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CONECT: Northeast Trade & Transportation Conference Copyright @ 2010 The JLJ Group. All rights reserved. March 2010 1 New Trends in Overseas Sourcing: Sourcing from China March 11, 2010 Prepared by The JLJ Group – Solutions for China Entry & Growth
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Page 1: Sourcing from Chinax - Cloud Object Storage | Store ... · Labor intensive goods shifting to Thailand and Vietnam ... • VAT rebates ... Zone Type Business functions VAT refund policy

CONECT: Northeast Trade &Transportation Conference

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

1

New Trends in Overseas Sourcing:Sourcing from China

March 11, 2010

Prepared by The JLJ Group – Solutions for China Entr y & Growth

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DISCUSSION COVERS 3 KEY AREAS IN REGARDS TO SOURCING FROM CHINA

Country Factors

Sourcing Method

• Infrastructure

• Logistics & Transportation

• …

• Direct

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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Actual sourcing decision should consider all factor s and be based on company specific needs

Other Considerations

• Indirect

• …

• China advantages

• China sourcing trends

• …

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CHINA IS MORE A CONTINENT THAN A COUNTRYCategory Description

Area6.73 Mil sq. miles (slightly smaller than the U.S.)

Population 1.34 B (1/5 of world’s pop.)

GDP1 (’08) US$ $4.2 Trillion

GDP / capita US$ (’08) $3,134

• 33 (+1) administrative areas (656 cities, 48,000 districts)

• 22 Provinces (not including Taiwan)

• 2 Special Administrative

Country Factors

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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1) GDP - Gross Domestic Product based on current exchange rate, does not take into account purchasing power parity.

~3,100 miles

~2,170 miles

Administration• 2 Special Administrative

Regions – Hong Kong, Macau

• 5 Autonomous Regions –Guangxi, Inner Mongolia, Ningxia, Tibet, Xinjiang

• 4 Municipalities – Beijing Chongqing, Shanghai, Tianjin

LanguageMandarin Chinese+ 7 major dialects and 80+ minority languages

� Most FDI and industry concentrated along coastal ar eas� 3 Key economic centers: Bohai Bay, Yangtze Delta , Pearl Delta

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INFRASTRUCTURE AN IMPORTANT FACTOR

Roadway Network

• Over 1 million km of roads, 30% of which are paved w ith multiple lanes

Railway Network

• Extensive rail network; continuously expanding and is expected to exceed 120,000 km of track by 2020

River ways & Seaports

Country Factors

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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• 110,000 km of inland passageways and some of the largest sea ports in the world (e.g. Grand Canal; YanShanDeep Water Port)

Airports

• 150+ domestic authorized airports; 20+ internationa l airports

� China infrastructure one of the best in Asia Pacifi c� Central government continues to improve & expand in frastructure network

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DOMESTIC LOGISTICS A KEY CONSIDERATION• ~25 billion tons of goods transported within China in 2008 (9% growth from 2007)

• Highly fragmented, with thousands of logistics comp anies in China

• Often difficult to find reliable logistics service providers due to absence of strict guidelines and lack of proper equipment (e.g. refrigerated tru cks/containers)

• Goods are transported using a variety of means:

Transportation mode

% of total

Description Products

Truck 73%Short / medium distances

(low quantity – 1-2 containers/truck• Primarily containers, although can be

versatile

Train 13%Long distance transportation

(large quantity - multiple containers)• Containers & liquids

Country Factors

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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Domestic logistics can be a bottleneck when sourcin g from some parts of China

Train 13%(large quantity - multiple containers)

• Containers & liquids

Inland water

12%

Inland transportationusing small-midsize ships

• Typically bulk cargo, e.g. ore, grain and steel• Liquid and containers

Ocean Long distance/ Large amount; large ships along coast

• Typically containerized cargo

Air <1% High cost but fast • High value / delicate / fresh goods

Pipeline 2%Suitable for large goods with

continuous delivery• Gases, liquids, and solid powders

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Sourcing Method

THREE KEY DIRECT SOURCING OPTIONS FOR CHINA

Sourcing Method ConsPros

1. Original Manufacturer

2. Independently contact supplier

• Relatively easy to access information

• Typically price savings• May be flexible to needs

• Language / culture barrier likely exists

• No direct representation• Possible quality inconsistency

• Usually saves time & easier to work with

• Difficult to find qualified supplier / agent

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� Key to monitor quality & consistency of goods sourc ed� Important to understand total price, including VAT, tariffs, etc.

contact supplier / agent

3. Establish China Presence

to work with• Pricing typically accurate

supplier / agent • Potentially higher costs

• Typically provides maximum control over sourcing process

• May provide option for local distribution and China entry

• Higher investment required –in terms of both time & money

• Not suitable for all companies

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Sourcing Method

TWO KEY INDIRECT SOURCING OPTIONS FOR CHINA

Sourcing Method ConsPros

1. Use Sourcing Agent / Trading Company

• Relatively flexible• Typically no minimum goods

for goods ordered• Most will handle any export

licenses

• Original manufacturer usually unknown

• Possible barrier to strategic sourcing 1

• Requires careful selection

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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2. Other Professional Service Provider

• Can provide variety of turnkey tailored solutions

• Can serve as own sourcing team in China

• Can be phased out after familiarity with China grows

• Need to fully understand services provided

• Will require upfront costs

� Important to conduct due diligence on any sourcing partners� Also key to understand total price, including VAT, tariffs, etc.

1) Strategic sourcing refers to buyer and supplier working together for new product development, new market development, etc.

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GOODS MADE IN CHINA IMPROVINGChina Sourcing Trends

• Low to high value

� Labor intensive goods shifting to Thailand and Viet nam (and inland China)

� China producing products with higher technology lev els

• Increased Costs

� Transportation and labor costs increasing

� Gradual reduction of favorable VAT rebates

Other Considerations

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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However, still important to independently verify qu ality and spot check upon receipt

� Gradual reduction of favorable VAT rebates

• Increased quality:

� Suppliers beginning to implementing control mechani sms and systems; however, important for sourcing company to confirm quality

� General increase in the talent pool

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• Typically lower overall costs; however costs are ri sing:

� Labor – average wage for manufacturing is $200-300 p er month

� Production costs – Tooling costs only 30-50% less th an in the US

� Tax & customs – VAT rebate offered on some export pr oducts

• Logistics & transportation network developed and co ntinuously improving

SEVERAL ADVANTAGES SOURCING FROM CHINAOther Considerations

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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improving

• Largest manufacturer in the world – likely able to s ource whatever is needed

• Currently exchange rate is stable – RMB ~6.83 : 1 US D; however, pressure on China to revaluate

However, important to understand all pros and cons when sourcing from China

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IMPORTANT TO CHOOSE PARTNERS CAREFULLY

1. Developing trust with Chinese partners is extremely important

2. Ensure any business partner is a legitimate & reput able business before remitting payment

Other Considerations

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If something sounds too good to be true, it probabl y is

3. Important to independently check quality of goods r eceived

4. Use common sense

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THANK YOU

Q & A

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Q & A

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KEY TO UNDERSTAND BEST OPTION FOR YOU Discussion & Mini Case Study – Available Options

Sourcing Method

A New England company that finished carbon tipped s aw blades is interested in the possibility of purchasing saw blanks from China . What are the pros and cons of each sourcing option?

A. Finding a manufacturer of saw blanks on their own• Taking risk on single manufacturer; dependent on si ngle source - uncertain

about pricing or quality

B. Use independent supplier / agent• Potentially good option; again dependant on single source

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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Option chosen depends on company needs, budget cons traints, etc.

C. Establish a presence in China• Significant risk, not suitable for company’s needs

D. Sourcing agent / trading company• Potential good option; paying price premium for ser vices; uncertain about

product origin

E. Other Professional Service Provider• Able to scan market – find company meeting quality a nd pricing needs;

facilitate meeting between companies; upfront cost for services

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** APPENDIX **

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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International Shipments

Customs

Infrastructure

China vs. Asia Pacific LPI*Logistics Performance Index

Indicators China Asia Pacific

Customs 3.16 2.41

Infrastructure 3.54 2.46

International Shipments

3.31 2.79

Logistics3.49 2.58

CHINA RANKS HIGH IN LOGISTICS FOR EAST ASIAAppendix

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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Logistics Competence

Tracking & Tracing

Timeliness

China

East Asia & Pacific

* Logistics Performance Index

LogisticsCompetence

3.49 2.58

Tracking & Tracing

3.55 2.74

Timeliness 3.91 3.33

Overall 3.49 2.73

Singapore, Japan, Taiwan, South Korea rang higher; although do not face the same challenges in terms of size

Source: World Bank

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EXPORTS SUBJECT TO REGULATIONS

RegulationCategory

Key Regulations for Exports

Non-tax

• Export quota & license regulation- most agricultural products need export license

• Prohibited export goods- mainly natural resources, e .g. silica sand, certain types of natural wood, opium

Appendix

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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Also important that companies understand import reg ulations from U.S. side

Tax

• Value-added tax (VAT) - applied at each stage of dom estic production chain

• VAT rebates - preferential tax policies to encourage exports

• Consumption tax - exemption

Source: JLJ analysis on multiple sources including General Administration of Quality Supervision, Inspection and Quarantine

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NUMEROUS SOURCING OPTIONS FOR U.S. COMPANIES

• B2B websites such as Alibaba and TradeKey

� Independently contact manufacturers and suppliers d irectly

� Pro: Lowest cost

� Con: No guarantee on quality of product and timelin ess of delivery

• Hire sourcing agent or source from Hong Kong

� Outsource service: sourcing, inspection, factory au dits, etc.

Appendix

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

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� Outsource service: sourcing, inspection, factory au dits, etc.

� Pro: Easy

� Con: Higher cost

• Setup legal entity (Joint Venture, Wholly Foreign O wned Enterprise)

� Direct involvement in the manufacturing process

� Pro: Greatest degree of control

� Con: Higher investment and setup

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SPECIAL ECONOMIC ZONES TO PROMOTE PROCESSING TRADE

Zone Type Business functions VAT refund policy Adminis tration

Free Trade Zones (FTZs)

• Manufacturing and processing

• Warehousing and logistics

• Exhibitions

• VAT refunds for domestically purchased goods (only available when goods exit China)

• Total enclosure• Usually in operation 8

hours/day

• Only for export • VAT refunds for

Appendix

Copyright @ 2010 The JLJ Group. All rights reserved. March 2010

17

Export Processing Zones

(EPZs)

• Only for export processing

• Warehousing and logistics

• VAT refunds for domestically purchased goods available upon delivery from the seller

• Total enclosure• Usually in operation 24

hours/day

Bonded Logistics Parks (BLPs)

• Warehousing and logistics

• Only simple processing allowed

• VAT refunds for domestically purchased goods available upon entry into BLP

• Total enclosure• Usually in operation 8

hours/day

Processing trade is a key part of China’s total exp orts


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