Procurement In China

Opportunities and Constraints November 2009

Procurement in China

Teacher: Mr. Anne Staal Mr. Jan Peek Student: Li Chang Qing Huang Xiaolin

Contents Summary...................................................................................................................................................3 Chapter 1 Overview.................................................................................................................................5 Country Overview ................................................................................................................................5 Country Resources:...............................................................................................................................6 China in the Asia...................................................................................................................................6 China in the world................................................................................................................................8 Relationship with the Netherlands......................................................................................................10 Chapter 2 Logistics Performance.........................................................................................................11 Logistics Performance Index..............................................................................................................11 Fact in different transport facilities....................................................................................................12 Chapter 3 Supply Market China..........................................................................................................17 2 Highlighted Economy Powerhouses................................................................................................17 Logistics Provider ..............................................................................................................................23 International Trade.............................................................................................................................24 Getting Started....................................................................................................................................25 Authorities and Associations...............................................................................................................27 Success Stories....................................................................................................................................28 Internal Disturbance...........................................................................................................................31 External Aggression............................................................................................................................31 Appendix: Report Sources...................................................................................................................32

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Summary As China emerges as a dynamic player in the world economy, with a more blooming and competitive supply market and highlighting investment prospect, the demand for English-language booklets about “Business in China” is multiplying. The purpose of this brochure is catering for this need and to support the project “Drenthe Connect China” in the LE-Network for its target of establishing a knowledge base related to Chinese market. The content of this brochure “Procurement in China” will provide you practical and concise figures about China’s highly competitive position as a core supply market in the world and also a procurement hub in the Asia through our primary desk research on some economic criteria and corresponding fact related to the supply market in China. The theme of this booklet is designed to help international buyers when taking their first purchasing business steps in China, on the other hand it will convince the reader that China could continue to be a major sales and investment market for international business partners in the near future as well. Chapter 1: Draw you a general picture of China regarding to the country geography, resource, industry, supply market in the world also the status of “Commercial Hub” in the Asia and the relationship with Netherlands Chapter 2: Demonstrate the updating statistics on LPIs (Logistic Performance Indicators), the transport infrastructure in China besides illustrate a comparison fact sheet of various transport modes like haulage, railage, air cargo and ocean shipping with more details about its local distribution capability. Chapter 3: This part is the main body of the booklet which will present you the current situation about its main regions of Chinese supply market with their relative labour &productivity, and key international trade and logistics providers. After viewing those factors, you will see all relevant information here are designed to convince reader China is the better rational choice in the global supply market on the basis of various economic parameters and logistic indicators. Chapter 4: Provide you some practical information at very aspect of procurement start-up procedure in China and the section about associations will give the reader a real guidance in the coming procurement project. Success stories will further convince you China is really your sensible choice in all world-wide procurement sources. Chapter 5: Considering the current global financial crisis, nowadays China’s economy is also facing more challenges than the past fast -3-

boom period. This chapter will sum up all possible negative factors existing in all above areas for that the transparency of the business information is an outstanding quality, for which we are designing this brochure. Better understanding of more constraints about Chinese economy is better for your further procurement activities in Chinese supply market.

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Chapter 1 Overview Country Overview As China’s economy grew vibrantly in recent decades, the country has become a powerful magnet for foreign investors who wish to diversify their investments in the Far East. With a population exceeding 1.3 billion and a constant GDP growth of 10+% for the past 20 years, China is undoubtedly an excellent location for investment and business expansion. In line with the boom economic growth in China, “LE-Network” is working on establishing a knowledge base related to Chinese market to assist inbound and outbound investors, companies, individuals, families - and their advisors. Source: CIA World Factbook 2008

Geography

Eastern Asia, bordering the East China Sea, Korea Bay, Yellow Sea, and South China Sea, between North Korea and Vietnam - 35 00 N, 105 00 E

Capital

Beijing

Time zone

UTC+8

Population

1.3 billion

Population growth rate Birth rate

0.629% (2008 est.)

Languages

Mandarin

Legal system

Based on civil law system

Economy overview

Since initiating economic reforms and open policy in the late 1970s, China has achieved tremendous success in economic development. The economy has shifted from a centrally-planned system to a more market-oriented one with a rapidly growing private sector. Despite of the financial crisis, China is still one of the fastest growing economies in the world, with GDP expanding at an annual average rate of around nine percent over the past two decades. Measured on a purchasing power parity (PPP) basis, China ranked in 2008 as the second-largest economy in the world after the United States. Benefiting from increased access to foreign markets since joining the World Trade Organization in 2001, China has become one of the world’s largest trading countries as well as a global economic force.

Currency

Renminbi (RMB); Note - also referred to by the unit yuan (CNY)

13.71 births/1,000 population (2008 est.)

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Country Resources: The People's Republic of China is situated in the eastern part of the Asian Continent on the western coast of the Pacific. With a total land area of 9.6 million square km, China is the largest country in Asia and the third largest in the world, next to Russia and Canada. China has many different minerals. Coalfields are found in various parts of the country, in many cases close to iron ore, which is favorable for the smelting of pig-iron and steel. Much attention is paid to prospecting for oil, and deposits have been discovered in Eastern China, Sinkiang and in the outlying regions of Tibet. There are ores of all kinds: iron, copper, tin and gold. There is wolfram, important in the smelting of high-quality steel, and antimony used in making alloys with zinc, tin and copper. China in the Asia Geographically, China is at the very heart of Asia –old and new. It’s the continent’s commercial hub, linking North and South, East and West. China shares borders with seventeen other Asian countries, making it the most “connected” state on the continent. North East Sea ports facilitate brisk trade with the South Korea and Japan. The South West broader links China to India, also providing easy access to some members of ASEAN (Association of Southeast Asian Nations). And South China Sea Shipping lanes carry cargo such as crude oil and all kinds of raw materials efficiently to the East Asian countries. In 2008, the total trade volume between China and ASEAN amounted to 231.1 billion U.S. dollars, representing a 14% rise over the previous year. China's exports to ASEAN reached 114.1 billion U.S. dollars, accounting for an increase of 21% year-on-year; imports from ASEAN were 117 billion U.S. Dollars with an increase of 8 % year-on-year. China's trade deficit was 2.8 billion U.S. dollars, dropped significantly compared with last year of 14 billion U.S. dollars. There were three countries among the ten ASEAN countries having trade surplus, namely Malaysia, the Philippines, and Thailand. In addition, the other seven countries have trade deficit. In spite of the negative impact as a result of the world financial crisis, China-ASEAN Free Trade Area having been constructed for several years would bring both China and ASEAN a new force to deal with the crisis. In 2009, China's general tariff level is 9.8%, while the average tariff level on ASEAN dropped to 2.8%. China and ASEAN open markets to each other, which facilitates the cooperation between the enterprises of both sides and is conducive to each other's exports and imports, especially the imports of zero-tariff products which are helpful to lower production costs, improve

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product competitiveness, make greater Spaces for market development, in order to gradually change the situation that the over-reliance of electronic products trade between China and ASEAN. More information you will find here: Http://www.cafta.org.cn/ .

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China in the world China's economy during the past 30 years has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Reforms started in the late 1970s with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, the foundation of a diversified banking system, the development of stock markets, the rapid growth of the non-state sector, and the opening to foreign trade and investment. Annual inflows of foreign direct investment rose to nearly $84 billion in 2007. China has generally implemented reforms in a gradualist or piecemeal fashion. In recent years, China has re-invigorated its support for leading state-owned enterprises in sectors it considers important to "economic security," explicitly looking to foster globally competitive national champions. After keeping its currency tightly linked to the US dollar for years, China in July 2005 revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that references a basket of currencies. Cumulative appreciation of the renminbi against the US dollar since the end of the dollar peg was more than 20% by late 2008, but the exchange rate has changed little since the onset of the global financial crisis. The restructuring of the economy and resulting efficiency gains have contributed to a more than tenfold increase in GDP since 1978. Measured on a purchasing power parity (PPP) basis that adjusts for price differences, China in 2008 stood as the second-largest economy in the world after the US, although in per capita terms the country is still lower middle-income. The Chinese government faces numerous economic development challenges, including: (a) strengthening its social safety net, including pension and health system reform, to counteract a high domestic savings rate and correspondingly low domestic demand; (b) sustaining adequate job growth for tens of millions of migrants, new entrants to the work force, and workers laid off from state-owned enterprises deemed not worth saving; (c) reducing corruption and other economic crimes; and (d) containing environmental damage and social strife related to the economy's rapid transformation. Economic development has been more rapid in coastal provinces than in the interior, and approximately 200 million rural laborers and their dependents have relocated to urban areas to find work - in recent years many have returned to their villages. One demographic consequence of the "one child" policy is that China is now one of the most rapidly aging countries in the world. Deterioration in the environment - notably air pollution, soil erosion, and the steady fall of the water table, especially in the north - is another long-term problem. China continues to lose arable land because of erosion and economic development. In 2007 China intensified government efforts to -8-

improve environmental conditions, tying the evaluation of local officials to environmental targets, publishing a national climate change policy, and establishing a high level leading group on climate change, headed by Premier WenJiabao. The Chinese government seeks to add energy production capacity from sources other than coal and oil. In late 2008, as China commemorated the 30th anniversary of its historic economic reforms, the global economic downturn began to slow foreign demand for Chinese exports for the first time in many years. The government vowed to continue reforming the economy and emphasized the need to increase domestic consumption in order to make China less dependent on foreign exports for GDP growth in the future. In the first three quarters of this year, the total value of imports and exports was US$ 1,557.8 billion, down 20.9 percent year-on-year. Of this total, the value of imports and exports in the first quarter down 24.9 percent, second quarter down 22.1 percent, and third quarter down by 16.5, with obviously narrowed declining rate. In the first three quarters of this year, the value of exports was US$ 846.6 billion, down by 21.3 percent; the value of imports was US$ 711.2 billion, down by 20.4 percent. The trade surplus was US$135.5 billion, down by US$ 45.5 billion year-on-year. The foreign trade continued to drop but the decrease rate obviously lowered based on the current financial crisis and the global economic downturn. The latest information about the China’s Major Economic Indicators; please check it on the link as below. http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp?searchword=transportation&channelid=9528&record=1

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Relationship with the Netherlands China and the Netherlands established diplomatic relations at the Charge d'affaires level in November 1954, which was upgraded to the ambassadorial level in May 1972. In May 1981, the government of the Netherlands ratified the construction of two submarines for Taiwan by the Dutch companies, as a result of which the bilateral diplomatic ties were downgraded to the Charge d' affaires level. After that the Netherlands undertook not to sell arms to Taiwan on February 1, 1984, China and the Netherlands restored ambassadorial diplomatic relations. At the moment, bilateral relations are enjoying sound development. Sino-Dutch economic and trade relations have been developing rapidly. Since 2003, the Netherlands has been second largest trading partner in the EU for six years. According to our statistics, bilateral trade topped 51.2 billion U.S. dollars, up 10.5% in 2008, which China imported 5.3 billion U.S. dollars, exported of 45.9 billion U.S. dollars respectively with growth of 7.6% and 10.8%. China has become the 4th largest trade partner of the Netherlands nowadays. The first quarter of 2009, bilateral trade volume 8.069 billion U.S. dollars, down 32.1%, which China imported 821 million U.S. dollars, exports 7.248 billion U.S. dollars, year-on-year fell by 38.3% and 31.3% respectively. Since 1980 China has maintained favorable trade surplus with Netherlands for years, but around 70% of Dutch exports are of re-exports more than 50% belongs to processing trade. Sister cities and provinces between the two countries are as follows: Jiangsu Province-the North Brabant, Shandong Province-North Holland, Guangdong Province-Utrecht, Shanghai- Rotterdam, BeijingAmsterdam, Nanjing-Eindhoven, Changzhou-Tilburg, Qingdao-Velsen, Wuhan-Arnhem, and Suzhou-Nijmegen.

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Chapter 2 Logistics Performance Logistics Performance Index Logistics Performance Index (LPI) is the simple average of the country scores on the seven key dimensions: Efficiency and effectiveness of the clearance process by Customs and other border control agencies; Quality of Transport and IT infrastructure for logistics; Ease and affordability of arranging shipments; Competence in the local logistics industry (e.g., transport operators, customs brokers); Ability to track and trace shipments; Domestic logistics costs (e.g., local transportation, terminal handling, warehousing); and Timeliness of shipments in reaching destination.

　

　

　 Overall LPI 　 Customs 　 Infrastructure 　

International shipments

　 Logistics competence 　 Tracking & tracing 　 Domestic logistics costs 　 Timeliness

East Asia & Pacific

China score

3.32

rank

30

score

2.99

rank

35

score

3.2

rank

30

score

3.31

rank

28

score

3.4

rank

27

score

3.37

rank

31

score

2.97

rank

72

score

3.68

rank

36

score

difference

2.58

0.74

2.41

0.58

2.37

0.83

2.64

0.68

2.54

0.86

2.53

0.84

3.04

-0.06

3.01

0.67

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Fact in different transport facilities Airports

Roadways “If you want to grow rich, you must first build roads,” an old Chinese saying goes. Since 1998, China has made an annual investment of close to 36 billion U.S. dollars on roadway and bridge infrastructure construction. By the end of 2008, 3.573 million km of roadways, 60,400 km of expressways, and 50,000 bridges have been constructed in China. They reach 99% of the towns and 94% of the villages. Roadway transportation has been playing an increasingly important role in the integrated transportation system in China. The freight volume and passenger volume transported along the roadways account for 92% and 75% of the total transport modes. On the other hand, Chinese engineers have been well prepared for the technological progress in structural design, construction techniques, new materials, and construction equipment and management. Recently, the China Road and Bridge Company in China's external contractors, organized by the "2009 China's foreign contracted projects Corporate Social Responsibility Award" selected activities, in recent years to fulfill their social responsibility by virtue of outstanding contributions to the field, received the "2009 China's foreign contracted projects Enterprises Social Responsibility Award”.

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Railways

Ports and terminal

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Transport modes Matrix

Haulage Road Freight Transport Market Price (August 2009) Average Transport Mode Average Price Price Chain Growth (Calculation Units) （Jul.2009） （Aug.2009 Rate（%） ） FTL(Yuan / ton-km) LTL High Density Cargo(Yuan / T-km) LTL Low Density Cargo(Yuan/ M3-km)

0.287

0.273

- 4.8%

0.308

0.299

- 2.9%

0.104

0.104

0.0%

http://www.chinawuliu.com.cn/cflp/newss/content1/200909/808_30277.html

Railage The railway mileage of China is 75,000 kilometers, which occupies 6.47% of 1.15 million kilometers of the world’s total railway mileage, however, look at the statistics in 2004, the railway of China has completed 27.3% of the world’s railway passengers transport, it has completed 24.8% of the world’s railway freight transport; this has led to a long-term overload operation of railway, load rate of lines is too large, transport density is too high, transport capacity is tense. The load rate of railway locomotives, buses, trucks are bearing much higher than the international level. Completed an average annual turnover volume of each locomotives in China is 147 million ton-km/Taiwan, which is 1.62 times of American locomotive loading rate, 2.45 times that of Russia, 3.20 times that of Japan, 6.12 times that of France, 6.68 times that of Germany. Completed freight transport of each freight train every year is 3.6608 million ton-km/vehicle in China, which is 1.99 times of American railway that based on freight transport, 1.37 times that of Russian railway. The above data clearly illustrates that compared with completed traffic, there are too less lines of railway in China, also shortage of equipments so it is impossible to maintain the sustainable development of the railway only by relying on competing lines and equipments. Air cargo In 2007, China's air cargo and mail transport continue the rapid development of robust growth: cargo and mail transport volume 3.94 million tons (excluding Hong Kong and Macao), an increase of 13.0% over the previous year, turnover of 11.47 billion ton-km cargo and mail, up 21.6 % over the previous year .

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Statistical graph of air cargo volume Administration of Chinese Civil Aviation 2007

of

General

Growth Growth Dec. 2006 2007 2006（10 Rate（% Rate（% （10KTs） （10KTs） KTs） ） ）

Airline

Dec. 2007 （10KTs）

Mainland

25.1

23.9

5.3

281.6

257.3

9.4

HK&MAC

1.4

1.6

-11.5

16.7

17.9

-7.0

Internatio nal

10.6

9.3

14.9

113.3

92.2

22.9

Ports and Ongoing investment South China, with its long coastline, has many sea ports. The ports of Guangzhou and Shenzhen in Guangdong province rank among the top ten sea ports of mainland China in regard to volume of freight handled annually. The port of Guangzhou is the largest comprehensive hub port in South China. In 2008 the port handled 347 million tons of cargo (ranking the 4th in mainland China) and 11 million TEUs. The port of Shenzhen had a cargo flow of 211.15 million tons and handled 21.42 million TEUs in the same year. Its container business features the highest growth rate in China. Another relatively important port is Xiamen (Fujian province), which handled 97.02 million tons of cargo and 5.03 million TEUs (ranking 7th in mainland China) in last year. There are also many middle small-scaled sea ports of regional importance in the area. The “11th Five-Year Plan” for Guangdong’s Comprehensive Transportation System (2006-2010): In the framework of this plan the handling capacity of the ports in Guangdong should reach 1.2 billion ton, including containers of about 55 million TEUs. Focuses for port development are container transportation system and energy transportation system. Emphasis is on the development of the five hub ports in Guangzhou, Shenzhen, Zhuhai, Zhanjiang and Shantou. A total of RMB 48.6 billion would be invested in 32 projects in port development. Hereunder a list of projects which are still on-going according to the plan:

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No

Project name

Type

Content

Constructi on period

1.

3rd phase of Nansha port area (Guangzhou Port)

Continuatio n

20072010

2.

Bulk terminal of Nasha port area (Guangzhou Port)

New

3.

Oil terminal of Nansha port area (Guangzhou Port)

New

4.

Expansion of the 3rd phase of Yantian container terminal (Shenzhen Port)

Continuatio n

5.

2nd phase of Dachanwan container terminal (Shenzhen Port)

New

6.

2nd phase of Guangodong LNG terminal (Shenzhen Port)

New

7.

2nd phase of Gaolan container terminal (Zhuhai Port)

New

8.

Expansion of crude oil terminal of Xiasha port area (Zhanjiang Port)

New

9.

Coal terminal of Yangxi port (Yangjiang Port)

New

6 container berths of 100,000 tons, handling capacity 2.4 million TEUs 6 berths of 80,000 – 150,000 tons, handling capacity of 14 million tons 1 berth of 50,000 tons, handling capacity of 5 million tons 5 container berths of 70,000100,000 tons, 1 berth of 30,000 tons, handling capacity of 3.7 million TEUs 4 container berths of 70,000100,000 tons, handling capacity of 2.4 million TEUs 1 LNG berth of 80,000 tons, handling capacity of 3 million tons 2 container berths of 100,000 tons, handling capacity of 1.5 million TEUs 1 crude oil terminal of 300,000 tons, handling capacity of 15 million tons 1 berth of 50,000-80,000 tons, handling capacity of 8

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Total investme nt (million RMB) 4,500

Investment during “11th Five-Year Plan” (million RMB) 4,500

20062010

3,050

3,050

20092010

350

350

20042010

11,200

10,060

20072011

6,000

3,000

20072010

200

200

20082010

3,000

500

20082010

200

200

20072010

800

800

10.

Crude oil terminal, Dongma port area (Huizhou Port)

New

million tons 1 berth of 300,000 tons

20072010

250

250

Chapter 3 Supply Market China 2 Highlighted Economy Powerhouses Supposing that you will start your procurement project with a precise supply market analysis in such a broad Chinese market, we highly recommended 2 economy powerhouses for you to focus on firstly instead of investigating in all regions of China especially for the uninitiated. One of the highlighting regions is Yangtze River Delta (YRD); the other is Pearl River Delta (PRD). Why to focus on PRD and YRD? The reasons are as below and the following illustrations will give you quick insights on them:  Both regions together account about for 1/3 of China‘s GDP  Both regions together absorb about 2/3 of China‘s FDI  Both regions together produce about 65 % of China‘s exports  Both regions have a large private company sector Yangtze River Delta (YRD)

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Pearl River Delta (PRD)

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Labor and Productivity Yangtze River Delta (YRD)

China is the world’s leading competitor for low labor cost in manufacturing sector. Based on the hourly wage of manufacturing workers comparison across different regions, China’s labor cost is the lowest compared to not only advanced economy, but also to other Eastern Europe and East Asia economies. Such a cost advantage keeps China one of the most attractive host countries for global outsourcing. China's hourly wages of production workers in the enterprises is only 0.8 U.S. dollars, far below the European (40.7 U.S. dollars) and the United States level (30.6 U.S. dollars). See Graph as blow:

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Logistics Provider With the further influences of global financial crisis in 2009, China’s logistics industry will step in the period of slow growth and structural adjustment, which will create new development opportunities for the third-party logistics. The third-party logistics in china is still in its early development stage, and has a high regional concentration degree, mainly distributing in the regions of YRD and PRD. The Chinese manufacturers seldom select third-party logistics companies, while the foreign-funded manufacturers prefer the third-party logistics companies.

Total Outsourcing Expense of Third Party Logistics in China, 2006-2010e Unit：US $ billion

Source: ResearchInChina

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The key third party logistics companies in china including the Tielong Logistics, CMST, and Eternal Asia. Tielong Logistics has the exclusive operation right of railway special containers, CMST is good at the network distributions and Eternal Asia is good at the supply chain management. The third-party logistics will future boost up the development of logistics in china, considering the constant expansion of foreign companies in China, logistics outsourcing demand growth, as well as the stimulating measures by the government. International Trade Made in China is a big beneficiary of World Economic recession, surprisingly to some people. China’s export this year has decreased by about 22 percent compared to that of last year, due to the slow down in advanced economies and China’s major trading partners. However, China actually suffers least among the world’s leading exporters, such as Germany (down 34%) and Japan (down 37%). There are a few reasons for the shine of Chinese export. First is that made in China focus on low cost low value products and commodities, which suits the change of appetite from consumers during recession? Second is the cheap RMB softly pegged to USD? As a result, China has replaced some competitors to increase its market share in world’s main exporting markets, such as USA. Such a result is probably not most people had expected, and it is not necessarily good news for China. Being the biggest exporter in the world, China becomes the scapegoat of trade protectionism and can easily become the victim of anti dumping penalty tariff. In addition, China will continue to accumulate huge amount of trade surplus in USD, which is not helpful to its diversification strategy to reduce the exposure to USD. Also, due to the trade surplus, the exchange rate of RMB will continue to be criticized heavily from most trading partners and there will be more pressure to push the RMB to appreciate. If China government is firm on the stance of RMB (eg., stick to USD at a fixed rate), the trading partners will try alternative ways to protect their market and industry (eg., soft trading barriers or WTO anti dumping measures). In the end China supplies the world with the cheapest product but only gain a small portion on the value chain.

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Chapter 4 Procurement Guidelines Getting Started + Currency of China: Renmingbi(RMB) + Exchange rate: RMB per US dollar - 6.8275 (25-11-2009) Purchasing in a foreign country can seem a daunting task. There are language barriers and time differences to cope with, new laws and regulations, and often a completely different business culture. One can definitely use some help. Fortunately, Dutch buyers in China have access to professional support whenever they need it, every step along the way. That’s the job of “Drenthe Connect China”, the Drenthe’s federally funded learning company. Anyone from inside of Drenthe who wants to launch or expand a procurement plan in China can get the ball rolling with just a single call to this enterprise. “Drenthe Connect China” team of experts provides the contacts and intelligence companies or students need to make informed choices. For incoming customers, there’s no easier way to clear hurdles and get a purchasing project up and running. Here are some of the services. “Drenthe Connect China” provides: • Briefings on all facets of Chinese supply market environment • Focused leads and networking opportunities within the supply market analysis • Personalized assistance for Dutch companies to setup a purchasing office in China Figure 1: procurement planning framework

Identify Significant Procurem ents and Desired Objectives as per Corporat e Procure ment Plan

Planning significant procurement projects Dema nd Revie w

Implementing significant procurement projects Supplie r evaluat ion and selecti on

Procurem ent Strategie s

Managing supply

Marke t Analy sis

Figure 1 illustrates that supply market analysis is an important activity in the development of effective procurement strategies for significant procurements. Note that the results of supply market analysis in a particular goods/services category may also be important for updating the

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Supply Positioning framework in developing the agency’s next Corporate Procurement Plan; especially if the supply market analysis points to changes in the market which may increase the risk and vulnerability of supply for the agency.

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Authorities and Associations + List of platforms or agencies to purchase in China  www.chinabidding.org  www.alibaba.com  www.chinabidding.com  China Federation of Logistics & Purchasing  China Chamber of Commerce for Import & Export of Textiles  China Chamber of Commerce for Import & Export of Light Industrial Products and Arts-Crafts  China Chamber of Commerce of Import and Export of Foodstuffs, Native Produce & Animal By-Products  China Chamber of Commerce for Import & Export of Machinery and Electronic Products  China Chamber of Commerce for Import & Export of Medicines & Health Products + List of banks are authorized as dealers in foreign exchange in China  Bank of China  Industrial and Commercial Bank of China  Agricultural Bank of China  China Construction Bank  China Citic Bank  China Merchants Bank  Etc. + Institutions to deal with customs declaration  State Administration of Foreign Exchange  General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China  Shanghai Entry-Exit Inspection and Quarantine Bureau  General Administration of Customs of the People’s Republic of China

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Success Stories Shell retains position as leading international supplier of lubricants in China – 31 August 20091 Beijing, 31 August, 2009: For the third consecutive year, Shell has been named the number one global lubricants supplier – selling more lubricants in 2008 than any other supplier in the world. Shell also retained its position as the leading international supplier of lubricants in China, according to research conducted by Kline & Company. The research gives Shell Lubricants 13% of the global market by volume, and a two per cent lead over its nearest competitor. The figures show that despite the tough operating environment, Shell outpaced the lubricants market as a whole and continued to increase its market share in key growth countries (source: Kline & Company). David Pirret, Executive Vice President for Shell Lubricants, said: “Kline’s research shows that we have continued to outperform the global lubricants market and maintained our leadership position in spite of the challenging external environment. To achieve this for the third consecutive year is testament to our consistent strategy, strong brands and technology leadership, focusing on delivering first-class lubricants solutions to customers, wherever they may be.” During 2008, global demand for lubricants declined by 3% (source: Kline & Company). However, Shell Lubricants achieved particularly strong growth in Brazil and Russia where volumes grew by 13% and 6% respectively. Shell also grew its volumes in Asia Pacific, the largest lubricants-consuming region in the world. In China, demand for lubricants was estimated at 5.5 million tonnes in 2008 making it the second largest lubricants market in the world behind the US. Shell retained its position as the leading international supplier of lubricants in China with a market share of just over 10% (source: Kline & Company). In spite of the global recession, the AsiaPacific region is expected to continue to show the most robust growth over the next few years. Demand for lubricants in China is forecast to grow by around 3.5% year on year to 2013, making it the fastest growing market in the world ahead of India. (source: Kline & Company). 1

http://www.shell.com/home/content/china-en/news_and_library/press_releases/2009/lubricants_20090831.html

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Looking ahead, David Pirret said Shell Lubricants was well placed to continue to outpace the market and make the most of opportunities in spite of the uncertainties ahead. Spending 5000 euro, Unilever Sixth biggest worldwide R&D center settled in Shanghai – 8 September 20092 Unilever sixth worldwide R&D network center is officially ready to use in Shanghai, which means China is becoming the Unilever worldwide R&D important center. This R&D center will be brought into the global consumption system of the company, comprehensive use of the advantages of each product category, achieve resource sharing during the product development process, its R&D result will be serviced for the global consumers. The completion of the China R&D center, achieve the commitment that intellectual and capital-intensive projects will be a long-term settled in Shanghai. In the future, Unilever will be gradually established a complete system in China; R&D, purchasing, production and other functions will enable China to become an integral part of the global system of Unilever, lay a solid foundation for China to be the global R&D center and regional management center of Unilever, which also shows Unilever has full confidence that China becomes its innovation center. Create high-value ‘Made in China’ upgrade ‘R&D in China’ ‘Innovation is the driving force of Unilever. The whole R&D system of Unilever is focused on integrating the technology into products so that it benefits the consumers. This will also make R&D be placed in the heart of Unilever’s business. Therefore, the consumer as the center to carry out research and development has also become one of our important features.’ Unilever Chief Executive Officer Paul Polman said, ‘Considering China is in the important position of Unilever’s global strategy, we decided to set up Unilever worldwide R&D center in Shanghai.’ The difference with other institutions that emphasis on applied R&D center is that, Unilever China R&D center not only includes product development, but also includes basic research. Basic research 2

http://www.unilever.com.cn/ourcompany/newsandmedia/pressreleases/rd_located_sh.asp

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belongs to the most advanced research and development, including the research and development of molecular structure, raw materials and so on. Although the basic stage of research has the furthest distance of the end products, it has decisive significance for the development of new products. Unilever particular R&D model fully integrates all aspects from the research, development, and practical application; this new model makes R&D of Unilever to closely integrate with the consumers and its operations, put on a profound insight of the market and consumer demand into the every aspect of innovation. Dedicate to standardize Chinese elements to service for global consumers Application of Chinese medicine and Chinese herbal medicine in China has a long history; however, because of the basic theory, technical and quality standards and other reasons, Chinese herbal medicine has not been recognized by the international market. Unilever researched and refined the Chinese herbal medicine through international recognized means, used its active ingredients for product formulations, and used standardized production mode, so that more global consumers can trust and use the products. And such product development will also be driven the development of origin of raw materials, manufacturing and other related industrial chain. The new R&D center building will be brought together the scientific research personnel around the would, use the latest scientific and technological superiority, future use the advantages of Chinese herbal medicine, structural materials and the field of organic chemistry, provide more unique innovative production around the world.

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Chapter 5 Constraints in China’s Economy During the eye of the financial storm; Chinese economy is also facing greater challenges of internal and external "troubles" as below: Internal Disturbance Appreciation of the Renminbi (China Yuan): During the worst period of monetary crisis, Yuan climbed again the euro 30%, which implied killing the vitality of Chinese export manufacturing industries by its own monetary policy. The new labor contract law: In January 2008, the government intervened to protect vulnerable groups by launching the labor contract law. The problem is the introduction of this law was too hasty, neither argument nor the pilot, causing the loss of enterprises and workers, moreover, it was dealt a heavy strike to the investment environment of manufacturing industries in China. The export tax rebate: Reducing the export tax rebates of successive years was once again negatively affecting the stable development or even the vitality of Chinese export manufacturing industries. Recent macro-economic control: Investment and management environmental degradation is the dominant factor in China's manufacturing crisis, rather than “excess liquidity” or the combined effect of three aspects above. More detailed information to support this argument will be presented in my final thesis considering the situation behind this part is too complex. Changes in accounting principles: The past accounting standards is your product sold to consumers after the sale is completed, then you have to pay tax but nowadays it is not like before, and that your product sold to the channel actually is not yet complete sales, which is considered as the completion of the sale, in this way the hidden tax increases; this updating accounting principles gave a through beating to the enthusiasm of entrepreneurs in the manufacturing sector. 　　 External Aggression In addition to five internal problems, recently there are three more major foreign aggressions as following: The exchange rate war: the U.S. has been successful from the first quarter of the financial tsunami, so from the beginning in April it had no need to maintain a strong dollar, because it didn’t need to borrow money, so the dollar was devaluated from that period. China takes the exchange rate wrong consequently its export manufacturing sector which accounts for one-third of GDP in China suffered a heavy blow. The cost war: The U.S. government has been controlling the oil and the international freight index through the Wall Street; that’s why to some products our buying price is quite expensive but our selling price is lower because the pricing in the international market is controlled by the hands of Wall Street. The trade war: The recent” Tire special safeguard case” will strike a further blow to our manufacturing industries. The economic consequences of the failure of this special case will be serious. More information please checks the external resource link as below: Resource: http://blog.chinatells.com/2009/09/2263

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Appendix: Report Sources Country

LPI

Customs

Infrastructure

International shipments

Logistics competence

Netherlands

4.18

3.99

4.29

4.05

4.25

China

3.32

2.99

3.2

3.31

3.4

LPIs table in primary selection.

Source from: http://info.worldbank.org/etools/tradesurvey/mode1c.asp Other Sources: 1. CIA World Factbook

https://www.cia.gov/library/publications/the-world-factbook/index.html.

2. Logistics Performance Index (LPI) https://www.cia.gov/library/publications/the-world-factbook/index.html 3. Economics Freedom Index http://www.heritage.org/research/features/index/chapters/htm/index20 07_execsum.cfm)

4. http://www.ficci.com/international/countries/Netherlands/netherlandcommercialrelations.htm

5. Http://www.cafta.org.cn/ . 6. http://www.stats.gov.cn/was40/gjtjj_en_detail.jsp? searchword=transportation&channelid=9528&record=1

7. http://www.chinawuliu.com.cn/cflp/newss/content1/200909/808_30277. html

8. http://www.nytimes.com/2009/10/14/business/global/14chinatrade.html ?_r=1

9. http://www.shell.com/home/content/china-

en/news_and_library/press_releases/2009/lubricants_20090831.html

10. http://www.unilever.com.cn/ourcompany/newsandmedia/pressreleases/ rd_located_sh.asp

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