Reference 3 – integration of China into the organization

Background

The integration assignment was for a major European supplier of pipe system solutions. In 2005, the company’s sales revenue was over € 1.3 billion. It employs approximately 7000 people and is active in mainly two market segments: Building & Installation and Civil & Infrastructure. It operates in 27 European countries.

A year earlier, the company acquired a British enterprise which already had a small establishment in China.

The main objectives of the integration project were to make good use of the current establishment in China for synergistic benefits on efficiency, cost savings (manufacturing and sourcing of components, equipments, etc.), tax incentives (export and job creation) and logistics.

The challenge

The parent company knew that many of its European components and equipment suppliers were actually traders and that the goods originated from China.

Buying directly from Chinese suppliers would, however, entail a series of risks such as quality, long-term consistency, supply chain efficiency (on-time-delivery is a huge issue due to the distance), exchange-rate exposure, commodity price and import duty volatilities and so forth.

The challenges were to manage these risks and simultaneously make considerable savings.

Supply chain structuring that includes new suppliers, experts for quality control, systematic approval (before each dispatch), logistics, etc. is only a part of the project.

So how can you make the supply chain planning efficient, financial and tax structuring transparent and lucrative for the corporation as a whole ?

The solution

Feasibility (financial and operational) studies of various possible business set-ups were made. Different degrees of involvement with the existing establishment in China were analysed for each set-up.

Besides the quantitative elements such as the working capital needed, the operation costs, the deductions (import duties, land- and sea freights, transaction costs, handling costs, etc.), the local tax incentives for export and job creation, qualitative aspects were also taken with proper caution, i.e. the transfer pricing issue, the agency costs, the influence on benchmark and control of mixed operations (manufacturing, assembling and trading by the existing Chinese establishment), the risk of bribery, the requirement of qualified people to perform QC (Quality Control) and QA (Quality Assurance) procedures and so on.

The pros and cons of each possible set-up were presented to the board.