China IPOs Executive Summary

2005 China International Procurement Organizations Survey Executive Summary Conducted by the China Supply Chain Council (CSCC) Sponsored & supported by Accenture

Global Sourcing and the Emerging Role of Chinese International Procurement Organizations Global sourcing has, in short order, become a fundamental consideration for corporate strategy. To assess executive level perceptions of global sourcing Accenture surveyed 238 senior procurement executives. Participants in the study represented a range of industries in both Europe and the United States In parallel with this, Accenture and the China Supply Chain Council (CSCC) conducted an in-depth assessment of International Procurement Organizations (IPO’s) in China and their role in building global sourcing capabilities.

This executive summary presents an overview of the findings of these studies, including some key insights on the trends in global sourcing and how Chinese IPO’s are rapidly becoming a fundamental part of a global sourcing strategy.

Global sourcing is a fundamental strategic objective for organizations Accenture research shows that organizations in large numbers are planning to make global sourcing a part of their core strategy.

Organizations plan to double their spend in low cost countries over the next three years and they expect savings to increase by an incremental 37 percent in that time over what they are currently achieving.

Why the increased attention to sourcing in low-cost countries? For many organizations, internal and external pressures have forced them to seek innovative ways to reduce their overall cost structure, while at the same time delivering a broader range of products and services to customers with increasingly shorter lifecycles. Simply put, global sourcing presents a compelling value proposition and provides another strategic lever for organizations to help meet these sometimes conflicting objectives.

The growth of China IPO’s China is a fundamental part of almost every organization’s global sourcing strategy and establishing an IPO is an effective means of maximizing the value from China sourcing. In fact, a significant proportion of organizations already have IPO’s in China, however over 50 percent of them are from only two countries.

With 36 percent of IPO’s established

by US organizations, the US is clearly the dominant country establishing IPO’s, followed by Germany at 17 percent. And for many of these organizations establishing an IPO is not a new venture. The survey revealed that almost 40 percent have four or more years experience with IPO’s. Among organizations without their own IPO, 55 percent intend to establish one in the next three years.

By industry, Electronic and High Tech (26%), and Industrial Equipment (20%) now form the largest segments investing in China. This is driven from a transformational shift occurring within the China export market. Traditionally, high growth export products have been heavy in

Migration to Eastern Europe, Asia and Central/South America Total procurement spend by region (in %)

National/home country

36%

45%

Total 2007

2% 2%

Africa and Middle East

Total today

10% 8%

Northern America 2% 4%

South and Central America

20% 18%

Western Europe 6%

Eastern Europe

11%

4%

South and Central Asia

7% 6%

Eastern Asia Japan Oceania 0% 0%

10%

4% 4%

0%

10%

20%

30%

Headquarters by region

40%

50%

Headquarters by industry Pharmaceuticals & Medical Products, 4%

Finland, 2% Canada, 2% Italy, 3% Great Britain, 3% Denmark, 3% Austria, 3%

Natural Resources, 2%

Media & Entertainment, 4% Retail, 4%

United States 36%

Sweden, 5%

Transportation & Travel Services, 7%

Netherlands, 5%

Electronics & High-tech, 26%

Chemicals, 7%

France, 8%

Automotive, 11% Others, 13%

Germany, 17%

Food & Consumer Products, 15%

“Others” include Saudi Arabia, Singapore, Taiwan, Australia, Pakistan, Japan and Malaysia

Source: Accenture and CSCC China IPO Survey, 2005

Organizations Experience with China IPO Initiatives Below, 14% Below expectation, 14% No Change, 14%

Meet expectation, 36%

Same performance as without China IPO, 14%

Exceed expectation, 11%

Slightly above expectation, 25%

Source: Accenture and CSCC China IPO Survey, 2005

Meet expectation & Exceed expectation, 72%

Industrial Equipment, 20%

Capabilities utilized within IPO Supplier market research Supplier identification & qualification Supplier development Identify saving opportunity

Fundamental capabilities

Over 70% of China IPO are focusing the development of their fundamental capabilities

Transactional capabilities

To materialize identified saving opportunities, China IPO needs to develop transactional capabilities

Progressive & sustaining capabilities

To maximize and sustain saving achievement, China IPO needs to equip with more sophisticated capabilities

Product quality inspection Supplier database development Execute bidding Logistics Management Procurement transactions Invoicing & payments Category management Develop supplier market strategies Inventory management Procurement & sourcing training

0%

50%

100%

Understand and implement total landed cost approach effectively High performance China IPO Source: Accenture and CSCC China IPO Survey, 2005

labor content. Now, we are seeing a clear shift to categories of goods with more technical and engineering components, reflecting China’s emergence as a higher quality category provider.

While there is clearly a growing trend to towards China, the key question for senior executives embarking on the execution of a Global Sourcing Strategy is: “Does the investment of time and effort to establish a functioning IPO in China provide the expected returns?” The short answer is yes.

Responses from the survey indicate that among those organizations which have established China IPO’s, 72 percent of executives feel that the ventures have met or exceeded their expectations. They feel their IPO’s delivered expected benefits within a set timeframe; helped them retain and maximize benefits; allowed them to continuously identify new opportunities and grow to expected size; developed strategic advantages; diversified their market risk; allowed

them to resolve all China sourcing challenges on the ground; and stimulated internal process change across the organization.

Success factors for IPO’s To achieve greatest value from an investment in a China IPO, organizations must develop a comprehensive portfolio of capabilities to ensure the best ‘Total Landed Cost’ solutions are developed.

The survey confirmed that many organizations—over 70 percent—are focusing on the development of their fundamental capabilities, such as supplier market research, supplier identification and qualification, supplier development and product quality inspections. This is a positive development. However, the survey also revealed that many organizations are not focusing on developing transactional capabilities, such as the execution of bidding, logistics management and procurement transactions. In addition, even less emphasis is being placed on the development

of progressive and sustaining capabilities, which include category management, inventory management, procurement and sourcing training, and the development of supplier market strategies.

Consequently, only eight percent of organizations with China IPO’s are currently maximizing their savings potential by effectively designing and implementing a suite of capabilities to provide ‘Total Landed Cost’ solutions from their investment.

In addition to a focus on specific capabilities, the research also revealed other less tangible factors that are essential for organizations to get right for their IPO’s to be successful.

• Effective Governance Structure - A China IPO is part of the home office procurement department operating in China to facilitate China sourcing activities. To work effectively within the China environment, a China IPO should put in place a governance structure which will allow it to have the

flexibility to engage the local supplier market but also maintain home office approved practices.

• Integration with the Home Office - Being far away from the home office, the China IPO team can experience difficulty accessing critical information and communicating with the product lead effectively. Integrating the China IPO successfully into the corporate family is a key internal challenge.

• Senior Executive Leadership - The survey suggested that installing senior executive management talent in an IPO is a fundamental requirement for success. Fully 66 percent of China IPO’s are managed by senior executives who have been charged with both the initial establishment of the IPO and its ongoing management.

not existed for more than one or two years, it can be expected that turnover will increase as the industry matures. Also, time will bring more people with higher levels of industry experience which will drive a competition for talent.

A talent management plan which addresses recruitment, retention and training will need to be in place to address this trend.

About Accenture Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With more than 115,000 people in 48 countries, the company generated net revenues of US$13.67 billion for the fiscal year ended Aug. 31, 2004. Its home page is www.accenture.com.

Copyright © 2005 Accenture All rights reserved.

About the China Supply Chain Council

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

The China Supply Chain Council (CSCC) is a leading community of 10,000 professionals dedicated to continually improving the professional abilities, progressing in careers, sharing information and resources, uniting as a community, setting standards for excellence, building credibility in the supply chain sector, and (best of all) having fun. Visit: www.supplychain.cn

ACC-3685

• Rigorous Talent Management - The success of the IPO will be directly dependent on the quality of its staff. While turnover is not yet a major issue, since many IPO’s have