Analysis of Manufacturing Location by Dragon Sourcing

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christian.santner@dragonsourcing.com | Tel: +43 664 88518030

About Dragon Sourcing We offer procurement services that deliver value from emerging markets, both for export and for localisation requirements Relevant category experience includes: Capex, Components, Transportation, Services, Raw Materials, Packaging, Promotional, & MRO. Key Services:

• Procurement Intelligence to deliver insight into categories and markets, and support effective procurement decisions.

• Global Sourcing to deliver sustainable value from sourcing goods and services from emerging markets.

• 70 staff globally • 15 locations across Asia, Latin America,

• Procurement Outsourcing

Middle East, Europe & US.

and setup of international procurement offices to increase productivity and decrease overheads.

• Headquarters in Shanghai (45 staff) • Private ownership since 2004 • Turnover: $7.5m (managed spend ~$1.2b)

• Capability Assessment of your international procurement operations to identify and implement practical opportunities for improvements © 2018 Dragon Sourcing. All rights reserved.

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Unser Netzwerk Ø

Unsere Teams sind ideal verteilt, um genau auf die Bedürfnisse unserer Kunden eingehen zu können.

Brussels

London Paris

Graz

Novosibirsk

Riga Warsaw Prague Kiev Budapest

Rome Ljubljana Bucharest Madrid Milan Istanbul

Houston

Shanghai

Tel Aviv Myanmar

Hong Kong

Mumbai

Mexico City

Bangkok Cambodia Manila

Ho Chi Min City

Lagos Addis Ababa Nairobi

Jakarta

Sao Paulo Santiago

Johannesburg

Buenos Aires Melbourne

Einkaufsbüros Sales-, Key Account Management und Projektbüros Büros von Dragon Sourcing Vertragspartnern © 2018 Dragon Sourcing. All rights reserved.

Service and Pricing Dragon Sourcing -­‐ Service Offerings

Market Intelligence

Country and Manufacturing Site EvaluaBon

Global Sourcing

Procurement OperaBons

Outsourcing

Pricing

DS Inhouse

Outsourced

Procurement Intelligence Should Cost Model Supplier Financial Assessment Supplier Supply Chain Assessment Supplier Ethics Assessment Category ExecuBve Dashboard Country SelecBon

x x x

x

x x x

Country/Region/City Analysis

x

Factory ramp up support PorHolio Analysis & Category PrioriBzaBon IdenBficaBon of potenBal suppliers (RFI process) Measuring cost compeBBveness of suppliers (RFQ process) AudiBng

x

x

x

x

x

x

Sample development and tesBng

x

x

Supplier development

x

x

Contract negoBaton

x

QC Management

x

x

LogisBcs Management

x

Payment / Invoice management

x

Interim Management

x (Buyers)

IPO Management

x

Standard

Comment

Fixed fees according to price list

Customized fixed fees based client's needs

Fixed fees according to price list

We can offer performance related deals (gain sharing, commissions, trading). Deals are structured on a case by case basis based on (1) spend value, (2) types of categories and (3) nature of the work required by the client For Long-­‐term Projects / High workload Projects, we move away from our standard pricing approach based on # of categories and # of countries to adopt a team-­‐based pricing

Fixed fee based on daily billing rate

x (SQE, SDE)

Fixed fee based on monthly billing rate

Fixed fees based on team size

Performance related deals are possible to be craPed on a case by case basis

Our Clients Automotive

Energy/Chemicals

Industrial Products

Consumer Goods

Kunden

Food & Beverage

Pharma / Medical

Retail

Construction

Heavy Machinery

Service

Government

Packaging

DIY

Manufacturing Location Analysis

Analysis Approach in 3 Stages

1

Country Selection •

Macro Analysis: Simple Score Card with basic indicators fitting client’s business case

2

Country Analysis •

Detailed Analysis: Detailed Score Card with specific indicators for client’s business case

3

© 2018 Dragon Sourcing. All rights reserved.

Region and City Analysis

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The analysis focused on the 2 pre-selected cities, Xiamen and Shenzhen, with the objective to establish a preference among these 2 options

Client Preliminary Considerations • Development of the area • Direct sea access • Air Access from Europe • Proximity and access to Taiwan

People Republic of China

FUJIAN Xiamen GUANGDONG

© 2018 Dragon Sourcing. All rights reserved.

Shenzhen

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TAIWAN

Client Pre-selected Cities • Xiamen • Shenzhen

Information from multiple sources were used to analyze each of the 2 options in terms of cost and convenience

• • • • •

COST RELATED CRITERIA Existing building rent / Land cost Labor cost Shipment cost Utilities costs Taxes

• • • • • • •

CONVENIENCE RELATED CRITERIA Infrastructure / local traffic Safety Local authorities attitude Utilities supply quality Labor "manageability" Air access to/from The Netherlands & Taiwan Seaport convenience

Information Sources • Shenzhen bureau of trade & industry information center • Shenzhen council for the promotion of International investment • Shenzhen Administrative bureau of free trade zones • Administrative of local taxation of Shenzhen municipality • Guangdong province price information website

• Xiamen Foreign Investment Bureau • China council for the promotion of International trade – Xiamen office • Xiamen Price bureau website

• Interviews with General Managers of western companies already located in Shenzhen or Xiamen • Various others (Sea shipment companies and sea forwarders, Airlines schedule, etc.) © 2018 Dragon Sourcing. All rights reserved.

Cost related criteria

CRITERIA Building cost

INDICATOR / PRACTICAL MEASURE Rental cost/m² Land cost Minimum wages level set by local government

Labor cost

Actual average wages for the typical worker profile Other employment related costs: insurances and other charges, allowance, etc…

Sea shipment cost

Freight cost to respectively Rotterdam and Los Angeles

Utilities

Utilities cost

Taxes

Local taxes

© 2018 Dragon Sourcing. All rights reserved.

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In summary, the cost difference between the 2 cities can at this stage be estimated between -230k€ and +80k€ Shenzhen

Xiamen

Difference / Comment

Potentially -310k€ Could represent around 310k€/year in "downtown" [50-30] x 13 000 x 12 = 3 120 000 RMB = 310 k€ areas

Building / Land Labor

Insignificant difference

Container shipping

+80k€

30 containers/month (45% Rotterdam, 35% LA)

+5% during peak Electricity Utilities

hours -1% over 24 hours

Water Gas

Taxes

© 2018 Dragon Sourcing. All rights reserved.

-17%

We may need to clarify the importance of water and gas consumption

+124% No difference

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Convenience related criteria

CONVENIENCE RELATED CRITERIA

• Infrastructure / ease to get around • Safety • Local authorities attitude • Utilities supply quality • Labor "manageability" • Air access to/from Germany & Taiwan • Seaport convenience © 2018 Dragon Sourcing. All rights reserved.

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We surveyed 13 GMs of Western companies with factories in Shenzhen or Xiamen to assess convenience criteria and complete unavailable information

23 questions survey covering: • Road Infrastructure • Safety • Local Authorities • Utilities supply • Labor 37 General Managers from Western companies with a factory located either in Shenzhen or Xiamen invited to respond to the questionnaire through a phone interview © 2018 Dragon Sourcing. All rights reserved.

• 13 participants to the survey • 7 from Shenzhen • 6 from Xiamen • 30-45 minutes phone interview with each of them for comments on their answers

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• Statistical assessment of soft criteria through the satisfaction level of people in these 2 locations • Complement when no available information

Despite Shenzhen slightly better sea shipping and air travel services, Xiamen is clearly a better place to be than Shenzhen, from a convenience point of view Shenzhen

Xiamen

Difference / Comment

Infrastructure / Ease to get around

Clear advantage to Xiamen

Safety

Responses to the survey don't reflect the danger often associate to Shenzhen

Local authorities attitude

Small difference on the average, but significant on support to companies, efficiency and corruption

Utilities supply quality

Clear advantage to Xiamen

Labor "manageability"

Clear advantage to Xiamen, mostly due to the higher weight of "local" workers

Air access

Benefit from Hong Kong proximity

Seaport convenience

Mostly due to shorter lead-time to Europe

Very Good

Good

Fair

Bad

Very Bad

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In conclusion, Xiamen appears to most likely be a better option for an assembly plant in China

Shenzhen

+

Cost

Convenience

Xiamen

Comment

++

• Only certainty on sea shipping (~80k€/year) • Building would actually be cheaper in Xiamen should client decide to pick a "downtown" location (estimated ~310k€/year)

++

• Sea shipping and air travel services are Xiamen only identified weaknesses

Considering: • The importance given by client to most of the convenience criteria • The cost difference that can either be in favor of Xiamen, or represent in the worst case ~80k€ per year

We consider Xiamen is most likely a better option for client © 2018 Dragon Sourcing. All rights reserved.

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Manufacturing Location Analysis Beispiel Ă„thiopien

13 Industrial Zones have been identified but only 2 are operational

Industrial Zones Industrial Zones

Current Operational Status

1

Operational

2

Operational

3

IZ Under Construction- No companies present yet

4

Govt. studying feasibility- awaiting external funds to commence construction

5

IZ Under Construction- No companies present yet

6

Govt. studying feasibility- awaiting external funds to commence construction

7

Govt. studying feasibility- awaiting external funds to commence construction

8

Govt. studying feasibility- awaiting external funds to commence construction

9

IZ not fully complete- very few companies present

10

Govt. studying feasibility- awaiting external funds to commence construction

11

IZ Under Construction- No companies present yet

12

IZ not fully complete- very few companies present

13

IZ not fully complete- very few companies present

Selected for further analysis (only IZs already operational) Not selected for further analysis Š 2018 Dragon Sourcing. All rights reserved.

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Selected for next stage of analysis

Of the 2 industrial zones that are immediately operational, X is the preferred option

Parameters

X Industrial Zone

Y Industry Zone

Developer

Government

Chinese company Group

Area

Phase I: 156 hectares fully complete and sold out Phase II: 186 hectares, construction in progress and is expected to be complete by the end of 2015. Booking open for Phase II

Phase I: 233 hectares Phase II: IZ in talks with the Govt. for additional 260 hectares for phase II expansion

Tax Holiday for Investors

Yes (Up to 2-7 years depending on case-by case approval by Govt.)

Yes (Up to 2-7 years depending on case-by case approval by Govt.)

Focus Industries

Textiles, Garments and leather products (including footwear) sectors

Textiles, Garment, Shoe, Construction materials, Electrical equipment, Engineering material equipment manufacturing and Food processing factories

Companies Present

1.

Factory Rent

USD 1 per square meter in Phase II (Under construction)

USD 2 per square meter

Available buildings for rent (L&R requires a building with floor space 20,000 sqm)

2 types of buildings in phase II being constructed: 5,000 sqm area buildings and 10,100 sqm buildings. No buildings available anymore of Phase I.

Buildings available with 10,688 sqm area in Phase I.

Closeness to Addis Ababa airport/ Djibouti sea port

15 km East of Addis Ababa

37 Km East of Addis Ababa

1.

Shortlisted Industrial Zone No

Yes Recommendation (Cheaper rental cost & closer to Addis Ababa) © 2018 Dragon Sourcing. All rights reserved.

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(Rental more expensive, IZ focus is multi industry and further from Addis Ababa)

Detailed Analysis – Location Analysis of X (1) Building & (2) Legal Entity (3) Tax and (4) Electricity

Parameters Section

X - Location

Legal

Tax

Electricity (Govt. Rates)

Industrial Zone Sub-section

X

Land Available (hectares)

156 Hectares in Phase I & 186 hectares in Phase II

Location

15 km east to Addis

Developer

Ethiopian Government

Time to set up a factory

Six months to a year (estimated time to construct factory by the tenant) from the time company is registered and lease signed

Special Economic Zone

Yes, no import duty and export duty for products manufactured for 100% export.

Monthly Rent per square meter

IZ provides building at a rent of USD 1/m2 for 5 years and for the next 5 years at USD 1.25/ m2. Tenants have the option of building their own plant as well

Floor space of available buildings

2 buildings at 5,000 sqm each and one at 10,100 sqm

Security Deposit

USD 25,000

Lease Option

Investing companies have the option of building their own building by leasing land from the Govt. in X. Land is usually leased out for a period of 70 years at a one time payment of USD 11.55 per square meter (period of lease and price per square meter subject to case by case approval by the authorities). Price per square meter can be paid in full or over a period of 20 years including interest charges.

Maintenance Cost to the IZ

None. All utility costs will be paid by the tenants themselves directly to the service providers

Paper work time for registering company in Ethiopia

10 business days from the time lease is signed

VAT

15%

Corporate Income Tax Holiday

2-7 years depending on case by case approval by the authorities based on the level of investment and projection of the growth in exports by the investing company

Expat salary income tax holiday

Up to two years

High voltage Consumers for over 400 KW per month

USD 0.038/KW (ETB 0.77/KW)

Š 2018 Dragon Sourcing. All rights reserved.

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Detailed Analysis – Location Analysis (6) Workforce – 2/2 Parameters Section

Workforce

Indicative Time to Recruit a worker (number of days)

Indicative Total Cost to the Company per worker category in USD

Industrial Zones

Sub-section

X

Termination cost to employer

3 months salary as termination cost to be paid by the employer of 3 months notice not provided- normal working practice in Ethiopia

Yearly bonus

Depends on the profit gained by the employer and based on its own policy, not stipulated by the Government

Lean period

Major religions are Christianity and Islam - Christmas time and Ramadan time are lean period

Operator

30-45 days

Technician

30-45 days

Supervisor

30-45 days

Engineer

30-45 days

Manager

30-45 days

Plant Manager

30-45 days

Operator (2 years experience)

USD 50 excluding mandatory 11% pension fund and 3% health insurance

Technician (2 years experience)

USD 50 excluding mandatory 11% pension fund and 3% health insurance

Supervisor (3-5 years experience)

USD 100 excluding mandatory 11% pension fund and 3% health insurance

Engineer (5 years experience)

USD 350 excluding mandatory 11% pension fund and 3% health insurance

Manager (5 years experience)

USD 550 excluding mandatory 11% pension fund and 3% health insurance

Plant Manager (5 years experience)

USD 550 excluding mandatory 11% pension fund and 3% health insurance

© 2018 Dragon Sourcing. All rights reserved.

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We have interviewed industry experts: Summarized Feedback General comments • Ethiopian suppliers speak little English and the communication is mostly happening in local languages.

• Ethiopian suppliers rather want to have face2face B2B relationships, and are rather weak in internet communication.

• Importing yarn to Ethiopia will be cheaper only if the end purpose is for exports as the raw material can be imported under duty & tax exemption.

• Ethiopian companies are importing yarn from different markets globally.

• Larger textile companies in Ethiopia try to be intensively vertically integrated, due to the difficult local supply situation.

Yarn Category: • Ethiopian spinning mills seem to be producing only 100% cotton yarn or viscose yarn.

• Spinning mills are producing yarn either for self consumption if they are integrated mills or supplying limited volume outside to regular clients.

• Supply of cotton yarn to the local market is not sufficient hence garment companies or local suppliers are also importing cotton yarn.

30-40% of the cotton processed in Ethiopia is from local suppliers, rest is imported.

• Local cotton price should be competitive, length of fibers and chemical composition often lack in quality.

• Spinning mills are not producing man made yarns like Elastane, Polyamide, etc. so garment companies are directly importing or buying man made yarns from the local importers.

Corrugated boxes Category: • Number of manufacturers is limited, small to medium scale manufacturers are available with limited flexibility to make customized size.

• Suppliers’ capacity utilization seems very high leaving little room for new clients.

• Local textile companies are buying the corrugated boxes from local manufacturers only but the supply is not easy and needs to be followed aggressively to ensure on time delivery.

• Manufacturers requesting 100% payment in advance before starting the production and almost every time do not comply with the deadline.

• Delays are happening due to frequent power cuts. © 2018 Dragon Sourcing. All rights reserved.

ANALYSIS OF TOTAL COSTS IN ETHIOPIA VS CHINA VS CZECH REP © 2018 Dragon Sourcing. All rights reserved.

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STAFF COMPARISON OF LABOR COST PER MONTH

Level

# of staff

CN

Weaver

100

Technician

10

Supervisor

10

Engineer

10

Manager

5

© 2018 Dragon Sourcing. All rights reserved.

CZ

61

ETH

RAILWAY PLAN

© 2018 Dragon Sourcing. All rights reserved.

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MEETING 16 INDUSTRY MINISTER

Meeting with:

Tadesse HAILE, State Minister, Ministry of Industry

Meeting notes: • • • • • • • • • • •

Goal is to make cotton available at a competitive price from in and outside of Ethiopia New railway will bring “50% improvement of land transport price” 80% of Ethiopian people live in the highlands Proposed to move into Awassa IZ, there are 34 sheds under construction and already 22 of them are occupied/booked There are only 12 sheds remaining for new investors In order to get the sheds, the investor needs to submit its proposal Government wants to subsidize the transport to Awassa, so that cost is similar than from Addis Comparable quality and quantity of labor available in Awassa Airport in Awassa needs 1,5 years to be finished IZ in Awassa will be finished mid of 2016 8 Companies which have booked in Awassa: 1. PVH - US - Garments 2. Arvind - India - Garments 3. Wuxi - China 4. …

© 2018 Dragon Sourcing. All rights reserved.

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Summary

• Mehrstufiger Prozess hilft, sich über die eingenen Anforderungen eines neuen Standortes klar zu werden • Exakten Kostenvergleich schaffen wenn möglich auf Basis Produkt-Kosten, welche verlagert werden sollen (inkl. Umfassender Import- und ExportKalkulation) • Lokale Vorteile/Incentives genau prüfen • Sehr hilfreich sind zahlreiche konkrete Einschätzungen von erfahrenen Managern vor Ort als ausgewerte Umfrage zusätzlich zur Datenbasis

© 2018 Dragon Sourcing. All rights reserved.

DI (FH) Christian Santner Director Germany, Austria and Switzerland christian.santner@dragonsourcing.com Dragon Sourcing Germany, Austria and Switzerland Kohldorf 79 | 8323 Sankt Marein bei Graz Austria T: +43 664 88518030 F: +43 316 2311238882 Dragon Sourcing Ltd. Headquarter 7/F Hong Kong Trade Centre 161-7 Des Voeux Rd Central Hong Kong SAR T: +852 91 80 40 57 F: +852 25 80 24 26

www.dragonsourcing.com

Eine Adresse.

Weltweite Märkte.

One stop.

Worldwide sourcing.