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. Over the short-term, lockdowns and supply chain disruptions in China must be closely monitored and could affect all industries and regions. Axis Group International offers insights for effective global procurement & supply from China.
- 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
- 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
- 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
- China retains its position as the largest global exporter, however global export rankings of other dynamic markets have shifted away from traditional export leaders. (More on this: A World of Global Procurement Opportunities – but Where to Look?)
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 Covid-19 pandemic hit the entire world in 2020. While the rest of the world was beset with the complexities of opening their economies during the pandemic, China’s GDP however increased to USD 17.46tn in 2021 and is expected to reach USD 19.91tn in 2022, 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 of 2020, 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. With easing of Covid-19 restrictions globally in 2021 and increasing demand from international markets, China’s exports soared by 29.9% to USD 3.36tn in 2021, picking up sharply from 2020. China could see this growth despite a lot of challenges in 2021 like the debt crisis at China’s Evergrande Group which weighed on the property market, while coal supply shortages and surging electricity demand led to power shortages in the country, curbing production in the world’s second-largest economy. In 2022, China has seen significant Covid-related lockdowns across the country, and this will hit growth. However, China’s export prowess is not likely to be affected, but it is necessary to carefully monitor the situation and plan for disruptions.
A global supplier in both ends of the value chain
From 2001-2021, China’s exports grew at a CAGR of 14%. 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 outputs such as chemicals & plastics and textiles comprising 12% and 10% respectively of 2021’s 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. Exports in 2021 were dominated by machinery and electronics, followed by epidemic prevention products, home office and daily necessities, and home decoration products, all maintaining high growth rates.
Trends: Whilst the rest of the world started to loosen up Covid-19 precaution policies, China, who insisted to keep its zero-Covid policy domestically in 2021, was able to maintain a strong supply capacity for export orders. Furthermore, its trading partners are becoming more diversified. Exports to emerging trade markets such as the countries in the “Belt and Road” initiative, Latin America, and Africa have maintained high growth, and exports to traditional trading partners such as the United States, the European Union, and ASEAN have also grown well. Trends to follow:
- Long-term, 20-year CAGR of 14% shows strong growth of China’s export capacity
- China’s exports grew by 29.9% in 2021, which was much more than global export growth of 26.3%, pushing China’s share of global exports higher
- China remains a leader in machinery & transportation equipment exports, which together contributed 48.2% to its overall exports of USD 3.36tn in 2021; but the export base is well diversified and is constantly shifting to high value-added 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 top exporter – a trend unlikely to change in the short or medium term
- However, the Covid-related lockdowns mean that risk of disruptions must be carefully monitored
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.
In the second year of the pandemic (2021), the value of global merchandise trade reached a record level of USD 22.3tn. This positive trend for international trade was largely the result of increases in commodity prices, subsiding pandemic restrictions and a strong recovery in demand due to economic stimulus packages, making many countries finding it difficult to move away from China’s supply chain. However, as the primary manufacturer for the world, the lockdowns in China that are still ongoing as of May 2022 mean possible shortages of goods and add another risk to global inflation. Containers piling up at Shanghai’s port and flight suspensions are also putting pressure on global supply chains and prolonged disruption could lead to further bottlenecks as parts and final products cannot be shipped out.
- China should remain a key part of a procurement manager’s supply chain due to 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
- Over the course of 2022, disruptions in China supply chains could affect all industries and regions
Imperatives: China continues to lead as the world’s largest exporter, with export growth of 29.9% in 2021 which is higher than the global export growth of 26.3%. 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
- Pay close attention to supply chain disruptions in China over the course of 2022
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 20 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 optimize 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 whole 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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