Power tools supply market research
--for the rBU Skil Europe within Bosch Power Tools division
Master thesis, MscBA specialization Operations & Supply Chains University of Groningen, Faculty of Economics and Business
Xu Weiqi
Student number: 1745034
Supervisor/ University: Dr. Ir. S. Brinkman Supervisor/ University: Prof. Dr. D.J.F. Kamann
Supervisor/ Skil Europe: Leon Joosten
Acknowledgements:
First of all, I want to thank my supervisor Mr. Brinkman, associate professor of University of Groningen. Without his great supports and guidance on theoretical methodology, this paper would not be complete succeed. His useful advices guided me to do a good research in a scientific way. On the other hand, his knowledge in global operations gave me a real sight of business as well.
Great thanks for my second supervisor Professor Kamann, Groningen Research Institute of Purchasing, University of Groningen. His lecture of advanced purchasing and supply management actually introduced me into this exciting area. Many useful research methods which I learned from his lectures helped me a lot during this research project. Great thanks for my company supervisor Mr. Joosten. Thank you for giving this opportunity of research project to me. During this project in Skil Europe, I got many helps from your side and learned a lot. Meanwhile, I would like to thank all my dear colleagues in purchasing department of Skil Europe. Your kindly helps during my project these days really warmed me.
Finally, I want to thank for my great parents and best friend Yan. Though, they are far from here in Shanghai. Special thank for your all great care and supports these years. Breda, June 2009
Abstract:
This Master thesis is typically a case study research focused on power tools supply market for Skil Europe B.V. Skil Europe is one of the business units under Robert Bosch Group specialized in power tools (PT) production. It locates in Breda, south of the Netherlands. From 2004, they decided to outsource entire production (except packaging) to China for cost saving. Those first tier suppliers for power tools are mainly located in “Great Shanghai Area” (Yangtze River Delta). Currently, the purchasing manager of SEU considers that focusing mainly on this dedicated area could become a risk in the near future. They want to know: is it applicable to build up a new supply area for PT
production outsourcing in the south of China?
Under SEU purchasing strategy, potential purchasing market research is the core content of this paper. Firstly, this paper gives a clear logical relationship from top cooperative strategy to functional purchasing strategy for SEU case. This part mainly clarifies why SEU outsourced its power tools production to China and what are the main business objectives.
Then, based on its purchasing strategy, a new purchasing market research is given based on the comparison of two main economic zones in China. Such comparison includes some relevant factors such as: geographic factor, economic factor, political factor and industry factor as well. Those two economic zones are well-known as Yangtze River Delta (current supply base) and Pearl River Delta (potential supply base). SEU firstly paid attention on south of China. Because of Pearl River Delta is the second biggest and developed economic area in China. As statistics shows, it is also the second biggest power tools supply area in China as well. Another southern province Fujian is also included in this supply market research. But after data analysis, this area is definitely out of consideration.
In the final conclusion and recommendation, author makes an overview of Chinese power tools supply market in future 5 years, based on the analysis from chapter 4 and 5. Those items of geopolitical, macroeconomic, industrial and cultural factors are concluded into several points.
1. Power tool demand in China will increase
2. Number of big power tool manufacturers will be reduced
3. Advantages in Yangtze River Delta will not be changed in short time 4. Industry upgrading will be slowly shifted from seaside area to inland area 5. Difference of PT price among Chinese local brands will be less
industrial dimension. All relevant influenced factors such as cost price, labor cost and
logistic service level are analyzed based on both internal and external data resources.
Abbreviations:
APEC BAF CPPCC ERINA FOB FMEA GPRD GYRD NPC PMI PRD PT R&D RMB SEU SSL TEU TQM TSR VAT YRDAsia-Pacific Economic Cooperation Bunker Adjustment Factor
The Chinese People's Political Consultative Conference Economic Research institute for Northeast Asia
Free on Board
Failure Modes and Effects Analysis Great Pearl River Delta
Great Yangtze River Delta
The National People’s Congress (China) Purchasing Managers Index
Pearl River Delta Power Tools
Research and Design Renminbi
Skil Europe
Table of content
Acknowledgements ... 2 Abstract... 3 Abbreviations ... 5 Chapter 1: Introduction ... 8Chapter 2: Research questions & methods ... 10
2.1 Problem statement and analysis ... 10
2.1.1 Skil purchasing procedures ... 10
2.1.2 Research questions... 11
2.2 Research methods ... 12
2.2.1 Conceptual model and scope ... 12
2.2.2 Research methods and literature review ... 13
2.2.3 Data reference and resources ... 17
2.3 Research design & thesis sructure ... 18
Chapter 3: Purchasing strategy of Skil Europe ... 19
3.1 Power tools market and business strategy ... 19
3.2 Purchasing strategy ... 22
3.2.1 Function of purchasing ... 22
3.2.2 Skil Europe purchasing strategy ... 22
Chapter 4: Current supply area analysis ... 24
4.1 Current supply area and supply chain ... 24
4.2 Relevant factors ... 25
4.2.1 Quality... 25
4.2.2 Cost price ... 27
4.2.3 Logistics and supplier service level ... 30
4.2.4 Communication... 33
4.3 Benefits and risks analysis ... 34
4.3.1 Benefits ... 35
4.3.2 Risks... 36
4.3.3 Summary ... 37
Chapter 5: Potential supply area analysis ... 38
5.1 New supply area in the south of China ... 38
5.2 Macro factors ... 40
5.2.1 Geography and demography ... 40
5.2.2 Culture... 42
5.2.3 Education and human resources... 43
5.2.4 Tariff and tax rate... 45
5.2.5 Economic factors ... 45
5.2.6 Political factors ... 47
5.2.7 Summary ... 49
5.3 Industry factors ... 50
5.3.1 Supply and demand... 50
5.3.2 Labor cost... 54
5.3.3 Energy and raw material ... 55
5.3.5 Logistics and transportation... 57
5.3.6 Infrastructure... 60
5.3.7 Summary ... 61
5.4 Benefits and risks analysis ... 62
5.4.1 Benefits ... 62
5.4.2 Risks... 63
Chapter 6: SWOT analysis ... 64
Chapter 7: Conclusion and recommendation... 68
References... 70
Appendix A: The importance of the PRD in Guangdong and China ... 73
Appendix B: Selected indicators, selected Chinese Jurisdications... 74
Appendix C: Gross industry output for PRD in 2005, selected industries ... 76
Appendix D: Output in the service sector, PRD region, 2005 ... 76
Appendix E: Selected financial markets ... 78
Chapter 1: Introduction
Currently, many western global manufacturers have already partly or completely outsourced their production to China. The main reason is cost reduction, mainly in labor intensive operations. Outsourcing is a typical trend nowadays in global operation. Skil Europe (SEU) is one of those players in global sourcing for power tools (PT) manufacturing. In power tools industry, it is very normal. All big PT manufacturers such as Black and Decker, Makita did same as SEU that outsourcing production part to low labor cost countries. Those global PT manufacturers established their main supply bases in China.
SEU is one of the business units of the Robert Bosch Group specialized in PT production. Headquarter of SEU is located in Breda, south of the Netherlands. From 2004, they decided to outsource entire production (except packaging) to China for cost reduction. SEU keeps R&D and sales in-house. In some cases, SEU also used suppliers’ design, if it was applicable. The supply bases for manufacturing of power tools are mainly located in “Great Shanghai Area” (Yangtze River Delta). There are many small well developed cities around Shanghai for supplying different material, parts and services related to PT production. Those PT suppliers in this area produced power tools which are designed by SEU.
Currently, the purchasing manager of SEU considers that focusing mainly on this dedicated area could become too risky in the near future, because of potential cost increasing. As a backup, they consider to find out another applicable supply area in China. Cost reduction is another reason as well. The potential area can be close to Guangdong or other seaside province in China like Fujian, because of its well established industrial infrastructure in seaside economic zones.
That is the main reason for doing this final thesis project of supply market research. The objective of this research is to find out what risks play a role when SEU keeps its current supply base and what are opportunities for the future in other areas of China.
The problem statement for this thesis is listed below:
How to select a future supply base for PT production outsourcing in the south of China?
Several sub research questions will be answered in this thesis. This real case study will be split into two parts. One part is mainly focus on current supply area. Second part is further analysis about potential risks and opportunities for new supply area. The comparison of two supply area will also be included.
Company background
Skil has been founded 85 years ago. It all started back in 1924 with the invention of the circular saw in the United States of America. Skil stands for good quality at an affordable price, in short: value for money. Skil has been developing, producing high quality professional power tools in the market. In Europe, over 120 million products have been sold under the Skil brand.
In 1996, Skil was acquired by Robert Bosch Group. Now, Skil is one of the PT brand fully owned by Bosch. As a division under Bosch, SEU located its headquarter in Breda. Before 2004, SEU manufactured all categories of its PT such as cordless drills, saws and sanders etc. in Breda. Under the sharp competition by low cost country, SEU decided to outsource all PT production out of Europe in 2004. The main supply area is within Yangtze River Delta.
SEU is a business unit under Bosch group. The yearly purchasing turnover of SEU is around 90 million Euros in 2008. The site in Breda is responsible for serving the whole Europe.
Chapter 2: Research questions & methods
2.1 Problem statement and analysis
2.1.1 Skil purchasing procedures
This research paper will mainly focus on the supply market research which is part of purchasing management process. Purchasing management process of outsourcing in SEU typically came from Van Weele’s model. There is only slight changing in order to fit more with Bosch purchasing procedures. They add two blocks as: gather supplier information and selection into the graph.
Figure 2.1: SEU sourcing process, modified Van Weele’s Model (Van Weele, 2002)
2.1.2 Research questions
SEU wants to expansion its supply area of buyout PT1 from Yangtze River Delta (Shanghai, Jiangsu & Zhejiang) to the south of China. The main reasons are listed below. 1) Reduce the risk from buyout suppliers which are now mainly limited in one area 2) Reduce total purchasing cost
This research is focused on selecting a new supply base in the south of China. Main problem statement is: How to select a future supply base for PT production
outsourcing in the south of China?
This research problem can be split to several sub-research questions. 1) What is the potential risk of staying in current supply area?
2) Compare current supply area to the south of china, what are the advantages and disadvantages?
3) What are the benefits and risks for building up a new supply area for PT manufacturing in the south of China?
All those research questions are highly based on SEU purchasing strategy. As Skil PT is positioned in the bottom of all Bosch PT brands, the fundamental task is cost reduction. It is totally different with other PT brands. In China, category of Bosch Green2 is produced in Bosch Hangzhou, which is fully owned by Bosch group. SEU outsourced its PT production to Chinese suppliers. That is why SEU wants to find a new supply base when they feel current supply area will be too risky. Cost increasing pressure and supply risk pressure are two main threats been considered. As seaside areas are the most developed area in China, southern China is the most applicable substitute or backup supply area compare to eastern China. Keeping most of supply bases in China will take many advantages. The most important thing is cost. Maintaining current supply chain in China will save lots of money. Shifting part of businesses from eastern China to southern China will not change a lot on supply chain processing. That is why southern China became the first option in this case.
1 After production outsourcing, most of PT goods of SEU are buyout products which purchased from China.
Buyout here means the power tools are completely purchased out of SEU and only packaged in Breda.
2
2.2 Research methods
The research method which was chosen should be appropriately relevant for answering the research questions that formulated earlier (Eriksson and Kovalainen, 2008). All the research methods and approach tools are used for analyzing this special case in supply management and purchasing filed. The scope of this research, conceptual model and its relevant research methods, data resources will be given below. This research is actually a case study which focuses on the company Skil Europe in Breda.
2.2.1 Conceptual model and scope
The conceptual model is consisted by several parts. Current supply area analysis and potential supply area analysis are two main parts of it. The first part is mainly based on existing supply area in Yangtze River Delta. This part of research will be in detail and practical. The contents of research will include purchasing cost analysis, benefits and risk analysis etc. Another half part will be much more broad and generic. The geographic area will be included both Guangdong and Fujian province in the south of China. The research scope is from macroeconomic level to median industrial level including economic environment research and industry infrastructure research.
Figure 2.2: Conceptual model of market area research
Yangtze River Delta --Purchasing cost analysis --Benefits and risk analysis comparison
Purchasing strategy
New supply area (South of China) Macro factors Geographical location Demography Culture Education level Tariff & tax rates Economic factors Political factors
SWOT analysis
Alternative Industry factors
Supply & demand Labor cost
Energy & material cost Quality / technological development
Logistics / transportation Infrastructure
Current supply area analysis Quality Cost price
Logistics / Service level Communication
There are two main parts in this research project. The focusing points and scope of those
two parts are different.
Current supply area analysis Potential supply area analysis
Area Yangtze River Delta Guangdong (Pearl River Delta) & Fujian
Scope Median to Micro Macro to Median
Data Internal data / Internet External data / international journey / Internet
Approach Detail and practical way General and academic way
Topic Supply chain to suppliers Economic factors to supply chain
Content --Purchasing cost analysis --Benefits and risk analysis
--Supply market research
--Economic environment research --Industry infrastructure research --Benefits and risk analysis Table 2.1: Distinguish between current and potential supply area analysis
2.2.2 Research methods and literature review
Figure 2.3: Stepwise approach for purchasing market research Determine objectives
Cost-benefit analysis
Data analysis Data collection Design of research plan
Execution of research activities
Prepare research report
Supply market research is the core part of this paper. Research method and approach used
here is mainly based on Van Weele’s procedures. The first 3 steps had already been done by SEU purchasing manager before this research project started. Based on defined objective, Author started from research design to the end of research outcomes. Desk research is the gathering, analysis and interpretation of data that serve the research assignment, which have already been gathered by others (Van Weele, 2001). Mainly in chapter 4, data gathering is based on Bosch intranet. Author used some first hand information from daily discussion within purchasing department as well for field research.
1. Business Strategy: Porter’s generic strategy (chapter 3)
Procurement strategy is part of operational strategy or functional strategy under the main business strategy. Before start to analyze procurement strategy in SEU, clarification for core business strategy of Bosch PT division is the first step. In this part, Porter’s generic strategy is used as a reference.
Michael Porter is a famous professor of Harvard business school specialized in competitive strategy. Generic strategy is one of his significant contributions. As defined by Porter, there are 3 different generic strategies: cost leadership, differentiation strategy and focus strategy (Porter, 1980). In first part of Chapter 3, analysis procedures are typically based on Porter’s methods. In his opinion, positioning-once the heart of strategy-is rejected as too static for today’s dynamic markets and changing technologies (Porter, 1996). Defining the PT industry and current market will be the first step. Then, positioning for different PT brand groups will help to define why Bosch chosen such strategy for PT division. Bosch PT division typically used focus strategy for its different segments. SEU is one of them. Each segments concentrate on different strategies based on its position in the market. In such position, SEU matched with cost leadership strategy in this case.
Further more, interrelationship of those strategies from top cooperative level to functional level are defined in Chapter 3.
2. Purchasing strategy and outsourcing (chapter 3)
3. Kraljic portfolio (chapter 3)
Kraljic portfolio is an inevitable method widely used in many kinds of supply management research. Many scholars concentrated and developed this approach further nowadays. Kraljic portfolio was introduced by Peter Kraljic in 1983. His famous paper “Purchasing must be supply management” published on Harvard Business Review. Kraljic matrix is based on two dimensions: financial impact and supply risk; classified into 4 categories: Bottleneck, non-critical, leverage and strategic items (Gelderman and Van Weele, 2002). This model received many attentions and developed by different authors.
Kammann cube is a typical portfolio analysis developed from Kraljic portfolio. Kraljic portfolio method does not take the supplier’s perspective into account (Kamann, 1999). He added one more dimension as: complexity of the buyer market into his cube model.
Figure 2.4: Kamaan Cube, 1999
As many researchers did in their purchasing case study, Kraljic portfolio model is very applicable on purchasing strategy analysis. In 2006, Gelderman did a research for Akzo Nobel, using purchasing portfolio as well. The study is the “top-down” nature of the knowledge development as a headquarter point of view (Gelderman, 2006). In SEU case, it is much more based on single business unit approach.
There are 3 kinds of purchasing categories divided by SEU’s portfolio. The portfolio analysis in figure 3.6 used the “moving in the matrix” methods. Such method is referenced from the 3rd research questions of Gelderman’s purchasing portfolio analysis paper in 2002.
4. Supply market research (chapter 4 & chapter 5)
It is divided into 2 main parts as current supply area and new supply area. The first part of current supply area analysis is mainly focused on micro business level. 4 Relevant factors used here such as: quality, cost price, logistics and communication which are applied on current suppliers. Second part of new supply area is taken much more attentions on macroeconomic and industrial level. The reason is that current supplier database is well established already. Analysis from micro business to medium industrial level will give a more detailed overview before analyze the new supply base. Second part of potential supply area analysis is used macroeconomic and industrial factors. The comparison of two supply area was also included in chapter 5.
Furthermore, why this potential new supply area should be in southern China? Global sourcing is a dynamic integrated system. It should be considered with all relevant factors. As Southern China (especially in Pearl River Delta) is the second biggest developed economic area in China. Electronic industry has well developed many years there. All relevant support facilities are well established as well. That is why this research focusing on this area.
5. Cost structure analysis (chapter 4)
Increasing cost and supply risk are the main two factors influenced on SEU to search a new supply base. Cost price analysis was one of the key factors in current supply area analysis. In this part, cost structure analysis was applied as a method to find out main factors impacted on the final export price.
6. Benefits and risk matrix (chapter 4)
Portfolio management or decision matrix is popular used in today’s business research. In benefits and risk analysis part, this research used a common two-dimension risk matrix for SEU case. Four risk factors such as high dependence, loss of technology and policy risk were analyzed by risk matrix to see which should be avoided immediately. The risky degree is mainly based on 2 dimensions of probability and impact.
Further more, a similar benefits matrix applied in the same way. The benefits for current supply area mainly depend on its uniqueness and impact as well. This benefits and risk matrix created by author is applied for this supply market research.
7. Heihe-Tengchong line (chapter 5)
In Chinese demographic and population distribution research field, Heihe-Tengchong Line is the most well-known method and used for many years. This method is created by Chinese geographer Hu Huanyong. Using this method here is actually for clarifying economic area location and demographic factor. All three well developed economic zones are located at the right side of Heihe-Tengchong line.
8. SWOT analysis (chapter 6)
study and project analysis. Here, this method is combined with former benefits and risks
analysis to output several options for future strategy plan.
2.2.3 Data reference and resources
2.3 Research design & thesis structure
The research design linked to chapters is showed below.
Figure 2.5: Research design related to different chapters
As mentioned in the conceptual model, chapter 4 and chapter 5 will be the main parts of this research. Chapter 5 is even more important than the current supply chain analysis part. This is the core part of supply market research. The sequence of this research is just from top business strategic level to lower practical supply chain level. The SWOT analysis will help to give some applicable guidance for further actions. Conclusion and recommendation will be given in the end for business objectives and academic results as well.
“Case studies are often pursued because of their potential to appeal to and benefit the practitioner; therefore, the researcher should make the report interesting, readable and understandable from the point of view of business practitioners in addition to academics (Eriksson and Kovalainen, 2008).” That is why this research will a bit more close to practical approach than pure academic research in many aspects.
Introduction + method Chapter 1-2 Business strategy Chapter 3 Purchasing strategy Chapter 3
Current supply area analysis Chapter 4
SWOT analysis Chapter 6
Potential supply area analysis Chapter 5
Chapter 3: Purchasing strategy of Skil Europe
3.1 Power tools market and business strategy
Before the economic crisis, researchers were all optimistic for PT demand forecasting. Freedonia Group concluded that the demand of PT would increase to $29.2 billion in 2009 (Michael A. Dennen, 2006). Only after 1 year, the same figure was adjusted to 2011, two years later. (Freedonia Group, 2007). Now, it was reduced further. In general, Bosch is the market leader in PT manufacturing. The annual sales in 2006 were 2.8 billion euros in total. It covered almost 25% in global market share (Bosch intranet, 2007). Skil is one of the main brands in Bosch PT division. They reorganized different brand groups to compete for different segmented markets since 2002.
Figure 3.1: Bosch PT development strategy, 2002
The market position of those brand groups (Bosch Blue, Bosch Green & Skil) with their main competitor Black & Decker was listed below.
Figure 3.2: Market position of different PT brand (Leon Joosten, 2009)
In this graph, that is very clear what the positions of different brands are. Bosch Blue
stands as the highest quality for tough professional using. Bosch Green PT is just positioned a bit lower following the Bosch Blue. That is also why Bosch established the biggest production plant in Hangzhou for Bosch Green. The reason is: they want to control production process and product quality internally for professional PT. Power tools with Bosch Blue brand are mainly produced in Germany. Bosch outsourced entire manufacturing for brand Skil to Chinese suppliers. Black & Decker is the main American competitor of Skil PT.
Clarification of strategy positioning for Bosch PT, based on Porter’s generic strategy is showed in figure 3.3.
Figure 3.3: Porter’s generic strategy applied on Bosch PT division
Business strategy for SEU nowadays is still cost reduction based on the same quality level. This strategy directly guide to the purchasing strategy further. Before talking about purchasing strategy, to clarify the relationship from top to down side is necessary.
Figure 3.4: Three different strategy levels from corporate to purchasing function for Skil Europe
Bosch PT
Skil Europe
Purchasing department
--Increase market share
--Brand development --Cost reduction
--Cost reduction --Supply risk reduction
Brand differentiation strategy --2002 (Corporate strategy)
Global outsourcing strategy --2004 (Business strategy)
New purchasing strategy --2009 (Functional strategy)
Organization Objectives Strategy
Cost leadership strategy Differentiation strategy
Three levels of strategy 1) Bosch PT division level
The main objective from top level is increasing market share and maintaining the leadership in global PT market. Bosch started brand differentiation from 2002. All those segmented sub brands are outstanding and well-known in the market now.
2) Skil Europe level
As stand in the middle of the PT market, the main tasks for SEU are brand development and cost reduction. To compete with Black & Decker, outsourcing entire production to China was the main strategy after 2004.
3) Purchasing department level
3.2 Purchasing strategy
Before start making the supply market research, some contents of purchasing strategy of SEU should be discussed first. This new purchasing strategy is just based on new requirements under the SEU business objectives.
3.2.1 Function of purchasing
Purchasing strategy is one of functional strategies under the cooperative strategy, which highly influence on the company’s financial result. Currently, many people get confused in different functions of purchasing, sourcing and procurement etc. Figure 3.5 clarifies the relationship and functions of those terms.
Figure 3.5: Purchasing process model, Van Weele, 2002
When designing purchasing strategies, the approach originally suggested by Kraljic (1983), in his classic article presented a useful portfolio-technique, is recommended (Van Weele, 2002)
3.2.2 Skil Europe purchasing strategy
This supply market research is mainly based on SEU’s purchasing strategy. This strategy can be clearly showed on Kraljic matrix which is listed below.
Figure 3.6: Kraljic matrix applied on SEU case (Kraljic, 1983)
Procurement Buying Supply Sourcing Purchasing function Contracting Determining specification Ordering Follow-up and evaluation Selecting supplier Expediting and evaluation Supplier Internal customer
Low Supply risk High
In total purchasing portfolio of 2008, SEU normally divided all purchasing categories
into 3 main portions such as: resale goods, direct material, indirect material and service (includes transport & logistics, engineering, facilities and IT cost etc.). These three categories are all refer to purchasing portfolio of SEU business unit. All sub categories of PT designed by SEU are now produced mainly by Chinese suppliers.
Skil Europe Purchacing volume 2008
64.46% 7.26%
28.28%
Resale goods Direct material
Indirect material and service
Figure 3.7: Three main purchasing portion of Skil Europe in 2008
Chapter 4: Current supply area analysis
4.1 Current supply area and supply chain
Now, most of buyout suppliers of SEU are located in Great Shanghai area as mentioned before. The name of this area is called Yangtze River Delta (YRD) consisted by Shanghai, Zhejiang and Jiangsu province. Currently, more than 80% of buyout suppliers and 90% percent of buyout purchasing volume are coming from this area. Purchasing dependence becomes higher in this area. Because of large capacity and qualified suppliers are not too much. Suppliers service level (SSL) of those buyout suppliers is lower around 40% of delivery on time in average in 2008 (Skil Europe, 2008). Though, it has improved at the start of 2009. Such figures are collected from SEU supplier assessment database.
Supplie r Asse ssme nt
2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4
Jiangsu Shanghai Zhejiang Taiw an Guangdong+HK
Commercial Logistics Quality Project
Figure 4.1: Buyout supplier assessment for different region in 2008
4.2 Relevant factors
There are 4 factors influence on overall supply performance in china: quality, cost price, logistics and communication. Based on data analysis on those 4 key factors, benefits and potential risks in YRD supply area will be seen clearly.
4.2.1 Quality
SEU used standardized quality capability assessment for their buyout suppliers. Those quality audit specifications are updated by the new requirements of SEU. The main focusing points are mainly related to 7 aspects. From those assessments, the quality capability status within this current supply area will be showed clearly.
Table 4.1: Main buyout supplier quality assessment
Except XX, other 10 big suppliers are all from YRD. Those suppliers are the main portion of buyout suppliers for SEU. In this table, preventative quality, testing equipment and external procurement are marked as the 3 worst aspects. Based on the observation and measures of those audit reports, several quality problems can be clarified as follow.
1) Lack of Failure modes and effects analysis (FMEA)
Except XX, FMEA is not applied in other suppliers. Some suppliers just start to introduce FMEA according to the customer requirements. Some of them even don’t have any knowledge of FMEA. First of all, the concept of FMEA is not familiar to most of Chinese manufacturers. Nowadays, more and more commodity manufacturers know the name of it. But deep application and understand “know how” even need some more time. Second, those buyout PT manufacturers are set up less than 20 years and even in the low status of the supply chain. Technology standards still have some gaps compared to leading manufacturers in supply chain.
2) Bad incoming inspection and supplier selection
The incoming inspections of those buyout suppliers are mostly not in proper procedures. ISO9001 certification is not a mandatory requirement for sub-suppliers. In some cases, Sub-supplier selection procedure was defined, but not fully implemented. The main
Supplier Management External procurement Testing equipment Preventative
quality Production Documentation
reason is that the total quality management (TQM) concept is less considered by those PT
manufacturers. Inspectors sometimes only choose one dimension or one aspect, which they consider important to check and record.
Second, fewer Chinese PT manufacturers thought that development of their suppliers is necessary. Actions only focus on concession, sorting or reject the parts, less action to improve the sub-suppliers. Some of them have a supplier list of repeat problem, but no action. They just wait for next time inspection again. The result is that they just keep attention on parts inspection, but less on sub-supplier improvement and development. Lots of quality problems are caused by those sub-suppliers.
3) Less process control
That is another main quality problem. Some PT manufacturers mainly focus on correct the failure tools. Cause analysis and repeat error reduction are not sufficient. So, even the finished goods are satisfied by customers. Errors and failure rate can be high in the process. The effectiveness is low. Sample checking is not implemented on every working station. Some failure parts will continue pass to the next stage without any warning.
4) Documents problem
In process inspection, the records are only showed as “pass” or “no pass”. Detailed data are not included. In supplier assessment reports of SEU, many PT suppliers have such kind of problem. The traceability of records is very low. That directly influenced on quality improvement. It makes continue improvement impossible.
Summary
Those quality problems can be actually seen as only one issue: focusing on the quality
of finished goods, but less focusing on the quality of process. This main issue then
transferred into several results.
Focusing points (Yes) Neglecting points (No)
Quality system installed according to ISO 9001:2000
But not really used for daily work
Finished goods inspection Suitable process control, work station sample inspection
Pass or no pass result recording Detail data traceability and root analysis Incoming parts inspection Sub suppliers development
Correct failure tools Actions for avoiding repeat errors
Satisfied customer requirements on finished goods Continue improvement on internal process
Introduce quality tools: FMEA, 6sigma etc. Real implementation of those quality tools into daily processing
Production efficient Production effectiveness Table 4.2: Quality focusing and neglecting points of current buyout PT suppliers
Those problems are observed from most of current Chinese PT suppliers. Because, they
hold on the advantage of low production cost, based on high production capacity. Such qualified big suppliers in Chinese PT market are not too much. The difference of quality capability from those players in this market is not large. To consider the high extra cost of quality system improvement, high efficiency based on acceptable quality is much more attractive for those suppliers. If the quality variation in this supply market is high, this situation will be changed. Another reason is that preventative quality tools such as FMEA and 6 sigma were just introduced in China less than 10 years ago. Those concepts and quality tools are quite new in industry. Even many manufacturers have already installed them in a few years. But the effectiveness of those quality tools is not fully accomplished in process. After several years developing, it will be improved and much more familiar by Chinese manufacturers. The potential quality development is based on the overall technology status of relevant industry.
4.2.2 Cost price
The price of PT from Chinese supply area has changed a lot during current 3 years. The cost price is one of the key factor which considered by SEU. That is also one of the main reasons that Bosch entered this supply market. The following list showed the price changing of some Chinese PT suppliers of SEU from May of 2006 till now. The selection of suppliers is base on time to see the changing of price. The starting indicator was just counted as 100. Several suppliers did the business before May of 2006.
05/06 10/07 01/08 06/08 11/08 12/08 01/09 01 / / / / / / / 02 / / / / / / / 03 / / / / / / / 04 / / / / / / / 05 / / / / / / / 06 / / / / / / /
Table 4.3: Price development of some Chinese buyout PT suppliers in current 3 years
The trend presented in this figure is very clear. All the suppliers reached the roof of the
price at the first half year of 2008. Then, based on economic crisis, PT price was slightly reduced at the end of 2008. From October of 2007 to June of 2008, PT prices were increased more than 20% in average.
There are several factors which impact on PT price in Chinese PT industry. Except demand impact, the most important factors which influenced on the price rising are distinguished in grey color.
Figure 4.3: Buyout PT cost structure
Many different portions consisted into final export price of PT. In this simplified figure, some less important factors such as management cost are not counted in. To consider that PT manufacturing is not a high-tech and high value added industry. Raw material cost and several import & export factors are still directly influenced on final PT price.
1) Rising copper price
Copper price raised more than 2000 dollars per ton from the start of 2007 and the start of 2008. To see the price graph from London metal exchange, that is also match the PT price development graph showed above.
Figure 4.4: London metal exchange 2009
As copper is one of the main raw materials by producing PT parts such as commutator.
Copper is also the most expansive metal material in PT manufacturing. Normally copper consisted 30% of total material cost and 20% of total production cost of PT. There are two booming period of Copper price changing. One is from January 2007 to April 2007 and the other one is from December 2007 to April 2008. The impact postponed several months later on PT industry. At the start of 2007 and start of 2008, PT price also increased more than 10% in each of those 2 periods. The rising trend stopped at June of 2008, just the same time as copper price went down. Of cause, economic crisis is one of the main reasons. If checking the metal price development in 5 years long term, the booming period even amplified a lot.
Figure 4.5: London metal exchange 2009
Before 2004, the price of copper was even lower than 3000 dollars per ton. That is the main reason for those PT suppliers to increase the price in that period. Currently, copper price goes down to around 4000 dollars per ton, even much higher than 4 years ago. But the trend is going down as all other metal prices as well.
2) Currency factor
Increase value of Renminbi (RMB) is another factor of Price increasing. Exchange rate of RMB against U.S. dollar straightly went up from 2005 till now. From more than 8 yuan per dollar to only 6.8 yuan per dollar, this made high price pressure for most of exporters. That is another reason of continuing increasing of PT price. All Chinese suppliers use U.S. dollar as exporting currency. The profit margin of those suppliers became smaller than before.
3) Export tariff rebate
suppliers in China are export orientation. 95% of their products are exported to abroad
market such as Europe and North America. But, Ministry of Finance and State Administration of Taxation adjusted export rebate rate from 17% to 9% for machine tools on 17th of June 2007(Ministry of Finance of China, 2007). Now, the rebate rates for different PT products are readjusted to 11%-14%.
Table 4.4: 123 (Deloitte Guangzhou, 2007)
The reasons of this adjustment are listed below 1) Control the high trade surplus
2) Restrict industries which use high amount of energy and nature resources 3) Balancing between different industries
Profit margin in PT supply market is not high indeed. This new policy was definitely influenced on price adjustments. Many suppliers even got this message before July. They asked to adjust the price on their contracts. The price of PT was increased a lot around October of 2007.
4.2.3 Logistics and supplier service level
20 ft 40 ft GP 40 ft HQ % Shanghai / / / / Yantian / / / / Ningbo / / / / Kaoshiung / / / / Hongkong / / / / Keelung / / / / Penang / / / / Shekou / / / / Mexico / / / / Sum / / / /
Table 4.5: Container shipping volume from different dispatch ports
Based on those suppliers’ location, the most of containers are shipped from Shanghai port. The logistics service level in this area is not satisfactory for SEU. Only one supplier reached the target of 70% on time deliveries in 2008, which is actually in Guangdong area. SSL of those buyout suppliers was showed clearly in following figure.
Figure 4.6: Average SSL in 2008 (confidential) Figure 4.7: SSL level of different supply area (confidential)
There are two suppliers from Guangdong area: XX and XX. Both of their SSL were beyond 50% in 2008. The highest SSL in different region is Guangdong area, even the average turnover from those suppliers are very low, less than 1 million dollars.
9
Supplier Development
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Main Reasons for Delay
9% 4% 14% 20% 23% 22% 3% 4% 0%1% 1.Component Shortage 2.Capacity Shortage 3.Price Negotiation 4.BU Order Management 5.Supplier Order Management 6.No Shipping Space/ No Shipping Info 7.Quality Issue 8.Engineering Change 9.Product SOP Delay 10.Force Majeure
Figure 4.8: Main reasons for delay of buyout suppliers
Influence of price negotiation with main suppliers caused a lot of order delay. Besides supplier order management, the second main reason of delay is no shipping space which counted as 22%. That is also why the government of Shanghai planned to construct the Yangshan deep-water port in 2001. This deep-water port was first planed in four phases. It will be completely finished in 2020 with 50 berths capable of handling around 25 million twenty-foot equivalent units (TEUs) (Rongzhang, 2003). Another confirmation is that the increasing rate of container turnover of Ningbo port is more than 20% annually. The distance between two ports is less than 200km. The short-term shortage of container capacity of Shanghai port and high container demand in this area are all feeding for the booming of Ningbo port. This situation will be changed gradually through the construction of Yangshan port. The detail comparison of different logistic areas will be analyzed later in Chapter 5.
The delay of shipping from Shanghai port will be reduced in future 5 years. But the shipping time is fixed based on geographic distance. Because the road transportation cost is very high, usually around 2/3 of shipping cost. Suppliers who located in Zhejiang will never try to deliver their goods to the port of Hongkong. Even if they should use this way, higher inland road transportation cost will be counted into their Free on Board (FOB) price as well.
the same based on such kind of cooperate contracts. The only difference is the shipping
time.
4.2.4 Communication
4.3 Benefits and risks analysis
SEU has already outsourced its PT manufacturing more than 4 years to China especially in YRD. Outsourcing gave many competitive advantages to SEU. But risks are always present as well. Normally, some risks were unexpected at the start of the time.
Figure 4.9: Expected risk of outsourcing in industries (Technology forecast INC. 2008)
Figure 4.10: Risk experienced in outsourcing in industries (Technology forecast INC. 2008)
Reduced supply chain flexibility and low supplier performance were voted mostly as risk experienced in outsourcing. It does not match the perception, which expected by the most of global players at the beginning. SEU has the same problem. SSL is very low which is not usual. Though, it has been improved at the start of the year 2009. Many suppliers are still lower than the Bosch standardize 70% (Skil Europe B.V., 2009).
4.3.1 Benefits
YRD becomes a main manufacturing centre nowadays based on many advantages such as low labour cost, well developed infrastructure and well established supply network etc. It carries several benefits for outsourcing PT production. Some benefits are especially in YTD.
1) Biggest PT supply area, enough capacity (local)
That is the main factor which gave both benefit and risk to SEU. In this area, there are many well developed PT manufacturers. Enough production capacity with acceptable quality can fulfil SEU’s demand. But, SEU too much rely on this area now.
2) Low labour cost (countrywide)
Even, the labour cost still much cheaper than developed countries. The labour cost advantage is much less or even no advantage compare to other low labour cost areas in China. Labour cost in YRD becomes more expensive. But the variation in this area is very large. Average income can be 2 times difference between Shanghai and other cities within YRD.
3) Well established infrastructure (local)
YRD is the most developed economic area in mainland of China. Infrastructures are well established. All links in supply chain can be served well. Sub suppliers network and technical support level are enormously beyond other area. Education level is also high compare to other economic area.
4) Integrated supply chain (local)
Even the SSL level is not very high; the improvement of total supply chain can be seen in the trend. Communication and project fulfilment will be more efficient and effective in the future. Time cost of changing main supply chain can be avoided. If staying this supply area, learning curve will rise up to improve SSL as well.
Figure 4.11: Benefits matrix analysis for current supply area
Though the uniqueness of benefits 1 and 3 are bit high in the figure, it will be reduced in
the future through industry upgrading in other Chinese supply area. Many PT suppliers are essential currently can be substitute in the future. This trend will not be clarified in short time. The substitution of low labour cost is very high. In south of china and further inland of China can serve this cost advantage even better. If the current supply chain will be developed and served well, SEU will invest more time cost on integrating another supply chain in a new supply area.
4.3.2 Risks
There are 4 main risks which SEU will confront in the future. First two risks are specially that staying in YRD supply area. Last two are applicable for the whole China.
1) High dependence
Though, potential PT suppliers are much in Mainland China. The qualified PT supplier which has enough capacity and qualification with low production cost are not too much in this area even in the world. Still mainly rely on those current suppliers will increase the bargaining cost based on high dependence. The flexibility and substitution of those buyout suppliers will decrease indeed.
2) Loss of technology
As many buyout suppliers producing PT for SEU, for its competitors and for themselves as well, loss of technology can be another risk. The impact of this risk will not appear in short time before industry upgrading. But after industry upgrading, consumer spending power will be increased by developed income level. Then the price of domestic PT can be sold higher than before. The gap of the profit between exporting PT and domestic sales will be much smaller. More developed PT suppliers will change their focusing on exporting to domestic market. At that time, the loss of technology will help those PT suppliers to increase their domestic market share in China. They can sell cheaper at accepted quality level.
3) Policy risk
As mentioned above, policy atmosphere is one of uncertainty. In 2007, Ministry of Finance of China adjusted the rate of export rebate. The rate covered for PT was reduced from 17% to 9%. As in before, PT was one kind of encourage exporting goods which offered 17% high rebate level, because of less pollution industry. But based on several reasons such as high pressure of trade surplus and high usage of energy and nature resources, policy was changed. Balancing different industries can be another factor. Remaining 9% rebate, that means machine tools are still seem as one kind of encouraging exporting goods. But the risk of uncertainty policy should be paid more attention. Currently, rebate rate is readjusted back to 13%, because of exporting protection during the economic crisis.
4) Increase value of RMB
currency always damages exporting. The space of appreciation of RMB is much less in
the future. Even the trend of increasing value of RMB is continuity. Chinese government will not allow the currency out of control.
Figure 4.12: Risks matrix analysis for current supply area
In this figure, the first risk is most inexcusable and should be dealt with. The probability and consequence are both higher. It will deeply impact SEU in the future. If there is no reaction step by step, it will be hard to change when the industry upgrading is completed in YRD area. The impact of technology loss is not so high. Because of PT Skil is not positioned at high professional market segments as Bosch Blue. Core technology is still hold on Bosch’s hand. The third and fourth risks are highly correlated. Policies from Chinese government are uncertain and hard to be predicted. Now, PT industry is still one of main exporting oriented industry in China. But industry upgrading is unavoidable by governmental will. It mainly depends on the time and process of industry upgrading.
4.3.3 Summary
Now the status is that totally moving out from this area is impossible and invaluable as well. The main reason is that the variation of industry upgrading processing & level
among different provinces in China is very high (it will be taken at least 10-20 years for industry upgrading). Global company as Bosch can follow the processing of
industry upgrading to maintain the cost reduction and market share in China. SEU can shift some buyout suppliers out of YRD to PRD to reduce the purchasing risk step by step. The direction of industry upgrading of China is from seaside provinces to inland area for sure. The most well developed industry area in China is YRD and PRD currently. Developing speed of YRD is much faster than PRD nowadays. Meantime the purchasing risk and cost in PRD is lower than YRD. In this way, the cost of reconstruction for new supply chain will be avoided. Well established supply network will further improve the market share in this biggest market in the future. Further analysis for new supply area (especially in PRD) compare to YRD will be given in following part.
Chapter 5: Potential supply area analysis
5.1 New supply area in the south of China
To find a new supply area is not meant to replace the old one. It is mainly seen as one potential option in future 5 years to disperse the supply risk. PRD and Fujian province located in the south of China are potential areas considered firstly. Based on several reasons:
1) Good infrastructure
2) Sea side active economic zone 3) Good base of manufacturing 4) Enough political support
Before make the further detail research on PRD supply area and its comparison with YRD, an explanation of geographic location of those two economic deltas will be given.
1) YRD
The Yangtze River Delta Economic Zone refers to 16 cities, which includes Shanghai municipality, southern Jiangsu and northern Zhejiang. This area includes cities of Shanghai, Nanjing, Suzhou, Wuxi, Changzhou, Yangzhou, Zhenjiang, Nantong, Taizhou, Hangzhou, Ningbo, Huzhou, Jiaxing, Shaoxing, Zhoushan and Taizhou. At this port of departure, Yangtze River drains into the East China Sea
If you look in an extensive way, Great Yangtze River Delta (GYRD) is not only including south of Jiangsu and north of Zhejiang, but the entire of those two provinces plus Shanghai municipality. This area has the most PT suppliers, which SEU relies on currently.
2) PRD
The Pearl River Delta Economic Zone, which consists of Guangzhou, Shenzhen, Dongguan, Foshan, Zhongshan, Zhuhai, Jiangmen, and parts of Huizhou and Zhaoqing, is the most economically dynamic region of the Chinese Mainland.
3) Fujian province
Fujian province is located at the east southern seaside of China, seen as the connection of YRD and PRD. But actually the advantage of this connection was never well embodied. The causes of it will be analyzed in detail later on.
There are many factors which have to be taken into account. Supply areas can be assessed under both Macroeconomic dimension and median industry dimension. Focusing on those two potential areas and the comparison between PRD and current YRD supply area will be the main tasks in following parts.
5.2 Macro factors
5.2.1 Geography and demography
Geographic and demographic factors should be considered under overall countrywide sight.
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Power Tools
Potential PT supply area in China
YRD Shanghai Jiangsu Zhejiang PRD Guangdong Hongkong Macao Fujian Influenced area Anhui Henan Hubei Influenced area Hainan Guangxi Hunan Jiangxi
Figure 5.1: Map of potential Chinese PT supply area
1) Geographical location
There are three main area of China regional economic development. In this map from the top to down, they are: Bohai Economic Rim, Yangtze River Delta and Pearl River Delta. The core centers of these three areas are: Beijing, Shanghai and Hong Kong which marked as black buttons in this map. Bohai economic area will not been discussed in this research paper. As several reasons for example far away from the logistics center and main business market made Bohai Economic Rim behind YRD and PRD nowadays. There is also lack of PT industry in this area. YRD, PRD and Fujian are consisted the most portion of coastline of China.
well. But this advantage did not make any real large economic outcomes which people
expected yet. The main reason is the landscape of this province. Fujian is mostly mountainous. Mountains cover most of area in this province more than 80%. It definitely result poor transportation network and further hamper its economic development.
Radiation area of YRD is broader than PRD. PRD influence the south of china, meanwhile YRD can further influence the whole Chinese domestic market based on its location as the midpoint of Chinese coastline.
Detailed maps of both Deltas are showed below
Figure 5.2: Yangtze River Delta Region Figure 5.3: Pearl River Delta Region
2) Demographic division
Year 2006 PRD YRD GPRD GYRD Fujian
Land area (sq.km) 41,516 109,654 180,890 209,303 121,894 Total Population (mn. persons) 45 93 99 143 36 Percentage of total land 0.43% 1.14% 1.88% 2.18% 1.27% Percentage of total population 3.46% 7.09% 7.55% 10.91% 2.71% Table 5.1: Land area and population comparison in 2006 (statistical yearbook of China 2007)
In table 5.1, two Deltas (GYRD+GPRD) occupy more than 18% of the whole population. The density of population is much higher then Fujian province. If viewing in the city level, it can be presented even clearer.
YRD Population GPRD Population Fujian Population
Shanghai 18,884,600
Guangzhou 10,045,800 Nantong 7,737,900 Shenzhen 8,464,300
Nanjing 7,413,000 Hongkong 7,000,000 Quanzhou 7,520,000 Hangzhou 6,776,400 Dongguan 6,864,000
Suzhou 6,073,000 Foshan 6,740,000 Fuzhou 6,608,000 Ningbo 5,681,000
Wuxi 4,471,900 Jiangmen 4,126,400 Changzhou 3,489,000 Huizhou 3,760,000 Jiaxing 3,355,500 Zhaoqing 3,700,000
Zhenjiang 2,672,100 Zhongshan 1,422,600 Xiamen 2,640,000 Huzhou 2,570,000 Zhuhai 1,408,000
Zhoushan 969,145 Macau 520,400 Zhangzhou 600,000 Putian 450,000
Table 5.2: Population comparison by different cities within 3 supply areas in 2007 (statistical yearbook of China 2007)
Fujian province has no one city above 10 million inhabitants. Only 2 cities’ population level is above 4 million. The speed of urbanization in Fujian province is very slow, far slower than the other 2 supply areas. Both YRD and GPRD have already established a well developed urban area. That is also caused by mountainous and pool transportation construction in Fujian province. Urbanization is slowly developed by separate “point” as Fuzhou and Xiamen. It is really hard to develop into a correlated urbanized “area” in Fujian. YRD and PRD are typically opposite. Urbanization is one of the key factors of infrastructure development. On the other hand, Urbanization will also stimulate the demand of construction and PT consumption.
5.2.2 Culture
actually by foreign investors’ views, they are less difference just seem as Chinese Culture.
It is useless to analyze different cultures in detail in this paper, because of less correlation to the core content of research. But the comparison of several relevant factors influenced on doing business will be helpful. Traditional business culture compare with PRD, YRD and Fujian are quite different.
1) Language
Most of people in Guangdong area speak Cantonese. The variation of language is really high in this area. There are 7 main local languages in China. Three of them are used in Guangdong. The popularization of Mandarin language (official language in China) in Guangdong is lower than YRD. Most of outside workers and employees have to learn Cantonese during their daily works. Fujian province has similar difficulties in communication. The communication with local employees will be much easier in YRD area. (“Communication” which used here is just means communicate between outbound labor and local labor within those areas, foreign employees are not included here.)
2) Embracement
PRD and YRD are far more open to the foreigner investors compare to all other areas. The people working there are like to accept new things. PRD even much more open to the western investors compare to YRD. Market dynamic and freedom in Guangdong are higher than YRD. On the other hand, businessmen in YRD are stronger by using political support.
3) Entrepreneurship
Most people agreed that: PRD producing more bosses and entrepreneurs, meanwhile YRD producing more professional managers. Business behaviors are more creative in PRD and more in control in YRD. Based on this business type, YRD attracts more big domestic and global groups; PRD cultivates more Small and medium exporting enterprises in general.
4) Correlation of culture
PRD is much more correlated to Hongkong and Fujian is closer to Taiwan in many aspects. Habits and customs are much closer within those areas.
5) Culture foundation and environment
Both of two Deltas absorb lots of immigration base on such dynamic market and working opportunities. But many high educated people and professional managers prefer to work in Hangzhou and Suzhou more than in Dongguan, just because of profound culture foundation in these cities. That is the advantage of YRD. In general, the culture foundation is better in YRD than in PRD.
5.2.3 Education and human resources
institution, continuing development and human resources etc. In this dimension, YRD
takes huge advantages compare to other two provinces.
1) Education resources and universities
University/Institution Project 211 Project 985
Jiangsu 116 11 2
Zhejiang 68 1 1
Shanghai 60 10 4
Guangdong 105 4 2
Fujian 63 2 1
Table 5.3: Education resources comparison among those supply areas (statistical yearbook of China 2007)
Except Hongkong, YRD is far ahead comparing to PRD and Fujian province in both education and research level. Hongkong is excluded out of this statistic table. Because of its education system is separate, if compare to the mainland of China. Only seeing the surface figures is less valuable. The most important thing is to get the meaning behind data. The number of “211 key universities”3 in east of China is almost 5 times more than south of China. Within those key universities, YRD has 7 first-rate universities which developed under the “project 985”4 supported by government. On the other side, PRD only has 2. The quality and research capability of those 985 universities are even variant. In the initial phase only 9 universities are included in “project 985” (currently around 40 in total). YRD covered 4 of them in the initial phase, meanwhile none of them from Guangdong and Fujian province. Those 4 first-rate universities even far better developed than other 985 universities in those regions.
Considered as relevant subjects such as electronic engineering, technology management, auto engineering and industry design, the advantage of YRD is too large compare to PRD and Fujian. Auto engineering in Tongji University, industrial automation in Shanghai Jiangtong University are all outstanding as the first rate in China. Mechanical and electronic engineering in Zhejiang University is even the best in China. That is also one of the reason that Bosch PT production center located in Hangzhou. The Cooperation between universities and companies, technology application in industries of YRD are more convenient and frequent than PRD. That is also why many global manufacturers move their research and design (R&D) center to YRD meanwhile many low technical exporters processing in PRD. Many PT manufacturers such as Bosch and Yongkang hire graduates of relevant subjects and corporate with manufacturing laboratory from Zhejiang University nowadays.
2) Flow of personnel
Though education level directly influence on the human resource in one region. But flow of personnel can potentially affect this factor. Shenzhen is a typical example. Though there is no top university located in this city. Dynamic market, better treatment and working opportunities attracted more young talent people from other provinces to this
3 “Project 211” is the Chinese government’s recent endeavor starting in 1995. It aims at strengthening about
100 higher education institutes and key disciplinary areas as a national priority for the 21st century.
4
active city. Based on PT supply market, large amount of professional managers and high
technical operator in Hongkong can be neglected. The requirements for high educated employee are not high in buyout PT manufacturing. Labor capability and human resources are just qualified for PT manufacturing in Guangdong province. PRD attracted millions of labors during past years. But now, high working attraction for external labor turned to YRD. Students studied abroad who prefer shanghai more than other Chinese cities.
In summary, based on education and human resources factors, YRD can satisfy the requirements from all tiers of the entire supply chain such as: manufacturing, R&D center, sales channel and technical support etc. On the other hand, PRD is more suitable for manufacturing, but lack of R&D personal (except Shenzhen).
5.2.4 Tariff and tax rate
Tariff and export rebate rate are the main indicators which effect on PT manufacturing. Relevant tariff rate in 2008 will be listed below.
Code Name Tariff preference Tariff normal Export tariff VAT Export rebate 84672100-84672990 Power tools 10% 30% 0% 17% 13% 84679910 Accessories 10% 30% 0% 17% 14% Table 5.4: PT tariff rate (China Customs, 2008)
There is no difference between PRD, YRD and Fujian province that all influenced by the same national tax rate. Though export rebate rate was reduced from the initial 17% to 9% and readjusted to 13% last year. To protect the exporting, government will not adjust a lot during the period of economic crisis in current few years as expectation. Plus VAT, PT suppliers have to take into account 3%-4% of tax in total.
5.2.5 Economic factors
1) Main economic indicatorsExcept Hongkong, YRD’s GDP is almost 1.8 times comparing to PRD. Greater PRD can be looked as the same scale of economic region as around 500 billion dollars in 2006. The portion of secondary industry in YRD is larger than in PRD. GDP of GPRD even consisted almost 66% in tertiary industry which far more than YRD. Hongkong is actually a service hub for entire GPRD. In 2006, GDP of Fujian province only accounted as 761.45 billion RMB (Statistical yearbooks of China, 2007). This capacity is only around 95 billion dollars as 1/5 of YRD’s GDP.
2) Exporting and domestic demand
PRD Hongkong GPRD YRD Fujian
In this table, there is a clarified phenomenon that PRD is an export oriented area.
Industries of PRD are mainly depends on exporting such as electronic assembly. Hongkong is even a typical service exporting hub in the eastern of Asia. On the other hand, YRD holds high portion of domestic production. Excluding raw material and other factors, value-added of exporting goods will less than 50% of GDP in YRD. Fujian is almost on the other side, mainly satisfied domestic market. That is also why many low technique assembling industries are well developed in Dongguan. High capital investment industry such as auto production, iron industry, chemical and pharmaceutical industries are located in YRD.
3) Industry output
At the beginning of 21st century, PRD developed as one of the main electronics, computers and telecommunication equipment manufacturing base in eastern Asia.
Figure 5.4: Industry output in PRD (Klaus Kohler, 2005)
This map showed the classification of industry output within PRD in 2003. The development trend of those main industries is strengthened even more after few years. In the statistics of 2005, those industries which suitable for manufacturing still marked in top 3 in PRD.
more focused on light industry; meanwhile YRD is even more balanced on both light and
heavy industries.
4) Financial service
PRD has the largest international financial center--Hongkong in the Asia Pacific. This irreplaceable advantage status will continue in future 5 years. Though, Shanghai pursued to reduce such gap.
The total number of foreign bank in statistics even not tells the whole story (see appendix E). As the number of 146 foreign banks located in Shanghai, which includes only 55 branches and the rest 91 are representative offices (The Greater Pearl River Delta, 2007). As Chinese government not fully opened the financial market to foreign banks, financial freedom of Hongkong is far beyond then Shanghai. Compare those two financial and service hubs, PRD is undoubtedly better than YRD. The only problem is balancing the independence and cooperation between Hongkong and PRD by central and local government. That is also why the concept of “Great PRD cooperation” created those years.
5.2.6 Political factors
Shanghai local government is one of the most powerful local governments. Shanghai can always take advantage of strong political support for big projects and high capital investments. Local government operation in YRD is more efficient than in PRD. Political support and political resources will highly influence on the development of economic zone in China. The success of PRD before 21 century and the success of YRD in recent 10 years are all affected by the support from Chinese central government.
The two most important meetings NPC5 and CPPCC6 sessions are typical the vane of new policies in coming years. To overcome the economic crisis and maintain the 8% growth of GDP, Chinese Premier Wen Jiabao commented that China’s 4- trillion-yuan (585 billion U.S. dollars) two-year stimulus package, which was announced in November, did not include new government spending (NPC, 2009 march). That means the total potential government investment package even bigger than this figure in coming 2 years. This project actually stimulus the economy of YRD and PRD as well.
To see the detail share of this big cake, those government investments are highly related to PT manufacturing.
5 NPC: The National People’s Congress (China) 6
