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Sourcing in China

Key Findings and Trends

Key Findings and Trends Company Information Most of the companies that participated in the survey report that they have been sourcing from China for more than 10 years and that they prefer to do so through in-house forces such as International Purchasing Offices (IPO’s). Main facts and trends: •• Almost 50 percent of the companies report that they control all the company related operations from a corporate office located somewhere in Europe. •• The majority of the company representatives, who took the survey, can be described as decision makers who are working in departments directly connected to sourcing activities. •• The medium sized companies of an average employee base of 5,000 employees that operate mostly in the production industry have been in the lead in taking the survey as also envisioned upfront. •• Also according to their global procurement volume most companies fall into the category of medium size. The procurement volume for China amounts for 50 percent to more than USD 50 million. •• More than half of the companies surveyed report that they have used China for sourcing activities for more than 10 years. Only 12 percent discovered the market just recently. •• Most of the companies rely on in-house procurement managers preferably located in an own IPO somewhere in China (35 percent of participating companies). Alternative organizational set-ups such as procurement offices located in the companies headquarter or at the Chinese manufacturing site, third-party service provider or local dealer are used little. •• The vast majority of participating companies that is working through an IPO is trusting on an IPO directly located inside of China instead of using an IPO located in another Asian country. •• IPO’s are relying on local manpower for operational tasks but are managed and lead by 1-3 expatriates. For 2017 the relation of locals vs. expatriates is broadly to be expected 10:1. •• In IPOs most of the disciplinary issues are managed by the local management whereas there is a corporate communication in case of technical discrepancies. •• IPOs in China will be able to exercise more control in the upcoming years due to an increasing procurement volume to manage. •• The two most common legal set-ups for IPO’s are either using an existing subsidiary or setting up a WFOE (Wholly Foreign-Owned Enterprise). •• IPOs in China perform various tasks and are responsible for most operational issues at location such as supplier development, supplier search, supplier negotiation and supplier management but also benchmarking and cost analysis. Their presence close to one of the suppliers thereby plays a crucial role in exercising control. 10

Insights on China’s Economic Situation and its Repercussion on Global Sourcing China initiated its industrialization process in the early 1950s, after the establishment of the People’s Republic in October 1949; but its economic proliferation really started after 1978. Before 1978, China had a standard GDP growth rate of 3 percent a year; similar to the growth rate in the United States, however starting from more challenging conditions. From 1978 on, the Chinese GDP speeded up exceeding a 9 percent average real growth rate per year (Chow G., 2004). Figure 1 shows the Chinese GDP average yearly growth rate from 1979 to 2013. The average level thereby proves to be continuously high. In 1979, China promoted foreign trade and investment and implemented free market reforms turning it into one of the world’s fastest-growing economies. China has recently emerged as a leading global economic and trade power. It is today the world’s second-largest economy, largest trading economy, largest holder of foreign exchange reserves, largest manufacturer and second largest destination of foreign direct investment (FDI) (Morrison, 2014). Figure 2 shows the largest recipients of global foreign direct investment in billions of US dollars. In the year 2008, the global economic crisis had a high impact on China’s economy. Imports, exports, and FDI inflows decreased, consequently the Chinese GDP growth stalled, and unemployment increased. As a measure to counteract this negative impact, the Chinese government geared up a USD 586 billion economic incentive program to promote domestic consumption by loosening monetary policies to increase bank lending. This program helped to prevent a demand recession for Chinese products and the potentially resulting negative or idle economic growth. During this period of time until year 2011, the Chinese GDP grew at an average of 9.6 percent; but in the past two years economic growth has slowed down to 7.7 percent as shown in Figure 1 (Morrison, 2014). 16 14 12 10 8 9 15,2 13,5 10,9 8,9 9,2 14,2 13,9 13,1 10,9 11,3 10 9,3 7,8 7,6 8,4 8,3 9,1 10 10,1 12,7 14,2 9,6 9,2 10,4 9,2 7,7 7,7 7,6 7,9 5,3 11,6 11,3 4,1 6 4 3,8 2 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 1 | Chinese Real GDP Growth (Percent): 1979-2013 (Source: Morrison, 2014) 11

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msg ist eine unabhängige, international agierende Unternehmensgruppe mit weltweit mehr als 6.000 Mitarbeitern. Sie bietet ein ganzheitliches Leistungsspektrum aus einfallsreicher strategischer Beratung und intelligenten, nachhaltig wertschöpfenden IT-Lösungen für die Branchen Automotive, Banking, Food, Insurance, Life Science & Healthcare, Public Sector, Telecommunications, Travel & Logistics sowie Utilities und hat in über 35 Jahren einen ausgezeichneten Ruf als Branchenspezialist erworben.

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