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The China Analyst - October 2012

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China's hand-picked next generation of leaders will be tasked with solving deep-rooted problems formed during China's 30 years of socio-economic development. A growing (and increasingly visible) disconnect between top wage earners and the working class, frustrated factory owners, and a rapidly-ageing population are just some of the key issues facing modern China.

Beijing needs to rebalance its economy away from excessive reliance on investment towards a more domestic consumption driven growth model. Beijing will only be able to accomplish this feat through targeted market-oriented reforms such as deepening reforms in the land, labour and financial markets. In the meantime, the vested interests of China's powerful SOEs, who have long enjoyed preferential government policies in an effort to breed global champions, will remain a major hurdle in pushing long-awaited reforms.

China is still on track to become the world's largest economy sometime during the new leadership's 10-year tenure. If China's policymakers fail to push much-needed reforms, foreign investors will look to other markets and marginalised sections of the population will grow even more restless. However, if China can stay on course - while battling increasingly visible signs of strain - it will herald yet another chapter in China's unrivalled growth story.

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Click here to download the October 2012 edition

In the October 2012 edition of The China Analyst, we gauge China's progress in implementing these market-oriented reforms and highlight the opportunities that companies need to be aware of as China enters a new, more sustainable growth phase.

This edition includes the following lead articles:

  1. China's Economy: Heading for a Firm Landing?
  2. China's SOEs: Stalled Reforms or Agents of Change?
  3. FOCAC 2012: Sino-African Partnership Gains Momentum

A new Commodities section focusing on China's role in global commodities trade is included to complement other regular sections such as: Procurement, where we take a closer look into China's rising labour costs; Strategy, where we explore China's role in Africa's development as an investor and major trading partner; Investment, where we analyse China's overseas resource investments; BRIICS, a macro economic comparison of the world's six major emerging economies; and four Regional Focus sections with analyses of the latest China-related trade and investment activities in Africa, Australia, Latin America and Russia.

The China Analyst is published by The Beijing Axis, a China-focused international advisory and procurement firm.

To view the current and past editions of The China Analyst online, please visit our website.

The China Compass - August 2012

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The China Compass - August 2012, published by The Beijing Axis, combines basic country data of China, as well as other major world economies, with more detailed analysis of a wide range of macroeconomic and social data; presents a comprehensive picture of the ever-changing and evolving Chinese landscape; contains up-to-date statistics, topical themes and insights; and is presented in a reader-friendly format as a useful desk reference for executives with a China agenda.

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Click here to download the August 2012 edition

Since our last edition, the developed world has been unable to escape from a self-induced sovereign debt crisis, which has fuelled speculation as to whether China's economy is headed for a 'soft' or 'hard' landing. While China's GDP growth has subsequently slowed to 9.2% in 2011 and 7.8% year-on-year in the first half of 2012, fears of 'hard' landing seem overblown. Even growth of 7.6% in the second quarter fits with our core view that China's annual growth rate for 2012 is still expected to be around 8%.

As China attempts to rebalance its economy towards a more sustainable growth pattern that puts a greater emphasis on domestic consumption while sheltering the economy from the global slowdown, we expect many cyclical and structural changes and increased volatility. However, we still do not foresee a hard landing.

Our focus and theme of this edition is 'China Moves Towards Growth Moderation and Sustainability', featuring sections on:

  • Selected Macroeconomic Indicators
  • Domestic Consumption and Foreign Trade
  • Domestic and Foreign Investment
  • Financial Indicators
  • Social Indicators

We trust that this edition of The China Compass will continue to shed light on past developments, current issues and future prospects of the Chinese economy, making this fascinating and complex story slightly more comprehensible.

As always, we welcome and appreciate all feedback. 


The China Compass is published by The Beijing Axis, a China-focused international advisory and procurement firm. 

For more publications by The Beijing Axis, including past editions of The China Compass, please visit the 'News & Media' section of The Beijing Axis website.

This is the first in a new series of posts looking at certain trade and industrial 'hotspots' in China.

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If you look at trade statistics for Chinese provinces in 2011, it is clear that something is happening in Henan, an emerging central province, and particularly in its provincial capital of Zhengzhou, one of China's 20 fastest growing cities. Zhengzhou is what some might call a typical second-tier Chinese city (Bentley and Louis Vuitton have just set up shop there). Provincial Value Added of Industry growth was a solid 19.6% in the first eleven months of 2011, yet what sets the province apart is the huge jump in foreign trade achieved in 2011. In August 2011, Xinhua picked up on Henan's trade bounty when it reported that Henan had registered total foreign trade of USD 11.7 billion for H1 2011 (this is perhaps an underestimate), with the European Union serving as the main trade partner. The province's main exports were silver, aluminium, vegetables, porcelain, and fur, while main imports were iron ore, lead ore, machinery, and wood pulp. 

According to China's National Bureau of Statistics, in the first eleven months of 2011, the y-o-y growth in the province's foreign trade was 78.5%, the second-highest rate of growth (Chongqing registered a full 143%). This rapid growth was from a relatively low base, it now stands at USD 28.4 billion (light years away from the likes of Jiangsu with USD 490 billion and Guangdong with USD 830 billion). Henan still also has a very low GDP per capita as well as average household consumption expenditure of only RMB 7837, the ninth lowest of all China's provinces, and the lowest average wages of all China's provinces (RMB 22,552). Yet the province's rapid growth in trade in 2011 points to the fact that something is stirring in Henan. 

From backwater to transportation and manufacturing hub
Although it is often regarded as somewhat of a rural backwater, Henan has a lot going for it. Consider the following. As a province of China, in 2010 Henan: 
  • had the third-largest population of 94 million people (Shandong had 96 million; Guangdong had 104 million)
  • had the second-largest cultivated land area of 7.9 million hectares Heilongjiang had 11.8 million)
  • had the second-longest total length of highways at 245,089 km (Sichuan had 266,082 km), and the fourth-longest length of railways in operation at 4,282 km
  • had the second-largest freight traffic at 20.0 billion tonnes (Anhui had 22.8 billion tonnes)

In 2011, moreover, Henan very much lived up to its reputation as China's breadbasket: it was China's leading province for Output Value of Agriculture, Forestry, Animal Husbandry and Fishery, with RMB 560 billion. Yet with a large albeit low-earning workforce, good transportation networks and a suitable geographic location close to the eastern seaboard, Henan is well-placed to take advantage of the large-scale relocation of manufacturing to cheaper central provinces. 
  
It comes as no surprise, then, that Foxconn, the original equipment manufacturer for Apple products, plans to hire an additional 100,000 workers at its plant in Henan, doubling its workforce there. Foxconn's Henan factory is itself brand new, only opening in August 2011. 

In appreciation of the province's attractive set of advantages for its business, Kerry Logistics in January 2012 announced plans to build a new logistics centre in Henan that will be targeting the electronics and technology, automobile, industrial and material science sectors. Kerry's managing director in mainland China put it well: "China’s coastal provinces have refocused to attract manufacturers of higher value-added products and there has been a migration of production to the central and western regions due to lower land and labour costs, we see the potential to transform Zhengzhou into one of China’s manufacturing and processing hubs."

Foxconn and Kerry are both setting up in Zhengzhou, the provincial capital and rising star of Henan. The city has been included in 29th place in the Top 50 Chinese Cities by Investment Potential list, and Zhengzhou’s imports and exports last year reached USD 13.5 billion, up 196% from 2010. Exports jumped 166% to USD 5.3 billion, while exports increased by 258% to USD 5.3 billion. Another prominent city in Henan is Luoyang, where CITIC HIC, one of the world's leading manufacturers of mining equipment, is located. 

The next China
Although its people are still relatively poor, Henan is on the cusp of the next development wave in China. It has a strong agricultural reputation, yet it also has a number of advantages that positions it to become a manufacturing hub in central China, ideally placed in central China close to the eastern provinces. 

It all means that you should probably get used to hearing the name 'Zhengzhou.' 


Note: All data is from China National Bureau of Statistics, unless otherwise stated. 
To all our readers who are taking some time off after a long year, we wish you a pleasant and relaxing time, hope we'll catch you again soon. 

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A New Approach to China Procurement

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China's procurement environment is changing under the weight of both old and new trends, and procurement managers worldwide must adapt to a new opportunity landscape. A different approach is now required that takes advantage of China's more sophisticated manufacturing base.

For the past 10-15 years, China has been the undisputed darling of purchasing managers worldwide. The goods Chinese suppliers export to the EU and US range from apparel and electronics to heavy machinery, all of which have grown steadily in the past decades to place China in the number one spot for overall exports volume. Exports of machinery and equipment to developed countries have particularly enjoyed rapid growth over the past ten years (see chart below, right). But since 2006-07, new issues such as an appreciating currency and increasing labour costs have started to impact both the real and perceived competitiveness of China as a source of manufactured goods. How should a procurement manager re-assess China in the light of these and other changes? How can they assure that competitive advantage is gained by investing in a China sourcing operation? How to benefit from the long-term trends and evolving landscape of China’s manufacturing base?

Old news: Labour and currency issues 

 Labour cost increases and rapid rises in input prices, mostly for commodities and energy, were a significant problem for the Chinese manufacturing industry in the years preceding the global financial crisis. The crisis provided a brief respite, with declining exports and capacity utilisation releasing upward pressures on prices and wages. But since early 2010, the trend has resumed, with labour costs increasing by 14.3% in real terms in 2010, and PPI inflation reaching 5.5%. Not only is labour becoming more expensive, but there is also a shortage of experienced white collar workers, engineers and managers which are increasingly in high demand. 

In addition, the Chinese government is allowing the gradual appreciation of the renminbi, with has risen by 21% against the US dollar over the past five years. With pressure from the US and other developed countries for China to further appreciate its currency, this trend is likely to continue for the foreseeable future. Other trends that are not new but continue to plague the Chinese manufacturing base are intellectual property protection; weakly defined and poorly implemented quality management processes; governance issues in supplier selection and management; and inconsistent product quality. 

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New trends 

There are also more recent discernable trends which are negatively affecting the pricing and availability of Chinese exports. The government is increasingly implementing trade restrictions such as export bans or export quotas, and also reducing VAT export rebates and in some cases placing export duties on certain commodity-type products, especially energy-intensive goods or low-value-added processed raw materials. On the other hand, newly emerging or existing sources of manufactured goods, such as Vietnam, Thailand, Malaysia, Indonesia, and the Philippines, have started to look comparatively better from a labour cost perspective. Governments across the region have started implementing some of the policies that brought success to China’s leading export manufacturing industries, and are offering increasingly attractive investment incentives to manufacturers. Procurement managers across the globe are under pressure to evaluate these up and coming low-cost countries, and determine the best approach for avoiding increasing costs in China and taking advantage of these opportunities.

Estimating the extent of change 

From our experience in China and our understanding of China’s manufacturing strengths and weaknesses, none of the trends described above are surprising. They all fit into the mould of the long term income rise of China’s population, as well as government policy goals of increasing the value added of local manufacturing, reducing the country’s energy and raw materials dependency, and shifting the growth engine of the economy away from export-oriented manufacturing towards a more balanced portfolio of investments, including boosting local consumption and the service exports are forecasted by MEPS to fall by 37% this year, while seamless tube exports will only see a modest 8% growth. To better understand how to take advantage of this shifting China procurement equation, we need to re-assess the key elements of China’s traditional manufacturing competitiveness. What began 30 years ago as a cheap labour outsourcing base for unsophisticated goods has changed dramatically to become a continent-scale country of widely varying costs, standards, capabilities and business environments.

In terms of labour costs, cost to company per employee is increasing across China due to uneven supply, high demand, inflationary pressure, organised labour demands, and growing social spending requirements. But Western China still offers large pockets of very reasonable wages for skilled and semi-skilled labour, and foreign and local manufacturers in China are increasingly taking advantage of this. While it is true that wages are rising quickly in coastal regions, labour productivity gains due to investment and technical upgrades, especially in the machinery industry, have kept pace with the rise in labour costs (see chart above, left).

Chinese exporters of manufactured goods are also taking advantage of the massive local market. The demand for new plants, equipment, infrastructure – often one third to half of world demand – has created significant economies of scale and of scope for most of China's manufacturing sub-industries. The competitiveness and innovation in the construction machinery sector, for example, have primarily been driven by the country’s infrastructure build-up over the past 15-20 years. The same effect has benefited the producers of steel commodities and structural steel, construction materials, trucks, barges, electrical equipment, power generation equipment, etc. The infrastructure build-up and procurement demand, initially fuelled by foreign-invested companies and with some assistance from government procurement policies, government-approved projects, and the availability and low cost of land and capital, have generated a highly competitive and increasingly sophisticated plethora of local producers that are now dominating the Chinese market and aiming for global expansion.

The size and growth of China’s manufactured goods market is in effect supporting a self-sustaining cycle of cut-throat competition that features innovation, capacity expansion and upgrading, and ‘learning by doing’. Suppliers and clusters of suppliers compete with each other but an engineering talent pool and the related innovation usually travels freely and contributes to China’s overall manufacturing competitiveness. They take advantage of the more than 600,000 students who graduate with engineering degrees every year, excellent transport infrastructure, especially in coastal regions, and generally supportive government policies favouring Chinese high value added manufacturing. As industries across China consolidate and manufacturers grow and become more assertive in their quest for value-added production and profitability at home and abroad, firms sourcing from China must address the following question: How can we protect and consolidate our savings in sourcing capital goods from China through the establishment of a China procurement operation? At the same time, how can we move to the next level and take full advantage of an increasingly sophisticated manufacturing base?

A new approach: Drawing in the supplier and sourcing goods of increasing complexity

The structural changes in China’s competitiveness across the sourcing spectrum will require procurement managers to shift some of their commodity spending from China to other LCCs, while increasing their orders of machinery, complex parts and high-value added consumables in China. In our view, the key to taking full advantage of a broader spectrum of cost and feature innovation present in the Chinese market is to move from a customer-supplier model of price-based sourcing with strictly dictated specifications and standards to a partnership-based approach where the supplier takes an active part in the overall project and in specifications design. This would entail a structured and patient exchange of ideas, a deeper understanding of Chinese manufacturing practices and standards, and above all, an open mind from both the customer and the supplier. Commercial practices would also require modifications. Contract management with Chinese suppliers generally relies less on contract enforcement and more on relationship management, so many of the standard contractual clauses traditionally used by international procurement teams are either not applicable or not enforceable in China, and thus create unnecessary burdens on suppliers and ultimately increase the total costs of the contract.

Ultimately, a sophisticated foreign buyer of Chinese capital equipment will probably need to adopt a number of Chinese standards, practices and approaches – all without compromising quality, environmental and labour protection standards, or good governance.

Note: This article originally appeared in the section China Sourcing Strategy of the September 2011 edition of The China Analyst. 
TCA.jpgThe China Analyst is a quarterly knowledge tool by The Beijing Axis, which also sponsors The China Sourcing Blog. The China Analyst - March 2011 has been released, and can be downloaded free of charge at the link provided below. 

In this first edition of 2011, we have peered into the future that likely lies ahead for China and the changing opportunity landscape for foreign firms, with the following lead features: 
1. China in 2030: The full extent of China’s rise in the coming decades and where it is likely to stand by 2030 
2. Strategic Options in China’s Construction Industry: The foreign firms who stand to profit are those with the advanced technology China needs, as well as those willing to look at new collaborative models 
3. Engaging China’s Machinery Industry: China presents options for foreign firms as an export and investment destination, and as a source of capital 
4. China’s Clean Coal Revolution: China is increasingly engaging clean coal, presenting scope for foreign firms to partner with Chinese firms 

Of course this edition also contains all the regular sections, including China Sourcing Strategy, highlighting new China sourcing opportunities for foreign steel players; China Strategy, featuring an investigation of China’s largest coal producer, China Shenhua; China Capital, including a new Hong Kong IPO Watch sub-section; and four Regional Focus sections with analysis of the latest China-related trade and investment activities for Africa, Australia, Latin America and Russia. I particularly want to point out a special feature on China-sponsored special economic zones in Africa, including a map. 

I hope you enjoy this edition, would love to hear your feedback.


Transactions are prioritised based on the duration of client relationship and volume, as production difficulties make it a challenge to fulfill growing orders on time. 

China's export manufacturers are in a conundrum. Overseas demand is picking up, but with the shortage in key materials and labour, suppliers are now finding themselves in a situation where they can be selective in accepting orders. While this means they are in a position to charge higher prices, it also raises the possibility of slower growth for the rest of the year. 

The deficit in parts, components and labour has made it difficult for many factories to finish goods within traditional lead times. Companies are extending their delivery schedules by at least 15 days, which sometimes results in frustrated buyers and cancellations. Fuzhou Hunter Bags & Luggage Mfg Co. Ltd said a handful of its EU buyers cancelled orders because lead time were not met. Production was delayed due to labour shortages at the fabric mills, which made it difficult for them to supply materials as scheduled. The situation is likely to extend through Q4 2010 and even beyond for some industries, including LEDs. 

To balance manufacturing difficulties and on-time shipment, suppliers are quoting more expensive rates or requiring larger quantities per transaction for them to prioritise an order. Depending on the product and specifications, prices can be 5 to 30% higher. The MOQ, on the other hand, can be as large as three TEUs especially, for garments and electronics. This measure, however, is implemented only as a last resort as it cannot shield businesses from cost spikes. Most companies, including Fuzhou Hunter, are also accepting and finishing orders from clients they have been working with for at least two years before they accommodate new customers. Furthermore, some are keeping close contact with their buyers to help the latter monitor raw material sourcing and production schedules, which would then enable both sides to react quickly to unexpected developments. 

Persistent shortages 

Although various provincial governments have lifted the minimum wage, the measure has done very little to ease the labour situation. It is estimated that factories in labour-intensive industries are still 10 to 30% short of hands. Specialists that dye fabrics for Zhejiang Weida Industry Investment Co. Ltd used to need only one week to finish the process. Now, it takes them 30 days. Because it does not have enough dyed fabrics, Zhejiang Weida had to prioritise orders, accomplishing those from long-term clients and with large volumes first. Until the fabric mills and dyeing specialists are able to speed up turnaround, there is not much garment manufacturers can do, especially since it is not easy to find suitable alternate sources. 

In the electronics industry, the scant supply of components such as LED chips is a factor slowing down production. Global demand for LED chips increased 100% this year to about 200 billion pieces. In contrast, worldwide output is projected to reach only 100 billion pieces. Analysts believe the only way for supply to outstrip demand is if there are 3,000 MOCVD machines, which are the key equipment in producing LED chips. But as of 2009, there are only 1,200 units globally, with 150 of these in China. Roughly 350 machines are expected to be put into use this year, of which 130 will be installed in Chinese factories. This still leaves a deficit of 1,450 units. 

Besides LED chips, electronic components such as digital signal processors, tantalum chip capacitors, optocouplers and amplifiers are also in short supply and have become more expensive, some doubling in cost. AVX 10µF 16V tantalum chip capacitors, for instance, was RMB 0.26 each in April. In June, quotes reached RMB 0.60 per chip. iSuppli senior analyst Gu Wenjun said in a report published in the Yangcheng Evening News, a Guangdong province-based newspaper, that many leather, luggage and mining businesses in Wenzhou started to invest in electronics last year. But they are believed to be hoarding the components they procured to inflate prices.  

Because of the deficit, some consumer electronic manufacturers are transacting with several upstream suppliers to see which one can deliver the fastest. Once the orders arrive at their factory, pending deliveries from other providers are cancelled. This practice, however, may cause more harm to the industry as it increases the operational risk at electronic component plants. Once the shortage eases, factories with large stockpiles may face significant losses.


This article was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through e-magazines, trade shows and industry research.
TCC Cover.jpgThe new edition of The China Compass has just been released, and can be downloaded free of charge below.

The China Compass is a knowledge tool by the China Strategy Group, a business unit of THE BEIJING AXIS. The publication is an extended chart pack examining China's current economic standing in the world. In this March 2010 edition, we provide the latest macroeconomic data available for a wide range of indicators, for China as well as for other major world economies, and include a new section, ‘What’s New: China From Rebound to Recovery’.

The publication summarises a wealth of information in an easily accessible format, and as such is intended to make China's complex economic rise a bit more comprehensible. 

To download The China Analyst - March 2010 (Size: 2 MB), click here:

The China Compass - March 2010.pdf

For more publications by THE BEIJING AXIS, please visit the Knowledge section of THE BEIJING AXIS website. 


Payment Terms

Beyond language and legal barriers, such as the requirement of GOST R certification, businessmen have to consider another important issue: payment terms. This is especially true given that Russia’s economy is still suffering from the financial crisis, recovering more slowly than other countries. Establishing acceptable payment terms can cause substantial delays to the progress of a deal.

There are three aspects of the payment process which tend to produce problems when setting the terms of trade between Chinese and Russian companies.

1. Russian buyers traditionally prefer to settle trades through cash.

2. The Russian banking system has yet to mature. By the end of 2008 there were approximately 1,300 banks in Russia. Over 800 of these were extremely small, with a capital base equivalent to less than USD 1 million. An extra element of disorder exists in Russia’s banking environment, in that many banks have a reputation for not honoring issued letters of credit. Furthermore, one-third of Russia’s banks may face bankruptcy as a result of the crisis; solvency is an important consideration when choosing a Russian bank’s services.

3. The level of cooperation between Chinese and Russian banks has yet to fully develop. Communication between both sides is inefficient. Chinese banks lack enough representative offices and agents in Russia, and vice versa.

Hence the situation suggests that extreme care must be taken when making payment arrangements for a Chinese supplier exporting to Russia. Some important steps to take include requiring the buyer to use a top, recognisable international bank when issuing the letter of credit, and asking for a risk-adjusted down payment when establishing the terms of trade. Additionally, the supplier may consider using the services of a company such as Sinosure which insures letters of credit against business and political risks. This type of service incurs extra charges but may be worth the cost for large traded values.

Just like any other prospective new market, Russia presents its own unique challenges. By overcoming the language barrier, by obtaining certifications to reduce the perception of poor quality and by taking extra precautions regarding the terms of payment, Chinese suppliers can prosper from increasing bilateral cooperation with Russia.

This blog posting was inspired by the cold Beijing winter and a recent conversation with my roommate. After having lunch together, my roommate, a native of Shenyang in China’s northeast, described what she and her family ate during the winters of her childhood. Fresh fruit and vegetables were scarce to nonexistent; large quantities of Chinese cabbage and pears were bought in late autumn and had to last all winter. The pears were frozen, which caused them to turn black. The cabbage was either dried or put in jars to make “sour cabbage”. Meat was a luxury.

Having only two food choices available for one-fourth of the year sounded terrible to me. “So what did you eat in winter?” she asked. Well, I ate the same things as in the summertime – except maybe more cups of hot chocolate. Although winter likewise halted regional agricultural production, bananas, broccoli, seafood – you name it – managed to find their way to grocery stores in the American Midwest – where I grew up.

How could our childhood experiences in the 80s and early 90s have been so different? At least part of the disparity may be due to differences in the availability of transportation within China and the US.

As anyone involved in sourcing knows, although goods may be available in one location, the challenge remains of connecting them with their prospective end users, often many kilometres away. The greater the ease of connecting point A to point B, the cheaper the cost, hence, the more feasible trade becomes. This process requires infrastructure.

China has done a lot to improve its infrastructure since the 1980s. When imports arrive from overseas, they usually do so by boat. Not only does China now host some of the world’s busiest ports, but it has also has increased the length of its navigable inland waterways from 101,000 kilometres in 1985 to over 110,000 in 2008. From these inlets, the goods must then traverse land to reach their destinations. To this end, China has upped its railway length to 80,000 kilometres, as of 2008, from 55,000 in 1985. Even more substantial is the increase in highway availability, now at around four million kilometres, an increase of almost 300% from only 20 years prior.

The result of these advances in infrastructure: more goods are able to make it across the Chinese mainland to the people that need them. The amount of freight traffic within China, measured in ton-kilometres, has increased more than three times its 1987 value. Just as the wintertime shelves of the grocery stores in my hometown are filled with goods from the warmer southern US states, Mexico, and South America, similarly those in Shenyang can now be more readily stocked with products from southern China, the Philippines, or elsewhere.

CnUS FrT-Km2 graph.JPG Source: China Statistical Yearbook; US Bureau of Transportation Statistics: US Census Bureau; Beijing Axis Analysis

The increase in transportation channels has reduced the contribution of shipping costs to goods’ retail prices, lessened the impact of food expenditures on one’s budget, and has enhanced the well being of Chinese consumers. This is evident when comparing the Engel’s coefficients – the percent of the typical household’s income spent on food, used as a general measure of a country’s standard of living – between China and the US. This statistic suggests that my roommate’s family may have spent about 55% of their household income on food in the 80s. The affect of both rising incomes and greater transportation availability since then have reduced this to less than 40%.

CnUS Engels2 graph.JPG Source: China Statistical Yearbook; US Census Bureau; Beijing Axis Analysis

It is interesting to consider how much more this is likely to improve in the future. I think for the Chinese New Year I will indulge in a little variety and buy my roommate both oranges and pears – fresh green ones– to celebrate the holiday and the progress made by China.

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Trade sanctions have clearly strained China’s steel industry. Seamless steel tubes, Oil Country Tubular Goods (OCTG), drill pipes, steel mesh panels, wire shelves... the list of newly sanctioned Chinese steel products goes on. Among the numerous made-in-China products impacted by international trade frictions, China’s steel industry has been hit the hardest, and given the severity of these trade disputes, the consequences for China’s steel enterprises are substantial.

Price and quantity decreases

Proposed last April, the oil well pipe anti-dumping and anti-subsidies action undertaken by the US International Trade Commission will adversely affect Chinese exports of as much as USD 2.8 billion. These exports are supplied by around 200 steel mills, and these provided oil well pipes to the US during early 2008 and Q1 2009. The monetary value at stake makes this the largest steel trade dispute in US history.

The oil well pipe anti-dumping and anti-subsidies case is only a sample of the international trade sanctions that have targeted Chinese steel makers in recent years. Since 2008, the EU, the US, Russia, India and other countries have successively launched anti-dumping and anti-subsidy surveys on China’s seamless steel pipes, oil pipes, drill pipes, steel mesh panels and other steel products. As a result of the financial crisis, global market demand has rapidly declined, exacerbating ongoing trade frictions – particularly within the steel industry. According to China Customs, in December 2009 China exported 3.34 million tons of steel, which contributed to a total of 24.6 million tons for the whole year 2009. This annual figure represented a 58.5% y-o-y decline.

Of all steel goods, pipe products were the most severely affected. In 2009, China's seamless pipe exports dropped by almost 50% compared to 2008. In 2009, China's export price for oil well pipes to the US was only USD 1,600/MT, well below highs of USD 3,600/MT in 2008.

Entering new markets

Some Chinese producers have adjusted their strategies in response to the sanctions. As an example, take one of China’s major seamless steel manufacturers, whose exports accounted for 48% of total sales volume before the financial crisis. In 2009 its shipments to major regions such as North America and Europe fell by more than 70% compared to the previous year, yet its total 2009 export volume dropped by only 10%. Its secret weapon: new markets – the company’s sales in Asia increased by 30% and African sales by 100%.

Other steel mills have followed suit, successfully exploring new markets such as Southeast Asia, the Middle East and Africa, thereby weathering the decline in demand from mature markets.

Along with the shift from mature to developing markets, export product structures are also changing. Many manufacturers are shifting their focus from high value-added products such as oil well pipes to a number of oil and gas transmission pipeline products, primarily in demand in countries in Southeast Asia and Africa. These regions are without well-established steel industries, ensuring less risk of new trade frictions arising from local competition.

Expanding domestic demand

Many Chinese steel mills capitalised on the national stimulus package which enlarged the domestic market in 2009. One of China’s largest stainless steel mills stated that although their exports declined by more than 50%, domestic sales increased by 58%, causing profits to remain consistent with those of 2008.

As of November 2009, China's net exports of steel have been largely restored to earlier levels. Nevertheless, China’s steel exports are facing more difficulties as overcapacity problems mount and international protectionism becomes more severe. As a consequence, China’s steel industry may yet have to adjust again in the near future.

A new shade of green is gradually sweeping across China's export manufacturing industry, one that took a while to take root, and companies are riding the environment-friendly wave.

Pressure from the national government and tightening regulations in overseas markets are compelling a growing number of suppliers to modify their business strategies and incorporate ecologically safe processes. The transition is neither extreme nor desperate, but the impact could be widespread as many midsize and small companies are also taking "green" initiatives. Due to the sheer number of these suppliers, they account for a large portion of the pollution and wasteful practices in the country.

Irrespective of size, companies are introducing long-term strategies anchored on recycling, waste reduction and sustainable energy adoption.

Recycling is the most common practice among factories, one that is carried out internally or through third parties. This, however, goes beyond reusing offcuts and scrap materials. Highly polluting industries such as leather tanning have always been required to invest in wastewater cleaning systems, but very few actually do. Now, many are investing large sums in such facilities not only to comply with local ordinances but also as a marketing tool. This comes as an increasing number of buyers are including social responsibility as a criterion in supplier selection.

Fujian Guanxing Leather Co. Ltd in Shishi, a city under the municipality of Quanzhou in Fujian province, has invested USD 3 million in a 6,000-ton capacity wastewater processing station. Once operational, the facility is expected to save the company USD 1.4 million annually.

In fact, waste recycling is becoming the norm in the city, one of the major garment and textile hubs in the province. More than 20 manufacturers have now installed treatment systems such as those from Carrousel. The majority of Fujian factories that dye fabrics in-house have similar facilities for their sewerage as well. Moreover, several local governments have set up complementary wastewater recycling services to help ensure a continuous supply of fresh water.

When it comes to material refuse, many large enterprises contract professional disposal services. Small and midsize businesses often transact with recyclers and junkyard operators.

Guangdong Weiermei Underwear Co. Ltd, for instance, sells fabric cutoffs to waste collectors. Watch exporter Shenzhen Full Success Gift Mfg Ltd and lock specialist Make Locks Manufacturer Ltd vend metal scraps to recyclers.

Some companies involve customers in their green efforts. On request, Shenzhen FJY Electronic Co. Ltd uses recycled materials during production. Doing so has the additional benefit of lowering unit costs.

Adopting degradable materials, however, does not always bring a similar effect. In the beauty and cosmetics industry, bottles made from such substances are about 20% more expensive than conventional plastic.

While recycling and reusing are gaining more adherents, only a handful of operations are tapping sustainable energy sources such as wind or solar power. Cynthia Garments Making (Dalian) Co. Ltd has taken steps to do so by using solar water heating at its workers' dormitories.


This posting was contributed by Global Sources, a leading business-to-business media company and a primary facilitator of trade with greater China.

supply conference.JPGI recently attended the ‘Global Purchasing and Supply Chain Forum 2009’, in Tianjin on 21-22 November, a forum was organised by the China Federation of Logistic and Purchasing (CFLP) and the Institute of Supply Management. The conference drew in around 200 people, including purchasing managers from MNCs, representatives of companies both state and privately owned, logistics company managers, government officials, as well as scholars in the field of supply chain management.

Besides a discussion on the macro economy, the two main topics from the forum were:
  • Supply chain management in the environment of economic recession; and
  • Supply chain management contributions to company value

Since the value enhancing role of supply chain management is a common topic discussed at a majority of procurement forums, I was more interested in the first topic. While exchanging ideas about supply management under economic recession with other purchasing managers, I received many useful tips—including those from the speakers. One speaker was Mr. Dai Dingyi, Vice Chairman of CFLP, who introduced the status and trends of purchasing and supply management in China. He indicated that supply management in the state-owned companies remains weak and that government purchasing is marred with problems.

Mr. Johnson Xiao, Global Sourcing Director of TRW Automotive Inc, was another speaker. Mr. Xiao shared his personal experiences in service sourcing. Attendees also learned a lot from Mr. Zhang Jiamin, Director of Li & Fung Group, who gave an insightful speech on how China’s manufacturers have survived the global financial crisis and advised ways for companies to adjust their sourcing strategies.

These speeches were very insightful about the current state of supply chain management in China and about its future outlook. Although most procurement managers remained stressed by the cost reduction target now, we were encouraged and inspired by this get-together; as long as a business can survive the crisis and remain innovative, there is a bright future ahead.

Putin’s visit to China in October has brought numerous promising projects for bilateral cooperation between China and Russia. More and more Chinese companies are becoming involved in deals with Russian companies, both in exports and imports.

However, when doing business with Russian clients it is important to understand their way of thinking, especially when you are looking to sell your products on the Russian market.

From my personal experience in sourcing for Russian clients from Chinese producers, the following issues—standard with any sourcing project—must be managed: price, quality, supplier reliability, delivery time, payment terms, availability, product certification, and transportation time, etc. What are the most critical issues specific to Russian companies? The top three would have to be payment terms, product certification, and language barriers.

Language

Effective Communication is a crucial aspect of any business deal. The existence of a language barrier is a particularly formidable challenge faced by Chinese companies aiming to enter the CIS market. Effective communication will allow certainty in the decision-making process; misunderstanding, however slight, may lead to unexpected troubles or worse—failure. The simplest way to avoid these unnecessary pitfalls is to have an effective conduit between your company and the client. A few of the best ways to do this are:

1. To establish a local representative office
2. To find a solid partner in Russia
3. To hire a long-term translator in your domestic office
4. To hire a short-term translator during your client’s visit to your factories or during your trip to Russia


The listings above are ordered according to the level of importance of the prospective deal. The first option is most acceptable for a Russian client, while the third and forth options are the easiest options to use when visiting a Chinese company. Any aggressive, long term, business expansion into Russia would require a representative office in Russia or even a joint venture with a local Russian company.

To be continued
During the past 3 months, I traveled with a few clients to visit some Chinese suppliers of motors, pumps, valves and other industry supplies. As usual, we recommended the best local Chinese producers – their pricing levels were normally between Chinese-foreign joint ventures and local middle-sized and smaller producers, but their quality was acceptable for our clients.

Although the manufacturing technology for some of the products was not on the international level, the quality of most products exceeded my clients’ expectations. From manufacturing machinery, i.e. widely-used CNCs, to every step of the manufacturing process, casting, machining, welding, surface treatment and packaging - all of these met my clients’ criteria for qualified suppliers. The previous biggest problem affecting my clients' China sourcing strategy, QUALITY, seems now to have been effectively solved. Chinese suppliers' price and delivery, moreover, is usually comparatively better than competitors from other countries.

So what else is the problem then? The biggest problem arose afterwards. Most of the suppliers we visited did not have any agencies in any of my clients' countries, which, incidentally, made it easy to talk to the supplier directly and get lower prices. But for those products frequently requiring maintenance, it is simply not possible to rely only on the suppliers.

Let’s take the procurement of pumps for mining industries as an example. The pumps are usually used in tough (i.e. high pressure and corrosive) conditions. The lifespan of the key parts will be short, sometimes 20 days to 1 month. The buyer can save 1/3 of the total purchase value by sourcing pumps from China. But for maintenance, the buyer will have to keep enough stock for the key parts. If there is not enough stock and the buyer has to order parts from the Chinese supplier, it requires lead time of at least 1 month, plus shipping time. To set up a solid agency overseas is a large investment for many Chinese suppliers, so after-sales service is not an obstacle that can easily be overcome. Yet as long as they are fully aware of the problem, with thorough communication, Chinese suppliers and overseas buyers can come up with solutions, such as
  • Sourcing some general-use parts (i.e. seal parts) locally with the assistance of other Chinese suppliers
  • Negotiating with Chinese suppliers to have a ‘green channel’ to shorten lead times
  • Setting up a stock level system with supply chain management knowledge

As another example of problematic after-sales service, I can relate the following example. A South African client recently bought an engineering machine from a Chinese producer. The drive, which carried an international well-known brand produced in Germany, turned out to be faulty. The German brand, however, has an agency in South Africa, and so the client was expecting the agency would easily be able to solve the problem. Yet the client was told that it could take 3 months to get a new drive and that this was the normal lead time. The client then came back to the Chinese supplier directly and finally got a new one within 15 days.

From this perspective, the fact that Chinese companies do not have agencies overseas is not reason enough to dismiss their after-sales service completely. Indeed, for international companies who have agencies anywhere else, rigid systems and other factors can sometimes form stumbling blocks of their own. Sourcing managers will still need to invest a lot of time to conduct thorough research before they can decide where to source most profitably.

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