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China’s supply market potential and top tips for effective sourcing

Date: 14 May 2021

China is the world’s largest global exporter and remains increasingly important in the global supply market and international supply chains; however, procurement managers should be aware of China’s developing position, and that of new markets that matter. Axis Group International offers insights for effective global procurement & supply from China.

Key Highlights

  1. China has solidified its position as an essential sourcing hub by being the top global exporter for over a decade. Getting China procurement right can undeniably yield significant efficiency and cost benefits, but achieving this is complex
  2. Finding the right supplier is critical. A core pillar of successful China procurement is robust supplier selection. This involves a thorough filtering and evaluation process that provides accurate insight into a supplier’s track record and capabilities
  3. A sound China procurement approach also relies on effective supplier management. It is fundamental that alignment between the procurement schedule and supplier performance is achieved. This requires a careful management of the relationship with the supplier
  4. China retains its position as the largest global exporter, however other dynamic markets have shifted global export rankings away from traditional export leaders. (More on this: A World of Global Procurement Opportunities – but how to navigate supply market & category choices in a ‘new’ global market?)

China’s growth story is one familiar with many around the globe. In the past 2 decades, China grew from the 8th largest economy, to become second only to the United States. Between joining the World Trade Organisation in 2001, and successfully mitigating challenges that occurred during the financial crisis in 2008, China navigated the first decade of the 2000’s to surpass Japan in 2010 for the position of world’s second largest economy. The rest of the world was beset with the complexities of opening their economies during the pandemic, however China was one of the few to grow in 2020, with GDP increasing to USD 14.72tn and is expected to reach USD 16.49tn in 2021 according to IMF forecasts.

China was able to recover from the pandemic faster than other economies due to the rapid and efficient containment measures implemented early in 2020. Whilst initial supply disruptions occurred in Q1, and procurement managers scrambled to meet orders due to their over exposure to one source market, China actively sought to return manufacturing output to pre-pandemic levels. China’s exports grew by 3.6% in 2020 to USD 2.59tn, showing that despite calls for supply diversification, the world’s largest exporter is still an integral part of global supply chains.

A global supplier in both ends of the value chain

From 2001-2020, China’s exports grew at a CAGR of 13%. The machinery & equipment sector constituted the majority share of Chinese exports for over a decade which, coupled with the high-end manufacturing level of China’s exported goods, is indicative of the country’s shift towards higher value-added exports. Whilst the shift to high-end value products is evident, China remains a major player in both ends of the spectrum, with other manufacturing inputs such as textiles, hides & skins and chemicals & plastics comprising 12 and 10% respectively of 2020 total exports. Early in 2020, China’s exports were heavily impacted by COVID-19, ongoing trade tensions with the US, and the diversification of global supply chains; however, a strong recovery occurred in the second half of the year, with full year growth of 3.6% in China’s exports.

Trends: Whilst the rest of the world struggled to contain the spread of Covid-19 within their borders, China, who successfully lowered the number of new infections in the country in the first half of 2020, was able to resume taking export orders. Continued measures to contain the risk of a further outbreak allowed the country to grow output in the second half of the year, counting themselves as one of the few nations to report growth in this tumultuous year. Trends to follow:

  • Long-term CAGR of 13% shows strong growth of China’s export capacity
  • 3.6% growth in China’s exports in 2020 while global exports declined by close to 10% pushed China’s share of global exports higher
  • China remains a leader in machinery & transportation equipment exports, contributing 48.6% to China’s 2.59tn in exports for 2020; but the export base is well diversified and constantly shifting to higher value add products
  • China is typically the top trade partner or one of the top trade partners for most economies around the world
  • China continues to be a key exporter in intermediate and consumer goods and should continue to be recognized for its increasing expansion into high-value goods exports
  • There are segments where China has become less competitive, but China has overall remained the world’s most competitive large exporter – a trend unlikely to change in the short or medium term

Upshot: Prior to the COVID-19 pandemic, global trade experienced uncertainty due to tensions between China and the US. The pandemic exacerbated trade uncertainty with countries re-evaluating their exposure to procurement and supply from China. Some countries imported fewer products due to decreased demand in their domestic markets, whilst China as a key manufacturing hub, saw an initial decline in export orders. This dynamic changed in the second half of the year, as the country was able to resume pre-pandemic levels of manufacturing output. Key takeaways:

  • China should remain a key part of a procurement managers supply chain due to this and the developed logistics capacity and technology of the country
  • Countries are diversifying their supply chains after their initial concern of over-exposure to China; however, China remains an integral part of global sourcing due to its cost-effective solutions and manufacturing potential

Imperatives: China continues to lead as the world’s largest exporter, with export growth of 3.6% in 2020 while global exports likely declined 7-10%. This still places China in a central position in global supply chains. However, the initial decline in China’s exports at the start of the pandemic has led many supply managers to re-evaluate how to mitigate risks from being overexposed to one source market. China is continuing its drive towards expanding its high-end exports capabilities, meaning it shall remain an integral part of many procurement strategies, albeit alongside other developing manufacturing markets. Key actions:

  • Determine categories in which China remains or is expected to become a core supply partner
  • Determine which markets matter more for other categories
  • Anticipate that global developments will force countries to dynamically adapt to the shifting global context and therefore adjust international inbound supply chains accordingly
  • Engage with the right partner to successfully identify and source from robust suppliers in China

Effectively sourcing from China can be complex, but manageable

China is the top global exporter, consistently ranked number one since 2010, following a meteoric rise over the preceding two decades. This positions China as a core sourcing hub and an indispensable part of any strong procurement strategy. While being a highly competitive supply base, through which effective procurement can be highly rewarding, understanding how best to incorporate China into inbound supply chains is complex.

Source: Axis Group International

In the 18 years since Axis Group International has been doing China procurement, it has often been asked what the ‘winning formula’ is for effective procurement in China. Successful China procurement is the result of a comprehensive set of complex and highly specialized processes. Distilling this down to a ‘magical recipe’ for success is no simple task and there are no shortcuts. However, as a useful reference, two fundamental ingredients for procurement success are: the selection of the right suppliers; and the effective management of chosen suppliers to optimise their performance. This is easier said than done, and a closer examination of these two processes is certainly warranted.

Source: Axis Group International

Robust Supplier Selection is key

  • Good supplier identification and evaluation are key components of an effective supplier selection system. In doing global sourcing, building a solid supplier database, primarily for China, Asia and other best-cost countries, is an invaluable exercise. However, in addition to drawing on a database, it is important to retain a disciplined approach to identifying new suppliers and reevaluating existing suppliers each time new sourcing activities are conducted, given the rapid changes in the market.
  • The first aim is always to determine a comprehensive ‘universe list’ of potential suppliers. This universe list includes all — or almost all — potential suppliers and represents an orientational map of the entire pool of possible suppliers. The universe list is then put through a series of relevant high-level filters which deselect inappropriate suppliers. Filters could include firm size, capacity, technology, quality standards, etc. The resulting output is a ‘long list’ of potential appropriate suppliers. From here, more refined filters are leveraged to arrive at a suitable and robust short list. It is important to understand that the characteristics of different industries, categories and products will impact the filtering and evaluation process.
  • For example, product complexity, quality requirements, technical specifications, cost reduction objectives, risk and various other factors must be considered. Simple online searches and superficial checks only create risk and must be avoided.
  • Systematic and rigorous engagement with the ‘short list’ – usually via RFx (all components of the formal request process) – extracts detailed information on supplier capabilities, suitability and credibility. Their level of interest and willingness to comply with demanding contract stipulations must also be gauged early on. A formal and systematic commercial and technical adjudication, combined with soft skills and good judgement, would yield a select few suppliers that meet the basic required functional needs, quality standards, detailed technical specifications, timelines and other criteria. In-depth supplier pre-qualification, CSR audits, reference checks and other due diligence are usually needed to verify supplier readiness.
  • A strategic approach to negotiation and contracting is then necessary before actual orders can be placed with any specific supplier. Contract provisions and critically important clauses must receive close attention. Due to differing business protocols and mindsets, all possible risks and contingencies must be foreseen and addressed.
  • Once an order is placed, the focus shifts from supplier selection to the management of selected suppliers.

Effective Supplier Management is critical

  • Effective supplier performance management involves strong project management, relationship management and contract management capabilities. It is all about aligning expectations and measuring and managing misalignments. It is particularly important to develop a quality management plan that includes solid quality assurance and quality control elements, i.e. for monitoring the vendor’s internal procurement protocols, testing practices, inspection and document management. Overall schedule management and streamlining is another integral part of the overall supplier management process. It is sometimes also necessary to support and to develop the suppliers throughout the process – and to continually align expectations on quality, timelines and risk. A partnership approach with the supplier greatly enhances China procurement.
  • Management of logistics must be closely integrated with the procurement process to ensure overall supply chain success as logistics issues and costs can often impact value and risk in a significant way. Furthermore, anticipating and forming agreements with the supplier regarding their after-sales obligations, warranty claims management and dispute resolution is pivotal.

A challenge, but it can be done

  • There are many complexities and risks which necessitate various skills during the supplier selection and the supplier management processes, i.e. engineering and technical skills, commercial experience, procurement process knowledge, solid programme and project management, logistics acumen, analytical capacity, strategic relationship skills, holistic risk management, cross-cultural expertise and communications, and mastery of relevant languages. No doubt, a tall order. However, if done well, it provides valuable opportunity for companies to effectively integrate China into their global supply chains. Getting it right can add significant value to a company’s capital project procurement, operating expenditure procurement, services procurement, etc. The key is a two-step approach: selecting the right suppliers, and then managing suppliers to optimize their performance – and if the risks appear too great, do not proceed as China sourcing must only be done if it is done well!

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