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Competitive Business Environment, Focus on Asia Preparation for a Venture in China. Possible Implementation Approach. Global Integration
Europe and USA offer long term mediocre prospects: defined market segments are mostly captured margin pressure, market volume is limited Asia is bright, the positive aspects: increasing new customer potential migration of existing customers to Asia long-term saving potential in sourcing vast HR potential learnings for future developments in products, services and processes: emergence of new competitors
price level 30 to 60 percent below Europe FX challenge USD some regional taste and preferences compete with local delivery time
Delivery Time to Customers in Days Europe China Europe China
Customer in China
Customer in Australia
Container loading Plant to harbour Customs at departure Seafreight/lorry Customs at arrival Harbour to customer Total
1 3 2 21 3 2 32
1 0 0 3 0 0
1 3 2 27 3 2 38
1 3 3 12 3 2
Modelled Economics for an Industrial Product: Produced in China and Exported to USA/Europe
Savings Percentage 100 100 20-25 Additional costs
80
60
40
20
0
U.S. or Western Labour European manufacturing cost Depreciation Materials, components, and tooling Scale Special LCC Logistics Other incentives manufacturing costs management cost (transportation, cost additional inventory, and expediting) Duties Landed cost from LCC
Bhattacharya, Arindam et al.: Capturing Global Advantage. How Leading Industrial Companies Are Transforming Their Industries by Sourcing and Selling in China, India, and Other Low-Cost Countries, The Boston Consulting Group, April 2004
Mature Markets
(Switzerland, UK, USA)
Western Company
s itie ets un rt ar k po M p ng eO isti eiz x S dE fen De
Mature Markets
(Germany, USA)
Challenging place to operate: fierce competition Unpredictable (interpretation of) legal environment, constantly new laws No slow-down of growth despite governmental wording Huge amount of FDI, contrary to Japan and Korea 75% of all exports initiated by Non-Chinese companies Cost-conscious consumers, middle-class USD 5000 to 10000 p.a. Like branded products, low IPR protection, many counterfeits Cheap labour force, favourable industrial policy R&D efforts and results; catch up quickly Best Chinese companies go abroad: winning by quality
China
Hemerling, Jim / Hsu, Hubert / Michael, David C. / Wong, John: China: The Pursuit of Competitive Advantage and Profitable Growth, The Boston Consulting Group, June 2003
Chinese Companies deinvent manufacturing: use of cheap capital and simple manual labour
Cowan, Jonathan et al.: Riding the Next Wave of Outsourcing, The Boston Consulting Group July 2004
Recognize Chinas
potential
Focus on reducing
purchasing costs
Leverage synergies
between export sourcing and domestic production - integrated capacity planning - flexible production
Obtain valuable
understanding of the supply base
Have no formal
China initiatives
Level 1
Level 2
Level 3
Level 4
Level 5
Hemerling, Jim / Hsu, Hubert / Michael, David C. / Wong, John: China: The Pursuit of Competitive Advantage and Profitable Growth, The Boston Consulting Group, June 2003
Strategic Options
The Boston Consulting Group, Avoiding Stalemate in China, 2000, p. 3
Protect and leverage leadership position to improve profitability - reap rewards from both scale and brand leadership
Make your brand the reference for the category (e.g. Kleenex for facial tissues) - Accelerate category-definition process among target consumers
Competitive Position
Invest or acquire to secure leadership or retrench to your niche - Base decision on anticipated size, timing, and risk of the ultimate payoff
Build on the momentum - Become a trend leader - Perhaps lobby for structural advantages
Reevaluate ambitions in China - Extend portfolio into less defined categories - Perhaps lobby for structural advantages - Acquire, find a niche or exit
Alter the playing field - create a trend in the way your product is used or perceived - perhaps lobby for structural advantages
High
Low
Category Definition
Operational efficiency (efficient production, manage inventory, VAT refund process, minimal administration, total cost of ownership) Process quality and transparency (robust processes, quality control and environmental standards, ease to understand the framework, visibility of events) Compliance with legal requirements (laws and regulations in China, Company guidelines) Time effectiveness (delivery time, setting priorities, direct contacts) Social factors (understanding with Chinese suppliers, contact to local authorities, retain employees and management)
Possible to transfer the successful supply chain model Combined own experience of outsourced production to suppliers manage distant production location (USA) develop supply market in a region of RDE Rapidly Developing Economy (Eastern Europe) Being able to reduce complexity (new: personnel, location, language, culture, suppliers, legal/rules, product, ERP)
Quickly find and develop qualified suppliers takes 1-2 years. Keep the required quality level of parts. Major delays during foundation procedure, unforeseeable requirements. Find and retain crucial personnel in purchasing, quality and logistics. Build guanxi relationships with local authorities. Support of key management personnel from Europe.
Run the production within capacity limits. Get the ERP system running Manage liquidity to survive the tedious VAT refund process and artfully balance the DSO for buying/selling terms. Chinese counterfeits undercut own products drastically in price with good quality. Own products Made in China will not be accepted.
Start simple with focussed objectives. Involve top management, build success stories Physical proximity is key, ideally own local personnel. Existing suppliers need minimum size to quickly relocate to another continent. Incent R&D to use new suppliers create successful products Applied Engineering new cost base offers alternate product offering. Sales welcomes savings but not delays no frictions during transition. Savings in production/logistics do not lead to savings in sales. Yes and Yes and No be aware of cultural differences.
Global Integration
4
Factory in the USA
4
Factory in China
3
Factory in Europe
2
Suppliers abroad
Trent, R. J. / Monczka, R. M.: International Purchasing and Global Sourcing What are the Differences?, in: The Journal of Supply Chain Management, Vol. 39, No. 3 2003; Kaufmann, Lutz / Hedderich, Fabian: A Novel Framework for International Sourcing Applied to the Emerging Chinese Supply Market, in: Perspektiven des Supply Managements Konzepte und Anwendungen Festschrift fr Ulli Arnold, Eds. M. Eig, Berlin, Heidelberg 2004
Global Activities form the Supply Network: Next Step: Plan and Control
Global Plan Global Sourcing Global Production Global Distribution Global Control
Global Sourcing
Global Distribution
time Increase in complexity: products, variants, locations, customers, time zones, languages Need for global standards in part numbers, supplier evaluation, HR, IT, processes Facilitate communication, BDPs, mutual learning, know how transfer Fulfil requirements like VAT, customs, transfer pricing rules, taxes