How do multinational companies conduct Chinese procurement?

In the past decade, “Made in China” products have become a widely accepted procurement option. Today, this has almost become an inevitable trend in all walks of life.

Recently, Ford Motor announced plans to purchase approximately $1 billion in auto parts from Chinese suppliers. Wal-Mart established a purchasing department in Shenzhen to purchase products directly from Chinese manufacturers. The total output value of Phillips Electronics' 23 plants in China has exceeded $5 billion, most of which is for export. The reason these companies and many other companies use China as a purchasing base is to save on spare parts and finished product costs – but the significance of China's procurement operations will go far beyond this. The ultimate goal is to gain a business cost advantage.

Of course, as in other developing country markets, there are considerable risks and challenges in doing business in China. But our experience shows that companies can completely control and overcome these risks and challenges. In fact, the bigger risk is that the action is too slow. China has long had a globally important influence in many industries. Therefore, companies that have not taken action – or whose operations lag behind competitors – will be at a competitive disadvantage.

Five levels of sourcing advantage

With the diversification of cost savings in China, the strategy of choice has increased accordingly. According to our experience, the advantages of purchasing in China can be clearly divided into five levels.

Level 1: Test the "water temperature"

Although many companies are aware of the importance of China, they have not yet taken any formal action in China. Some of these companies may purchase some basic commodities from China, but they are completely tentative. However, such a cautious action is almost impossible to gain any competitive advantage. The possible benefits of these companies are to learn from the mistakes and successes of other companies. But this is not enough to offset the opportunity cost of doing so.

Level 2: Purchasing parts or finished products

In 2001, Wal-Mart purchased $10.3 billion worth of goods from China, accounting for 4% of China's total exports for the year. Although Wal-Mart's outsourcing is almost higher than any other multinational company in China, it reflects the current procurement model of most large multinational companies with business activities in China. For example, in 2002, French retail giant Carrefour purchased $1.6 billion in China – 27% more than in 2001. Whether it's $10 million or $10 billion, the starting point for most companies is to buy or manufacture basic products or accessories that meet their standards at a lower cost.

The advantage of this level is that companies can achieve a lower cost structure than competitors with less purchasing power. In addition, the experience of working with specific suppliers and a broader understanding of the overall supply base are also valuable. However, these advantages are easily lost. For competitors, there is nothing to stop competitors from saving the same cost, except for the resistance within their own organization.

Level 3: Development of all-round procurement

Motorola plans to achieve $10 billion in cumulative purchases and $10 billion in annual output in China by 2006. At the same time, Motorola plans to invest 10 billion US dollars in China by 2006, including building a global R&D center in Beijing and recruiting 5,000 researchers. The significance of this procurement strategy goes far beyond the procurement of simple goods and accessories, but extends to the scope of services and talents such as product design and engineering.

Since the strong relationship with major suppliers or the attraction of designers and engineers is difficult for other companies to copy, all-round procurement undoubtedly locks in the competitive advantage. Telecommunications equipment manufacturers have established more advanced R&D capabilities in China. They have found that China can design and manufacture more value-added accessories, thus reducing the dependence on imports from high-cost countries. All-round procurement can also achieve time advantages, such as shortening the product development cycle. A global manufacturing company has recently found that if a factory is rebuilt in China, not only is the cost half of that of other countries, but the time required is also cut in half.

Level 4: Implementing the Integrated China Strategy

Not long ago, the global car manufacturers operating in China and their suppliers mainly considered how to serve the Chinese market. Today, their position has changed. They no longer only regard China as a purely important market or a pure export commodity supply base, but increasingly see China as a combination of market and supply base. Whether for these companies or other companies, operating in China requires an integrated strategy that each component line of parts can be purchased separately for the production of products suitable for sale in China and abroad.

The advantage of the integration strategy stems from the synergy brought about by the scale effect, and the possible cost savings are considerable. The products are designed for both the global market and the local market. At the same time, the integrated planning of production capacity is also carried out: the scale of the plant is no longer a single domestic or export demand, so the scale effect can be fully realized, and the specifications meet the requirements of domestic and internationalization. If you compete in two areas at the same time, you may also gain certain policy advantages: Some Chinese economic observers believe that only using China as an export processing base may encounter some difficult situations, because the government will think that these companies are less invested in China than those China is an important market enterprise.

Level 5: Gaining a global advantage

While many companies are talking about how to integrate low-cost sourcing with the operations of many other countries, only a handful of companies have really made a difference. For example, Toyota closely coordinated manufacturing and supply between different regions and procured parts from Asia, enabling the company to reduce costs and deliver on time.

The economic benefits of cost structure and business model globalization are endless. The competitive advantage of a truly global business comes from the full use of lower costs and better capabilities, which is a structural advantage in economies of scale and stability. But this advantage must be based on ability, it is difficult to achieve, and it is difficult for competitors to imitate. The resulting benefits are greater business growth—business growth at the local, regional, and global levels.

How to act

The five levels of the above procurement advantages are not necessarily gradual: a company does not have to develop from the previous level to the second and then to the third. Corporate strategy can sometimes leap from a cost-oriented strategy for sourcing basic accessories to an ambitious, comprehensive China strategy. Similarly, many companies that have been in the Chinese market for many years of sales activities are now returning to the procurement level in a certain sense and restarting export production. Similar examples include Siemens, Lion Beer, General Electric and several multinational OEMs.

So how do you get started? Based on our experience, there are three important steps that need to be taken to establish procurement capabilities in China from scratch or to improve existing operations.

Opportunity analysis

Today, multinational companies can buy almost anything in China. So what should they buy? To answer this question, the company is required to develop a procurement plan as soon as possible, and then segment all market opportunities—including potential products and potential suppliers—and conduct realistic and feasible screening of all opportunities. In addition, the company must also estimate the total cost of the supply chain to achieve the potential cost savings, and then determine the potential advantage is enough to offset the risk? Later, because the market environment will continue to change rapidly, the company needs to establish a management system that helps the company to constantly update its views on China.

Wal-Mart's direct purchase from Chinese factories is a case worth pondering. With its unbeatable ability to price, and because it requires relatively simple products, most of the work of Wal-Mart screening suppliers is done by the suppliers themselves, allowing them to provide detailed background information and samples. However, even so, Wal-Mart needs more than 200 people to complete on-site inspections, verify information and implement procurement decisions. For other companies, this task is even more daunting. More complex products—particularly those that are to be installed in other products—require more detailed evaluation and must be in more contact with the supplier.

Infrastructure establishment

Designing and establishing procurement operations is a daunting task, which means developing processes and policies for all aspects, including supplier screening, assessment, monitoring, compliance, human rights assessment and risk management. Establish a database to track supplier quotations; establish professional capabilities in line with China's national conditions; and obtain and evaluate important data on reference companies, on-site assessments, and supplier capabilities. Later, it also means establishing close relationships and partnerships between different departments and operations around the world – a very difficult task that requires caution. Companies must build good systems and teams to make the right decisions and execute them quickly, resulting in cost savings and growth. To accomplish such a daunting task, it is important to choose a leader with sufficient experience and ability to drive the entire organizational structure. In addition, many of the factors that have to be successful in China come from outside China, so it is important to get active support from the headquarters. Several multinational companies in China have considered the “two levels of improvement” rule of thumb, that is, the responsibility of China's procurement business must be borne by two levels of organization than the normal situation.

Overcome obstacles to action

Many business managers are now worried about the risks of doing business in China. To be sure, the development of the Chinese market does face a series of huge challenges. For example, the banking industry or other financial crisis may affect the stability of the Chinese economy. Companies must also pay close attention to the progress of WTO commitments. Equally important are operational and management risks, such as how to eliminate the effects of currency fluctuations. Coordinate complex logistics systems and find competent and trustworthy partners.

Trust is the key to sharing intellectual property. When the company brings patented technology for product design from overseas, they also bear the risk of disclosure of patented technology, leaking it to competitors, leaking it to employees who may quit to rival companies, and leaking private entrepreneurs to the country. These private enterprises It will steal patents from mobile phones to shoes, from shampoo to any product in the software. However, companies that seem to be more vulnerable, such as electronics or apparel manufacturers, continue to expand production in China because they believe it is necessary to improve overall competitiveness. While these issues are real and important, competitive advantage comes from deep understanding and overcoming risks, not from evading risks.

The bigger obstacles may be resistance from within your own company, or even from your existing suppliers. We have repeatedly found that companies wishing to do business in China are plagued by cultural and organizational difficulties. These difficulties include a lack of urgency, a “step-by-step” concept, a lack of experience in sourcing in China, and general experience in global sourcing, an extremely complex organizational structure, incomplete information, opposition from existing suppliers, and difficulty in setting viable goals. Before a company can act, it is necessary to identify and solve these organizational problems.

In essence, "high ambition and fast action" are the principles of procurement in China today.

Leading companies in some industries have made great strides in China's business: they have already locked in the advantages and are moving toward the fifth level of sourcing advantage. However, many companies today—even those that buy multi-million dollar products in countries with low procurement costs—have fallen behind major competitors in China. For these companies, the starting point for any market situation analysis is no longer "How large should we purchase in China?", and first of all, "How do we catch up with other companies?"

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