Strategic Selection of FTZ for setting up a new manufacturing facility for a global security systems

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Case Study Strategic Selection of FTZ for setting up a new manufacturing facility for a global security systems company

Agenda

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1.

Context

2.

Phase I Analysis

3.

Phase II Analysis

4.

Phase III Analysis

5.

Results and conclusions

2

Context • Client: A global digital security systems manufacturer • Business Requirement: Our client wanted to select a Free Trade Zone in Asia to set-up a new manufacturing facility in addition to a facility already operating in China

• Dragon Sourcing Approach: Dragon Sourcing conducted a structured 3- phase analysis of 11 FTZs in Asia, pre-selected for the study by both the client and Dragon Sourcing, eliminating FTZs on preset parameters in each phase • 3- Phase Study: Study was conducted in 3 phases and each of the phase is explained in the following slides

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Agenda

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1.

Context

2.

Phase I Analysis

3.

Phase II Analysis

4.

Phase III Analysis

5.

Results and conclusions

4

Phase I - Evaluation of Manufacturing Hubs Objective • Analysis and ranking of pre-selected Free Trade Zones in Singapore, Manila (Philippines), Ho Chi Minh City (Vietnam), Chengdu (China), Phnom Penn (Cambodia), Johor (Malaysia), Batam and Jakarta (Indonesia), Dubai, Delhi and Chennai (India) Methodology • DS used publicly available information sources through secondary research, government sources and primary information from local logistics & customs clearance companies to analyze and rank FTZs based on the following parameters: – Freight capacity of the closest airport to FTZ • Number of freight flights per day to major destinations in US, Canada, Europe and Africa • Number of pallets handled per day – Lead time for export and import clearance

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The scope covered 11 cities (FTZ/hubs) in Asia. Airports in these FTZs were analyzed for air cargo frequency and capacity to destination cities in Europe, US, Canada, UAE.

Hub/ FTZ

Singapore Manila

Destinations

HCMC

Los Angeles

Chengdu

Philadelphia

Phnom Penh

Toronto

South Malaysia (Johor)

Montreal

Batam

Paris

Jakarta

Amsterdam

Dubai

Frankfurt

Delhi

Dubai

Mumbai

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Chennai (added)

Hubs connectivity direct flights all-cargo and passengers lines

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Analysis and Scoring of Airports near Free Trade Zones

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Based on Airport capacity and air cargo frequency, 9 FTZs were chosen for Phase II analysis

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Phase I – Summary • 7 Free Trade Zones/ Hubs were shortlisted based on the ranking of airports close to the FTZ, which include – Jebel Ali Free Zone/Dubai International Airport – Iskandar (Johor)/ Changi Airport (SG) or KLIA – Batam/ Changi Airport (SG) – Cavite Economic Zone to Manila/ Manila Niny Aquino International Airport (PH) – Tan Thuan EPZ (HCMC)/ TSN International Airport (HCMC) – Chengdu Hi-tech Zone/ Shuangliu International Airport (China) – Sri City/ Chennai International Airport (IN) + Chennai Free Trade Zone, and – Bangkok Free Trade Zone (TH) • Malaysia, Indonesia, Philippines, Vietnam and Thailand Free Trade Zones/Hubs are considered for Phase II analysis by Dragon Sourcing and the remaining Dubai, China and Indian Free Trade Zones/Hubs will be analyzed by the client

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Agenda

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1.

Context

2.

Phase I Analysis

3.

Phase II Analysis

4.

Phase III Analysis

5.

Results and conclusions

11

Phase II - Detailed Evaluation of Manufacturing Hubs Objective • A detailed evaluation and in-depth analysis of the FTZs shortlisted in Phase I was performed and the FTZs were scored based on a scorecard developed jointly by the client and DS Methodology • Dragon Sourcing conducted phase II analysis of the following parameters on FTZs shortlisted from phase I – Tangible Cost parameters like • Rent of available factory space in FTZs, cost of electricity, water, other utilities and cost labor workforce – Intangible Cost parameters like • working hours, overtime, public holidays, termination contract and costs, religious and local specific lean periods, availability of electricity, availability of space for factory, income tax and hub incentives, other environmental parameters like logistics, infrastructure, corruption, neighbor industries • Dragon Sourcing obtained information through desk research from primary data sources (HR resources, government authorities and representative staff) and a multitude of legitimate secondary sources such as websites of FTZ authority, government websites, etc.

• Dragon Sourcing created a scorecard and scored the FTZs on the above parameters

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Sample Scoring of Tangible Parameters Rental Charges

Cost Driver Framework • Cost is driven by Structural

– Rental Charges – Electricity Tariff – Salary Electricity Tariff

Salary

(Engineer Salary as an example)

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Sample: Comparison of Hubs based on Tangibles and Intangibles

Comparison of Scores - Tangibles & Intangibles Tangible Final - Score

Intangible Final - Score

Grand Total

120 100

100

100

100

93

100

93 87

78

80

72

69

60 40

80

77

74 67

66

Hub 3

Hub 4

85

78

76

75

79 72

80

75

65

66

67 68 67

Hub 9

Hub 10

55

33

20 0 Hub 1

Hub 2

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Hub 5

Hub 6

14

Hub 7

Hub 8

Sample: Labor wage rate scoring Workforce

Measure

Maximum Score per Criteria

Hub 1

Hub 2

Hub 3

Hub 4

Hub 5

Hub 6

Hub 7

Hub 8

Hub 9

Hub 10

Total Cost of an Operator (monthly)

1=More than $400 2=$400 to $350 3=$350 to $300 4=$300 to $250 5=Less than $250

5

1

1

5

3

5

4

4

5

5

2

Total Cost of a Technician

1=More than $600 2=$600 to $550 3=$550 to $500 4=$500 to $450 5=Less than $450

5

1

1

3

5

5

5

1

5

5

1

Total Cost of a Supervisor

1=More than $1000 2=$1000 to $800 3=$800 to $600 4=$600 to $400 5=Less than $400

5

1

2

4

4

5

1

2

4

4

1

Total Cost of an Electrical/Mec hanical Engineer

1=More than $800 2=$800 to $700 3=$700 to $600 4=$600 to $500 5=Less than $500

5

1

1

3

2

1

3

1

5

3

1

Total Cost of a Plant Manager

1=More than $2,100 2=$2,100 to $1,600 3=$1,600 to $1,100 4=$1,100 to $600 5=Less than $600

5

1

1

1

1

1

1

1

1

1

1

Legend:

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1 less than current facility

2 less than current facility

3+ less than current facility

1 more than current facility

2 more than current facility

3+ more than current facility

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Phase II – Summary • 4 FTZs were shortlisted for phase III part of the study based on the ranking in the scorecard, which include – Batam, Indonesia – Ho Chi Minh, Vietnam – Chennai, India – Bangkok, Thailand

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Agenda

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1.

Context

2.

Phase I Analysis

3.

Phase II Analysis

4.

Phase III Analysis

5.

Results and conclusions

17

Phase III – Physical Audit of the selected hubs Objective • To conduct a due diligence of the Free Trade Zones in the shortlisted countries by conducting a physical audit. The information collected through desk research in phase II was also cross-verified and validated Methodology • Based on phase II study, 4 cities/ countries were selected for phase III analysis- physical audit of the short listed FTZs on the parameters used in phase II analysis to make sure information collected through desk research is correct • FTZs in these 4 cities/ countries were identified and Industrial Estates within these FTZs were identified based on the immediate availability of factory space for move-in • In addition to the parameters of phase II, the following information was also collected during physical visit – Availability of factory space – Amenities provided by the Industrial Estate and/ or FTZ – Ease of getting labor force onboard through HR consultancies – Local problems that could potentially impact labor and productivity – Interview workers from neighboring companies to understand if there are any unions/ how active they are, etc.

– Verify access to Ports/ Airports – Whether the area is prone to flooding/ natural disasters – Availability of potable water – Interview logistics and freight forwarders – Time for customs clearance – Whether the local customs agency is efficient or if any delay can be expected • Dragon Sourcing visited the free trade zones & industrial estates and estimated the operating cost by discussing with the trade zone authorities and other peer companies thus understanding the real operating conditions. Total monthly cost in each free trade zone is compared to come up with the best suitable free trade zone for the client. © 2015 Dragon Sourcing. All rights reserved.

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Sample: Phase III Analysis of FTZs Parameters Section

Sub-Section • Is there a ready-to occupy factory available?

FTZ

• Is the factory available for rent?

• Factory floor space (sq.m)

Location Specific

Rental

• Approximate Distance from Airport (km)

Industrial Estate 1 



• 9,217

FTZ2 Industrial Estate 2

Industrial Estate 3 







• 12,155

• 11,700

Industrial Estate 4 



FTZ3

FTZ4

Industrial Estate 5

Industrial Estate 6

Industrial Estate 7



No Only land available at present





No Only land available at present

No

• 8,070 (Total • 5,640 area of 4 small Expandable factories) twice in size

• 10,000 • (land only)

•

1,950

72.5

73.5

84

40

147

18

36.5

4-6 months

4-6 months

4-6 months

4-6 months

4-6 months

9-12 months

9-12 months

• Factory rent/sq.m (USD)

3.8

3.8

4.8

6.7

7

6

X

• Maintenance cost/sq.m (USD)

0.91

0.23

0.02

0.02

0.02

0.48

0.04

X

X

X

X

X

X

X

0.16 1.29 0.2

0.12 1.4 Nil

0.09 0.5 0.18

0.09 0.6 0.18

0.09 0.7 3.04

0.16 0.46 0.24

0.1 0.87 Nil

• Time required to start operations including obtaining permits

• Estimated Renovation Capex(USD) Per Sq. M*

Utilities

FTZ1

• Electricity cost/kWh (USD) • Water tariff/cu.m (USD)

• Sewerage tariff/cu.m (USD)

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Sample Analysis of FTZs Parameters

Section

FTZ1

FTZ2

FTZ4

Sub-Section

Industrial Estate 1

Industrial Estate 2

Industrial Estate 3

Industrial Estate 4

Industrial Estate 5

Industrial Estate 6

Industrial Estate 7

• Administration Efficiency

Good

Good

Good

Good

Good

Poor

Poor

Very quick (5-6 hours)

Very Slow (3-4 days)

Bureaucracy • Customs clearance

Quick (<24 hours) Quick (<24 hours) Quick (<24 hours) Quick (<24 hours) Quick (<24 hours)

• Availability of Packaging Suppliers (Estimation)

10-15

10-15

25+

25+

25+

10-15

25+

• Availability of Tooling Suppliers (Estimation)

5-10

5-10

25+

25+

25+

<5

25+

Eco System • Scheduled Power Cuts (Yearly)

• Unscheduled Power Cuts in 2014

Tax

FTZ3

• Corporate Tax (%)

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1-2 times per year 1-2 times per year 1-2 times per year 1-2 times per year 1-2 times per year 1-2 times per year 1 hour every day for 1 hour for 1 hour for 1 hour for 1 hour for 1 hour for 1 hour

2 times

2 times

Nil

Nil

Nil

3-4 times

10+ times

25%

25%

20%

20%

20%

25%

30%

20

Sample Analysis of FTZs Parameters

Sub-Section Minimum Monthly Wage (for ref)

Worker Termination Compensation

Paid Sick leave

FTZ1 Industrial Estate 1

Industrial Estate 2

FTZ2 Industrial Estate 3

USD 215 (In 2014) High • 2 month per worked year 2 + 15% of monthly allowance

• 12 months paid sick leave (with doctor certificate)

Industrial Estate 4

Industrial Estate 5

USD 219 (In 2015) Med 30 days’ for employment period below 120 days, 90 days’ for employment period from 1 to 3 years, 180 days’ for employment period from 3 to 6 years, 240 days’ for employment period from 6 to 10 years 300 days wages for 10 years and more An employee must be granted a minimum of 30 days paid sick leave with pay (by employer) each year. An employee using sick leave for three • consecutive working days can be required to provide a physician's certificate proving the illness

• • • • • •

FTZ3

FTZ4

Industrial Estate 6

Industrial Estate 7

USD 145 (In 2015)

USD 97 (In 2014)

Low • 15 days’ per worked year

Low • 15 days’ per worked year

• 30 days max with proven document from doctor. Paid by the government.

Paid leave allowance

14 (Women get 1 day off every month additional)

13

10

13

Min Wage Revision Period

Every Year

No systematic. Next revision in 3 years

Every Year

Every Year

Social/Health Insurance Cost

18%

5%

30%

42%

Approximate time to recruit an employee

60 days

90 days

90 days

60 days

HR Benefits Package

Contract type (permanent / temporary) Availability of English Speaking Labor Projected Labor wage increase (YOY %) 2014-15 Lean Month (Holiday Season in 2015) No of official holidays in 2015 (days)

• Accommodation, food, access to prayer hall

Food, high bonuses (6 months by auto industry)

• Free two-wheeler service annually, food

• Food, transportation allowance

Permanent

• Temporary: 3 + 3 years then permanent

• Permanent

• Temporary: 2 + 1 year then permanent High

High

Medium

High

14%

0%

12%

12%

Ramzan (Jun-Jul)

Songkran (Apr)

Chinese New Year (Feb)

Diwali (Oct-Nov)

15

10

15

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Phase III – Summary • Information was collected on available factory spaces in the Industrial Estates in FTZs of the 4 cities/ countries • Tangible costs were calculated in the FTZs and compared against client’s current tangible costs in their Chinese facility • Two Industrial Estates were selected by the client based on both tangible costs associated with those FTZs and intangible parameters like the country’s HR policy, availability of labour force, etc

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