Leading global excellence in procurement and supply

CIPS Corporate Services in China and Hong Kong

Javier Cuñat GM, Corporate Services (China & HK)

Leading global excellence in procurement and supply

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The Beijing Axis (TBA)

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CIPS and The Beijing Axis

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Introducing CIPS

Awarding Body

CIPS

Charitable Status

CIPS for Business

Chartered Body

Membership Organisation

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Achieve organisational objectives

People Development Tailored Skills Training

We can help:

Adapt content

Deliver

Analyse skills gaps

Accommodate learning

styles

Review

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People Development Tailored Skills Training

Example courses that

we tailor for each

customer

• Commercial awareness • Value chain improvement • Managing business relationships • Risk management • Negotiation • eProcurement and process integration • Managing cultural diversity • Presentation skills • IT in purchasing • Contract law and management • Influencing and persuading • Retail buying • Procurement fraud

Leading global excellence in procurement and supply

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Process Excellence Corporate Certification

Standard

5 4 3 2 1

Mat

uri

ty p

rofi

le Leadership and

Organisation

Strategy

People

Processes and Systems

Performance Measurement and

Management

Dim

en

sio

ns

Ass

ess

ed

CIPS Corporate Certification

Standard

CIPS Corporate Certification

Advanced Standard

Healthcheck

3 O

utc

om

es

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Examples of Previous Certification clients

Process Excellence Certification

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Activities in other Fronts

Hong Kong Branch

CPO Event(s)

Workshops Marketing Open Training

Leading global excellence in procurement and supply

The Changing Face of China/Asia’s Sourcing Competitiveness

The Beijing Axis 11

22,426

20,452

25,771

5,136

3,627

2,450

0%

2%

4%

6%

8%

10%

0% 5% 10% 15% 20% 25% 30% 35%

Emerging economies are outperforming developed economies in terms of global economic growth. By 2015, Asia-Pacific is expected to account for one-third of global GDP

Regional GDP Comparison (2012, 2015F)

Average GDP Growth Rate (2012-2015F)

Africa

Asia-Pacific

North America

Europe

Other Asia

South America

Asia-Pacific is

expected to account

for the largest share

of the world’s GDP

by 2015

Rising real incomes

and high commodity

prices will continue to

drive Africa’s growth

Developed

economies are

expected to continue

to lose share in the

world’s GDP over the

coming years

A bubble this size represents a GDP of USD

1,000 bn

Forecast world average

GDP growth until 2015:

3.9%

BRICS 2015F GDP (USD bn) 2012 Growth Rate (%) 2012 GDP Per Capita (USD)

China 11,020 7.8% 6,091

Brazil 2,800 0.9% 11,340

Russia 2,544 3.4% 14,037

India 2,308 5.0% 1,489

South Africa 411 2.5% 7,508

Share of

World’s GDP

Note: Translucent bubbles refer to 2012 data. Solid color bubbles refer to forecasted 2015 data.

Source: IMF; The Beijing Axis Analysis

The Beijing Axis 12

China’s importance to the global economy is illustrated by its position as the world’s largest exporter – driven by its manufacturing sector, its exports have rapidly outstripped those of developed markets

World’s Major Exporters (2013)

Source: World Bank; IMF; UN Comtrade; The Beijing Axis Analysis

0

400

800

1,200

1,600

2,000

2,400

2,800

0 10 20 30 40 50 60 70 80 90

Exports (USD bn)

Exports/GDP (%)

Bubble Size: GDP = USD 1,000

bn

China Developing Asia Developed Asia Others

China’s Exports (USD bn)

2003 485

2008 1,582

2013 2,225

CAGR (2003-

2013) 16%

Malaysia

Netherlands Thailand

S. Korea

Germany

China

US

Japan

Brazil

India

Australia Switzerland

Mexico

China in 2003 Russia

Canada Spain

France

UK

China overtook

Germany to

become the

world’s largest

exporter in 2010

A large economy, large

exports and high exports to

GDP ratio – however, its

future growth model will not

depend on exports

South Africa

Rest of

Africa

Africa

The Beijing Axis 13

0

500

1,000

1,500

2,000

2001 2013

Machinery and ElectricalEquipmentFoodstuffs

Miscellaneous ManufacturedArticlesProducts Classified by Material

Composition of China’s Exports* (USD bn; 2001, 2013) CAGR

Represents CAGR for the period 2001-2013

Note*: SITIC Classification System

Source: China Customs; The Beijing Axis Analysis

Over the last decade, China’s manufacturing export structure has shifted from labour-intensive goods to high-value manufactured goods such as machinery – such supply chain shifts are still evolving

Increasing

share

22.1%

13.1%

17.1%

19.2%

12.3%

20.1%

10.7%

36%

47%

X%

33%

26%

China’s Exports as a Share of Global Exports for Selected High-Value Items (%, 2003 vs. 2013)

0 10 20 30 40 50

Centrifuges

TransmissionShafts/Cranks

Construction andMining Parts

Silicon Wafers

Optical Fibres

Refrigerators,Freezers

Cruise/CargoShips, Barges

Derricks andCranes

Motorcycles

2003 2013

15

22

CAGR (%)

12

13

15

14

13

22

22

China’s global export

presence in mid- and high-

value products is

considerably larger today

than it was a decade ago

Machiner

y:

22.1 %

Textiles and garments

exports grew from 46.1 bn to

256 bn, representing a

CAGR of 15.3%

19.3%

The Beijing Axis 14

0

50

100

150

200

250

300

350

2001 2013

Others

Textiles

IT

Engineering

Food & Beverage

Chemicals

Wholesale and Retail

Rubber and Plastics

Construction

Machinery

Electrical Equipment

Metal Products

Chinese Enterprises with ISO 9001 Certification (No. of Enterprises in Thousands, 2001-2013)

Source: ISO; The Beijing Axis Analysis

Drivers of Improving Product Quality in China

At the same time, Chinese manufacturers have stepped up their game and improved the quality and standards of their products – expect this trend to continue

Represents CAGR for the period 2001-2013 X%

24%

Eroding cost advantage implies China must seek alternate

differentiators

Low confidence in ‘Chinese quality’ requires an

improvement to sustain export demand

Currency appreciation and the increasing prominence of

market-driven rates has further reduced cost advantages

Government push to facilitate economic transformation

and transition up the value chain

Emergence of other Asian LCCs means that China is no

longer unique

1

5

2

3

4

The Beijing Axis 15

0 6 12 18 24 30

Vietnam

Indonesia

Philippines

India

China

Mexico

Poland

USA

Japan

Germany

2002 2013

0 5 10 15 20 25

Vietnam

Indonesia

Philippines

India

China

Mexico

Poland

USA

Japan

Germany

2008 2013

Average Hourly Manufacturing Wage Comparison in Selected Economies (USD, 2002 vs. 2013)*

Note*: Hourly manufacturing wage is computed using total manufacturing compensation, which includes compensation related to all employees in the manufacturing sector and includes

(1) direct pay and (2) employer social insurance expenditures and labour-related taxes

Source: Bureau of Labour Statistics; National Bureau of Statistics; CBRE; The Beijing Axis Analysis

Average Industrial Rentals in Selected Economies (USD/sq. ft./annum, 2008 vs. 2013)

Although manufacturing input prices have increased in China, they are still low in absolute terms when compared with other manufacturing powerhouses

7

CAGR (%)

11

8

8

9

16

2

9

3

3

The Chinese government‘s 12-year

plan calls for a minimum 13% wage

increase every year for workers

earning less than USD 400/month

Developed

markets

Non-Asian

LCCs

Other

Asian

LCCs

China's wage increase is

partly driven by rising

inflation and the

government's drive to

reduce income inequality

1

5

3

6

11

9

3

-1

-4

1 Developed

markets

Non-Asian

LCCs

Other

Asian

LCCs

CAGR (%)

Tight supply and

sustained demand have

led to a robust increase

in industrial rentals in

China

The Beijing Axis 16

1%

1%

11%

8%

1%

0%

6%

6%

4%

4%

4%

3%

Labour Productivity Comparison Across Selected Economies (USD, 2003-2013)*

Note*: GDP per person employed in 1990 USD is used as a measure of labour productivity

Source: The Conference Board; The Beijing Axis Analysis

China’s labour productivity has improved significantly over the past decade but it is still far lower than that of developed economies – this presents both opportunities and challenges

China's GDP per

person employed is

only 23% of USA’s X% Represents CAGR

Represents a GDP per person employed of USD 20,000

Year USA China Mexico India Indonesia Vietnam

2003 61,783 6,517 18,931 5,491 8,208 4,328

2008 65,495 10,990 19,996 7,289 9,832 5,309

2013 70,242 16,470 20,289 9,639 11,880 6,210

The Beijing Axis 17

China’s key competitive advantages in manufacturing, i.e. labour abundance, product integration capability and robust infrastructure, remain intact – other areas, mainly labour cost advantages, are shrinking

Overview of China’s Manufacturing Cost Advantages, Sustainability and Competitive Trends (2013)

Source: Various; The Beijing Axis Analysis

Low High

High

China’s Current Advantage

Labour

Cost

Product

Integration

Capability

Real Estate/

Land Cost

Transportation

and

Infrastructure

Reduced

Tax Breaks &

Increasing

Export Taxes

Increasing

Environmental

Cost

Positive Competitive Trend Negative Competitive Trend

China’s overheating property market has increased costs

Low export duty but tax incentives such as rebates and tax breaks are disappearing

Emphasis on HSE regulations have increased costs

Cheap labour advantage no longer exists

Capability to integrate components provides a substantial advantage

Robustness of China’s infrastructure continues to support manufacturing

Labour

Abundance

Access to large, skilled labour force will continue to be a core advantage Cutting Edge

Technology

China will continue to rely on imports for raw materials

China’s R&D/ technology/innovation lags other markets but the trend is shifting quickly

Su

stai

nab

ility

Integrated

Supply Chain

Ability to provide integrated supply chain is a core advantage

Raw Materials

Cost

The Beijing Axis 18

2.0

2.5

3.0

3.5

4.0

4.5

5.0

30 35 40 45 50 55 60 65

Comparison of Sourcing Capabilities of Selected Economies (2013)

Note*: Technology Index based on WIPO’s Global Innovation Index (out of 100) and Infrastructure Index based on World Bank’s Logistics Performance Index (out of 5)

Source: World Intellectual Property Organisation; World Bank; UN; The Beijing Axis Analysis

China will continue to hold certain key advantages compared to its manufacturing competitors i.e. robust infrastructure, advanced technology/R&D and a skilled labour force

Infrastructure Index*

Technology Index*

A bubble of this size represents 50% of the

population aged 25 and older with a college

degree

US Germany

Japan

Czech

Republic

Malaysia

China

Brazil

India

Vietnam

Mexico

Indonesi

a

Developed markets – high

technology capability,

robust infrastructure and

highly skilled labour force

Developing economies still have a long way

to go before catching up with China in terms

of technology, infrastructure and skilled

labour pool

Polan

d

South

Africa

South

Korea

France

Italy

China Developing Asia Developed Asia Others

The Beijing Axis 19

Various positive and negative factors will reshape China’s position in the global manufacturing landscape over the short-, medium- and long-term

Positive/Negative Factors that will Impact China’s Competitiveness over the Short-, Medium- and Long-Term

Source: The Beijing Axis Analysis

Robust Infrastructure

to Support Manufacturing

Large Skilled Labour Pool

Integrated Supply Chain and

Diversified Supply Bases

Increasing Focus on High Value

Products and R&D/Technology/Innovation

Product Integration Capability and

Established Industrial Clusters

Increasing Environmental Costs

and Stringent HSE Regulations

Increasing Wage Inflation

Increasing Competition

from Other LCCs

‘Made in China’ Brand/Quality Risk

Strengthening Currency (RMB)

Ageing Population

Positive Factors Negative Factors

1

2

3

4

5

1

2

3

4

5

6

Factors that will persist

in the short-term

Factors that will persist

in the medium-term

Factors that will persist

in the long-term

China’s

Manufacturing

Competitiveness

Factors

arranged in

order of

importance

Numerous National and Local

Government Incentives

6

Factors

arranged in

order of

importance

The Beijing Axis 20

Asia supply is changing – China is increasingly competing with global leaders of high-value manufacturing, while India, Indonesia, Vietnam, etc. emerge as regions for low-value manufacturing

Product Manufacturing Complexity Spectrum

Source: The Beijing Axis Analysis

Low High

Reflects a country’s manufacturing value add focus along the product manufacturing complexity spectrum during the time

period

China

Emerging leader in high-value add Phasing out low-value add

US/Germany/Japan Retain positions in high-value add Global leaders in high-value manufacturing

India Phasing out of low-value add Established low-value add destination

Other Asian

Economies

(Indonesia/Vietnam/

Bangladesh) Global leaders in low-value manufacturing Emerging as low end destinations

Others

(Mexico, Turkey,

Poland) Established low-medium end

manufacturing Phasing out of low-value add

Africa Emerging as a low end destination

Low High Low High Long-term Medium-term Short-term

The Beijing Axis 21

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Analysis of China’s Exports of Top Mining Products* (2013)

Note*: The top 5 mining-related products in each product category based on total global traded value were selected for comparison

Source: UN Comtrade; The Beijing Axis Analysis

Over the last decade, China’s exports of major mining products have grown rapidly as the country transitions towards manufacturing high-value goods

Export CAGR for the period 2003-2013 (%)

A bubble of this size

represents total export value

of USD 5 bn Front End Loaders Industrial

Engines

Hydraulic

Excavators

Light Mobile

Equipment

On-road Passenger

Vehicles Cathode

s

Instrumentatio

n and

Automation

Compressors

Film –

Plain

Cranes

& Spares

Drilling Machine

Parts

Steel and

Structural

Products

Special Process

Equipment & Packages

Industrial

Engine

Parts

Steel Shot &

Steel Balls

Paints/Marine

Coatings Pot Shells and

Superstructure

Packaging

Power

Transmission/

Gearboxes

Accounts for

61% of the

export CAGR

Fixed Plant &

Equipment Mobile Equipment

Production

Consumables MRO Consumables Global Market Share

(%)

Engines and

Generators

The Beijing Axis 22

0%

10%

20%

30%

40%

50%

60%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Analysis of Developing Asia’s1 Exports of Top Mining Products2 (2013)

Note: (1) ‘Developing Asia’ includes both developing and emerging Asian economies as per the economic classification

(2) The top 5 mining-related products in each product category based on total global traded value were selected for comparison

Source: UN Comtrade; The Beijing Axis Analysis

Developing Asia’s global exports of major mining products have also grown rapidly – China leads, but alternatives are rising

Export CAGR for the period 2003-2013 (%)

Global Market Share

(%)

A bubble of this size

represents total export value

of USD 5 bn

Fixed Plant &

Equipment Mobile Equipment

Production

Consumables MRO Consumables

Front End

Loaders

Industrial

Engines

Hydraulic

Excavators

Light Mobile

Equipment

On-road Passenger

Vehicles

Cathodes

Instrumentatio

n and

Automation Compressors

Film –

Plain Cranes

& Spares

Drilling Machine

Parts

Steel and

Structural

Products

Special Process

Equipment &

Packages

Industrial

Engine

Parts

Steel Shot &

Steel Balls Paints/Marine

Coatings

Pot Shells and

Superstructure Packaging

Power

Transmission/

Gearboxes

Represents considerable

shift towards the right

Engines and

Generators

The Beijing Axis 23

As an illustration, China stands out as a key sourcing destination for a large number of mining products. For other Asian countries, the sourcing potential is limited to a few select products

Note*: Primary relates to a country’s sourcing potential for each procurement package

Source: Various; The Beijing Axis Analysis

Japan Primary Secondary

• Transformers

• Switchgear

• Stackers and

reclaimers

• Steel pipes

• Variable speed

drives

• Grinding mills and crushers

• Conveyors

• Flotation cells and magnetic

separators

South Korea Primary Secondary

• Transformers

• Switchgear

• Steel pipes

• Conveyors

• Stackers and reclaimers

• Structural steel and plate work

• Variable speed drives

Malaysia Primary Secondary

• Switchgear

• Conveyors

Indonesia Primary Secondary

• Transformers

• Switchgear

• Structural steel and

plate work

China Primary* Secondary

• Transformers

• Switchgear

• Grinding mills and crushers

• Conveyors

• Structural steel and plate work

• Pre-fabricated housing

• Steel pipes

• Flotation cells and magnetic

separators

• Variable speed drives

• Grinding media

• Stackers and

reclaimers

India Primary Secondary

• Grinding media • Switchgear

• Steel pipes

• Flotation cells and

magnetic separators

• Variable speed

drives

Thailand Primary Secondary

• Structural steel and

plate work

• Grinding media

• Transformers

• Pre-fabricated housing

The Beijing Axis 24

LEVEL 1

MACRO FILTER

LEVEL 2

COST FILTER

LEVEL 3

TREND FILTER

Macro Filter

Preliminary ranking of countries by key macro economic,

socio-political and industry parameters to compare overall

attractiveness

Cost Filter

Evaluation of countries on the basis of key drivers

and restraints of export price in apparel across key product

categories

Trend Filter

Assessment of key trends and developments to impact

relative price competitiveness of the countries in foreseeable

future

RANKING

Country Ranking

Ranking of shortlisted countries on the basis of

in-filter scorers to evaluate optimal sourcing destination per

each product category

Level Type Level Description

Methodology

Source: The Beijing Axis Analysis

The Beijing Axis 25 The Beijing Axis 25

Today's best-practice procurement leaders are developing sourcing strategies built on value creation rather than low labour costs. China will continue to be a leading source of goods and services

China +1/+2

strategy

Operational

excellence

Grow local

market

Best sourcing

strategy

Revisit risk

management

Issues and Trends

1

4

3

2

5

With increasing labour costs, rising inflation and a strengthening currency, China is losing its foothold as the

world's optimal ‘low cost’ manufacturer of consumer goods. Rising costs are forcing companies to take a

closer look at new sourcing locations across Asia

‘Low cost’ country sourcing strategy has lost some of its luster. While low labor costs and prices will always

be part of a sourcing strategy, they no longer are the centerpiece. Today's best-practice supply management

leaders are developing sourcing strategies built on a foundation of value creation

With strong demand growth in consumer sectors China remains to be an increasingly important end user

market for MNCs. MNCs with manufacturing operations in China can reconfigure their supply chain

management strategies to distribute and sell products to Chinese customers

As consumer demand continues to grow, MNCs and local manufacturers alike will need to refine their

operational excellence and manufacturing strategies to stay ahead of the curve. China specifically, and Asia

more generally, will continue to be a leading source of goods and services

As companies become more dependent on cost-cutting initiatives to maintain or increase their margins,

managing supply chain risks becomes critical. This is especially important when those initiatives involve new

(and usually riskier) sources of supply (eg. China +1+2)

General Overview

Source: ISM; The Beijing Axis Analysis

The Beijing Axis 26

Final Word

• The global manufacturing landscape is changing and China/Asia is now at the

forefront of it

• China is losing its foothold as the world's optimal ‘low cost’ manufacturer. Rising

costs are forcing companies to take a closer look at new sourcing locations across

Asia. China +1+2 Strategy

• The ‘what source from where’ question must be answered taking into consideration

multiple factors – global sourcing readiness and potential, country analysis (macro –

cost – trends factors), and supplier engagement

• Very complicated - many risks i.e. quality/safety, counterparty risk, complexity,

contracts, language, trade protectionism, etc. – Watch out!

• The increase in ‘China +1+2’ opportunities has highlighted some serious issues in

procurement practices. From every perspective – reputational, financial and ethical –

this is not acceptable

• Ethical and responsible procurement is now an economic and reputational

imperative, and in some contexts a legal requirement

Source: CIPS; The Beijing Axis Analysis

Leading global excellence in procurement and supply

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