Global Sourcing. Procurement in China

Bachelor Thesis, 2005

110 Pages, Grade: 1,7



1 Introduction
1.1 Problems and Objectives
1.2 Structure

2 Procurement Market China
2.1 Basic Information
2.1.1 Geographical Data
2.1.2 Economic Data
2.2 The Significance of China as a Procurement Market
2.3 Procurement Regions
2.3.1 Pearl River Delta
2.3.2 Yangtze River Delta
2.3.3 Beijing-Tainjin Bohai Bay Triangle
2.3.4 North-Eastern Lowlands – Liaoning Region
2.3.5 The Inner Regions
2.4 Chinese Companies
2.4.1 A Division of 6 Classes National Champions Dedicated Exporters Competitive Networks Technology Upstarts Emerging Companies Scrap Companies
2.4.2 Forms of Ownership of Chinese Companies
2.5 Products Suitable for Industrial Procurement in China

3 First Contact to Potential Suppliers
3.1 Possibilities of Contact Initiation
3.1.1 Trade Promotion Office in the Embassies
3.1.2 Chinese Representative Offices in Germany
3.1.3 Chinese National Foreign Trade Companies
3.1.4 Industry and Commercial Companies in China
3.1.5 Fairs
3.1.6 Seminars and Symposiums
3.1.7 International Procurement Offices
3.1.8 Internet
3.1.9 Magazines and Technical Periodicals
3.1.10 Business Partners, Acquaintances and Friends
3.2 Exhibition Market China
3.2.1 Trade Fair Visit within the Context of a Purchasing Strategy in China
3.2.2 Trade Fairs in the Consciousness of Chinese Companies
3.2.3 Trade Fair Industry and Trade Fair Centres
3.2.4 Successful Trade Fair Visit for Purchasers
3.3 Initiating Business – from First Contact to Business Relations

4 Quality Management
4.1 Quality Management in International Procurement
4.2 Quality Consciousness in China
4.2.1 Development of Quality Management in the PR China
4.2.2 Quality Consciousness Today
4.3 Practical Quality Assurance Measures
4.3.1 Supplier Certification
4.3.2 Assessment of the Supplier by Audit
4.3.3 Quality Agreement
4.3.4 Quality Support

5 Transportation Logistics
5.1 Introduction
5.2 Logistics Companies in China
5.3 Traffic Carriers in China
5.3.1 Road Traffic
5.3.2 Rail Traffic
5.3.3 Aviation
5.3.4 Inland Waterway Transportation
5.3.5 Sea-going Vessel Transportation
5.4 Checklist for the Selection of a Logistics Service Provider

6 Chinese Negotiations
6.1 Roots of Chinese Culture
6.2 Basic Values
6.2.1 Personal Connections – Guanxi
6.2.2 Face (Lien and Mien-tzu)
6.2.3 Hierarchy
6.3 Further Important Aspects
6.3.1 Patience
6.3.2 Significance of Business Cards
6.3.3 Different Contractual Understanding
6.3.4 Minutes of Meeting
6.3.5 Translator
6.3.6 Gifts
6.3.7 Business Meals

7 Conclusion


List of Lectures

Internet Links

List of Figures

Figure 1: Map of China

Figure 2: Sourcing regions of Asian and European countries

Figure 3: Comparison of hourly compensation for production workers

Figure 4: Pearl River Delta

Figure 5: Yangtze River Delta

Figure 6: Beijing-Tianjin Bohai Bay Triangle

Figure 7: North-Eastern Lowlands – Liaoning Region

Figure 8: Inland

Figure 9: Scrap company

Figure 10: Servopiston unmachined

Figure 11: Servocyclinder unmachined

Figure 12: China International Exhibiton Centre

Figure 13: Shanghai New International Exhibition Centre

Figure 14: Guangzhou International Convention & Exhibition Centre

Figure 15: Initiating Business

Figure 16: Traffic Infrastructure

Figure 17: Road Transportation

List of Tables

Table 1: General Data on China

Table 2: National Champions

Table 3: Dedicated Exporters

Table 4: Competitive Networks

Table 5: Technology Upstarts

Table 6: Forms of Ownership of Chinese Companies

Table 7: Basic Values in China

Table 8: Basic Values in Germany

List of Abbreviations

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1 Introduction

1.1 Problems and Objectives

The significance of global purchasing activities is becoming ever more important for German companies. The high salaries – and non-wage labour costs – and the high production costs in the German economic region associated with them are reflected in the prices of products. A way out of this cost trap for many companies is offered by international procurement and production. They see in global procurement a possibility to purchase parts of products cheaply. Thus, an orientation towards international procurement and supply is both understandable and necessary.

For Germany, China is the most important trading partner in Asia. The most striking feature in the last few years has been the change in the structure of procurement from China: whilst in the past it was mainly textiles, shoes and toys that were sourced there, the focus is now shifting to more high-tech product categories, such as metal products, pressure die-cast components, electronic components and hardware, for example. This increasing provision is drawing production companies to China, companies which are on the outlook for potential savings. In addition to China’s cost advantage, the quality level and the reliability of suppliers in China have increased in the last few years.

Despite all the options available, China is, however, not a simple and transparent procurement market and should not be tackled with undue haste under any circumstances. All buyers who would like to get involved in this new business in China are subject to a series of problems. The geographical distance, the foreign culture and language as well as the lack of market knowledge all play an important role. This is why the China’s potential as a base for procurement is still being used too little, especially by German companies. Proceeding in a systematic way and carrying out thorough preparations reduce risks and help to ensure success in the Chinese procurement market.

The objective of this thesis is the creation of a guide to industrial procurement in China. It is aimed at purchasing employees in German production companies who have not yet had experience of dealing with or in China and who would like to start. The guide is to give an initial general orientation towards that which purchasers expect and how they can best carry out their sourcing project. The reader is given insight into the Chinese procurement market. Problem areas and hurdles regarding procurement in China are observed; practical tips are given to get round such problems.

Due to the size of the subject matter, it is not concerned with developing a complete compendium of industrial procurement in China. Some questions which have been discussed in other publications will inevitably remain open. Thus, e.g. taxation and legal aspects are not dealt with. The reader who is interested in further information is directed to the literature list as an aid.

1.2 Structure

The thesis is divided into seven chapters.

After the introduction in Chapter 1, Chapter 2 focuses on the “where” (procurement regions in China), on the “from whom” (classification of Chinese suppliers) and on the “what” (procurement products) of the involvement of a production company in China.

The focus of Chapter 3 is the initial contact with possible Chinese suppliers. The different possibilities of establishing contact are shown, dealing in particular with the Chinese trade fair market and the behaviour of German buyers at Chinese fairs.

For German companies which have already gained buying experience in China the quality of the products supplied is a great problem. Thus, Chapter 4, after describing the quality consciousness of the Chinese, presents practical measures for quality control with regard to procurement in China.

Chapter 5 deals with transport logistics. It describes the different types of logistics service providers and the potential carriers for inland and export logistics with their opportunities and risks. At the end of the chapter, a checklist gives assistance in choosing a logistics service provider.

Chapter 6 is concerned with “Negotiations in China”. Some basic values which still determine the course of negotiations today can be found in the roots of Chinese culture. The reader is also given practical tips for successful negotiations in China.

The concluding remarks are presented in Chapter 7.

2 Procurement Market China

2.1 Basic Information

This section presents a short overview of the most important geographical and economic data on China.

2.1.1 Geographical Data

Fig. 1: Map of China[1]

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Table 1: General Data on China[2]

2.1.2 Economic Data

Despite some doubts as to the accuracy of its statistics, the People’s Republic of China is undoubtedly one of the countries with the strongest economic growth. Gross Domestic Product (GDP) in 2004 reached a value of $1650.7 billion . After 9.1% (2003) GDP rose by 9.5% and reached its highest growth level since 1996. China has since become the sixth biggest economy in the world. GDP more than doubled in the 10 years between 1994 and 2004 (+128%). In the same time frame, its export trade volume rose almost six-fold from 198 million to 1.155 billion dollars. This gives it 3rd place among the trading nations, behind the USA and Germany.

In contrast, on the international welfare scale China is in the last third. GDP per capita passed the 1000 dollar threshold for the first time in 2003. If one takes into account the different levels of prices in the countries, GDP per capita based on purchasing power can be calculated at approximately 4700 dollars. The slight level of development can be seen by the fact that almost 15% of GDP is still produced in the primary sector, which employs almost half of all gainfully employed. The tertiary sector of industry, also called the service sector, contributes just 32% to the production of GDP – compared to 60 to 70% in industrialised nations. Unemployment among the 745 million employees is around 10% in the cites, somewhat higher in rural areas.[3]

2.2 The Significance of China as a Procurement Market

From a German point of view, the Chinese procurement market has increased considerably in significance in the last fifteen years. This is shown by the very dynamic growth in the German imports from China, which more than quadrupled from 8 billion in 1995 to 32.5 billion Euro in 2004.[4] The share of technological products also increased in the same period. In 2004, China was Germany’s sixth most-important trading partner for imports. In the mid term, it is assumed that by 2010 bilateral trade will have doubled.[5]

The growing significance of the Asian supply market is also shown in a study carried out by the University of Applied Sciences in Berlin.

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Fig. 2: Sourcing regions of Asian and European countries[6]

According to this, the European companies questioned will increase their procurement volume in the Far East from 10% to 15%. Whereas Europe will continue to increase its worldwide imports from an average of 40% to 49%, the procurement departments in Asia will reduce their share of global sourcing from 60% to 46% (see Fig. 2).[7]

The Chinese procurement market is observed by international companies from many different perspectives: on the one hand, as a so-called sourcing market against the background of the realisation of price advantages and cost reduction or to expand the supply spectrum within the framework of global sourcing, and on the other hand as a local procurement market for raw materials, prefabricated products, accessories, and machine and plant equipment for production in China.

There are many reasons why China has become one of the world’s most significant export countries within a relatively short time:[8]

- Cheap production due to a comparatively cheap but increasing highly qualified workforce. Chinese universities currently supply the job market with approximately 3 million highly qualified engineers and natural scientists annually. The average monthly salary for a young academic is currently at approx. 250 Euro in the cities.
- Extensive capital investments: in 2004, Foreign Direct Investment (FDI) in China reached a volume of US$ 60.6 billion.[9] China is the largest receiver of FDI.
- Improvements in product quality and production efficiency due to advances in technological developments as well as restructuring of the economy. There are even Chinese companies certified by the TÜV-ISO.
- Continually improved infrastructure and efficiency of the logistics system: as a rule, goods from China can reach European ports via sea within approx. 4 weeks.[10]
- Expanding Chinese internal market: strong competition within the internal market, the continual inflow of foreign investment and new technologies ensures market adjustment in all areas and increases the international competitiveness of Chinese industry.

Due to these aspects, in particular the unrivalled low wage costs, China is developing into one of the most lucrative procurement markets. According to the study “Capturing Global Advantage“ by the Boston Consulting Group, China’s cost advantage will not change in the next few years. The cost gap is not only unlikely to close within the next 20 years but in some cases may actually increase. Mainly there are 2 reasons for this:[11]

First, the growth of wages in China will be limited because of the enormous reservoir of under- and unemployed people. China still has more than 800 million people living in the countryside. They are expected to exert very strong downward pressure on wages for low-skilled positions over the next few decades. Although there will be more pressure on higher-skilled positions, the supply of candidates for such positions is also very large.

Second, the current differential in labour rates is so great that the gap between them will remain substantial for the foreseeable future, even if there are double digit differences in the rates at which they grow (see Fig. 3).

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Fig. 3: Comparison of hourly compensation for production workers[12]

In fact, the gap in real wages will actually increase in absolute value, at least for the next few years, because the bases are so widely different. A U.S. or Western European factory worker costs an employer $15 to $30 per hour. A Chinese factory worker earns less than $1 per hour – a gap of $14 to $29. If wages increase at an annual rate of 8 percent in China, while in the United States and Germany they increase at annual rates of 2.5 percent and 2 percent, respectively, in 2009 the average hourly wage will be approximately $1.30 in China, $25.30 in the United States and $34.50 in Germany. So despite the disparity in growth rates, the gap will have expanded by up to $4 (assuming that there is no significant change in the relative values of the countries).

2.3 Procurement Regions

China’s 5 procurement regions are described below.

2.3.1 Pearl River Delta

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Fig. 4: Pearl River Delta

The Pearl River Delta is not only one of China’s most dynamically developing economic regions but also one of most quickly emerging worldwide. In half a million manufacturing sites, it produces approx. 10% of all the People’s Republic’s goods and services, attracts almost 25% of all foreign direct investment and produces almost 40% of all the country’s exports. In the ports of the Pearl River Delta, almost as many containers are handled as in all of the USA.[13]

Traditionally, Guangdong is a home to light industry, which makes up more than half of industrial output. The most important products are electrical devices such as televisions, audio equipment, copy machines, telephones and other consumer products such as textiles, cigarette lighters, watches, toys and shoes[14]. It is not surprising that numerous western retail companies have settled in the region (Wal-Mart, Metro, Otto, Carrefour, Ikea).

Increasing numbers of companies are now following the retail companies, for the focus of production in the region is shifting increasingly towards the high-tech fields of electronics and telecommunications.

The supply industry in also growing strongly since the density of factories has attracted an increasing number of competitive suppliers. The resulting growth in the range of electronic components and assemblies, plastic and metal parts, and pressure die-cast components on offer is also attracting an increasing number of European and American Small and Medium-sized Enterprises (SME) to the region, which are buying parts for their own manufacturing processes.[15] The area of the Pearl River Delta is highly recommended as an entrance into the Chinese supply market.

2.3.2 Yangtze River Delta

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Fig. 5: Yangtze River Delta

The Yangtze River Delta (YRD) is the industrial heartland of China. Almost a quarter of the economic performance of the country is created here, whereby the region makes up only 1% of the territory and has less than 7% of the population. A third of China’s exports originates from the YRD. Exactly as in the Pearl River Delta, the region has a highly developed private sector and is home to more than 800000 private companies.

The YRD Region also has numerous companies from the steel industry (e.g. Boasteel Shanghai), machine building and the automotive industry (e.g. Shanghai Volkswagen, Shanghai General Motors and more than 180 international supply companies). Other pillars of the region are the textile and chemical industries (e.g. Bayer Shanghai, BASF Nanjing). There is a large number of industrial supply companies (e.g. tool makers, pressure die-cast companies, synthetics spraying companies, metal working companies), which ensure a large range of raw and basic materials, semi-finished goods and diverse investment goods and means of production.[16]

Shanghai offers an international atmosphere, a high quality of life and a somewhat western lifestyle. Such “soft” factors should not be underestimated for expatriates from the west when choosing a procurement region, especially when installing one’s own procurement offices.[17]

2.3.3 Beijing-Tainjin Bohai Bay Triangle

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Fig. 6: Beijing-Tianjin Bohai Bay Triangle

Beijing as the capital of China possesses superior advantages since business and politics are still closely connected. Beijing thus plays an important role for foreign entrepreneurs in establishing and maintaining social relations with party functionaries and representatives of state institutions and ministries.[18]

The Bohai Bay Region accounts for 9% of China’s economic performance and a fifth of its exports. As an industrial area the region is home to the country’s largest steel and oil industries. However, high-tech companies have also located in the region in the last 20 years. Experts are of the opinion that the region could become the dominant economic force of the whole of north-eastern Asia by 2010. It already dominates the steel, automotive, chemical and raw materials industries. The production of software, mobile telephones and electrical household appliances is centred mainly around Beijing and Tianjin.[19]

For western buyers who would like to procure components for production at home, the Bohai Region offers only a very limited supply market.

2.3.4 North-Eastern Lowlands – Liaoning Region

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Fig. 7: North-Eastern Lowlands – Liaoning Region

The three north-eastern provinces Liaoning, Jilin and Heilongjiang are China’s “Ruhr Region”. Heavy industry has been built up here intensively since 1949. The whole north-eastern lowlands lives from the iron and steel industry, automotive factories and chemical works. China’s first automobile factory was built in 1953, since 1990 it has been a joint venture with Volkswagen AG.[20]

Closures and redundancies in the outdated steel works and coal mines has lead to mass unemployment and mass protests in the last few years. A quarter of all Chinese unemployed live in the north-eastern provinces.

Until the end of the seventies the Liaoning province was China’s main production region. Together with Jilin and Heilongjiang the province accounted for 17% of GDP. Today, it is only 9%. In Liaoning alone in the last few years three million workers have been laid off and 500 firms closed. Many cities in the region arose because of state companies. When a state company is closed, the unemployment rate in the vicinity of the company quickly rises to 50%.

The private sector is only gaining ground slowly. 70% of the north-eastern Chinese economy consists of state-owned companies, in Shanghai’s neighboring province Zhejiang the share is only 30%.

Since 2003, the Chinese government has increasingly supported the structural change of this region. 7.4 billion US dollars have already been put into 100 industrial projects.

Foreign investors (e.g. Volkswagen 1 billion Euro, BMW 225 million Euro) and foreign know-how are also helping considerably to create new jobs.[21]

In the course of the reform process a small but increasing number of local suppliers are setting up procurement bases near production centers.

2.3.5 The Inner Regions

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Fig. 8: Inland

In contrast to the booming coastal regions the Chinese heartland is defined by its slight economic power, weak foreign orientation and its reform deficit. Only a few well-qualified state-owned companies can be found. Since the end of the 90s the Chinese leadership has been following a “Go West” strategy. Economic development is to be boosted by state support and foreign investment. The expansion of the infrastructure in particular is being supported by the Chinese government’s development plan. Everywhere in western China large construction projects for highways, railroads, canals, dams, pipelines and electricity cables can be seen. With high levels of investment the government in Beijing is trying to ensure that the west can compensate its greatest disadvantage as soon as possible.

In addition to the new infrastructure, the low wage costs – when compared to the coastal regions – and the attractive tax benefits represent further essential incentives for foreign investment.[22]

An example of this is Intel’s announcement to build a semi-conductor factory for 200 million dollars in Chengdu, the capital of the province Sichuan.[23]

2.4 Chinese Companies

2.4.1 A Division of 6 Classes

The authors Ming Zeng and Peter J. Williamson identify in their article “The Hidden Dragons” different classes of Chinese companies.[24] The tables No. 2 to 5 concerning the individual classes also originate from this article. National Champions

China’s national champions are using their advantage as domestic leaders to build global brands. After competing for decades with global leaders selling products on their home turf, some Chinese companies decided to concentrate on developing and selling products not just in the domestic market but also overseas. These national champions have tested the waters confidently, because they have successfully kept their multinational rivals at bay at home. But overseas, they do not challenge their larger opponents head on. Instead, they scout for segments that the market leaders have vacated or are not interested in serving because profit margins or volumes are low. They use their experience in adapting technologies and features to meet the price points of cost-conscious buyers to develop products for those segments. Not surprisingly, low manufacturing costs allow these national champions to turn a profit where their rivals cannot.

Haier exemplifies this strategy. By the early 1990s, the company had battled Whirlpool, Electrolux, Siemens, and Matsushita to become the leader in China's market for household appliances. The company manufactures 250 types of refrigerators, air conditioners, dishwashers, and ovens. When it entered the U.S. refrigerator market in 1994, it sidestepped market leaders like GE and Whirlpool. For five years, it focused on selling only compact refrigerators – units smaller than 180 litres – which could be used as mini-bars in hotel rooms or students could squeeze into dorm rooms. The incumbent leaders had dismissed these market segments as peripheral, but they proved to be quite profitable for Haier, which last year had about half of the mini-fridge market.

The company's second strategy foray was equally cautious: in 1997, Haier entered the market for “wine coolers” – refrigerated units for storing bottles of wine – and captured 60% of that specialised segment last year.

Haier’s customers did not demand groundbreaking innovations or state-of-the-art technologies; they only wanted products that were reliable, cheap, and designed to meet their basic needs. Like Haier, many Chinese companies can deliver such products in both low-tech and high-tech industries. This allows them to surprise their rivals, who are more worried about disruptive technologies and breakthrough innovations.[25]

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Table 2: National Champions

The national champions produce very large unit quantities. Exports are carried out practically along the way; at the same time they have already gained a large share of the world market. Since these companies are represented on the world market and most operate sales offices abroad, there are no major procurement problems for European buyers. Buyers can practically “buy off the peg” from these companies. No direct investment in China is necessary. Dedicated Exporters

The country’s dedicated exporters are attempting to enter foreign markets on the strength of their economies of scale.

Despite the lure of the domestic market, some Chinese companies set their sights squarely on the external market when the government opened the economy. These dedicated exporters were probably motivated by the prospect of reaping global economies of scale or the knowledge that competition in their businesses was inherently global. Some of them attacked the overseas market from the start; others, which were subcontractors to big international players, had to think small at first to ensure that they did not jeopardise their supplier relationships.

Not surprisingly, China’s dedicated exporters first broke into mass markets, where they enjoyed an edge over their rivals because of their low production costs.

China’s dedicated exporters do not however confine themselves to the volume game. As they develop expertise with crucial technologies, they migrate to specialised, high-value segments. They are not shy about striking partnerships or acquiring rivals to move up the value chain. For instance, China International Marine Containers (CIMC) set up six plants along China’s coast in the 1990s to manufacture shipping containers. Because of its cost structure and the boom in China’s trade, the company became the world’s largest producer of standard freight containers by 1996. In 1997, CIMC bought Hyundai’s container-making operations in China, primarily for Hyundai’s refrigerated container-manufacturing technology. Over the next five years, CIMC captured half the world market for refrigerated containers. By 2002, the Chinese company had developed the ability to design and manufacture a full range of refrigerated containers – for air, sea, road, and rail – and is still the only company in the industry to have done so.

The speed at which China’s dedicated exporters are able to master important technologies and component designs is impressive.[26]

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Table 3: Dedicated Exporters Competitive Networks

China’s competitive networks have taken on world markets by bringing together small, specialised companies that operate in close proximity. In the city of Wenzhou (population about 7 million) in the Zhejiang province, south of Shanghai, the manufacture of cigarette lighters began in the mid-1980s, when locals brought them back from Japan as gifts. The enterprising Wenzhouers broke the gadgets down into components and learned to produce replicas. By 1990, more than 3000 families in the city were making lighters. The intense competition among them soon forced a shakeout. The smaller family businesses switched to make components for the lighters, and the larger companies focused on assembling them. That’s how the Wenzhou network, about 700 private companies that operate as a single unofficial entity, came into being. This specialisation drove down the manufacturing costs; the cost of an igniter, for instance, fell from $1 in 1990 to 25 cents in 1999. This allowed the Wenzhou network to enter the international market. It sold units based on price at first but earned higher margins as it learned to produce new designs more quickly. In 2002, the Wenzhou network manufactured 750 million lighters and enjoyed a 70% share of the world market. Because of the Wenzhou network’s dominance, most of the Japanese and South Korean companies that used to control the lighter business have disappeared.

There are a number of competitive networks, or clusters, in China, each made up of hundreds of small entrepreneurial companies (and their families) located in one geographical area and operating as a cohesive, interdependent entity. Since the networks have few, if any, bureaucratic systems and little, if any, corporate overhead, they are highly flexible, low-cost producers. They thrive in markets that require quick responses to changes in demand. Foreign executives usually ignore them because the networks do not conform to the conventional notion of a globally competitive organisation. But their power should not be underestimated. China’s networks have taken the markets for watches, socks, shoes, toys, pens, and Christmas decorations by storm, capturing market shares of as much as 50% in some of these industries. Indeed, in these markets, the “Made in China” tag has itself become a powerful brand among distributors.[27]

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Table 4: Competitive Networks Technology Upstarts

The technology upstarts are using innovations developed by China’s government-owned research institutes to enter emerging sectors such as biotechnology.

Many Western managers believe that high-tech businesses are immune to competition from Chinese companies. This is a dangerous misconception, especially when one considers that, among other things, gunpowder, paper, and the compass were all invented in China.

Under the central-planning system, the Chinese government built a large infrastructure for basic scientific research and developed sophisticated military-related technologies. The research could only be used by the government or the military and for decades was not commercially exploited. This changed in 1984 when the government shook up the research community and forced state-owned laboratories to obtain most of their funding by commercialising the technologies they developed.

China’s research institutes have spawned several companies to take their technologies to market. For example, Legend, China’s biggest PC manufacturer, was set up in 1984 by a group of scientists who worked at China’s Institute of Computing Technology. Other institutes have encouraged their scientists to turn into entrepreneurs. China’s Institute of Biochemistry and Cell Biology, which is funded by the Chinese Academy of Sciences, succeeded in 1999 in generating a DNA array representing 8000 human genes. The institute encouraged one of its scientists to use the research to develop a protein chip that would allow the diagnosis of several types of cancer through a single test. The scientist floated a company, Shanghai HealthDigit, which used funds from commercial investors to develop the biochip. In 2002, the company sold 150,000 units of the chip.

Companies are able to buy technologies relatively inexpensively because the Chinese government usually underwrites most of the costs.

Datang Microelectronics, for example, has drawn on research done by China’s Telecommunication Research Institute to become a major global player in the design and manufacture of integrated chip sets.[28]

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Table 5: Technology Upstarts Emerging Companies

Emerging companies are developable producers with satisfactory equipment and sufficient to well-qualified personnel. These companies are suitable for building up a sustainable supply base for certain products. There are good chances on the mid- and long-term planning horizon for German Small and Medium-sized Enterprises.

A lot of commitment, patience and development support is however necessary. Emerging companies as a rule do not have comprehensive, professional export experience. There are often weaknesses in quality control.

Thus, investments are initially required to set up the supplier; perhaps even a shareholding to be able to have a degree of influence.

The object of this support is the procurement of high-quality products with medium costs. This process may take 1-2 years. There should then be in the mid- to long-term a constant supply base in China.[29] Scrap Companies

These companies offer very low prices. However, their products are of very low quality. Thus: Do not touch! The quality risk is much too great.

One can recognise scrap companies by the following characteristics:

- outdated equipment (e.g. machines, buildings)
- no qualified employees (e.g. unskilled rural labourers)
- no quality management
- no export experience
- insufficient or no health and safety regulations

Many state-owned companies are scrap companies (see Chapter 2.4.2).

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Fig. 9: Scrap company[30]

These companies do not come into question as suppliers at all due to the above-mentioned deficiencies. The following rule should apply here in particular, which is valid for Business in China in general: visit and investigate the companies, in order not to think a potential supplier is in Class 4 when in reality he is in Class 6.



[2] 2&land_id=32;

[3] Cf. Schüller (2005), lecture; 32_wb2.pdf,

[4] Cf. Statistisches Bundesamt (2005a), press release.

[5] Cf. Schüller (2005), lecture.

[6] Cf. Baumgarten/ Krokowski (2003), p. 13.

[7] Cf. Baumgarten/ Krokowski (2003), p. 13.

[8] Cf. Song, G. (2004), p. 75.

[9] Cf. Asia Bridge (2005), p. 25.

[10] See Chapter 5 for Transport Logistics.

[11] Cf. Boston Consulting Group (2004), p. 18-20.

[12] Boston Consulting Group (2004), p. 19.

[13] Cf. Song, L. (2005), lecture.

[14] Cf. Song, G. (2004), p. 72.

[15] Cf. Kracht/ Kriegeskorte (2004a), p. 6.

[16] Cf. Kracht/ Kriegeskorte (2004b), p. 7 f.

[17] Cf. China Contact (2004a), p. 16.

[18] Cf. Song, L. (2004), p. 242.

[19] Cf. Song, G. (2004), p. 73.

[20] Cf. Song, L. (2004), p. 243.

[21] Cf. Wirtschaftswoche (2004), p. 90 f.

[22] Cf. Song, L. (2004), p. 246.

[23] Cf. Wirtschaftswoche (2003), p. 72.

[24] Cf. Zeng/ Williamson (2003), p. 92–99.

[25] Zeng/ Williamson (2003), p. 95.

[26] Zeng/ Williamson (2003), p. 96 f.

[27] Zeng/ Williamson (2004), p. 97 f.

[28] Zeng/ Williamson (2003), p. 98 f.

[29] Cf. Bogaschewsky (2004), lecture.

[30] Krokowski (2005), handout.

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Global Sourcing. Procurement in China
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