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CONECT: Northeast Trade &Transportation Conference

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

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New Trends in Overseas Sourcing:Sourcing from China

March 11, 2010

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

DISCUSSION COVERS 3 KEY AREAS IN REGARDS TO SOURCING FROM CHINA

Country Factors

Sourcing Method

• Infrastructure

• Logistics & Transportation

• …

• Direct


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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

• …

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


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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

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


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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

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


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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

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

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


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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.

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



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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

• 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


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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

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



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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

THANK YOU

Q & A


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Q & A

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


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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

** APPENDIX **


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0

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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


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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

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


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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

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


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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

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


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Export Processing Zones

(EPZs)

• Only for export processing


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


hours/day

Bonded Logistics Parks (BLPs)


• Only simple processing allowed

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


hours/day

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

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