 -4.7 0.0 -1.7 3.1

(mom growth %)

Natural rubber -33.4 -11.5 24.3 73.8 80.6 67.7 72.9 72.5 61.2 60.0 156.1 42.7

(yoy growth %)


11. Price index of non-ferrous metals rebounded in July and August

After declining by 5.7% mom in February, the price index of non-ferrous metals recorded growth

of 2.5% mom and 1.3% mom in March and April respectively, backed by the ongoing recovery

of the global economy. The price index then dropped sharply by 7.3% mom in May and 5.2%

mom in June, due largely to the cool down of speculative demand for non-ferrous metals and the

deepening concern over the European debt crisis.

The price index of non-ferrous metals rebounded by 3.2% mom and 5.0% mom in July and

August respectively, as concern eased over the European debt crisis and a number of smelting

plants in China were shut down for regular maintenance. (See exhibit 16)

The price indices of several types of non-ferrous metals rose markedly in July and in August.

For example, the price index of copper gained 3.5% mom in July and 5.9% mom in August;

the aluminum price index increased by 2.6% mom and 2.5% mom; the lead price index was up

strongly by 4.8% mom and 8.1% mom; and the zinc price index surged by 5.8% mom and 9.0%

mom.14 (See exhibit 17 - 20)

14 The indices are compiled by the China Federation of Logistics & Purchasing (CFLP).

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=B<

Exhibit 16: Price index of non-ferrous metals, Sep 2009 - Aug 2010


Non-ferrous 0.4 1.3 2.8 5.7 7.7 -5.7 2.5 1.3 -7.3 -5.2 3.2 5.0

metals (mom

growth %)

Non-ferrous -9.5 20.3 41.2 68.5 63.8 57.6 53.6 35.5 29.2 17.2 16.9 10.9

metals (yoy

growth %)


Exhibit 17: Price index of copper, Sep 2009 - Aug 2010


Copper (mom 0.8 1.6 5.3 6.4 7.7 -6.4 5.3 2.2 -8.7 -4.6 3.5 5.9

growth %)

Copper (yoy -16.2 25.9 62.2 105.3 107.8 96.9 87.2 49.3 45.4 32.3 29.2 18.9

growth %)


Exhibit 18: Price index of aluminum, Sep 2009 - Aug 2010


Aluminum -0.5 -0.4 0.6 5.6 6.9 -4.8 0.2 -0.3 -6.1 -4.3 2.6 2.5

(mom growth %)

Aluminum -7.4 8.2 11.8 44.4 39.7 34.1 28.3 18.7 17.2 6.9 6.5 1.1

(yoy growth %)


Exhibit 19: Price index of lead, Sep 2009 - Aug 2010


Lead (mom 12.2 0.7 0.3 0.2 3.6 -4.1 0.0 0.4 -4.4 -3.7 4.8 8.1

growth %)

Lead (yoy -12.5 14.2 66.2 61.6 32.3 30.6 28.0 26.9 25.6 10.4 13.5 18.2

growth %)


!"#$#%&'(#)*+*,-./#0*'1-* B2


Exhibit 20: Price index of zinc, Sep 2009 - Aug 2010


Zinc (mom 1.0 6.3 7.3 9.0 8.0 -11.8 2.6 1.3 -12.7 -9.1 5.8 9.0

growth %)

Zinc (yoy 5.8 51.4 80.4 94.5 72.2 63.6 66.0 46.6 23.3 10.2 15.5 13.8

growth %)


Part Three: Other Costs of Production (Energy, Transportation and Labour)

and Exchange Rate

1. China’s crude prices "uctuated considerably throughout June to August

In line with the movement of global crude prices, the domestic crude prices had moved up

since early February, until they peaked in early May. The crude prices then declined sharply in

the month, mainly attributed to growing doubts over the sustainability of the world economic

recovery, which in turn were triggered by rising concerns over the European debt crisis. The

Daqing15 crude price, for example, dropped from the recent high of US$ 87.0 per barrel on

4 May 2010, to US$ 68.1 per barrel on 25 May. The domestic crude prices did not fall further

afterwards, but "uctuated considerably throughout June to August. For example, the Daqing

crude price picked up in mid-June and peaked at US$ 77.4 per barrel on 21 June, and then

softened to US$ 69.1 per barrel on 7 July. It then rebounded to US$ 78.3 per barrel on 6 August,

before declining to US$ 71.3 per barrel on 24 August. Since then, the Daqing crude price has

trended upward again. (See exhibit 21)

From the year 2000 onwards, China’s crude oil prices were determined with reference to global

crude prices. Looking ahead, the future movement of global crude prices will depend on the

pace of the global economic recovery, as well as global crude oil production. It is noteworthy that

the Organization of the Petroleum Exporting Countries (OPEC), whose members supply about

40% of the world’s crude oil, is expected to maintain its current output level. In late March, the

Secretary-General of the OPEC suggested that crude prices within the range of US$70-US$80

per barrel were good for both producers and consumers – such levels are high enough to provide

incentives for producers to invest in new projects but not so high that oil demand from developed

15 Daqing Field (!"#$ ) is the largest oil !eld in China.

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=B;

economies will be discouraged.16 Then, on 27 June, he said that he did not foresee any change

in crude oil production, and the current crude price was at “comfortable” level.17 (The Brent crude

price was US$76.3 per barrel on 25 June, two days before he made the statement.) It is widely

expected that, if crude prices drop below US$ 70 per barrel, the OPEC will lower its output level.

Exhibit 21: China’s crude prices, Sep 2009 - Aug 2010

Source: ifeng.com

2. Price index of re!ned oil products moderated in June and July, and then

rebounded a bit in August

With improving retail demand for diesel and gasoline, the price index of re!ned oil products grew

by 1.6% mom in March. Afterward, driven by the government action to raise the maximum retail

prices of gasoline and diesel on 14 April, the price index rose further by 5.7% mom in April and

0.5% mom in May. The index then moderated a bit by 2.4% mom in June, as the government

reduced the fuel prices on 1 June. (See exhibit 22)

Since then, the government has not adjusted the maximum retail prices of gasoline and diesel.

The price index of re!ned oil dropped by 1.1% mom in July, but then rose by 0.3% mom in

August.

16 http://in.reuters.com/article/idInn2911666020100330?pagenumber=2&virtualBrandChannel=0&sp=true17 http://www.bloomberg.com/news/2010-06-27/crude-prices-at-comfortable-level-opec-secretary-general-el-badri-

says.html

!"#$#%&'(#)*+*,-./#0*'1-* B>


In China, the maximum retail prices of re!ned oil products, namely gasoline and diesel, are still

under government control. The government of!cial would consider adjusting the fuel prices when

the 22-day moving average of a basket of global crude prices has changed by more than 4%.

Exhibit 22: China’s price indices of re!ned oil products, Sep 2009 - Aug 2010



0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=B?

3. The benchmark Qinhuangdao coal prices have softened since late July

Due largely to the reduced heating demand, as well as the gradual expansion of coal output in

Shanxi province, the benchmark Qinhuangdao coal prices declined in February and early- and

mid- March. The coal prices then rebounded strongly in late April - mid May, before staying

relatively stable in late May to early July. For example, the price of coal with calori!c value of

5,800 kcal/kg dropped from the peak of 840 yuan per tonne in January to 720 yuan per tonne on

15 March. It then picked up to 785 yuan per tonne on 17 May. Afterwards, it stayed stable until

mid July. (See exhibit 23)

The sharp rise in coal prices in April and May was mainly due to the increasing demand from

domestic power producers, as well as the maintenance of the Daqin railway, the railway which

connects the major coal-producing region to the largest coal shipping port in the country. The

drought in southwestern China had reduced output of hydropower plants in China, thereby

boosting demand for output of coal-!red power plants. The increased demand, together with the

expectation of heavier demand for air conditioning in summer, drove power producers to raise

their inventory levels of coal in April and May.

Since late July, coal prices have started to soften, mainly caused by slowing coal demand from

power producers. One of the major reasons was that the energy saving campaign recently

launched by the Chinese government has reduced power consumption in the country. Besides,

on 25 June, the government ordered major coal companies to maintain the stability of market

prices of coal, and not to adjust the coal prices set in their annual supply contracts with power

producers.

Looking forward, coal prices are expected to stay largely stable or trend slightly downward, given

the increasing coal output, as well as the moderating growth of China’s industrial output.

!"#$#%&'(#)*+*,-./#0*'1-* B@


Exhibit 23: Qinhuangdao coal prices, Aug 2009 - Aug 2010

Source: Cqcoal.com

4. The China Containerized Freight Index has trended slightly upward since

mid-May

The China Containerized Freight Index (CCFI)18 moderated a bit in March and early-April, and

then stayed relatively stable in mid April to mid May. Since then, it has started an upward trend.

(See exhibit 24)

Although major shipping companies have started expanding the active capacities of their carriers

since April, the container freight rates remained robust in recent months, due largely to the

stronger demand for container transport associated with improving exports.

We believe that the container freight rates will continue to rise in the near term, supported by

growing demand for container transport.

18 The index, compiled by the Shanghai Shipping Exchange, measures the freight rates of eleven freight routes. The destinations of these routes include Hong Kong, Korea, Japan, Southeast Asia, Australia and New Zealand, the Mediterranean, Europe, East and West Africa, America West, America East, South Africa, South America.

The freight rates data are collected from major shipping companies in the market, such as CMA-CGM, COSCO Container Lines, China Shipping Container Lines, Hanjin Shipping, Hapag-Lloyd, Kline, Maersk, MOL, NYK, OOCL, P&O Nedlloyd, PIL, Shanghai Hai Hua Shipping, Shanghai Jin Jiang Shipping, Sinotrans Container Lines, SITC Container Lines, etc.

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=BA

Exhibit 24: China Containerized Freight Index, Aug 2009 - Aug 2010

Source: Shanghai Shipping Exchange

5. Labour costs

(i) Average annual wage of employees in urban private units increased by 6.6%

in FY09

The average annual wage of employees in urban private units19 increased by 6.6% yoy to 18,199

yuan in FY09.20 Among various regions, the average annual wage of employees in urban private

units in the eastern region reached 19,840 yuan in FY09, much higher than those in the central

region (15,402 yuan), the western region (16,234 yuan) and the northeastern region (16,414

yuan). Nevertheless, employees in urban private units in the eastern region witnessed the slowest

growth in average annual wage, up 4.5% yoy in FY09, compared with 11.3% yoy, 10.1% yoy and

9.9% yoy respectively in the central region, the western region and the northeastern region. (See

exhibit 25)

19 On 27 October 2009, the NBS released the result of its !rst survey on wages of employees in urban private units in FY08. The result shows that urban private units employ a large number of people in China. As of end-2008, there were about 66.76 million employees in urban private units, equivalent to 54.75% of the total number of employees in the “non-private units” category.

http://www.stats.gov.cn/tjdt/gjtjjdt/t20091028_402596828.htm20 http://www.stats.gov.cn/tjfx/jdfx/t20100716_402657779.htm

!"#$#%&'(#)*+*,-./#0*'1-* BB


Exhibit 25: Average wages of employees in urban private units, 2008 - 2009

FY08 FY09

Average wage (RMB) Average wage (RMB) yoy growth (%)

China (overall) 17,071 18,199 6.6

Of which:

Manufacturing sector 16,443 17,260 5.0

Eastern region 18,980 19,840 4.5

Central region 13,843 15,402 11.3

Western region 14,751 16,234 10.1

Northeastern region 14,933 16,414 9.9


(ii) Average annual wage of employees in urban non-private units grew by 12.0%

in FY09

The average annual wage of employees in urban non-private units21 reached 32,736 yuan in

FY09.22 The growth rate was 12.0% yoy in FY09, much faster than that in urban private units.

Among provinces and municipalities in the country, Tibet registered the slowest growth in FY09,

rising by 3.1% yoy, whilst Hubei saw the fastest growth of 19.3% yoy. It is also noteworthy that

some other provinces in the central and western regions, such as Jiangxi and Shaanxi, recorded

growth above 15%, re"ecting the rapid economic development in these areas. (See exhibit 26)

21 The “non-private units” category covers state-owned units, urban collective-owned units, cooperative units, joint-ownership units, limited liability corporations, shareholding corporations Ltd. and foreign-funded units (including units funded by Hong Kong, Macau, and Taiwan), but does not cover private units.

22 http://www.stats.gov.cn/tjfx/jdfx/t20100716_402657787.htm

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=BC

23 According to the National Development and Reform Commission’s (NDRC) delineation, there exists ten major city clusters in China: the Pearl River Delta (%&'() ), the Yangtze River Delta (*&'() ), Beijing-Tianjin-Hebei region (+,-./0 ), Central and Southern Liaoning (123./0 ), Shandong Peninsula (4567./0 ), Sichuan and Chongqing region (89./0 ), Middle reach of Yangtze (*&2:./0 ), Cross-Strait West Bank (;<=>./0 ), Central Plain region (2?./0 ), and Central Shaanxi (@2./0 ). An overview of the development of these ten city clusters can be found in our China Distribution and Trading, Issue 49: Overview of China’s Regional Development: Part 1, and Issue 50: Overview of China’s Regional Development: Part 2.

Exhibit 26: Average wages of employees in urban non-private units in China and in the

provinces where the ten major city clusters23 are situated, 2008 - 2009

FY08 FY09

Average wage yoy growth Average wage yoy growth

(RMB) (%) (RMB) (%)

China (overall) 29,229 17.2 32,736 12.0

Of which:

Manufacturing sector 24,192 15.8 26,599 9.9

Eastern region 34,316 – 38,002 10.7

Central region 24,390 – 27,478 12.7

Western region 25,602 – 29,120 13.7

Northeastern region 25,101 – 28,383 13.1

Ten major city clusters

Pearl River Delta

situated in:

Guangdong 33,110 12.5 36,355 9.8

Yangtze River Delta

situated in:

Shanghai 56,565 14.7 63,549 12.3

Jiangsu 31,667 15.7 35,890 13.3

Zhejiang 34,146 9.8 37,395 9.5

Beijing-Tianjin-Hebei region

situated in:

Beijing 56,328 21.1 58,140 3.2

Tianjin 41,748 19.5 44,992 7.8

Hebei 24,756 24.3 28,383 14.7

Central Shaanxi

situated in:

Shaanxi 25,942 21.8 30,185 16.4

Central and Southern Liaoning

situated in:

Liaoning 27,729 19.5 31,104 12.2

!"#$#%&'(#)*+*,-./#0*'1-* BD


FY08 FY09

Average wage yoy growth Average wage yoy growth

(RMB) (%) (RMB) (%)

Cross-Strait West Bank

situated in:

Fujian 25,702 15.3 28,666 11.5

Shandong Peninsula

situated in:

Shandong 26,404 15.6 29,688 12.4

Central Plain region

situated in:

Henan 24,816 18.5 27,357 10.2

Middle reach of Yangtze

situated in:

Hubei 22,739 14.7 27,127 19.3

Hunan 24,870 15.5 27,284 9.7

Jiangxi 21,000 14.1 24,696 17.6

Sichuan and Chongqing region

situated in:

Chongqing 26,985 16.8 30,965 14.7

Sichuan 25,038 17.5 28,563 14.1


(iii) Average monthly wage of migrant workers in China showed positive yoy

growth in 2009

According to the NBS, the average monthly wage of migrant workers in China increased to

1,417 yuan in 2009, up from 1,340 yuan in 2008. Among various regions, migrant workers in the

western region witnessed the fastest growth in wages. Compared with the previous year, the

average monthly wage of migrant workers in the western region grew by 8.2% yoy in 2009, while

those in the eastern region and the central region were up by 5.2% and 5.9% respectively. (See

exhibit 27)

By industries, the average monthly wage of migrant workers in the manufacturing sector rose by

5.3% to 1,331 yuan in 2009, while those in the transportation, storage & post service sector; the

hotel & catering sector; and the construction sector reached 1,671 yuan, 1,264 yuan and 1,625

yuan respectively in 2009.

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=C<

It is noteworthy that the average wage of migrant workers still registered positive growth of 5.7%

yoy in 2009, although China’s economic growth showed moderation and the minimum wage

levels were frozen during the year.

Looking ahead, we expect that the average wage of migrant workers will show double-digit

growth in 2010, given the improving economic prospects of China.

Since late February, there have been reports on serious labour shortages in the coastal

provinces. Enterprises have to offer higher salaries to hire or retain workers. Besides, local

governments in a number of provinces and municipalities have announced to raise the minimum

wage levels in their regions in recent months. These factors will put additional upward pressure

on the wage levels in China.

Exhibit 27: Average monthly wages of migrant workers in China, 2009

2009

Average monthly wage yoy growth

(RMB) (%)

China 1,417 5.7

Eastern region 1,422 5.2

Central region 1,350 5.9

Western region 1,378 8.2


6. The RMB has appreciated against the US dollar since 19 June 2010

The nominal RMB/USD exchange rate stayed relatively stable at around 6.80-6.85 throughout

late August 2008 to mid June 2010. On 19 June 2010, the People’s Bank of China (PBOC),

China’s central bank, announced to “proceed further” with the reform of the RMB exchange rate

regime and to increase the "exibility of the RMB exchange rate.24 The central bank reiterated that

the RMB exchange rate would be determined with reference to a basket of currencies, instead

of pegging to the US dollar solely. Such an important announcement signaled a big change in

the Chinese government’s exchange rate policy. Afterwards, the RMB has appreciated slightly

against the US dollar. The nominal RMB/USD exchange rate edged up from 6.83 on 21 June

to 6.77 on 2 July, and then "uctuated within the range of 6.77-6.81 throughout July to early

September.

24 http://www.pbc.gov.cn/detail.asp?col=100&ID=3664

!"#$#%&'(#)*+*,-./#0*'1-* C2


Recently, with China’s trade surplus remaining high in July and August, international pressure

for RMB appreciation has increased again. On 8 September, the US Treasury Secretary Timothy

Geithner said that the Chinese government had not let the currency move very much and called

for faster RMB appreciation. The RMB appreciation against the US dollar has quickened since

9 September, few days before a hearing on China’s exchange-rate policy conducted by the US

congress. The nominal RMB/USD exchange rate rose from 6.78 on 9 September to 6.72 on 17

September, the highest level since 1994.

On the other hand, the RMB has appreciated strongly against the Euro since late November

2009: The nominal RMB/Euro exchange rate strengthened from the recent low of 10.32 on

26 Nov 2009 to 8.13 on 7 June 2010, and then depreciated a bit to 8.99 on 9 August, before

advancing to 8.78 on 17 September. (See exhibit 28)

Against its trading partners, the RMB depreciated by 1.7% in real terms in June to July 2010,

as indicated by the real effective exchange rate (REER) compiled by the Bank for International

Settlements.25 Overall, the RMB appreciated by 2.4% in real terms in the !rst seven months of

2010. (See exhibit 30)

Since the introduction of the reform of the RMB exchange rate regime in late July 2005, the

RMB has been depegged from the US dollar, and the RMB exchange rate has been determined

with reference to a basket of currencies. During July 2005 - late August 2008, the RMB gained

by more than 20% against the US dollar. The global !nancial crisis broke out afterward, leading

to sharp contraction in export and in turn, serious job losses and factory closures in China.

Therefore, the RMB appreciation against the US dollar stopped from late August 2008 to mid

June 2010. (See exhibit 29)

Looking ahead, we expect a gradual appreciation of the RMB against the US dollar to take place

in the near term, thereby easing international pressure, as well as bringing down the prices of

imported commodities in RMB terms. It is forecast that the nominal RMB/USD exchange rate

will appreciate to around 6.6 at end-2010. It is unlikely that there will be a substantial RMB

appreciation against the US dollar. Otherwise, the competitiveness of China’s exports will

25 The Bank for International Settlements (BIS) calculates effective exchange rate (EER) indices for a total of 58 economies (including individual euro area countries and, separately, the euro area as an entity). Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. The weighting pattern is time-varying, and the most recent weights are based on trade in 2005-07.

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=C;

be weakened seriously, and it will cause a big loss in value (in RMB terms) of China’s foreign

exchange reserve.26

Exhibit 28: RMB/USD and RMB/Euro, Sep 2009 - Sep 2010

Source: State Administration of Foreign Exchange

26 According to the local media, more than 60% of China’s foreign exchange reserves are held in US dollar-denominated assets.

http://www.cs.com.cn/xwzx/03/201007/t20100706_2499504.htm

!"#$#%&'(#)*+*,-./#0*'1-* C>


Exhibit 29: RMB/USD, Jun 2005 - Sep 2010

Source: State Administration of Foreign Exchange

Exhibit 30: RMB REER, Aug 2009 - Jul 2010

Source: Bank for International Settlements

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Part Four: Highlights

1. Labour shortages and labour unrest have triggered signi!cant increases

in labour costs

Since late February 2010, there have been numerous reports on serious labour shortages in the

coastal provinces.27 According to a survey of enterprises in 26 large- and medium-sized cities

in 13 provinces conducted by the Ministry of Human Resources and social security (MHRSS),

the labour demand from enterprises rose by 15% soon after the Chinese New Year Holiday,

compared with the same period of the previous year.28

Among different regions in China, the Pearl River Delta and southeastern Fujian experienced the

most severe problem of labour shortages in early 2010, according to another survey done by

MHRSS.29 As of 10 March, 700,000 workers were needed in Guangdong province. More than

60% of the job vacancies were in Guangzhou, Shenzhen and Dongguan. And 200,000 workers

were required in Fujian province. Around 53% of the vacancies were in Quanzhou.

Moreover, the survey suggested that, among different size of enterprises, small- and medium-

sized enterprises (SMEs) suffered the most from the labour shortages. The supply of skilled

workers was also particularly tight.

The recent pick up in orders due to strong domestic demand and export recovery has boosted

the labour demand from mainland manufacturers. On the other hand, the rapid economic

growth in the interior provinces has limited the labour supply in the coastal provinces. In recent

years, the Chinese government has strengthened its efforts to promote the development in the

central and western regions through increasing investment and implementing favorable policies

to support the agricultural industry. In addition, many factories have moved inland, driven by

rising costs in the coastal provinces, improved infrastructure in the interior provinces, as well

as government policies to support relocation. Consequently, migrant workers can !nd more

job opportunities and earn higher wages in the interior provinces, compared to the past. Many

migrant workers from the inland, traditionally working in the coastal provinces, now choose to

work in provinces closer to their hometowns. In response to the situation, enterprises in the

coastal provinces have to offer higher salaries in a bid to hire or retain workers.

27 See, for example, http://www.china.org.cn/video/2010-02/23/content_19460894.htm28 http://www.gov.cn/gzdt/2010-02/26/content_1541943.htm29 http://www.mohrss.gov.cn/Desktop.aspx?path=mohrss/mohrss/InfoView&gid=a573179a-9d0e-4e08-8c8c-

5a636ac176e0&tid=Cms_Info

!"#$#%&'(#)*+*,-./#0*'1-* C@


Besides, a strike at a Honda factory in Foshan caught worldwide attention in late May. As a result

of the strike and wage negotiation, Honda announced to offer a 24% pay rise to the workers at

this plant. In another scene, following a spate of suicides at Foxconn, the company announced to

raise the salary for its workers by 30% or above on 2 June 2010. Then on 6 June, it announced

to increase salary of most assembly line workers, line managers and supervisors to 2,000 yuan

per month, effective from 1 October 2010.

In fact, due to labour shortages and changing expectation of China’s migrant workers,

labour disputes in China have been on the rise and wages have been on an upward trend in

recent years. The Foxconn and Honda events are only triggers for the widespread collective

bargaining over wages to come in the future. With the news of sizable pay rise of Foxconn and

Honda spreading across China through media reports, workers in other regions/factories are

encouraged to ask for similar wage increases. Labour unrest is showing signs of spreading from

the Pearl River Delta (PRD) to other parts of the country. Strikes were reported at a Taiwan-

owned sporting goods supplier in Jiangxi province, and at the Japanese sewing machine maker

Brother Industries in Xian.

It is observed that many employers have offered sizable pay rises in order to settle labour

disputes. Wage increases will soon become prevalent among manufacturers, especially in

the coastal regions. The cost hike will put stress on the manufacturing supply chain. Many

enterprises are unable to pass through the higher cost to buyers, thereby leading to reduced

pro!t margins. In particular, low value-added producers, which compete on cost basis, are now

under threat of closure. To cope with the higher labour costs, some manufacturers opt to relocate

to lower cost production bases, while others are trying to move up the value chain. Foxconn, for

example, plans to move most of its production lines from Shenzhen to Hebei province by the end

of this year.

Many see this wave of strikes as the turning point in China’s economic restructuring – Chinese

companies can no longer run on the traditional OEM model dependent on abundant cheap

labour, but must move on to a model of higher value-added. The latest developments coincide

with China’s macro policy objective to adjust its economic structure and accelerate industrial

upgrading, as well as to change its growth model from export-oriented to consumption driven.

In this regard, improving household income is one of the major keys. The Chinese policymakers

have vowed to boost labour income lately. As of 10 September 2010, local governments

in twenty eight provinces/municipalities in China raised the minimum wage levels in their

jurisdictions by signi!cant amounts. (See the next highlight for more details.)

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=CA

2. The minimum wage levels in twenty eight provinces/municipalities were

adjusted upward in the previous few months

As the minimum wage levels in China were frozen in 2009, many local governments have to

adjust the levels in 2010, in order to conform to the government provisions.30 As of 10 Sep 2010,

the minimum wage levels in 28 provinces/municipalities in China were increased. See below for

details:

Shanghai

On 1 Apr 2010, the minimum monthly wage in Shanghai was adjusted to 1,120 yuan, up by

16.7% from the previous level.31

Tianjin

On 1 Apr 2010, the minimum monthly wage in Tianjin was adjusted to 920 yuan, up from the

previous level of 820 yuan.32

Guangdong province

On 17 Mar, the Guangdong provincial government announced to raise the levels of minimum

monthly wage in the region by 21.1% on average, effective from 1 May 2010.33

Jiangsu province

On 27 Jan, the Jiangsu provincial government announced to raise the minimum wage levels in

various regions within the province by around 12.9-13.6%, effective from 1 Feb 2010.34

Zhejiang province

On 1 Apr 2010, the minimum wage levels in various regions in Zhejiang province were adjusted

upward to 1,100 yuan, 980 yuan, 900 yuan and 800 yuan respectively.35

30 According to the “Provisions on Minimum Wage”, the minimum wage level in each region must be revised at least once every two years.

31 http://rsj.sh.gov.cn/200912333/2009xxgk/ztxx/gzzd/01/201003/t20100329_1116178.shtml32 http://big5.gov.cn/gate/big5/www.gov.cn/fwxx/sh/2010-04/08/content_1575923.htm33 http://www.gd.lss.gov.cn/gdlss/sy/pnews/t20100318_116019.htm34 http://www.jiangsu.gov.cn/shouye/wjgz/bmwj/201001/t20100128_422866.html35 http://www.zjhrss.gov.cn/art/2010/3/1/art_1161_881.html

!"#$#%&'(#)*+*,-./#0*'1-* CB


Fujian province

On 1 Mar 2010, the minimum wage levels in Fujian province were increased by 24.5% on

average.36

Shandong province

On 1 May 2010, the minimum wage levels in Shandong province were raised by 21.2% on

average.37

Shanxi province

On 1 Apr 2010, the minimum wage levels in Shanxi province were raised by 15.5% on average.38

Beijing

The minimum monthly wage in Beijing was raised from the previous level of 800 yuan to 960 yuan

on 1 Jul 2010.39

Shenzhen

On 1 Jul 2010, the Shenzhen municipal government raised the minimum monthly wage in the

city to 1,100 yuan.40 Before the adjustment, the level of minimum monthly wage in Luohu, Futian,

Nanshan and Yantian districts in Shenzhen was 1,000 yuan; whilst that in Baoan and Longgang

districts was 900 yuan.

Anhui province

On 13 Jun 2010, the Anhui provincial government announced to raise the levels of minimum

monthly wage in various districts within the province by 25.9-28.6%, effective from 1 Jul 2010.41

36 http://www.fjlss.gov.cn/showinfo.asp?infoid=1220537 http://www.shandong.gov.cn/art/2010/4/14/art_291_204658.html38 http://www.sxldbzt.gov.cn/news/snxw/2010/324/1032417164CF4A5A09H556BACCJI23.html39 http://210.75.193.158/gate/big5/zhengwu.beijing.gov.cn/gzdt/gggs/t1118046.htm40 http://www.sz.gov.cn/rsj/szsrzhsbj/tzgg/201006/t20100628_1549217.htm41 http://www.ah.hrss.gov.cn/Root/web/templet/siteColumnContent.jsp?siteColumnContentId=29246

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=CC

Hunan province

On 8 Jun, the Hunan provincial government announced to raise the minimum wage levels in

various districts within the province by signi!cant amounts, effective from 1 Jul 2010.42 For

example, the minimum wage level in class I districts increased from 665 yuan to 850 yuan, up by

27.8%.

Shaanxi province

On 1 Jul 2010, the minimum wage levels in various districts in Shaanxi province were adjusted

upward to 760 yuan, 680 yuan, 630 yuan and 580 yuan respectively.43

Henan province

On 1 Jul 2010, the minimum wage levels in Henan province were increased by more than 20%.44

Yunnan province

On 1 Jul 2010, the minimum wage levels in various districts within Yunnan province were

increased by more than 20%.45 For example, the minimum wage level in class I districts was

raised to 830 yuan, up by 22% from the previous level.

Liaoning province

On 1 Jul 2010, the minimum wage levels in various districts within Liaoning province were

increased to 900 yuan, 750 yuan and 650 yuan, up by 28.6-30%.46

Hainan province

On 1 Jul 2010, the minimum wage levels in various districts within Hainan province were

adjusted upward.47 Particularly noteworthy is that the minimum wage level in class I districts was

increased substantially by 31.7% to 830 yuan.

42 http://www.hn12333.com/pub/hnjbw/sy_gzdt/gzdt_2010/hn2010/t20100608_54714.htm43 http://www.shaanxihrss.gov.cn/Html/2010-5-25/163111.Html44 http://www.haly.lss.gov.cn/news_view.asp?newsid=92845 http://www.lcldl.gov.cn/Article/Article.asp?newsid=106146 http://www.ln.lss.gov.cn/ln/6/10/2010/06/i9083.shtml47 http://hi.lss.gov.cn/web/default/article.jsp?articleId=1268

!"#$#%&'(#)*+*,-./#0*'1-* CD


Jiangxi province

On 1 Jun 2010, the Jiangxi provincial government announced to raise the levels of minimum

monthly wage by 23.6% on average, effective from 1 Jul 2010.48

Hubei province

On 1 May 2010, the Hubei provincial government raised the levels of minimum monthly wage by

150 to 200 yuan.49

Jilin province

On 1 May 2010, the minimum wage levels in various districts within Jilin province were adjusted

upward by 22.9% on average.50

Ningxia Hui autonomous region

On 1 May 2010, the minimum wage levels in various districts within the region were increased by

23.5-26.8%.51

Sichuan province

On 1 Aug 2010, the Sichuan provincial government raised the minimum wage levels in various

districts within the province by 30.8-44.4%.52

Xinjiang Uygur autonomous region

On 1 Jun 2010, the levels of minimum monthly wage in the region were raised by 24.7% on

average.53

Hebei province

On 1 Jul 2010, the minimum wage levels in various districts in Hebei province were adjusted

upward to 900 yuan, 840 yuan, 760 yuan and 690 yuan respectively.54

48 http://www.jxrenshi.gov.cn/Content/show.php?id=1005049 http://www.hubei.gov.cn/zwgk/zfxxgk/zfwj/ezfwj/ezf2010/201004/t20100428_116428.shtml50 http://www.jl.gov.cn/zwxx/zfwj/szffw/201004/t20100430_712995.html51 http://www.nxhrss.gov.cn/news/gzdt/2010/428/1042812812EA4EE055IE39GCBI0E6J.html52 http://www.chinanews.com.cn/cj/2010/07-07/2386464.shtml 53 http://www.xjrs.gov.cn/show_!les.asp?ArticleID=378154 http://www.chinajob.gov.cn/LabourRelations/content/2010-09/08/content_557886.htm

0/"',#3&-./,+"'(#4*5*6789*'1#)*87-1#:;<2<=D<

Inner Mongolia autonomous region

On 1 Jul 2010, the minimum wage levels in various districts in Inner Mongolia autonomous region

were increased to 900 yuan, 820 yuan, 750 yuan and 680 yuan respectively.55

Heilongjiang province

On 1 Jul 2010, the minimum wage levels in various districts in Heilongjiang province were raised

to 880 yuan, 840 yuan, 720 yuan, 700 yuan, 670 yuan, 620 yuan and 600 yuan respectively.56

Tibet autonomous region

On 1 Jul 2010, local government in Tibet autonomous region increased the levels of minimum

monthly wage by 220 yuan.57

Qinghai province

On 1 Sep 2010, the levels of minimum monthly wage in the region were raised by 28.8% on

average.58

Guangxi Zhuang autonomous region

On 1 Sep 2010, the minimum wage levels in various districts within Guangxi Zhuang autonomous

region were adjusted upward by 22.4 % on average.59

On top of the above adjustments which have taken effect as of 10 Sep, on 5 Sep 2010, the

Gansu provincial government announced to raise the levels of minimum monthly wage by 130 to

140 yuan, effective from 1 Oct 2010. 60 We also expect that the local governments in Chongqing

and Guizhou will raise the minimum wage levels in their jurisdictions soon.

The minimum wage levels in many provinces were increased substantially in this round of

adjustments. In particular, the levels of minimum monthly wage in Shanghai, Shenzhen, and

class I districts in Guangdong and Zhejiang are now higher than 1,000 yuan. Labour-intensive

industries such as textiles, apparel, shoes, electronic components, etc. will be adversely affected.

55 http://www.chinajob.gov.cn/LabourRelations/content/2010-08/27/content_554951.htm56 http://www.hlj.gov.cn/wjfg/system/2010/08/04/010088649.shtml57 http://tibet.news.cn/gdbb/2010-08/04/content_20529639.htm58 http://www.qh.gov.cn/html/31/146084.html59 http://www.chinajob.gov.cn/LabourRelations/content/2010-09/09/content_558274.htm60 http://www.chinajob.gov.cn/LabourRelations/content/2010-09/07/content_557283.htm

!"#$#%&'(#)*+*,-./#0*'1-* D2


Some manufacturers are reported to move their production lines from the above-mentioned

areas to lower cost provinces or even to other countries such as Vietnam and Indonesia.

Looking forward, bolstered by the government’s determination to raise workers’ income and the

strong Chinese economy, labour costs are expected to trend upward in the foreseeable future.

3. The government reduced the fuel prices by around 3% on 1 June, in

response to the recent drop in global crude prices

During January to August 2010, fuel prices were adjusted two times, and gained 1.1-1.6% in

total. On 14 April 2010, the Chinese government raised the maximum retail prices of gasoline and

diesel by 4-5%. The purpose of the price adjustments was to allow domestic fuel prices to re"ect

the movement in global crude prices since 10 November 2009, the previous time when fuel

prices were adjusted upward.

On 1 June 2010, the Chinese government reduced the maximum retail prices of gasoline

and diesel by around 3%, in order to re"ect the decline in global crude prices since 14 April

2010. The drop in the fuel prices has reduced transportation costs, as well as energy costs on

manufacturers who run their own electrical generators in China.

Indeed, since the introduction of the re!ned oil pricing mechanism in late December 2008, fuel

prices have been adjusted more frequently than before, as fuel prices would be determined by

the following factors: global crude prices, domestic re!ning costs, taxes and reasonable pro!ts

of re!ners. The government of!cial would consider adjusting fuel prices when the 22-day moving

average of a basket of global crude prices has changed by more than 4%. Therefore, the pass-

through of global oil prices to domestic fuel prices will now be bigger and faster than before.

4. The Chinese government announced to scrap export VAT rebates for 406

tariff items

On 22 June 2010, the Chinese government announced to scrap the export value-added-tax (VAT)

rebates for 406 tariff items, effective 15 July 2010.61 These 406 tariff items include various types

of products such as steel and nonferrous metal products, silver powder, ethanol, corn starch,

glass products, pesticides, pharmaceuticals, chemicals, plastics and rubber. The removal of the

export VAT rebates would increase the unit cost of these products for export.

61 http://szs.mof.gov.cn/zhengwuxinxi/zhengcefabu/201006/t20100622_323730.html

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In fact, during 2006 - early 2008, the Chinese government eliminated or slashed export VAT

rebate on a large number of products, and expanded the prohibited and restricted lists for

processing trade, with an aim to discourage the export of products that were energy- and

resource-intensive, highly polluting, labour-intensive and low value-added, as well as to promote

industrial upgrading. However, the global !nancial crisis and economic slowdown dealt a hard

blow to the export sector in China. The government reversed its earlier policy and raised the

export VAT rebate rates for selected products for seven times during late 2008 - June 2009.

Currently, China’s exports in US dollar terms have already returned to the pre-crisis level and are

showing strong growth again. The latest policy to scrap export VAT rebates indicates that the

Chinese government is renewing its efforts to discourage undesirable industries.

5. The government raised the retail power tariffs for non-residential users

on 20 November 2009

On 20 November 2009, the Chinese government raised the retail power tariffs for non-residential

users by 0.028 yuan per kilowatt-hour on average, or about 5% from the previous levels.62 This

was the !rst adjustment of the retail tariffs for non-residential users since late June 2008, when

they were increased by around 5% on average.

In fact, earlier in August 2008, the midstream on-grid power tariffs were adjusted upward by

0.020 yuan per kilowatt-hour in response to the rise in upstream coal prices. Nevertheless, the

downstream retail tariffs were not adjusted, as the government avoided increasing cost burden

on enterprises and households. Soon afterwards, the global economic slowdown took a toll on

China’s industrial production and thus power consumption. As a consequence, power grids in

China have incurred huge loss since late 2008. Boosted by robust domestic demand and export

recovery, the manufacturing sector in China has improved since 2Q09. Growth of industrial

production rebounded to 19.2% yoy in November 2009. In view of the recovery, the government

opted to raise the retail power tariffs for non-residential users in November 2009, in a bid to

restore the pro!tability of power grids.

It is noteworthy that, on 25 June 2010, the Chinese government ordered major coal companies to

maintain the stability of market prices of coal, and not to adjust the coal prices set in their annual

supply contracts with power producers. As such efforts would help alleviate cost pressure on

power producers, we believe the government will not raise power tariffs in the near term.

62 In China, both retail power tariffs and on-grid power tariffs are still under the government control.

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6. The ASEAN-China Free Trade Area has been established since 1 January

2010

The ASEAN-China Free Trade Area (ACFTA) has been established since 1 January 2010. The

purpose of setting up this free trade zone is to create a uni!ed market, through reducing the

barriers to intra-regional investment, trade in goods and services. With total population of around

1.9 billion, the ACFTA has become the free trade zone with the largest number of people in the

world.

On 1 January 2010, the Chinese government and the governments of six countries in ASEAN

(Association of South East Asian Nations), namely Thailand, Indonesia, Malaysia, Singapore,

Philippines and Brunei, removed tariffs on almost 90% of products traded within the region.63

The average rate of tariffs imposed by China on goods imported from these ASEAN members

has been reduced to 0.1%, compared to 9.8% in the past. On the other hand, the average rate

of tariffs levied by these ASEAN governments on imported Chinese goods has been lowered

from 12.8% to 0.6%. Beginning from 2015, tariffs on most products traded between China and

remaining four ASEAN members, namely Myanmar, Cambodia, Laos and Vietnam, will also be

abolished.

Currently, ASEAN is China’s fourth-largest trading partner. China’s trade with the ASEAN

countries amounted to US$213.0 billion in FY09. Boosted by the establishment of the ACFTA,

China’s trade with the ASEAN countries registered a stunning growth of 54.7% yoy in 1H10,

compared to -7.9% yoy in FY09.

7. The Economic Cooperation Framework Agreement (ECFA) between the

Chinese Mainland and Taiwan was signed on 29 June 2010

Taiwan signed the Economic Cooperation Framework Agreement (ECFA) with the Chinese

Mainland on 29 June 2010, which is a milestone in cross-strait ties. The ECFA aims to set out the

framework and targets; and is not a one-off agreement. The content will be expanded step-by-

step in future negotiations. More deregulations are in the pipelines.

To satisfy the demand for urgent actions in certain sectors, the ECFA includes an “early harvest”

plan, which will take effect on 1 January 2011. Good and services not included in the early

63 Governments in the ASEAN countries and China have been implementing a tariff reduction programme since July 2005, after signing the Agreement on Trade in Goods of the Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China in November 2004.

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harvest list will be dealt with in future ongoing negotiations. Apart from the trade pact, the two

sides have also signed an agreement on intellectual property rights protection.

The early harvest list includes tariff reduction/ removal and liberalization of trade in services, as

summarized below:

(1) Tariff concessions

Import duties on 539 tariff items of Taiwanese exports will be eliminated gradually. Taiwan will

follow a similar time frame to eliminate the tariffs it presently imposes on 267 goods from the

Chinese mainland.

Included in the agreement is a set of provisional rules governing certi!cate of product

origins. The provisional rules prescribe more stringent regulations in de!ning product origins.

According to the head of Taiwan’s Department of Customs Administration, the required

percentage of content provided at product origins should be between 40% and 50%.

(2) Open up service industries

The Chinese Mainland will open up 11 service industries to Taiwan: accounting and audit;

computer services (software & data processing); research & development (natural science &

engineering); convention; professional design; !lm import; hospital; civil aircraft maintenance;

banking; securities; insurance.

Taiwan will liberalize 9 service sectors to the Chinese Mainland: research and development;

convention; exhibition; product design; film import; agency services; sports and

entertainment; air ticketing; banking and !nancial services (excluding securities, futures and

insurance).

The ECFA is set to further advance cross-strait relations and give a major boost to two-way

trade. According to a prediction by the Taipei-based Chung-Hua Institution for Economic

Research, the signing of the ECFA will help to raise Taiwan’s GDP by 1.65-1.72%, and Taiwan’s

exports and imports by 4.87-4.99% and 6.95-7.07%. respectively. In addition to gradual tariff

reductions in goods and open-ups in services after signing the ECFA, one of the possible

supplements is to deepen development in the Strait-West Coast Economic Zone, particularly for

the !nancial sector.

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Signing the ECFA will help Taiwan avoid being marginalized in the face of increasing trade blocs

in the region and opening the door for similar treaties between Taiwan and other countries. The

inking of the ECFA will hopefully reduce the obstruction to Taiwan’s effort to sign FTAs with other

trading partners with improved cross-strait ties.

The ECFA, coupled with the progress in Three Linkages and other measures offered by the

Taiwan government to attract foreign investment and to encourage the return of Taiwan

businesses to the domestic markets (such as the reduction of corporate income tax and offering

incentives for building R&D centers), will enhance the incentive for multinationals/ Taiwan

companies to invest in Taiwan.

Looking ahead, the two sides will continue discussing agreements for commodity trade, service

trade and investment six months after the ECFA takes effect. Further discussion will include

tariff reduction and removal; rules of origin; customs procedures; trade remedies. Discussions

on service trade agreement will focus on cutting and removing restrictive measures gradually,

enlarging the service sectors covered, and enhancing cross-strait cooperation. In addition, the

two sides agree to enhance cooperation in medical and health, intellectual property protection,

investment protection, !nance, trade facilitation, customs, and E-business at the new round of

talks.

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The post-!nancial crisis strategies of China’s manufacturers and sourcing businesses

The post-crisis recovery is well on track in 2010. Major international organizations such as the

World Trade Organization are optimistic with the outlook of global trade. However, recent !gures

show that China’s economic growth has been slowing.

Although China’s manufacturing sector has received increasing orders from domestic and foreign

markets, growth moderation has been observed. On the other hand, Chinese manufacturers

currently face mounting cost pressure, which stem from the rising wages and the higher prices

of raw materials and energy. RMB appreciation poses another challenge to Chinese exporters.

Finally, though protectionism is decreasing on a global basis, more protectionist policies against

China have been observed.

The post-!nancial crisis strategies of China’s manufacturers

1. Cost reduction

Various cost cutting approaches have been adopted by the enterprises to cope with the

challenges. Examples include automation (substituting machines for workers), improving

operation efficiency, outsourcing non-core production processes such as transportation,

development of online sourcing and marketing, etc. As a case in point, Vtech, one of the largest

corded and cordless telephone suppliers of AT&T, has increased automation and rely less on

manpower.

2. Diversifying export markets

The !nancial crisis has made enterprises realize that solely relying on traditional export markets

could be risky; and that diversifying export markets is one of the way-outs. Traditional export

markets such as the US, Europe and Japan are still weak, yet the emerging markets maintained

strong growth momentum.

The ASEAN and the other BRIC countries are examples of markets with huge potentials. The

trade volume between China and ASEAN grew by 49.6% year-on-year (yoy) in 2Q10, while

trade between China and the US, Europe and Japan only rose by 34.1% yoy, 39.1% yoy and

36.1% yoy, respectively. The stunning growth of the Sino-ASEAN trade was largely due to the

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establishment of the China-ASEAN Free Trade Area on 1 January 2010. China and the other three

members of the BRICs, namely Russia, Brazil and India, also recorded remarkable growth in

trade volume in 2Q2010, with yoy growth of 41.8%, 51.3% and 57.3% respectively.

3. Developing the China market

More and more export-oriented manufacturers in China started developing the domestic

market, in a bid to reduce their reliance on the unstable export markets and explore new market

opportunities. This is in line with China’s policy of boosting domestic demand. The results of a

survey conducted by the Chinese Manufacturers’ Association of Hong Kong (CMA) in April 20101

demonstrate the escalating importance of the Chinese market to Hong Kong-owned enterprises.

About 70% of the respondents expect the export orders in 2010 to be stable or better than year

2009. In comparison, over 90% of the enterprises which sell to the China market expected to

see stable or more orders in 2010, and the average expected annual growth in orders reached as

high as 30%.

However, selling in China is not easy. According to the above-mentioned survey by the CMA,

the various forms of tax and administrative fees, complicated administrative procedures and

regulations, strict restrictions on processing trade enterprises selling in the domestic market,

serious infringement of intellectual property rights, and lack of distribution channels are the major

obstacles barring the export-oriented manufacturers from developing the domestic market.

Both central and local governments have introduced policies to help the manufacturers. For

example, the State Council issued a series of policies in May 2009, including simplifying the

approval procedures for processing trade enterprises without domestic selling rights to sell in the

domestic market and organizing trade fairs for domestic selling.

Local governments in export-oriented provinces have also been active in helping the

manufacturers to tap into the domestic market. Take Guangdong province as an example.

In order to facilitate the enterprises engaging in processing/ assembly operations and

compensatory trade (TFPs) to transform into foreign-invested enterprises (FIEs), which

are allowed to sell in the domestic market, the government announced in August 2008 the

instructions to help enterprises transform without the need to cease production. Tax subsidies

would also be provided to these enterprises during the process.

1 The Chinese Manufacturers’ Association (CMA), Survey on CMA Members’ Operation in the PRD, April 2010. The respondents are Hong Kong manufacturers operating in the Pearl River Delta. A total of 222 valid responses were collected.

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4. Industrial upgrading and transformation

Facing numerous challenges including tightened processing trade policies (e.g. expanding of the

prohibited and restricted lists for processing trade), the reduction in export VAT rebates, RMB

appreciation and the rise of labour cost after a series of labour disputes, enterprises have to

accelerate their upgrading and transformation.

Homa Appliances Co.,Ltd (Homa) is a case in point. It is a Chinese refrigerator manufacturer

which exports its products mainly to the European Union (EU). It is the original equipment

manufacturer (OEM)2 for famous brands such as Whirlpool, Changhong and TCL. It started

building its own brand since 2007, and it hired pop stars as the brand’s spokespersons and

launched TV commercials to increase popularity of the brand. Homa also developed the Chinese

rural market with the help of the “rural subsidies scheme for home appliance purchases”

program.3 The sales of Homa’s refrigerators in the rural market turned out to be more than

satisfactory. On the other hand, Homa’s export business also outperformed the market. In 2009,

while big brands like Samsung, LG and Haier were suffering from decline in exports, Homa

achieved stunning export growth of 70% – with 2.5 million refrigerators exported overseas.

In the face of competition from top brands,# some enterprises focus on development of new

products. Beijing Tianyu Communication Equipment Co.Ltd, a handset manufacturer, launched

new handsets with its functions and design tailor-made for Chinese consumers. With its

competitive price, the new model contributed signi!cantly to the increasing market share for the

company. The company’s market share in 1Q07 was only 1.2%, but it climbed to 7.5% in 1Q10.

The company is now the third largest player in the handset market in China, only after Nokia and

Samsung.

BYD Company Limited (BYD) is another case for industrial upgrading. BYD produced

rechargeable batteries at the beginning and then stepped into the automobile business. The

company applied their leading technology in battery manufacturing when it was doing R&D on

environmental-friendly electric automobiles. The E6 electric car was introduced in Shenzhen

earlier this year, and the company expects to export E6 to the US later this year and to Europe

2 An original equipment manufacturer, or OEM, manufactures products or components according to the design and con!gurations speci!ed by the client, and the products or components are retailed under the client's brand name. An original design manufacturer (ODM) is a company which designs and manufactures a product which is speci!ed and eventually branded by another !rm for sale. An original brand manufacturer, or OBM, is a company selling products under its own brand.

3 The government launched the program in early 2009. Under this program, rural households across the country are offered subsidies of up to 13% of the prices for purchases of designated household appliances.

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in 2011. Besides automobile manufacturing and distribution, BYD will work with a subsidiary of

Société Générale to expand its business scope into car loans.

5. Industrial relocation

The central government had planned to encourage enterprises in the eastern coast to relocate

to the less developed central and western China since 2007, but the outbreak of the !nancial

tsunami called it a halt. Given the surge in raw materials, labour and energy costs, as well as

growing expectations of RMB appreciation recently, enterprises have to re-consider moving

locations. According to the abovementioned CMA survey, 33.1% of the surveyed enterprises with

production activities in the Pearl River Delta would consider relocating their production.4

For example, facing the recent series of suicides among its workers, Foxconn speeded up its

construction of the new plant in Chongqing. It also accelerates its plans to set up new production

capacities in other inland provinces such as Henan and even other countries like Vietnam and

India.

Some would consider expanding their existing production lines outside China. Coach, the

international luxury brand of women’s handbag, was planning to expand its production scale

in Vietnam and India. Takara Tomy, a Japanese toy company, also decided to shift 30% of its

existing production from China to Vietnam in the next few years.

More enterprises adopt a gradual approach towards relocation. They prefer to relocate labour

intensive or low value-added production processes to low-cost provinces !rst. For example,

Foxconn will relocate almost all parts of its production line from Shenzhen to the inland, leaving

only two high value-added processes in the Shenzhen production plants.

In the past, enterprises were reluctant to relocate to inland China since the production chains

were not yet formed there. However, it is likely that the recent waves of relocation of large

enterprises would bring their upstream and downstream enterprises, such as suppliers,

logistics and other commercial services providers to the inland regions. The emergence of

industrial clusters in the inland regions will be another favourable factor. It is expected that more

enterprises will opt for relocation in the near future.

4 The Chinese Manufacturers’ Association (CMA), Survey on CMA Members’ Operation in the PRD, April 2010.

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6. Taking full advantage of government policies to reinvigorate the economy

The central government has introduced a series of policies to help enterprises to get through the

dif!cult time. For example, to facilitate industrial upgrading, the Ministry of Finance announced

in June 2010 that subsidies or interest-free loans would be provided to small- and medium-sized

enterprises (SMEs) for upgrading technology, energy saving and emission reduction.

As for industrial relocation, an array of policies was introduced by the State Council in April 2010

to facilitate industrial relocation. Measures such as tax breaks will be implemented to encourage

foreign-invested enterprises in eastern China to relocate to central and western China.

The government also tries to encourage enterprises to develop the domestic market. A number

of policies have been introduced to help export-oriented manufacturers to deal with problems

on sourcing, production and testing when developing the domestic market. More details can be

found in the part “developing the China market” above.

Local governments are also actively providing policy supports to enterprises. For example,

Guangdong government has implemented new measures since April 2010 to help its enterprises

develop the overseas market, in a bid to promote the province’s competitiveness at the

international level.

Implications for sourcing businesses

1. China remains one of the most competitive sourcing bases in the world

According to the 2010 Global Manufacturing Competitiveness Index, a report by Deloitte’s Global

Manufacturing Industry group and the U.S. Council on Competitiveness, China ranks !rst in

terms of manufacturing competitiveness. The report also forecasts that China will remain the

most competitive location for manufacturing in the coming !ve years.5

To many multi-national corporations (MNCs), China is still their most important sourcing base.

Despite the challenging business environment, some of them have even expanded the scale of

sourcing in China. This is attributable to the relatively well-developed infrastructure, thousands of

vibrant industrial clusters with complete production chains, abundant supply of innovative talents

5 Deloitte, 2010 Global Manufacturing Competitiveness Index, June 2010. It is a report released by Deloitte’s Global Manufacturing Industry group and the U.S. Council on Competitiveness. The result is based on the responses of more than 400 chief executive of!cers and senior manufacturing executives worldwide to a survey on manufacturing competitiveness conducted in late 2009 and early 2010.

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and skilled labour, stable political environment and diversi!ed yet distinctive products available in

China.

As for Li & Fung Limited, one of the largest global supply chain management companies, China

remains its most important sourcing market. In 2009, 54% of its global sourcing was from China,

up from 52% in 2008. Other renowned MNCs which set up sourcing departments or even head

of!ces of sourcing in China include IBM, Of!ce Depot and Staples. China is also an increasingly

popular location for manufacturing bases and sourcing for Hong Kong enterprises. According to

a survey on offshore trade conducted by the Hong Kong Trade Development Council in 1Q20106,

93% of the surveyed enterprises conducted manufacturing or sourcing activities in the Chinese

Mainland in 2009. Besides, the percentage of enterprises which manufactured or sourced solely

in China rose signi!cantly from 56% in 2006 to 62% in 20097.

On the other hand, trade protectionism against China has been on the rise. Commonly-used

measures by foreign countries include raising technical and environmental barriers for Chinese

imports. To overcome these barriers, enterprises in China have turned their focus to enhancing

product quality. A survey by the Development Research Centre of the State Council revealed

that many foreign companies were planning to relocate their R&D centres to China, believing

that the technological talents in China can greatly contribute to the quality enhancement of

their products. China thus will remain a highly competitive sourcing base as more products with

outstanding quality will emerge in China.

2. The China-plus-one strategy – one should be cautious when extending

sourcing network to other countries

Due to the surging production costs, especially the labour cost, in China, more buyers tend

to adopt the “China-plus-one” strategy and adjust the proportion of sourcing among different

sourcing bases. As it continues to move upward the value chain, China and other manufacturing

bases in the emerging economies can complement each other to satisfy overseas demand for

labour intensive products.

However, one should not focus only on production costs when extending his sourcing network

to other low-cost countries. Factors such as manufacturing capabilities, political and economic

environments, availability of industrial clusters, quality of labour force, language and culture, and

6 Hong Kong Trade Development Council, Survey on Offshore Trade of Hong Kong, June 2010.7 Hong Kong Trade Development Council, Survey on Offshore Trade of Hong Kong, June 2010.

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transportation and logistics should also be taken into account. For example, Bangladesh offers

low-cost production, but it is always overbooked. As for Southeast Asian countries such as

Vietnam, Indonesia, Thailand and Cambodia, the smaller landmass and workforce, as well as the

less developed infrastructure and transportation are obstacles to large scale production in spite

of their lower cost of land and labour. One should also be aware of the political unrest in some of

these countries, such as Thailand and Indonesia.

3. Exploring sourcing opportunities in other regions in China

Apart from the coastal manufacturing bases, other provinces, especially those located in central

and western China, also deserve attention from buyers. According to the National Bureau of

Statistics (NBS), the value-added of industrial enterprises above designated size in the whole

country grew by 17.6% yoy in 1H2010. By region, the growth rates in eastern, central and

western regions were 16.7%, 20.7% and 17.6% respectively. China Customs also reveals that

Guangdong, Jiangsu and Shanghai together recorded a growth of 36.6% in processing trade in

1H2010, while the growth rate for central China and western China reached 62.5% and 61.8%

respectively. These !gures indicate stronger growth in central and western China than in the

coastal region.

According to the list of top 100 industrial clusters in China released by the Chinese Academy

of Social Sciences in December 20098, many of the competitive clusters in China were located

in the coastal areas. However, an increasing number of competitive industrial clusters were

emerging in central and western China. In the 2007 and 2008 exercises, only 5 or 6 industrial

clusters on the top 100 list were from inland provinces, but the number rose to 16 in 2009. The

change was mainly attributed to the industrial relocation and the robust development of the

inland market in recent years. Nowadays, products with outstanding quality and competitive

price are available not only in the coastal areas. Therefore, buyers should explore and nurture

relationship with suppliers from emerging manufacturing bases in the inland regions.

4. Supplier management is crucial

Buyers are advised to stick to quality suppliers with sound management and up-to-standard

production. The recent labour disputes at Foxconn and Honda have raised public awareness on

“sweatshops”. Consumers are increasingly concerned about the misbehavior of manufacturers

8 The Chinese Academy of Social Sciences (CASS) released the list of top 100 industrial clusters in China in December 2009. This is the third annual exercise since 2007. The CASS aims to encourage relevant government departments to attach more importance to the sustainable development of industrial clusters.

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and brand owners, such as providing inhumane working conditions for the workers.

To respond to the consumer concerns, buyers should monitor the suppliers on all issues related

to corporate social responsibility. In fact, maintaining good and interdependent relationship

is crucial for both buyers and suppliers. Buyers should have a good understanding of the

suppliers’ operation, and should keep in touch with all levels of the suppliers’ staff for effective

communication.

5. Green sourcing is gaining importance

Global warming tops the agenda of many countries nowadays, while consumers are becoming

more conscious of green issues. Carbon emissions, renewable energy, recycling, as well as

organic products are commonly discussed topics. As for enterprises, customers’ concerns

over green issues lead them to practise green sourcing. Green sourcing can be practised

through carrying out green policies based on customers’ requirements regarding environmental-

friendly raw materials, packaging and product management, as well as adopting energy savings

measures in daily operation.

Green sourcing brings bene!ts to enterprises in many ways. First, it can satisfy consumers

who are more environmentally conscious. Second, production costs and social costs can be

brought down and revenue can be boosted by energy savings and emission reduction during

the production process. Besides, the environmental-friendly products can more easily enter the

overseas markets with green trade barriers. Finally, it can contribute to a better public image and

reputation of the enterprises.

In fact, more and more enterprises integrate green sourcing into their sustainable development

strategy. For example, Walmart, the world’s largest retailer, promised to provide products with

carbon emission labels in 2010. Zhejiang Aokang Shoes Co., Ltd., one of the leading shoe

manufacturers in China, has introduced a set of green sourcing standards for its products.

The green standards cover the design, production and retailing processes. For instance, raw

materials for shoe production, including leather, soles and shoe ornaments have to meet the

green requirements set in the standards.

6. Outsourcing the sourcing function has become a trend

By outsourcing non-core functions to professionals providing quality services, enterprises can

focus on their core competences. Sourcing is one of the business processes to be outsourced; it

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can be partly or entirely outsourced to sourcing !rms. In fact, quite a number of the US retailers

have outsourced their sourcing functions to professional sourcing !rms so that they can focus

more on product design and development, retailing and marketing.

Amid the financial crisis, enterprises had to adopt stricter cost control measures. Many

enterprises chose to outsource their sourcing functions. It is expected that the trend will continue

even during the recovery. For example, Walmart Stores entered into a landmark sourcing

arrangement with Li & Fung Limited in January 2010. The sourcing volume is expected to reach

USD 2 billion in the !rst year of cooperation.

7. To source and sell in China makes China sourcing even more appealing

As mentioned above, many MNCs source in China and thus consumers all over the world are

enjoying the high quality yet price competitive Chinese-made products. However, China is not

only a globally competitive sourcing base, but also a consumer market of huge potential. In the

past 30 years, China has achieved tremendous economic success and the average income of

the Chinese people is on continual rise. The Chinese consumer market has been growing rapidly:

Double-digit growth in total retail sales of consumer goods was recorded almost every year for

the past 10 years. In view of this, many buyers who originally source in China and sell in overseas

markets now want to tap into China’s lucrative consumer market. According to the 2010 White

paper on the State of American Business in China, 58% of their member companies (US

companies in China) indicated that they were in China to produce or source goods and services

domestically for the Chinese market, rather than for export9.

However, numerous institutional obstacles still hinder domestic selling. For example, many

Chinese manufacturers do not have domestic selling rights. The Chinese consumers thus do

not have access to the high quality and price competitive Chinese-made products. Removing

these institutional barriers will bene!t not only the Chinese consumers, but will also be in line with

government’s policy to boost domestic demand. As for the enterprises, if they can source from

China and then sell to the China market, ‘China sourcing’ will become an even more appealing

strategy.

9 The American Chamber of Commerce in the People’s Republic of China (AmCham-China), 2010 White Paper on the State of American Business in China, April 2010. The survey was conducted between November and December 2009. 388 member enterprises, including MNCs and SMEs, took part in the survey.

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Appendix: About the China Purchasing Development Report (Chinese version)

The Chinese full report (~400,000 words), consisting of a China sourcing survey and 35 essays,

covers all aspects about sourcing development in China. The table of content of the full report is

as follows:

Chapter 1 OverviewChina sourcing survey 2010

Sourcing and supply chain management in China: Outlook for the next !ve years

Chapter 2 Background and environmentGlobal economic and !nancial market outlook

An analysis of China’s economy in 2009/10 with PMI

An analysis of China’s economy in 2009/10 with NMI

The bulk commodities market in China: Analysis in 2009 and prospects in 2010

Sourcing light-manufactured consumer products in China: Cost trends and outlook

Highlights of the commodities market in China in 2010

Chapter 3 Sourcing activities of different industries Survey on the sourcing activities of !ve key manufacturing industries in China 2010

The post-!nancial crisis strategies of China’s manufacturers and sourcing businesses

The distribution centre model and the application of supply chain management in the

electronics and IT industry

Sourcing of auto parts: lessons from the experience of international automobile enterprises

Enhancement of supply chain management is the key to sustainable development of

manufacturing enterprises

Sourcing of agricultural products in China: strategies and the development of supply chain

management

Supply chain management in the retail industry

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Chapter 4 Special topics How do business conglomerates achieve synergies through adopting advanced sourcing

models?

The signi!cance of implementing supplier development in China

A study of supply chain models and standards

From “made in China” to “created in China”

Survey on green supply chain in China

Implications of Walmart’s green supply chain for China sourcing businesses

Education and manpower training in sourcing in China

The key to success in sourcing: Vision, trust and persistence

Chapter 5 Case studies The role model in asset-light management – a global network orchestrator

Hershey Foods: A case study of supply chain management in the food industry

An analysis of liability for dead stocks of raw materials of suppliers

Wumart : The revamp of distribution systems for chain stores

Arrow Electronics Inc.: A case study of supply chain management in the electronics industry

The application of E-business in China Petroleum and Chemical Corporation

United Colors of Benetton: A case study of supply chain management in the apparel industry

Chapter 6 Reports on international sourcing and supply chain management Supply strategy implementation: Current state and future opportunities

Healthcare & life sciences supply chain industry report series - Medical devices focus

Hi-tech & electronics supply chain industry report

From purchasing to “supply network design and coordination” - The challenges and rewards

of reinventing

Global supply chain trends 2010-2012

Appendix About the China Federation of Logistics & Purchasing (CFLP)

About the Specialized Committee for Purchasing and Supply Chain Management of the CFLP

Links of sourcing websites by industry

English report productionLi & Fung Research Centre, Member of Li & Fung Group

Authors:

Chan So Ching

Tel: (852) 2300 2474

[email protected]

Helen Chin

Tel: (852) 2300 2471

[email protected]

Leung Hoi Shuen

Tel: (852) 2300 2467

[email protected]

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