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November 7-8, Shanghai CHaINA’12 Live The Global Supply Chain Event for China CHaINA’12 is the largest Supply Chain event in China involving a combination of presentations, networking, workshops and exhibitors followed by an exclusive gala dinner. This must attend event is the ultimate opportunity for supply chain, procurement and logistics executives to learn from your peers from world's leading companies and make new contacts from the hundreds of professionals who will attend the event over the 2 days! 变 化 中 的 中 国 ： 提 升 价 值链，增加在全球经济中的竞争力。数以百计 的同僚会参会，所以今年是您扩大人际关系网络，树立中国供应链领袖 形象的绝佳机会。
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Publisher: Global Supply Chain Council Ltd. CHaINA Magazine is a FREE bi-monthly magazine. As of this issue, CHaINA Magazine is going 100% Digital, and is now searchable, interactive, printable and also green. Available in ePDF digital format, the magazine is supplemented by a new website, and a mobile and tablet magazine. Readers can subscribe to the digital, web and iPad editions for just US$15.99 a year. Check out the: -Digital edition: subscribe today to the digital edition at www.chainamag.com. Get a sneak preview of the latest issue and view the full content with a 1 or 2 year subscription. -Web edition: new stories added weekly. View exclusive content (in mobile and tablet formats) with a 1 year subscription at www.chainamagazine.com. -iPad App: log in to iTunes, download the App and purchase single issues or subscribe for 1 or 2 years at http://cha.in/amagipad.
Publisher Max Henry
Chief Editor Peta Heinrich
Graphic Designer Emma Xu Contributing Writers Peta Heinrich, Maurits Elen, Charles de Trenck, Steven Millward, Getchee Inc., Mark Millar CHaINA Magazine is the only bilingual supply chain and logistics magazine with a strong focus on Greater China. In every issue, we write about the news, trends and best practices that will help manufacturers, retailers and distributors make better business decisions with their sourcing, production, logistics from, to, or within Asia. www.chainamagazine.com
This issue features an interesting roundup of supply chain stories. Our cover feature explores talent shor tages in various developing markets in the logistics sector, an issue which has become prominent in all areas of supply chain. Peta Heinrich With manufacturing having Chief Editor recently hit a seven month low in CHaINA Magazine China, we explore manufacturing trends in the nation, look at how counterfeit parts have been infiltrating supply chains worldwide, and learn how an unlikely US company is providing jobs for some of the world’s poorest people. With the e-commerce sector growing rapidly in China, we look at the divergent delivery strategies of some of the Chinese e-commerce platforms, and Macy’s attempt to use a Chinese e-commerce website as a springboard into the Chinese market. Fi n a l l y, i n o u r f e a t u r e s e c t i o n , w e t a k e a controversial look into how the sourcing practices of one top food chain have sparked outcry from environmental groups. This issue features riveting interviews from a BMS executive, the Captain of the Emma Maersk, and author and China expert Jason Inch. As always we are keen to hear from our readers. Write to us at editor@supplychain.cn to share your thoughts and opinions.
DISCLAIMER Editorial and advertising are independent and do not necessarily reflect the views of the Council, the board, its members or the staff. While every efforts has been made to ensure accuracy, the publisher is not responsible for any errors. Views expressed by writers or contributors in this magazine are not necessarily those of the publisher. The publisher is not responsible for product claims and representations. JULY/AUGUST
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C ONTENTS frontlines
procurement
4 5 6 8
Dotcom Quotes The Big Shot Invest-O-Mania
4 5 6 8
网站一览 引言 乐从镇钢材市场 建设一览
Logistics 30 32 35 36
Procurement News A Life at Sea Jade Cargo Liquidated COSCO: An SOE Recipe for Huge Losses 38 What is 360Buy Truly Worth? 30 32 35 36
物流短讯 专访: 海上人生 翡翠国际货运清算结业 中远集团：国有企业应对 巨额亏损 38 京东商城真正的价值是什么？
JULY/AUGUST 2012
MANUFACTuRING
10 Procurement News 12 Interview with James Grills from BMS 14 H&M considers sourcing in renminbi 16 China Cuts Alumina
19 Manufacturing News 21 Interview: Jason Inch 26 Counterfeit Parts continue to infiltrate Supply Chain 28 Victoria’s Secret: An unlikely Boost for Rural Indian Women
10 采购短讯 12 专访：James Grills 14 H&M考虑使用人民币
19 21 26 28
采购产品 16 中国减少氧化铝产量
制造短讯 专访：Jason Inch 假冒伪劣不断渗入供应链 维多利亚的秘密：推动 印度农村妇女的进步
DISTRIBUTION
The LINKS
41 Distribution News 44 Need For Speed 46 Burberry Buys Back CHINA 48 Macy’s tests waters with Investment in Chinese E-commerce Site
61 VAT Expansion in China to be delayed 62 Does SAP have its head in a Cloud?
41 44 46 48
61 中国推迟增值税扩大计划 62 SAP的战略异想天开？
零售短讯 速度的需求 巴宝莉回购中国 梅西投资中国电子商务 网站以了解中国市场
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FEATUREs
51 54 58
Exploring Talent Shortages
in the Developing Logistics Sectors in China, India and Vietnam 探索中国，印度和越南物流行业人才短 缺的问题
Ravaging the Rainforest: Greenpeace links KFC to Indonesian Jungle Destruction 雨林灾难：绿色和平组织宣称肯德基涉 及破坏印度尼西亚森林
Tmall adopts new logistics strategy 淘宝商城采取新物流战略
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FRONTLINES
Quotes
US$ 24,000 bn The total value of logistics in China last year, according to the China Federation of Logistics and Purchasing.
US$ 60 mn paid by Apple Inc. to settle China iPad trademark dispute with Proview Technology (Shenzhen).
“We’ve been absent for so long, we decided, ‘Why don’t we try it and see what happens?’ ” Google executive Andy Rubin, on Google’s decision to manufacture the new Nexus Q media player in the US instead of China.
“Rapid urbanisation in China means that people aspire to own cars and white goods and they are still shopping. However, the boom is over and a chill wind is beginning to blow across the region.” Nicholas Emmerson, partner of Eversheds law firm, on China’s slowing manufacturing.
“The ruling party has been the worst manager of the demand-supply of food grains.”
US$ 50 mn
D. Raja, national secretary of the Communist Party of India, criticises the Indian government’s supply chain management.
The amount Maersk is being sued for by crew members of the Maersk Alabama, which was rescued from a Somali pirate hijacking.
2/3
“I’m not sure from a marketing point of view whether this is a good move. Chinese people are known to differentiate between imported and locally made. It could dilute the brand image and result in two-tier pricing.” Dr Chiang Jeongwen, marketing professor at the China- Europe International
of China’s dairy products come from abroad, despite the country being the world’s third largest milk producer.
Business School, on Chataeu Lafite’s decision to begin production in Yunnan.
50 billion litres the amount of raw milk China aims to produce by 2015.
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the title THE BIG SHOT
Lecong Steel Market, located in the Shunde district of Foshan, Guangdong Province, is China’s largest steel market.
20
million square metres Total area of the market
1200
Approximate number of steel processing enterprises
150 million tons
Amount in annual sales
500 million tons
The market’s annual processing capability
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a i n a M O t s Inve
.
ction and investment in China
constru A glimpse at the never-ending
Rovio- Shanghai Office
Vestas Factory
Shanghai
Hohhot
Rovio has opened an office in Shanghai. The maker of Angry Birds plans to establish activity parks and stores across China.
The world’s largest wind turbine makers will close the company’s Hohhot factory.
Annto Logistics Logistics Base Urumqi- US$67.55 million
Annto Logistics plans to invest US$67.55 million in building the Urumqi modern logistics base. Urumqi
Trelleborg GroupManufacturing Facility Xingtai
Trelleborg Group’s new manufacturing facility in Xingtai, Hebei, will primarily manufacture high-performance agricultural tyres.
Kunming Changshui International Airport Kunming- US$3.6 billion
The new Kunming Changshui International Airport commenced operations on 28 June. It is expected to handle 38 million passengers per year by 2020.
Decathlon- South China Logistics Centre Dongguan City- US$50 million
Logistics
Manufacturing
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Decathlon will establish a South China Logistics Centre in Chashan Township of Dongguan City. The centre aims to attract projects from throughout the Pearl River Delta region. www.chainamagazine.com
Shell Oil Group of North China- Oil Storage Plant
Embraer- Plant reopens
Tianjin- US$87 million
Harbin
Shell Oil Group of North China will build a 200 000 cubic metre oil storage plant by 2015 in Tianjin’s Binhai New Zone.
Embraer has signed an agreement to build its Legacy 600/650 business jet at its Harbin plant. The plant has been closed since the second quarter of 2011. BMW Brilliance Automotive- New Plant Shenyang
BMW has opened a new plant in the Tiexi district of Shenyang, as part of its localisation strategy in China. Harbin
Nissan Motor CorporationManufacturing Centre Shenyang
Beijing Dalian
Hohhot Tianjin
Dalian- US$800 million
Nissan is planning to set up a fourth manufacturing centre in China. Located in Dalian, it will have a production capacity of 150 000 vehicles by 2014.
Xingtai
Kia Motors- Factory Yanchen
Yancheng District, Jiangsu Shanghai
Hangzhou
Kia Motors has opened a third plant in Yancheng District Economic Development Zone, Jiangsu Province. It will manufacture Chinese consumeroriented sedans, and is expected to be completed by the first half of 2014.
Ford Motors Assembly Plant
Kunming Dongguan
Hangzhou- US$760 million
In its its largest factory expansion program in a half century, Ford will build a $760 million assembly plant in Hangzhou.
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JULY/AUGUST
Content
►
Interview /12 ► H&M considers Sourcing in RMB /14 ► China cuts Alumina Production /16
专访：百时美施贵宝公司James Grills /12
H&M考虑使用人民币采购产品 /14
中国减少氧化铝产量 /16
Procurement a major violation of U.S. arms control laws. The company will pay more than US$75 million in fines. The U.S. has barred the export of defense articles to China since 1989.
ZTE wins Contract for Telecom Procurement Project
H&M may move Procurement Unit to Mainland China H&M is rumoured to be relocating its procurement d e p a r t m e nt f ro m H o n g Kong to Shanghai or Guangzhou. This would move it closer to its supply chain and production line in mainland China, and improve operating efficiency. About 7 0 a f fe c te d H o n g K o n g employees will will gain compensation for dismissal or internal transfers.
ZTE, a global provider of telecommunications equipment and network solutions has won a contract for 40 per cent of China Telecom’s 2012 broadband equipment procurement project. The contract includes United Technologies procurement of PON OLTs, fined for supplying FTTB MDUs, and broadband China with Military terminals, with over 21 million Pratt & Whitney Canada, units valued at approximately a division of United Technologies Cor p., has pleaded guilty to crimes related to the illegal export o f s o f t w a r e , w h i c h U. S . officials claim was used by China to develop its first modern military attack helicopter. The company supplied PT6C-67C engines and engine software modified for military use, in
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PROCUREMENT RMB4 billion. Building IT infrastruc ture, including broadband, is a key part of China’s 2012 development plan.
Uniqlo to phase out Wool from Mulesed Sheep According to the People for the Ethical Treatment of Animals (PETA) Asia, Japanese clothing retailer Uniqlo will phase out its purchase o f wo o l f ro m Au s t r a l i a n suppliers who practice “mulesing” of sheep. PETA describes “mulesing” as a procedure where “Australian
farmers cut large chunks of sk in and flesh from lambs’ backsides with instruments resembling gardening shears, often without any painkiller.”
Topshop, H&M, Abercrombie & Fitch and Ti m b e r l a n d h ave a l s o pledged to phase out the use of wool from mulesed sheep.
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PROCUREMENT
Could you tell us about your background and main responsibilities with BMS?
I
have worked for BMS for over 28 years and in Procurement for the last 18 years. In 2002 I assumed responsibility for the Asia Pacific as Regional Director of Indirect Sourcing. Based in Tokyo, Japan, I was directly responsible for all indirect procurement staff, and developed the Indirect Strategic S ourcing func tion in I ndia, Australia, Mainland China and Taiwan. I managed the region for five and a half years before returning to the USA, where I managed the Asia and Latin America Indirect Procurement t e a m s fo r a p p r ox i m a t e l y a year and half. After moving t o S h a n g h a i l a s t y e a r, m y main responsibility has been leading the regional Indirect Procurement organisation.
James Grills Bristol-Myers Squibb’s Global Procurement Director in the Asia Pacific and Japan talks Procurement.
Can you tell us about the operations of Our headquarters in China is in Shanghai, although we have offices in other tier one BMS in China? BMS just celebrated its 30th anniversary in China. It’s a joint venture relationship b e t we e n B M S , U S a n d t h e S h a n g h a i Pharmaceutical Group and China National Pharmaceutical Foreign Trade Group, called SASS. Bristol-Myers Squibb is a global Bio Pharma company focused on discovering, developing and delivering innovative medicines that help patients prevail over serious diseases. The therapeutic areas we focus on in China are Cardiovascular, Diabetes, Chronic Hepatitis and Oncology.
and two cities.
In terms of procurement what are the main challenges and issues that you face here in China as opposed to elsewhere? One of the main challenges we f a ce i s re l ate d to t a l e nt a n d f i n d i n g Procurement staff who have the right skills and capabilities to drive high levels of productivity while meeting the needs and expectations of stakeholders. Another challenge is related to driving category
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PROCUREMENT management with our Indirect spend categories. The demand for continuous and sustainable productivity from our internal clients is strong and continues to grow. In order to meet this requirement, the function needs to evolve beyond basic Procurement levers (bidding etc), to strategic category management and supplier management.
What strategies do you employ to overcome these challenges? The Procurement community is not large in Shanghai, and there are some very good candidates out there if you leverage your network and/or professional associations. Looking beyond the Healthcare industry to other industry segments like FMCG or IT can be a source of talent. We have recently had some success in this area by bringing in non-Pharma talent which brought a new dimension of capability and perspective to our team. In terms of category management we have been increasing our interface with the central Procurement team at our HQ in central New Jersey. There are several sourcing councils underway which include representation from my local team as well as regional teams. We also participate in local and regional Procurement professional associations to benchmark what our peers are doing to drive the Procurement function to higher levels of performance.
What important factors do you need to consider when you’re sourcing goods and services? The quality of the deliverable is an important factor, as we need to ensure the goods/services we buy meet the needs of the end users. Also, the firms we partner with must be reputable and have the
potential (scale and capability), to grow with us as we endeavor to expand our China business. Finally, the cost-value aspect of what we source needs to be competitive within the local market.
How do you ensure the quality of the product or service in China? During our due diligence phase of supplier selection we will check supplier references and in some cases execute a site visit. We will also monitor and check the deliverables from the perspective of our stakeholder to ensure their needs are met and what was contracted was actually delivered. The whole area of Supplier Management is key to improving quality and driving out inefficiency between the buyer and seller. We are looking to improve our tactics around Supplier Management as we move through 2012 and into 2013.
What are your plans and expectations for the Chinese market and priorities for the future? In terms of Global Procurement China in the short term, I am focusing on building up the procurement teams’ capability around categor y management as well as closer integration with our business unit stakeholders. I am expecting our productivity plans and initiatives to be more robust and in sync with the strategic direction of our Commercial and Research and Development operations. As we grow in China, the Procurement function needs to transform into a high performing and efficient group, and become the enabler of new ideas and innovation for our stakeholders as they look to maximise the value of their purchases. 13
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PROCUREMENT
H&M considers following
Maurits Elen
S
rivals by sourcing in Chinese renminbi
wedish fashion retailer H&M is considering sourcing its clothes i n C h i n e s e re n m i n b i a f t e r i t s purchasing costs rose sharply as the dollar strengthened against the euro. H&M currently sources most of its clothes in Asia, with the dollar covering roughly 80 percent of costs. Nils Vinge, head of investor relations at H&M, said the move could benefit both H&M and its suppliers: “A lot of our rivals
have already begun paying directly in yuan. We sell about 60% of our clothes in euros or currencies pegged to the euro, so the relationship between the euro and the dollar is very important. If the dollar increases against the euro, our costs will increase, all other things being equal.” Sourcing in renminbi will become more manageable as Beijing further loosens control on the currency and prepares to turn it into a global currency. China began relaxing its grip on the renminbi in 2010 by allowing cross-border capital flows and trade to be invoiced and paid in renminbi. Such transactions currently account for merely 10 percent of China’s total trade. However this is expected to rise to 15 percent this year according to analysts at Deutsche Bank AG. According to banking executives, an increasing number of Chinese exporters are willing to accept payment in yuan due to fluctuations of the renminbi, which are spark ing strong expectations for appreciation of the currency. Beijing has been urged for years by Western countries to liberalise its grip on the renminbi, thereby allowing the yuan to appreciate more rapidly.
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“
PROCUREMENT A stronger yuan could boost consumption by Chinese consumers in debtstricken Europe and the US, where spending remains sluggish. On the other hand it could harm the Chinese export market because export products will become more expensive overseas. Although China’s success is not dependent on its export market, it is gradually shifting to more domestic consumption and spending to be less reliant on its expor ts amid the global economic turmoil. Vi n g e n o te d t h a t t h e current developments for
“
It is not written in stone in which currency we’ll buy in. We want the best and simplest option, and the option that carries the least risk for us and our suppliers.
the yuan are quite exciting: “It is becoming more and more open and there are now future contrac ts in y ua n. Bu t i t i s st i l l ve r y expensive. There are a lot of fees involved, and the banks are making a lot of money. But we are pragmatic. It is not written in stone in which
“
- Nils Vinge, H&M head of investor relations
currency we’ll buy in. We want the best and simplest option, and the option that carries the least risk for us and our suppliers.” Maurits Elen is a Netherlands based correspondent for CHaINA Magazine.
15
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PROCUREMENT
A
drastic change in I ndonesia’s export policy in May has forced China’s alumina producers to reduce production by ten percent in a move to stabilise the domestic market. Indonesia is China’s key supplier of bauxite, the ore used to produce aluminium. According to data f r o m C h i n a’s G e n e r a l Administration of Customs, roughly 60 percent of China’s bauxite is imported, with more than 87 percent coming from Indonesia. In 2011, Indonesia exported 35.79 Maurits Elen million tons of bauxite to China to produce 11.93 million tons of alumina. Indonesia has cut shipments and imposed a 20 percent tax on exports of bauxite and 13 other kinds of ore. According to research firm Antaike, Indonesia is expected to ban the export of these minerals before 2014. China’s largest aluminium producer with an annual alumina capacity of 14 million tonnes, Aluminum Corp of China (Chalco) will reduce its alumina capacity by 1.7 million tonnes this year due to the Indonesian changes, a cutback of 12 percent, or 15.44 percent of China’s alumina production. In a statement to the Hongkong Stock Exchange (SEHK) on 31 May, Chalco said: “In the principle of maximising benefits, the company has determined to implement flexible production arrangements.”
China Cuts
Alumina Production by Ten Percent
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PROCUREMENT This has been followed by similar announcements from other leading Chinese aluminium manufacturers including Gaoxin Aluminum & Power Co, Nanchuan Minerals (Group) Co, Shandong Nanshan Group and Xinfa Group. Chalco has called upon all alumina producers to comply with a ten percent output decrease from June. A production cut is in line with forecasts of lower mainland economic growth. Linus Yip, a strategist from First Shanghai Securities stated the latest disappointing China PMI data will reduce alumina demand, and probably production, while bauxite i m p o r t s Chalco has an annual increased 29.38 percent to 5.29 alumina capacity of million tonnes million tonnes co mp a red to April last year.
14
Increasing import prices combined with rising labor costs are boosting Chinese alumina prices, spurring increased imports of alumina by smelters. In the first four months of 2012, alumina imports increased by 74 percent to 1.44 million tonnes compared with the same time last year. According to smelter sources, the import trend will continue in the second quarter of 2012, possibly resulting in faltering profits for local alumina producers. In a report published on 1 June, J.P. Morgan amended this year’s forecast for Chalco from a RMB122 million profit down to a RMB2 billion loss, primarily due to metal output remaining high while aluminum prices languish. Maurits Elen is a Netherlands based correspondent for CHaINA Magazine.
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Content
►
Interview /21 ► Counterfeit Parts infiltrate Supply Chain/26 ► Victoria’s Secret /28
专访：Jason Inch /21
假冒伪劣不断渗入供应链 /26
维多利亚的秘密：推动印度农村妇女的进步 /28
MANUFACTURING counterfeit drugs, which have resulted in several deaths. The crackdown aims to protect the growing pharmaceutical industry in China, where lack of regulation is one of the biggest problems.
Hershey to open new Factory in Asia
New Crackdown on Counterfeit drug Embraer, the world ’s makers in China
Embraer taking off in China
fourth largest plane maker, has gained Chinese government approval to manufacture jets on Chinese soil, increasing its chances of selling more business aircraft in China. The company has signed an agreement to build its Legacy 600/650 business jet at its Harbin plant which suspended operations in 2011.
A program announced by the State Food and Drug Administration (SFDA) of China will crackdown on websites advertising and selling fake drugs, on the management of postal express services distributing fake drugs and on the marketing of fake drugs in rural stores and health centres. China is the world’s number one source of
US based confectioner Hershey will open a new factory in Asia. The company is embarking on a ‘five core brands’ strategy, focusing on Hershey’s, Reese’s, Hershey’s Kisses, Jolly Rancher and Ice Breakers, and aims to grow in selected emerging markets. Since 2007, Hershey’s business in China has grown faster than any other market. The location of the new Asia site is yet to be confirmed but the company also has plans to open an R&D centre in Shanghai.
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MANUFACTURING in Changchun, Nanjing and
VW to double Production Chengdu, and building new Capacity in China facilities in Yizheng, Foshan
G e r m a n c a r m a k e r and Ningbo. Volkswagen is planning to double its capacity in China New Plant for Kia Motors Kia Motors has opened to four million vehicles by 2018. The company ’s two a third plant in Yancheng Chinese joint ventures FAW D i s t r i c t E c o n o m i c and Shanghai Automotive D e v e l o p m e n t Z o n e i n plan to spend EUR14 billion J i a n g s u P r o v i n c e . T h e by 2016, and reported a 15% company aims to double rise in output to 2.20 million its production capacity in vehicles in 2011. Volkswagen China, the world’s largest is also planning to build a a u t o m o t i v e m a r k e t . A s new EUR170 million assembly p a r t o f a l o c a l i s a t i o n p l a n t i n U r u m q i , a n d i s strategy, the new factory currently expanding its plants will manufacture Chinese
consumer-oriented sedans, adding new products in the future according to market demand in China. The factory is expected to be completed by the first half of 2014.
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MANUFACTURING
Shanzhai, Sinification and the Virtual Economy:
Jason Inch talks manufacturing trends in China
J
ason Inch, author of recently published “China’s Economic Supertrends,” has been in China since 2003. He has travelled widely, gaining a comprehensive perspective on China, and holds a BA in Asian studies and an MBA.
Could you give us an outline of your book “China’s Economic Supertrends”?
What forces are shaping future business in China?
I believe there is a number of misconceptions about China’s economy and how it is functioning. I’ve defined this concept called the “Olympic Decade” which began in 2008 and continues until 2018. This book focuses on the economic changes that are happening in these ten years.
One misconception about China is that it’s a low cost producer, a copier of intellectual property. 2008 signaled the end of the low cost era and it’s now moving into a higher value added, higher innovation era of production. By 2018 China will have reorientated its manufacturing to become the world’s number one manufacturing economy. 21
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MANUFACTURING
Do you think manufacturing growth will continue in China?
and supported with subsidies. The eastern region of China is now focused on high tech I do but in a different area than it has up manufacturing. The central and western until now. In the financial crisis from 2008 regions have been designated as the low to 2010, many low end manufacturing tech or raw materials production areas. operations closed while a new type of Can you explain the phenomenon of company expanded because of new access to the domestic market. Companies focusing Shanzhai and its effects? I see Shanzhai as an interesting type on higher value added production and innovation are doing much better, while of disruptive innovation, a product with companies which relied on low labour costs low functionality which may only appeal are struggling due to increasing wages and to a ver y small and specific segment of customers. In third, fourth and fifth the higher RMB exchange rate. tier cities, people cannot afford to pay 5000RMB for a smartphone, but want them How is manufacturing changing in nevertheless, so often turn to Shanzhai China? In 2006 and 2007 in Shanghai, a lot of products. There is a negative to the Shanzhai Chinese competitors were no longer just when it rips off intellectual property. But it trying to produce the lowest cost products, does help Chinese manufacturers become they were investing in R&D. The government more sophisticated and move up the value five year plans placed increasing emphasis chain, eventually to the point where they’ll become disruptive innovators. They’ll rise on innovation and R&D. Over the last couple of years patents have up to challenge Samsung or Apple five or increased enormously. I believe China will ten years from now. start to create its own technologies and not just depend on innovation based on foreign technologies. Patents are evidence that China is becoming more innovative.
How is the restructuring of the Chinese economy affecting manufacturing? Much of China’s focus in the twelfth five year plan is on encouraging high tech industries like new energy, clean energy, new materials, even bio sciences. That is creating enormous supportive development of these industries. Local governments also support the development of industrial zones where certain industries are encouraged 4 22
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MANUFACTURING
Can you describe the concept of sinification? Sinification describes the need for foreign companies to adapt both their products and processes to China, where it is increasingly important because of the large size of the market and importance of China in the future. If you don’t localise here you’ll face increasing barriers. KFC became more successful more quickly in China as compared to McDonalds, because its localised products gave Chinese consumers what they wanted.
Can you tell us about the virtual economy? As China increases productivity, it will increasingly rely on the service economy to create jobs for workers displaced by factory automation. One growing sector is the virtual economy that is popular on platforms like Tencent QQ where users can create their avatar and buy virtual clothing, accessories etc, with QQ credits. Another type of virtual goods arises in the so-called in-game economies which are part of the massive multiplayer online role playing g a m e s (MMORPGs). These games work to a model which bases its economy on agriculture, m i n i n g g o o d s , fishing etc. to generate
gold which is used to buy products in the in-game economy. At a very low end level there is a virtual economy of people who are virtual farmers, goldminers and fishermen who create the currency of the economy. By placing a large number of computers in an area of China which had low wages, you could pay workers a small amount to dig virtual gold and then resell it or products it’s bought with in more developed economies where players are willing to pay for them. So virtual labour of Chinese workers is converted into real money through this international difference of labour. But it’s also a new industry and the implications are not yet entirely clear.
What do you expect to see from the Aviation and Automotive industries in China in the future? It’s going to be a long time before China has its own jet that can be sold and flown in other countries. Jets must meet FAAA standards and China does not yet have the industry to support the development of a jet to meet these requirements. China will develop its own jet for flying within China and countries willing to forgo FAAA registrations. China’s jets can be successful within ten to 20 years. But it will be a long road before it can compete with Boeing and Airbus due to difficulty in achieving some of the advanced materials required. But they’ll be a good disruptive competitor for the Boeings and Airbuses. I n t e re s t i n g l y, C h i n a’s a u t o m o t i ve industr y has been dependent on the joint venture model. Every major automotive manufacturer in the world has a joint venture in China due to Chinese
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MANUFACTURING government planning which wanted to achieve technology transfer. Some Chinese automotive manufacturers are now doing quite well on their own. So one future trend is more Chinese automotive manufacturers exporting. I predict some of these joint ventures will eventually break apart once they’ve outlived their usefulness for their Chinese partner. As China antitrust law becomes more sophisticated, large automotive joint ventures may be targeted and might even be broken up. Foreign manufacturers may lose their Chinese joint venture partners, who will retain the technology to produce cars on their own. Chinese companies will become much stronger in the automotive sector in the next ten years.
One particular area China is encouraging is electric vehicles, hybrid electric vehicles, and hydrogen fuel cells. I see China as being able to develop infrastructure more quickly than other countries, using central government authority, state owned banking system and large electric companies to roll out projects to support the development of new energy cars. The Olympic decade will be very good for China’s new energy vehicles. I’m expecting three things to happen: less joint ventures, Chinese companies being more successful exporting products, and new energy vehicles from China being increasingly competitive and successful domestically and possibly abroad.
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POTENTIAL FOR HAVOC:
Peta Heinrich
“
Counterfeit Parts continue to infiltrate Supply Chain
C
ounterfeit parts continue to infiltrate the global supply chain and the problem is increasing. A serious threat, fake components can potentially wreak havoc, even with lethal consequences. Data from supply chain monitoring organisation ERAI revealed a record 1363 incidents of counterfeit electronics in 2011.
34% of incidents were reported in the United States and 33% in China. Analyst IHS iSuppli found the fake electronic parts predominantly originated in Asia, with China as the lead producer, although the true origin of the bogus parts is often difficult to trace. A repor t from the Senate Ar m e d S e r v i ce s Co m m i t te e (SASC), revealed vast numbers of
A faulty counterfeit analogue IC can cause problems ranging from a mundane dropped phone call to a serious tragedy... - Rory King, IHS director of supply chain product marketing
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counterfeit electronic parts showing up in US military equipment, with 1800 cases of fake parts in military aircraft, covering more than 1 million suspect parts uncovered. Over 70% of these had been traced to China. Besides being costly, the counterfeit parts had the potential to pose a threat to defense and aerospace organisations, national security and human life. Rory King, director of supply chain product marketing at IHS said: “Counterfeit par ts are of ten cheap substitutes or salvaged waste components that fail to meet strict military and aerospace specifications, potentially leading to failures. Even more concerning, these failures put lives at stake.” He added: “A faulty counterfeit analogue IC can cause problems ranging from a mundane dropped phone call to a serious tragedy in the aviation, medical, military, nuclear or automotive areas.” According to iSuppli, counter feit devices, such as integrated circuits which could be remotely disabled could potentially act as “malicious Trojan horses” and threaten defense capabilities. The SASC investigation said counter feit par ts could disrupt the Department of Defense (DOD) supply chain a n d h a r m we a p o n s y s t e m s integrity. The failure of small yet sophisticated components in military equipment could endanger lives as could fake parts in military helicopters and aircraft.
a record 1363 incidents of counterfeit electronics were recorded in 2011
1363
Pentagon Press Secretary George Little stressed they would continue to address the issue, but played down the threat saying: “We’re unaware to date of any loss of life or catastrophic mission failure that has occurred because of counterfeit parts.” The SASC blamed weaknesses in the supply chain and China’s failure to crack down on counterfeit manufacturers as contributing to the problem. The new National Defense Authorization A c t ( N DA A ) , i n t r o d u c e d i n 2 0 1 1 b y the DOD, imposes strict penalties on companies supplying counterfeit parts to the US government. Yet with thousands of international companies supplying the DOD, King said the regulation would impact suppliers which needed to understand the issues and NDAA compliance.
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MANUFACTURING
Victoria’s Secret:
R
An unlikely Boost for Rural Indian Women Peta Heinrich
ural Indian women are receiving a boost from an unlikely sourcein opportunities that is. Victoria’s Secret, which produces garments designed to give a different kind of boost, is now providing jobs for rural Indian women, allowing them to escape poverty and break free of traditional roles. 30km south of Chennai, Kanchipuram district has become a manufacturing hub for a range of industries in recent years. Attracted
by its strategic location, companies have set up manufacturing plants, transforming the area into one of the most industrialised in the country. Intimate Fashions, which produces bras for Victoria’s Secret and La Senza, is one such company. After joining the Pudhu Vaazhvu (“New Life”) project, an Empowerment and Poverty reduction initiative funded by the World Bank, the company employs 2500 mostly female workers, 92% of whom come from families below the poverty line. Apart from providing rural women with jobs in the manufacturing sector, there are social and economic benefits. In the conservative rice growing region, where women often marry in their teens, receive minimal education and rarely venture from the confines of their villages, families had initially been reluctant to allow daughters to step outside traditional roles. Despite t h e s e reservations, the social benefits of of the workers come the program from families below w e r e significant. the poverty line According
92%
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to Shajeevana R.V. from Tamil Nadu’s Rural Development Department, “we are seeing positive social changes taking place due to these jobs. Girls, who were married off straight out of school are now delaying their marriages by three or four years.” The financial benefit was also substantial with many workers coming from Mamandur village, where villagers often earned just 100 rupees ($2) a day. Latta Gubendran’s 19 year-old daughter, Divya, works at Intimate Fashions and earns a monthly salary of 7000 rupees ($130). Having previously struggled to send her children to school and even buy food, Ms Gubendran was now able to educate her two younger daughters and afford household amenities such as a fridge and television: “She is like the son I never had. She brings me and my family respect,” she said. Yet one of the most significant benefits
was the self esteem, empowerment and independence derived from economic freedom. 2 2 ye a r o l d J ay a mostly female workers w h o m a k e s t h e are employed by popular Victoria’s Intimate Fashions Secret “Very Sexy” push-up bra said of her parents: “They never saw me as an asset, just a burden. They did not think a woman could earn money, but look at me.”
2500
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we are seeing positive social changes taking place due to these jobs. -Shajeevana R.V. 29
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CONTENT ► Interview /32 ► Jade Cargo Liquidated /35 ► COSCO /36 ► What is 360Buy Truly Worth?/38 专访: 海上人生 /32
翡翠国际货运清算结业 /35
中远集团：国有企业应对巨额亏损 /36
京东商城真正的价值是什么？/38
Logistics Delta region. With 39 stores already in China, Decathlon plans to open a further 19 in Dongguan.
Midea Group invests in modern Logistics Base
Transport Logistic China event featured 167 exhibitors from China. The event also 2012 attracts more offered forums, conferences, Chinese Exhibitors The 5th Transport Logistic China was held from 5-7 June at the Shanghai New International Expo Centre. Aiming to demonstrate the technologies and services of all segments of the transport and logistic industry, the event featured 490 exhibitors from 42 countries and attracted 15 000 trade visitors from 73 countries. In a 65% increase, this year’s
panel discussions and workshops.
Midea Group subsidiar y Annto Logistics, one of the m a j o r p l a y e r s i n C h i n a’s mainland 3PL services, plans to invest a total of RMB430 million ($67.55 million) in the building of the Urumqi modern logistics base. The facility will consist of a home appliances production and assembly area, a logistics information trading center, an online shopping logistics centre, a distribution center and a service and management centre.
New Logistics Centre for Decathlon French spor ts supplies retailer Decathlon will establish a South China Logistics Centre in Chashan Township of Dongguan City. With a total investment of US$50 million, the centre aims to attract projects from throughout the Pearl River
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Top Logistics Companies making inroads into China 260 companies including FedEx Corporation, and United Parcel Ser vice have been granted license to operate in China’s domestic express market. Already established in deliveries between China
and abroad, the companies had been excluded from the domestic express business in China which has until now been dominated by state-owned and private players. The companies now hope to benefit from the fast expanding Chinese delivery market.
China Opens new Route to Central Asia and Europe On 27 June, China opened a new motor transport route to Central Asia and Europe. Initiated
by the Yili WIL-CAN Cargo Group of China, and France’s Comex Holdings International Ltd, the route will reduce time required to transport cargo between China and Europe, and provide a safe, efficient, low-cost and convenient logistics channel. With trade between China, Central Asia and Europe booming in recent years, motor logistics is in demand due to the longer time required for sea freight transportation.
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LOGISTICS
A Life at Sea Once the largest containership ever built, the Emma Maersk and her seven sister ships, are, at 397.71 metres, the longest containerships in use. With 22 floors, the ship’s interior is, at first sight, a labyrinth of passageways, decks, stairways and cabins. Danish Captain Kristian Johansen, who comes from a family of sailors, talks about his unique position in charge of this impressive mega ship. What is the typical route for the ship? It’s just like driving a bus. We start in Gwangyang in South Korea, go to Ningbo, Shanghai, Yantian, Tanjung Pelepas in Malaysia. Then to Rotterdam, Bremerhaven in Germany, Gdansk in Poland, Aarhus in Denmark and Gothenburg in Sweden. Then back to Bremerhaven, Rotterdam and down to Tangiers in Morocco. Then through the Suez Channel to Singapore, up to Yantian, to Hong Kong and back to Gwangyang, and that is 12 weeks. 32
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What do you enjoy most about life at Are there any ports or climatic zones sea and what is the most difficult part of which pose difficulties? it? They all have their own challenges. Like this
I enjoy that it’s not an eight to five job, it’s a 24 hour job. I’m off as much as I’m on, that means usually 11 weeks on and 11 weeks off. It’s a job I like, with a lot of challenges. The most difficult thing is when I receive a message from home that one of my crew members has lost his wife or kids. It can be quite tough. When accidents happen on board you must be the doctor, that’s also quite tough.
What are your favourite destinations? Definitely Hong Kong, Tangiers, Malaga, Aarhus and Felixtowe where you can go ashore without needing a taxi. But if you have to take a taxi for one and a half hours, like in Shanghai, forget it, we don’t go ashore.
one, there’s a lot of current coming in but a lot of space. In Bremerhaven there’s no space but a lot of current, but they have extremely good pilots. You start to learn the ports, so they are a challenge but there’s no problem.
How many crew and what qualifications or background are required for this ship? There are 22 crew. Six from Denmark, one from the Ukraine, and the rest are Filipino. Everybody requires an education. All start in school learning the basics, firefighting, boat drills, sailing a small boat, making different knots, and learning about the vessel. It takes usually five to six months. Then they go to sea for some time as non-experienced ordinary seamen or apprentices, then back to school, before becoming an engineer, navigator or chief steward.
What are the unique challenges of Can you tell us about the functions of the operating such a large containership? different crew members? There’s not much difference in this As the master, I’m on standby 24 hours a day. vessel from a small vessel. The challenges I take care of all communication between the are exactly the same because I only have company and shore or the agent. All leaders on a bigger engine or a bigger vessel. The board report to me, and I also do inspections crew is still around 20, and the work and paperwork is still the same.
How do weather or sea conditions affect the everyday operations of the ship? Well this vessel can roll a lot. The wind does not affect us much, but if the sea is rough, we have to stop. We just make sure everything is tied, and try to save things.
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LOGISTICS and keep track of a lot of certificates which are updated continually. The chief officer is on watch from 4:00 until 8:00. Elsewhere he is responsible for the cargo and stability of the vessel. The first officer takes care of the navigation. The third officer looks after the emergency equipment. The fire equipment and lifeboats will be checked once a month to make sure they are ready for use. Then there is the chief engineer and engineers. The chief steward takes care of the food, and usually starts at 5:00. The steward cleans the officer’s cabin, washes dishes and may clean some of the floors. Most accommodation is cleaned by the ABs (able seamen) who work on deck and in maintenance.
Have you ever experienced any emergency? A whole life at sea, you cannot avoid it. One of the biggest was when the vessel caught fire and we had to abandon ship. That still stands in my mind. The vessel burned out but no crew was harmed so that was fine. That was far out at sea. Another vessel came and assisted us.
Would you be able to share any interesting anecdotes or amusing stories from your career? To be out here you need to have some h u m o u r, i t c a n b e q u i t e b o r i n g a n d sometimes you have to do something. It’s totally different being a sailor because we are together 24 hours. I work with them and I’m forced to have a private life with them which gives a new angle on them. Today we have a lot of videos, movies, we play cards. Also we have coffee breaks, tell jokes, read the newspapers. We often do a lot of things (practical jokes). We drilled a very small hole in the bottom of a cup and put it back. When the officer came to drink coffee there was this ring underneath. He would keep drying this ring and every time he put it down there would be a ring. When he’d emptied the cup he could see light through the bottom and had to get a new cup.
What kind of law do you apply on the vessel? Danish law. According to the law I am the owner’s representative. I can do a lot of things in emergency cases. I can even marry people.
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Jade
Cargo
Peta Heinrich
Liquidated:
Shareholders Jump Ship
L
ufthansa’s financially troubled freight venture with Shenzhen Airlines has been dissolved with Shenzhen based cargo airline Jade Cargo International Ltd ceasing operations. The airline was shut down after shareholders failed to agree on restructuring. According to a Lufthansa Cargo spokesman: “Due to the ongoing weak demand for air cargo services to and from China, the restructuring of Jade Cargo could not be successfully concluded.” Therefore “In view of the latest developments, the board of directors has decided to voluntarily dissolve the company subject to all required government approvals for this process. All efforts will be made to minimise the impact on stakeholders.” Lufthansa Chief Executive Christoph Franz said tough freight conditions in the world’s second largest aviation market had led to the decision. With Lufthansa’s 25% stake in the venture Franz said: “We are a minority shareholder, but the shareholders all together agreed that we will dissolve the company.” The other shareholders are Shenzhen Airlines (51%), and German Investment Firm DEG (24%).
In March a salvage venture with Chinese firm UniTop failed, with the company abandoning plans to acquire and restructure the airline. Established in 2004, Jade Airlines had been grounded since 31 December 2011 owing to lack of demand, and while discussions took place between the owners. It had operated cargo services to Asia, Africa and Europe with a fleet of six Boeing 747 Freighters. With a debt of CNY4 billion ($628 million), Jade Cargo reported a net loss last year of CNY16 million. In 2011, Lufthansa experienced a loss of almost 16 million euros ($21.2 million) as a result of the venture. Other carriers such as Tianjin based Grandstar Air Cargo which is co-owned by Sinotrans Air Transportation Development Co. and Korean Air Cargo, are expected to follow suit. The airline lost $53 million last year and has suspended operations. Factors such as the European economic crisis and the resulting decrease of imported goods are to blame for lack of airfreight demand, with export growth from China slowing significantly and imports in the country also decreasing. 35
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LOGISTICS
COSCO:
AN SOE RECIPE FOR HUGE LOSSES
I
recall an ex colleague at Citi wrote a big buy report o n CO S CO H o l d i n g s i n early 2011. It’s always nice to write a big buy report. This is the best kind of report an analyst can write for investors – w h e n co r re c t . A b i g s e l l report does not help investors as much, as investors tend to sell less over the long term and brokers can’t make as much from selling stock. The main way to make money on the downside is to short stocks, and shorting COSCO would certainly have made money. But this is for fewer and braver players than most investors. This is the reality of the stock market: Companies want to see a good story told and their shares go up. But telling a good story and needing to run the other way is an often repeated situation for many big listed Chinese companies in recent years, with transport having the pick of the litter. COSCO is a State Owned
Charles de Trenck
E nte r p r i s e ( S O E ) a n d a transport leader case study. In container shipping and shipping in general, COSCO Holdings probably had the most embarrassing set of 2011 results with just under USD1 billion in operating losses in the container shipping division alone, an
EBIT of -15%. This compared with -9% for China Shipping Container Lines (CSCL) which generates one of the ‘cleaner’ and lower revenue/ TEU figures in industry due to its more basic end-toend business. We c a n s e e o n a p e r T E U b a s i s t h a t CO S CO
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LOGISTICS performed much worse than CSCL and fared considerably worse than Hanjin Shipping Co, one of its CKYH Alliance partners. COSCO explained its bunker costs were up 36.6% and its total costs per TEU were up 2.4%. Translated into US dollars, the real increase in costs was in the order of 7.5%.
Some big picture issues: Cost in 2011: Voyage costs had the biggest increases at +25%. COSCO said its vessel costs were up 6.3%, but this was more like 13% when adjusted for the stronger RMB, while vessel charter costs fell precipitously in 2011. But it must be remembered that COSCO had a spiking pattern on deliveries which came later than most, and charter rates peaked in the first quarter. Corporate Governance: I have been talking about corporate governance concerns at COSCO for years (ie, prior to the IPO in mid2005). Is the below-industry per formance at COSCO (containers and bulk) due to the problems that arise from managing a sprawling conglomerate, which in turn created problems such as those seen at COSCO Qingdao (ie, payment problems of
associates in 2011), or problems with Freight Forward Agreements/BDI hedging strategies (ie, 2008 losses up to about RMB5.4bn from FFA)? To be clear, these failures were mostly not specific to the container shipping division, but a problem at the holding company, which resulted in serious returns above its cost of errors of judgment in capital in 2007 and early greater amounts than other 2008. In 2006 its returns companies. were 5% below the cost of Some concerns include: capital and in 2009 it was 12% below the benchmark • Overall management figure. coordination and decisions longer term Charles de Trenck first began • Decision-making on researching COSCO Group vessel orders and specifically in the early 1990s as a credit their timing analyst, and later followed • Cost performance in the COSCO Pacific, and other container Division COSCO Group companies from A l l m a n a g e r s m a k e a distance. mistakes at one time or another and senior executives are known to t a k e c h a n c e s a t t i m e s, COSCO Holdings which can, at such times, experienced just under harm shareholder va l u e. B u t h ow c a n management justify staying in business with COSCO’s apparent in operating losses in underperformances? the container shipping Since its IPO in division in 2011 2005, COSCO has only generated real economic
USD1 billion
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LOGISTICS
Amid Rumors of a September IPO,
3
Steven Millward Techinasia.com
What is 360Buy Truly Worth?
60Buy, China’s second-biggest B2C e-commerce site, is said to be preparing for its American IPO right now, with a view to listing in September. The business news website ChinaVenture recently reported rumors of 360Buy executives holding a lengthy meeting with analysts, and that a resultant SEC filing could be coming this month. But, after a year of turmoil for Chinese tech stocks, and right after the controversially over-inflated Facebook (NASDAQ:FB) listing, the highly contentious issue of of what 360Buy is worth will come to the fore. If we think back to March of last year when Russian investment group DST committed hundreds of millions of dollars to the Chinese online shopping
website, that effectively valued 360Buy – or Jingdong Mall, to translate its Chinese name – at US$10 billion. That huge figure syncs up nicely with a calculation of 360Buy’s worth according to Amazon’s price-to-sales ratio of 1.18 based on 360Buy’s sales estimate of $11 billion for 2013. Trouble is, Amazon – which 360Buy resembled strongly in its initial stages – is a much more mature company in a more stable ( a n d , I ’d the highly dare to say, contentious issue of less fiercely of what 360Buy is competitive) A m e r i c a n worth will come to market. Plus, the fore. A m a zo n i s
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LOGISTICS pulling in profits, while 360Buy is still bleeding 5 percent operating losses. S o, t we a k i n g t h a t r a t i o to a m o re reasonable 0.5 would value 360Buy at $6 to $7 billion. Some would say that’s still too high. The last time the rumor mill whirred into life for 360Buy, it was being valued at way over $10 billion, with talk of raising as much as $5 billion. Surely the recent blunders and mis-steps among Chinese tech IPOs – and with Greece and Spain staring into the kind of financial abyss that could drag down global markets – will curtail such excess this time round. Timing remains crucial. In the past, 360Buy’s founder and CEO, Liu Qiang-dong, has talked publicly of 2013 as making sense for a public offering for his company. Throughout 2012, it looks to be busy hiring 25,00 new staffers; by 2016, he wants the e-commerce site to have usurped Alibaba’s Tmall as the market leader. Somewhere in
the middle, the time has to be right. Making this happen in September – rather than waiting for 2013 – might come down to a bunch of odd factors. These include avoiding the market upheaval during an American election period (November this year), getting in before a hyped re-appearance of a Game of Thrones- esque “winter ” of investment freezes, a fast-changing e-commerce landscape in China, and preempting a downturn if the Chinese economy really does hit the kind of “hard landing” that some economists are predicting. Until 360Buy’s IPO roadshow creaks into life, estimations of its valuation will vary wildly, which in itself speaks a lot about economic conditions. This article is reprinted with permission from Techinasia.com, which gives a global perspective on e-commerce, startups, apps, and general tech from across the region.
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CONTENT ► Need for Speed /44 ► Burberry Buys Back China /46 ► Macy’s /48 速度的需求 /44
巴宝莉回购中国 /46
梅西投资中国电子商务网站以了解中国市场 /48
Distribution
Marks and Spencer plans further expansion in China Having opened just eight outlets af ter four years in China, Marks and Spencer has announced plans to double this number over the next 12 months. Some critics believe the chain’s products do not appeal to locals, with sizes being too large and styles not localised to Chinese tastes. With Marks & Spencer having recently suffered subdued sales in the UK, time will tell how successful the planned expansion in China will be.
Angry Birds migrating to China Finnish gaming company Rovio, the maker of Angry Birds, has opened an office in Shanghai and plans to establish ac tivity parks and stores across China. Currently the second most popular paid iPhone application, Angry Birds has gained huge popularity in China. The company will add Chinese cultural elements to localise to the Chinese market.
Bright Milk Recall
New Strategy for Best Shanghai’s Bright Dair y Buy in China
& Food Co. has been forced U.S. based Best Buy plans to to recall milk tainted with return to the Chinese market detergent. The city’s quality by adopting a new business bureau said the recall was strategy. The company will due to a “technical” problem in which detergent used in maintenance found its way into Bright Dair y ’s Ubest fresh milk. This comes just weeks after another top C h i n e s e d a i r y c o m p a n y, Inner Mongolia Yili Industrial Group, recalled infant formula products containing mercury. An investigation is under way. 41
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DISTRIBUTION introduce its Best Buy Mobile brand, selling mobile phones and tablet computers in 14 stores in Five Star Appliance retail o u t l e t s i n N a n j i n g. Th e cooperation will allow the company to combine i t s i nte r n at i o n a l m o d e l w i t h F i v e S t a r ’s l o c a l operating experience. Due to difficulties promoting its brand in China, Best Buy closed all nine stores in the country in 2011.
Casio claims never to have authorised the sellers as retailers. Dangdang follows Taobao.com as the second e-commerce platform to become embroiled in such a scandal.
First Stores in China for Aer Rianta Irish Airpor t retailer Aer Rianta International (ARI) has opened its first China stores at Kunming Changshui international airport, trading under The Loop brand. The 11 shops offer a broad range of inter national brands and include duty-paid per fume and cosmetics, fashion and accessories, jeweller y, confectioner y
and souvenirs. New features for the Chinese travel-retail sector include a stand-alone shop within a shop for the Origins skin care brand.
IKEA to invest US$1.9 billion in India Swedish furniture retailer, Ikea, plans to invest 1.5 billion euros ($1.9 billion) in India, Asia’s third largest economy. 600 million euros will initially be invested into establishing 25 new stores. The I ndian gover nment removed foreign investment caps in single brand retail earlier in the year, under the condition foreign retailers source 30 percent from small and mid-sized local enterprises.
Dangdang Online Mall embroiled in Counterfeit Watch Scandal E-Commerce China operator Dangdang Inc. has been accused of selling counterfeit watches. Dangdang.com online stores were found selling Casio electronic watches at just 40 percent of normal market prices. Despite D a n g d a n g’s a s s u ra n ce s the watches were genuine,
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Need For Speed:
Some Chinese E-Commerce Companies to Expand to Express Delivery Business? Steven Millward Techinasia.com
W
hen a Chinese consumer buys something on one of C h i n a’s ve r y n u m e ro u s B 2 C e - co m m e rce s i te s, the item in question is whisked off by a private express delivery company, zooming the product from one city to another in a van, and than stuffed onto – usually – an electric scooter for the final to-the-door delivery. But two of China’s top e-tailers, 360Buy and Vancl, look ready to upset that system by starting up their own express delivery companies. According to Chinese media citing industry insiders, electronics site 360Buy and fashionoriented Vancl have applied for the necessary business licenses to enter the
logistics sector and could well be granted permission to do so next month. After that, in a strategic need for speed, their own trucks, e-bikes, and deliverymen would do the final logistical leg of a purchased item’s j o u r n e y. A c c o r d i n g t o QQ Tech, China’s mostly online shopping focused express deliver y sec tor was worth 1.04 billion BMB (US$163.4 million) in the
first quarter of 2012 alone, and so it will blow away the 2011 full-year market value of 3.67 billion ($576.6 million). With e-commerce in China set to expand to generate 18 trillion RMB ($2.8 trillion) in revenue in 2015, there’s still room for courier companies to grow in unison. But in good news for the private courier sector, market leader Alibaba
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– which runs Taobao and Tm a l l – h a s r e a f f i r m e d its backing of its delivery partners and the ecosystem as a whole. The company renewed its partnerships with nine Chinese logistics firms last month, including the likes of SF Express, and EMS. When I heard Alibaba’s Jack Ma give a speech in his native Hangzhou last year, he spoke in depth about how competition is good for society, raising quality and lowering prices. He also singled out state-run China Post for mocker y, pointing out how the new business culture brought about by e-commerce had shaken up the dinosaurs, and spurred a huge new boost in
employment and business oppor tunities at courier companies.
E-commerce in China set to expand to generate 18 trillion RMB ($2.8 trillion) in revenue in 2015. 360Buy and Vancl – and perhaps some other e-tailing companies who might make the same in-house delivery move – might argue that the sector, with its often ramshackle vans and ducttaped e-bikes (pictured left), is ripe for pumping in some professionalism, perhaps
with companies like UPS or DHL in mind. Of course, this business switcheroo can go two ways. Indeed, on May 31st, SF Express launched its own e-commerce site that uses its own resources to get products into customer’s hands. And so there’s likely a battle ahead in China as the formerly complementary logistics and e-commerce sectors turn competitive on one another. This article is reprinted with permission from Techinasia. com, which gives a global perspective on e-commerce, startups, apps, and general tech from across the region. 45
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Burberry
BuysBack CHINA
I
t’s no secret that the luxury market in China is burgeoning. In fact, since 2005, the presence of luxury stores in China has more than tripled, creating a market worth US$10.7billion (2010). In light of this, top brands such as Prada and Burberry announced an increase in profits this year of 72% and 24% respectively. Both companies attribute much of this increase to China and the Asia Pacific region. According to consulting firm Mckinsey & Co, China will account for about 20% of global luxury sales by 2015. If China’s luxury sales reach US$100 billion by 2020, the country will surpass the US as the world’s largest luxury market (CLSA, 2012). But how will global brands continue to capture this growing market? For Burberry, the answer was to buy back its 50 franchised stores in 2010. “Brands that buy back licenses regain control of their customer, image and growth;” according to Burberry CEO Adrianne Shapira. At the same time, Burberry launched a global crackdown on knockoffs and counterfeits, and ended lines such as its signature plaid to revitalize the brand image.
getchee Inc A whopping US$110 million was paid for the 50 assets, which were worth only US$47 million. Ms. Shapira was obviously confident in Burberry’s ability to manage the brand, supply chain and store network in the Chinese market. Now the question for Burberry is in which cities and tiers to invest, and in which trade areas to open new locations. Should it remain on the highstreet, like its flagship store in Sanlituan, or focus on luxury shopping malls? Two years later, and Burberry now has 59 stores in over 30 cities in China: Nine in Beijing, five in Shanghai, and even one in Urumqi, Xinjiang. Overall, there are 18 stores in tier one cities, 26 in tier two cities and 15 in tier three cities. The
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difference between the Chinese luxury market versus that in Europe and the US, is 73% of shoppers are under 45 years of age, according to Mckinsey. The brand has aggressively targeted this market, using new innovations and technology such as social media and ipads in stores, making a digital shopping experience more appealing to a younger generation. This marketing strategy has paid off, as profits from the Asia Pacific region grew to US$1.02 billion in 2012 (year to March), versus US$443.2 million in 2010, according to Burberry’s annual report. The Asia Pacific region now represents its most profitable region, accounting for 30% of sales, with the number soon expected to reach 50%. But how will Burberry determine how it is performing versus the market? In order to do this, Burberry will have to apply
innovative strategies similar to those used in its marketing programs, to its network planning goals. Burberry recently posted strong profits of 26%, which along with sales, is in line with expectations. Initially, the results of buying back its franchise licenses appear to have been a success. But is Burberry on track for 100 stores in China by 2013? Moving forward, what will Burberry’s strategy for expansion be? Finally, as the Chinese luxury market continues to grow, will buying back stores become a trend, or is Burberry the exception? getchee is a data ser vices and solutions company. We create and validate market data for business use throughout China, India, and Southeast Asia.
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Macy’s I
Peta Heinrich
tests the waters with Investment in Chinese E-commerce Site
n a move to probe Chinese and international markets, Macy’s Inc has invested $15 million in VIPstore, a leading online retailer of luxury and fashion goods, which operates China- based e-commerce site omei.com. From Spring 2013, Macy’s will sell items from its private brand collection I.N.C. directly to Chinese shoppers via the site. Founded in 2009, VIPstore also operates established flash sales site jiapin.com. Its website omei.com offers brands such as BCBG, Guess, Calvin Klein and Italia Independent, and will sell Macy’s I.N.C. brand before introducing other private labels. Macy ’s CEO Terry Lundgren said there is “significant long-term opportunity internationally” for Macy’s . Online initiatives allowed them to test overseas markets before 4 48
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opening stores: “That’s a very different decision than us building a bricks and mortar store, which is permanent, which is expensive and a bit of a bet.” Jon Bond, VIPStore’s head of business development said the move was “a smart way to introduce Macy’s biggest selling brand in the US” to the Chinese market: “It will be the only way to buy the I.N.C. brand in China.” Al t h o u g h C h i n e s e a n d ove r s e a s shoppers have been able to buy on macys.com since last year, the company has no namesake stores outside the United States. However buyers on omei. com will be able to avoid import duties and tariffs with orders shipped through Chinese warehouses, while orders on macys.com are supplied from the US. According to Macy’s spokesman Jim Sluzewski, the site offers further convenience to Chinese shoppers: “omei.com is in Chinese,” while mac ys.com is only available in English. Detractors, including 25 year old Zoe Chan from Chongqing, have voiced doubts: “Chinese people prefer brands they are familiar with.” In a country where many retailers do not allow returns or exchanges, and with customers being unable to try apparel before purchase, Macy’s may face competition from retailers such as H&M which have a physical presence in China. However company officials say omei.com does offer returns and exchanges. Macy’s internet sales comprise approximately 7% of total sales,
with online sales rising 39.6% last year. According to Zia Daniell Wigder, an analyst with Forrester Research, the value of e-commerce sales in China is expected to reach $169 billion this year, and $356 billion in the Asia Pacific region in 2016. An increasing number of Western retailers such as Dallas based Neiman Marcus Group have been investing in Chinese e-commerce websites. However, in it’s first foray into a foreign market and with little knowledge of Chinese online consumer behaviour, only time will tell if Macy’s will find success among China’s 173 million online shoppers. In the meantime VIPstore, one of a huge number of similar online retailers in China, is cashing in on a lucrative deal.
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FEATURE
Exploring Talent
Shortages in the Developing Logistics Sectors in China, India and Vietnam
In emerging and developing markets, logistics activities involve a range of opportunities and challenges: Opportunities - revolve around the fac t that the emerging markets are experiencing rapid economic growth and the resulting increase in trade and commerce drives increasing demand for logistics services. Challenges - are many and varied, with the top three consistently being infrastructure limitations, b u re a u c r a t i c re g u l a t o r y procedures and shortage of skilled experienced logistics professionals. Let’s explore Infrastructure Developments and Sk ills Shortages in three specific markets – China, India and Vietnam:
Mark Millar
Infrastructure Developments China has made massive progress in transportation infrastructure development, accelerated a massive boost from the four trillion RMB stimulus package initiated in late 2009. The highway
system now has over 75,000 km of expressways, new airpor ts are being constructed at the average rate of one new airport every five weeks, inland waterways are being developed and expanded, and container port infrastructure d e ve l o p m e nt s co nt i n u e
Population (millions)
Land mass (1,000 km2)
GDP/Capita (USD)
Logistics Costs as % of GDP
China
1,339
9,640
7,536
18%
India
1,210
3,287
3,586
13%
Vietnam
87
3,586
3,130
25% 51
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FEATURE unabated, with Shanghai port handling over 31 million twenty foot containers (TEU) in 2011. Furthermore, the huge development of the high-speed passenger rail network is expected to free up some of the existing rail infrastructure to be converted for cargo use in the future, including containerised rail freight. I n I n d i a , t h e transportation infrastructure is nowhere near as developed as in China. The level of investment and support has not been enough to keep up with modern logistics requirements, resulting in limited road infrastructure and congested container ports, leading to huge delays and inevitable inefficiencies - costing time and money. A Washington Post article quoted experts as saying that “If urgent steps are not taken, by 2020 the cost of waste and delays will increase from $45 billion annually to $140 billion.” S everal years ago, I ndia took the initiative to allow private companies to operate on the state railway systems. One major player, Arshiya, is investing heavily in the rail sector in a bid to improve India’s overall
logistics efficiency, including i nves t m e nt s o f ove r 1 . 5 billion rupees in order to double their rail capacity. Vietnam - with the suppor t of foreign investment and through several public-private partnership (PPP) projects, Vietnam has been able to make good progress in recent years on infrastructure developments, par ticular ly in souther n Vietnam. One example is Cai Mep port — the large, impressive, modern container terminal development south of Ho Chi Minh City. Together with the huge industrial zones and logistics parks built in Binh Duong province, north of the city, there are now much better options available for logistics activities. However there are still opportunities to further improve the overall planning and coordination of the logistics infrastructure projects - despite the Cai Mep port container terminals being open, there is limited highway connectivity to and from the port. There is also a need to develop multi modal ground transportation networks and corridors – specifically road and rail infrastructure – to connect
the new industrial zones and logistics parks in Binh Duong province to the container ports - both the city terminals and the new Cai Mep facilities.
Talent Shortages The skills shortage is one logistics challenge common to China, India and Vietnam – indeed throughout all emerging markets. As their economies are rapidly expanding, then logistics activity increases, which in turn drives demand fo r t r a i n e d , s k i l l e d a n d experienced professionals. One of the key findings of the most recent Global Chief Supply Chain Officer Report was that “talent
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acquisition and leadership development� represents a significant challenge in supply chain management, with 35% of respondents listing it as one of their top challenges and a further 56% agreeing that it is an important challenge. In China the difficulty of recruiting skilled professionals is exacerbated because of its scale and also due to China’s expanding role in global supply chains, leading to increasing demand for skilled logisticians. At the same time, the sheer size of the population gives it a larger pool of experienced workers than in other countries. India’s leadership role in global commerce has developed in areas such as telecommunications and business process outsourcing. The impact for supply chain management
is a smaller pool of experienced talent to fill the expanding demand in the logistics sector. As India plans to modernise many sectors, in particular the retail trade, there will be further increasing demand for experienced logisticians. In Vietnam, the majority of the population are young, well educated, with English widely spoken. Thus there is a large pool of potential workers for the logistics sector. However, as in many other countries, there are not enough young people choosing the logistics sector as their career path. Therefore in Vietnam, we are also seeing skills shortages.
Conclusion The logistics sectors in China, India and Vietnam have improved significantly during the last five years, and as they continue to do so, we
can expect to see a gradual reduction in the logistics costs as percentage of GDP. As industry leaders, we have collec tive responsibility to encourage the younger generation to choose a career in logistics, and within our businesses we must actively engage on talent attraction and retention programs. In line with maturing logistics sectors in developing and emerging markets, we will also see an increase in the level of outsourcing, which is good news for the 3PL logistics service providers. Acknowledged as an industry thought leader, Mark M illar has been engaged as Keynote Speaker, Moderator or Conference Chairman at more than 220 events in 20 countries. mark@markmillar.com 53
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FEATURE
Ravaging the Rainforest:
Greenpeace links KFC to Indonesian Jungle Destruction
Peta Heinrich
A
report by Greenpeace accuses KFC of contributing to Indonesian rainforest destruction through its packaging sourcing practices. The group revealed KFC was sourcing pulp based packaging materials from Asia Pulp and Paper (APP) which has been linked to harmful environmental practices. Research revealed damning evidence of mixed tropical hardwood fibre (MTH) in some KFC packaging.
A Bucketful of allegations With slogans such as “KFC Stop Trashing M y H o m e” a n d “C h i c k e n w r a p p e d i n rainforest”, Greenpeace has launched a global campaign to “expose KFC’s secret recipe”, following the release of the report “Junking the Jungle: How KFC is driving deforestation in Indonesia.”
The report alleges some KFC packaging is produced from Indonesian rainforest timber. Packaging including chicken buckets, cups, boxes and napkins was sourced from APP, the world’s third largest pulp and paper producer, notorious for sourcing from Indonesian rainforests, and recently exposed for using illegal timber at its main pulp mill in Sumatra. A two year Greenpeace investigation which combined forensic testing and supply chain research, revealed traces of MTH from Indonesian rainforests in packaging purchased in Indonesia, the U.K. and China. Some packaging products tested contained more than 50% rainforest fibre. According to the Greenpeace report, over half the materials used in China contained traces of wood specific to Indonesian rainforests. China is the largest KFC market,
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2 million
hectares of forest a year have been lost to logging in Indonesia since 1996
“ “
The irony is that KFC UK claims to have a very clear policy on sourcing paper from sustainable sources yet sadly their promise doesn’t seem to be worth the very unethical paper it’s been written on.
“
- Greenpeace spokesman Robin Oakley
with over 3700 restaurants. More than half of KFC’s profit is generated by the Chinese market and 72 other emerging markets. Bustar Maitar, head of Greenpeace’s campaign to save the forests in Indonesia said: “KFC is the latest big brand to be caught trashing rainforests and pushing endangered animals, like the Sumatran tiger, towards extinction. KFC customers worldwide will be horrified to learn that packaging destined for the trash comes from trashed rainforests.”
KFC and APP hit back KFC representatives in the UK denied the Greenpeace accusations saying: “100% of packaging used by KFC in the United Kingdom and Ireland are obtained through recycling and other sustainable sources.
None of the two markets or any other supplier buy from APP.” This claim has been rebuffed by Greenpeace as simply untrue. APP claims the Greenpeace report is misleading, saying its products do not come from the felling of virgin tropical rainforest trees in Indonesia: “As long as APP activity is concerned in this conflict, we emphasize that Mixed Tropical Hardwood products do not come from tropical logging in Indonesia.” It continued by saying: “APP has strict policies and practices in place to ensure that only residues from legal plantation development on degraded or logged-over forest areas and sustainable wood fibre enters the production supply chain.” The company has nevertheless announced a temporary suspension of natural forest clearing in Indonesia.
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The Greenpeace Mandate Greenpeace is calling for KFC, and its parent company Yum! Brands to create strong sustainability policies to eliminate products derived from deforestation from their supply chains and suspend use of APP products. Greenpeace says it will continue to pressure APP’s customers until meaningful reforms are achieved. Maitar said: “KFC must stop buying from APP, a notorious rainforest destroyer which has been repeatedly exposed for wrecking Indonesia’s rainforests to make products like throwaway packaging. APP treats Indonesia as little more than a vast disposable asset, destroying rainforests that are vital to forest communities.” While more than 60 major companies worldwide including Mattel, Adidas, Hasbro, Nestle, Staples, Xerox, Unilever, Kraft and Kroger have suspended purchases from APP, the report claims neither KFC or its parent company YUM! Brands has taken similar steps. Greenpeace Forest Campaign Director, Rolf Skar said: “Other companies recognise that rainforest destruction is bad for business and that trading with APP is a peril to their brand. Other companies including, major competitor, McDonald’s, have taken some steps to address their impact on rainforests.” Yet Greenpeace claims that since the launch of the campaign there is little evidence KFC is serious about cleaning up its act. With Indonesia being one of the world’s largest greenhouse gas (GHG) emitters, largely due to deforestation, President Susilo Bambang Yudhoyono has committed
to a 41% reduction by 2020. To reach these targets, rainforest destruction must be stopped. The loss of forests, which remove carbon dioxide from the atmosphere, globally accounts for one fifth of emissions blamed for global warming. Global Forest Watch research has shown the region has lost over two million hectares a year to logging since 1996, double the rate of the 1980s. According to the Greenpeace report: “These forests are a key defence against climate change and are habitat for many protected species including the critically endangered Sumatran tiger.” The Indonesian rainforest is also home to a host of other endangered wildlife including elephants and orangutans. Greenpeace spokesman Robin Oakley said: “The irony is that KFC UK claims to have a very clear policy on sourcing paper from sustainable sources yet sadly their promise doesn’t seem to be worth the very unethical paper it’s been written on.”
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FEATURE
Maurits Elen
Tmall adopts
I
new logistics strategy
n a move divergent from its competitors, Alibaba group’s online retail subsidiary Tmall, announced a new logistics agreement in May with nine major express delivery companies. Tmall currently ranks as China’s leading business-toconsumer (B2C) e-commerce website in an increasingly competitive and growing market, While rivals 360buy.com and vancl.com incorporate their own express delivery services, Tmall has signed with nine delivery firms, including EMS, Hentong Express, SF Express, and YTO Express. According to a Tmall spokesperson, the deal will result in
delivery orders exceeding RMB5 billion in 2012. The delivery firms will provide basic and diversified services to Tmall and its contractual stores, while trading information will be shared by the online operator. One service will enable consumers to receive parcels within 24 hours if orders are placed before 4pm. The service will be available in 22 Chinese cities, including Beijing, Chongqing, Shanghai, Suzhou and Tianjin. Cash-on-delivery or evening delivery will be optional. Ta n B i a o, g e n e r a l m a n a g e r o f t h e Electrical Mall at Tmall.com, said the service
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FEATURE will be extended nationwide if the new “The parcels delivered by 360.com can strategy is received well. To meet consumers arrive in 12 hours. That’s why I shop on halfway, Tmall will cover the cost of goods 360buy.com.” However, internal delivery systems have which are delivered late. Perhaps even more than price, some huge establishment costs. 360buy.com experts believe logistics will become a key began laying the groundwork for a system challenge for online retailers in China’s rapidly in January 2009 in Shanghai, and plans to growing e-commerce market. For consumers have an overall express delivery system it is not only important that retailers provide ready by 2014. The plan will cost RMB20 quality, but also prompt delivery. Companies billion and another 20 to 30 billion to build can meet these requirements either by distribution centers in Beijing, Chengdu, building their own internal logistics network Guangzhou and Shanghai. Owing to the enormous market or by forming strategic partnerships. Although Tmall processes a huge number growth, and taking into consideration of parcels each day, Zhang Yong, president the widespread geography of the market, of Tmall, emphasised the company will analysts doubt whether retailers with innot create its own delivery system. Tmall’s house logistics capabilities will be able to a nn ou ncement s co i n ci d e wi t h s i m i l ar fully address the demand themselves. According to data by Singapore research maneuvers by competitor Dangdang.com, which extended delivery service times to as firm AT Kearney, China’s e -commerce market has expanded from nearly USD750 late as 10pm in eight cities. On the other hand, 360buy.com, one million in 2004 to roughly USD32 billion in of Tmall’s main competitors, is keen on 2009, which is equal to a compound annual building its own independent deliver y growth rate of 90 percent. It is estimated system. According to Zhang Lei, an analyst the market will be worth USD175 billion in a t Z h e n g w a n g C o n s u l t i n g i n B e i j i n g : 2014, which raises concerns as to whether “E-commerce companies with their own logistics companies will be able to keep up delivery systems still have the advantages of with the vast increase in volume. better controlling delivery speed and quality and providing enhanced user experience.” Maurits Elen is a Netherlands based Zhang added: “The service speed and quality correspondent for CHaINA Magazine. is expec ted to improve following new regulations on express delivery services which E-commerce companies with their own took effect on May 1.” delivery systems still have the advantages of For Qiu Jing, an better controlling delivery speed and quality office worker in Beijing, delivery speed was the and providing enhanced user experience. key motivation behind - Zhang Lei- analyst at Zhengwang Consulting in Beijing his decision to purchase at 360buy.com. Qiu said:
“
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VAT Expansion in China to be delayed
Peta Heinrich
Nulla id
T
he expansion of the value added tax (VAT) scheme which was trialled in Shanghai has been delayed. With ten cities and provinces waiting to join, the program had been expected to begin outside Shanghai in late May or early June, but will be postponed until early October. According to internal documents, the trial will begin in Anhui on 1 October, with a source close to China’s tax authorities saying: “Other applying cities and provinces that get approvals will probably also start the reform at the same time.” Under the pilot reforms in Shanghai, a VAT was levied on sectors such as transportation and various service industries to replace a business tax (BT) which was based on revenue of an enterprise. Under the new program, the VAT is levied on the difference between a commodity’s price before tax and its cost of production. Although significantly higher for some sectors, the BT tax rate was generally three to five percent. Under the VAT program, tax rates range from three to seventeen percent. The system aims to boost growth in service industries and promote structural taxation reduction. With the potential to remove inefficiencies facing businesses, the VAT reforms may bring considerable economic benefits. Under the new system, the taxpayer
is likely to end up paying less tax after recovering input VAT from the output VAT. Areas with VAT schemes are also likely to be more attractive to service companies. As such, many regions are keen to join the program including Beijing, Tianjin, Chongqing, Xiamen and Shenzhen, as well as the provinces of Jiangsu, Hunan, Hainan, Anhui and Fujian. According to Zheng Jianxin, deputy director at Chinese Ministry of Finance’s Taxation Department, China aims to spread the reforms countrywide by 2015. 61
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Does SAP have its head in a Cloud?
Peta Heinrich
S A P, t h e largest maker of enterpriseapplications software, is set to acquire cloud computing supplier Ariba in a $4.3 billion deal which could help the company become a major player in the cloud marketplace. Yet not everybody agrees this is money well spent. Ariba, a leader in cloud- based collaborative commerce applications, is the world's second largest cloud vendor by revenue, connecting to over 730 000 suppliers. The transaction is expected to be completed by the end of August, pending approval by Ariba shareholders and regulators. Cloud computing provides software, storage, computing power and other services from remote data centers via the internet, allowing companies to implement new programs faster and at lower cost than traditional products installed at a customer's own data center. SAP expects the acquisition will give the company a good position in a fast growing segment and help “create new models for
business-to-business collaboration in the cloud.” SAP Co-CEOs Bill McDermott and Jim Hagemann Snabe said: “The addition of Ariba will create the business network of the future, deliver immediate value to our customers and provide another solid engine for driving SAP’s growth in the cloud.” According to Richard Williams, an analyst at Cross Research in Livingston, New Jersey, Ariba would allow the company to automate business transactions with outside companies and make more competitive cloud-based business networks. Roger Kay, principal analyst for Endpoint Technologies Associates agrees: “Ariba is a solid business in its own right and gives SAP access to cloud computing technologies that it couldn’t replicate internally.” But others, including Forrester analyst Andrew Bartels, believe the deal may not make strategic sense due to the duplication of products between the two firms: “The only unique products that Ariba brings are its eInvoicing product (SAP has been reselling OpenText) and its SaaS version of
“
We don’t have the DNA in the cloud. - SAP Co-CEO Bill McDermott
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eProcurement and services procurement.” He sees fu r th er n eg at i ves i n Ar i b a’s “idiosyncratic pricing model” and inability to “generate the kinds of revenues that SAP is expecting”. The need to integrate Ariba products and systems into the SAS business may deflect management attention from product improvement and the selective filling of product range gaps with fully integrated products. Some also question whether SAP is paying too much for Ariba, which has closed as low as $22.12 in the past 12 months. Following the SAP offer on 22 May, the price leaped from $37.64, but has since remained a little under the offer price. In keeping with the trend of businesses increasingly storing and processing data on the Web, SAP is shifting many staple
applications to the Internet. According to McDermott: “We don’t have the DNA in the cloud.” He continued: “We’re probably the most strategic cloud player in the enterprise software industry.” SAP first made inroads into cloud computing with the purchase of SuccessFactors Inc. for over $3 billion in December. Oracle, one of SAP's biggest rivals, followed by signing an agreement to pay $46 per share for Taleo, a cloud- based human resource management software firm, and has also purchased social media marketer Virtue for $300 million. But Williams said there was still potential for other bidders to emerge: “There’s a histor y of bidding wars between SAP and Oracle and this is exactly the kind of strategic company that would spark something like that.” 63
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