One of the key strategies in Strategic Cost Management is the option of sourcing your ‘direct’ or even ‘indirect’ commodities from Low Cost Countries (LCC’s). This would be done due to various factors, but primarily because LCC’s are sometimes in substantially more price competitive positions than organisations at home. Several countries are now classified as an LCC, but by far the most well-known and attractive, is China.
This issue was dealt with in detail at the 2008 SmartSourcing Conference by Jackie Li, Business Development Officer at The Beijing Axis, a Beijing based cross-border China business solution provider that focuses on and specialises in facilitating cross-border business to and from China.
Li explained to SmartProcurement that “the era of Chinese high-value industrial exports is at a mature stage, but that the world is still wary of diving in too soon. The real winners at this stage are thus organisations that roll up their sleeves and successfully navigate the pitfalls and peculiarities of cross-border trade, and thereby develop the necessary experience”.
Based on their years of experience and knowledge, The Beijing Axis has developed a basket of business solutions and a simplified framework for sourcing from China. Essential to Li’s presentation on the opportunities offered by China are three questions: (i) Why do business with China? (ii) What are the options? and (iii) How to go about the process?
When answering the question as to ‘why’ organisations should do business with China, one must take into account four main elements, namely:
- The distinct price advantage across a wide spectrum of equipment, goods and final products;
- International forces which are constantly changing whilst China seems to stay consistent;
- Industry changes and trends that China seems to be able to anticipate correctly; and
- Factors peculiar to your organisation that China can cater for.
The ‘what’ question, in turn, depends on your organisation’s specific requirements. This is where analysis and supplier comparisons are essential. In general, China is particularly competitive in the supply of cement, chemicals, clothing, coal, sugar, consumer goods, cotton fabrics, electricity, electronic goods, explosives, fertilisers, footwear, and equipment like generators, plastic products and television sets.
The ‘how’ question, however, remains the most problematic: China’s status as the leading global sourcing hub is now undisputed. Yet many organisations still find it difficult to extract enough value from their China sourcing ventures.
Throughout her presentation, Li emphasised that not everyone needs to become a China sourcing expert, but that it is essential for organisations to understand China’s cultural nuances, practices and the massive economic landscape.
If organisations do opt to work with an experienced service provider, they will immediately gain an advantage and this can greatly reduce the risks involved whilst at the same time developing a winning strategy. When finally implementing a LCC strategy, organisations will need to have a solid grip on supply chain management organisational design; people, skills and teams; methodologies, processes and insource / outsource decisions; and working with various service providers. They will also be required to have a thorough understanding of project-, risk- and relationship-management.
Li further cautioned that there are some serious cultural and regulatory differences that must be catered for. Examples of pitfalls include:
- The language barrier: This remains an immense and ongoing concern. If the language issue is not dealt with, it will become an obstacle throughout the process.
- The legal system: The legal system in China is unique, and regulatory frameworks are complex, hence they require more attention from management.
The only systematic way that can ensure minimum risk and sustainable long-term benefit will involve the following elements:
- Applying thorough initial filters (scoping);
- Arranging client visits and short-listing matched LCC suppliers;
- Preparing the request for quotations;
- Negotiating and contracting; and
- Project managing the logistics, risks and after sales services.
The Beijing Axis has their own in-house research centre and a specific China supplier database with savings already estimated in many cases. Some examples of competitive commodities are:
- Textiles (up to 30% savings);
- Capital equipment (up to 40% savings);
- Grinding media (up to 15% savings on landed cost);
- Water treatment (up to 60% lower than local suppliers); and
- Windscreens (up to 50% savings).
In conclusion Li explained that The Beijing Axis has been successfully facilitating a business bridge between South Africa and China for many years now. Ultimately, procurement practitioners must bring about value and savings – and these can both be attained abundantly when doing business with China.
Editors Comment: We need to understand that China is designed and geared in all respects to export goods / products and services, and especially to do business with Africa. Indeed, we in South Africa feature very high on their ‘favourite prospects list’ and thus we should not under-estimate the value of this. Depending on the sector that your organisation is in, you might even find that there are specific incentives available to suppliers, and that there are beneficial payment arrangements available to your organisation as a buyer.