#1ARC CONSULTING EU-China Sourcing Presentation of 2023 Sourcing Survey Shanghai 2023-08-30 benelux 荷比卢商会 chamber of commerce in china#2ARC CONSULTING COPYRIGHT © 2023 ARC Consulting. All rights reserved. Stockholm Beijing Shanghai New Delhi Dubai & Abu Dhabi Hong Kong Zhongshan Ho Chi Minh City Kuala Lumpur Singapore Jakarta JOHAN ANNELL PARTNER Johan Annell is Partner and manages the Beijing branch at ARC Consulting - well recognized partner and service provider for European companies in China and Southeast Asia. He is fluent in Mandarin and has an M.Sc. in Industrial Engineering & Management from Chalmers University of Technology and a M.Sc. in Financial Economics from Gothenburg University. 2#3We are global advisory company with roots in Scandinavia Market Entry & Expansion COPYRIGHT © 2023 ARC Consulting. All rights reserved. Sourcing & Supply Chain Management Restructuring & Transformation Financing & M&A 62998 3#4Global trade growth softening, with a challenging environment for global supply chains The value of trade increased in H1 2023 but growth remained slow 30% 20% 10% 0% -10% Q3 Q4 2021 Nagative factors of global trade growth 2022 Goods Annual Growth -Goods Quarterly Growth Q4 2023 Q2 22 Geopolitical Tensions Weakening Economy Trade Restrictive Slowing Industrial Inflation and High Measures Output Interest Rate Sources: UNCTAD, Global Trade Update COPYRIGHT © 2023 ARC Consulting. All rights reserved. 4#5Respondents come from a diverse array of industries and over 33% have a purchasing value of over 100 million USD per year Norway Denmark UK Netherlands Germany USA The survey data cover the following topics: Sweden Respondents in different classes of total global purchasing amounts in 2023 (Million USD) Finland Switzerland Italy 18% China Hongkong Singapore ➤ Sourcing markets overview in China, Europe, and Southeast Asia ➤ Current reshoring/nearshoring activities and trends The role of ESG in sourcing ➤ The future of sourcing and the perceived importance of different sourcing regions COPYRIGHT © 2023 ARC Consulting. All rights reserved. 15% 29% <-0-10 ■ 11-100 ■101-500 501+ 38% 5#6China sourcing market has lost some steam, and South East Asia (SEA) has become a complementary market for many companies China * Share of respondents who source in China Share of respondents who source in SEA 78% Yes × 22% No 49% Yes × 51% No 51 38 36 36 COPYRIGHT © 2023 ARC Consulting. All rights reserved. Estimation of how large the purchase amount was in China and SEA (2022-2023) 20 166 13 (0%-10%] (10%-50%] 3 (50%-80%] 10 5 (80%-100%] 5 21 20 20 70 70 SEA 76 76 2022 2023 6#7More companies have some sourcing in Europe, however many respondents have very limited part of spend Share of respondents who sourced in Europe (2022-2023) Estimation of how large the purchase amount was in Europe 78% 83% 2022 2023 1 COPYRIGHT © 2023 ARC Consulting. All rights reserved. 80% - 100% 50% -79% 10%-49% 0% - 9% 12% 15% 2022 2023 28% 17% Survey respondents listing top 3 countries they source 2 D 3 19% 31% 41% 37% 7#8China and Southeast Asia have much sourcing for pure exports, while Europe normally supplies local and global demand 67% China is mainly identified as a market for global supply Main reason for sourcing in China, share of the respondents (2019-2023) ➤ SEA mainly serves global demand while Europe supplies both local and global demand Main reason for sourcing in SEA and Europe, share of the respondents (2021-2023) 73% 52% 51% 50% 49% 23% 20% 46% 38% For global production/sales only For both global and local production/sales COPYRIGHT © 2023 ARC Consulting. All rights reserved. 13% 10% 4% 3% 1% For local production/sales only 58% 53% 45% 36% 31% 30% 2019 2020 2021 2022 51% 46% 31% 28% 25% 16% 6% + 26% 18% *. * + For global production/sales only 2023 For both global and local For local production/sales production/sales only 8#9There is a significant group of companies moving some sourcing out of China, in SEA less so Recovering confidence toward the Chinese market Share of respondents' likeliness to relocate their sourcing out of China 15% 7% 16% 6% 29% 17% 44% 41% 2022 ■ 2023 9% 9% Already planned to/moved sourcing out of China within the past 12 months Very likely Likely Unlikely Very unlikely Growing confidence in SEA market when compared with China Share of respondents' likeliness to relocate their sourcing out of SEA 63% 58% 21% 11% 7% 2% 1% 2% Already planned/moved Very likely Likely sourcing activity out of Southeast Asia within the past 12 months COPYRIGHT © 2023 ARC Consulting. All rights reserved. 22% 12% Unlikely Very unlikely#10Costs pressure reduced compared with last year, but remains top concern Share of respondents listing their perceived top three risk factors 7 Increasing costs 2022 2023 -21% 2 65% 44% Unstable suppliers performance 2022 2023 -9% 38% 29% 3 Increased tariffs 2022 2023 9% 15% 24% COPYRIGHT © 2023 ARC Consulting. All rights reserved. + 7 Increasing cost 2022 2023 -7% 85% 78% 7 Increasing cost 2022 57% 2023 40% -17% 2 Production capacity 2 Unstable suppliers performance 2022 2023 3% 2022 26% 29% 43% 2023 30% -13% 3 Currency risks 2022 8% 2023 10% 18% 3 Lack of suppliers skills 2022 20% 2023 23% 3% 10#11Supply Chain situation has improved significantly, Cost pressure, logistics disruptions and lead time are a concern for fewer Top sourcing problems 1 2 3 2023 59% -26% Increasing costs 2022 85% 2023 41% -33% Logistical disruption 2022 74% 2023 32% -36% Longer lead time from 2022 68% suppliers COPYRIGHT © 2023 ARC Consulting. All rights reserved. The three biggest challenges that companies have faced in 2023 remain the same as those of previous years. On average, the concerns over the top three problems declined by about 30% between 2022 and 2023 11#12Cost is still the biggest criteria when companies decide whether to relocate Top Reasons for relocating 1 2 3 2023 60% -3% Cost saving 2022 63% 2023 39% 10 -2% Risk mitigation 2022 41% 2023 26% -20% Improved logistics 2022 46% and distribution COPYRIGHT © 2023 ARC Consulting. All rights reserved. The decline in the share of may partly attribute to the reopening of China. Companies today, looking back at the challenges posed in recent years, have realized the importance of diversifying their supplier base into more markets to help mitigate potential risks. Many companies reshore or nearshore to strengthen control of logistics by shortening the shipment distance 12#13Quality and insufficient knowledge have decreased as perceived barriers of entering new sourcing markets Quality Risk 2023 37% 2022 49% The most significant barrier -12% Performing extensive quality controls of new suppliers is a costly but necessary measure to take to ensure that the requirements are met. Insufficient knowledge about the new market 2023 32% 2022 40% -8% Companies may benefit from hiring a local resource or appointing consultants with market insights to support the entry. Set-up Costs 2023 31% 2022 27% 4% The cost may involve market research expenses, marketing expenses, supplier searching and training expenses Each of these costs needs to be carefully considered and budgeted. COPYRIGHT © 2023 ARC Consulting. All rights reserved. 13#14Significantly more companies started to assess suppliers' carbon footprint data Share of the respondents assessing suppliers' carbon footprint in 2023 compared with 2022 2022 2023 40% China 75% COPYRIGHT © 2023 ARC Consulting. All rights reserved. 57% 75% 35% Europe SEA 70% The share of companies assessing suppliers from three regions increased significantly 14#15Environment: Companies assess sustainability performance, but many struggle with data collection Extent of the respondents assessing current and new suppliers' carbon footprint data in 2023 13% 22% 6% 7% 25% 26% 25% 22% 14% Enough to ensure that we follow the local regulation standards According to our customers' requirements 31% 9% According to our own internal ambitions that exceed customers' minimum requirements COPYRIGHT © 2023 ARC Consulting. All rights reserved. 3% 20% 18% 30% 20% 10% We do not assess it Suppliers do not provide data when asked I do not know 15#16Social: Assessing Fair Labor conditions is more mature and most are able to receive needed data Fair Labor ➤ Positive treatment of all employees including favorable pay and benefits in excess of mandated minimums. This includes fair employment consideration for all individuals regardless of personal differences. ➤ High percentage of assessing in fair labor data points to this issue received high degree of awareness in Europe Share of respondents assessing fair labor data of suppliers 9% 19% 10% 46% 16% 15% 9% 2% 32% * * + 32% 10% 8% 9% 18% 30% 15% 30% Enough to ensure that we follow the local regulation standards According to our customers' requirements According to our own internal ambitions that exceed customers' minimum requirements We do not assess it Suppliers do not provide data when asked I do not know COPYRIGHT © 2023 ARC Consulting. All rights reserved. 16#17Governance: Corporate integrity of suppliers is a topic that has received less focus Corporate Integrity Across three regions, nearly 25% of companies went and beyond the requirements of the customers, while a large portion in each do not know Share of respondents assessing corporate integrity data of suppliers 28% 33% 0% 3% 10% 15% 18% 31% 28% 33% 0% 3% 10% 28% 9% 26% 10% 28% Enough to ensure that we follow the local regulation standards According to our customers' requirements We do not assess it Suppliers do not provide data when asked According to our own internal ambitions that exceed customers' minimum requirements I do not know COPYRIGHT © 2023 ARC Consulting. All rights reserved. 17#18Five common strategies to ensure suppliers' ESG compliance 1 2 3 58% respondents adopted 46% respondents adopted 42% respondents adopted On-site visit to the suppliers' facilities Review of data and documents Conduct third-party Audit suppliers provide COPYRIGHT © 2023 ARC Consulting. All rights reserved. O M+ M-R C % FORMA INVOICE 4 5 22% respondents adopted 13% respondents adopted Interview with experts and/or suppliers' staff Review of media reports about the suppliers E S G Environmental Socia Governance 100% Group 4 18#19449 49 Respondents show growing confidence in SEA and Europe, but China remains highly important Share of respondents' perception of regions' importance as a sourcing market Year 2022 45 41 49 39 30 21 10 China SEA 16 15 Europe 10 10 Share of important sourcing destinations in the future 60% 53% 32 Year 2023 36 49 49 37 58 The trend of conducting sourcing activities in Europe has accelerated faster than in SEA 55 53 More Important Same Importance Less Important 44% SEA receives more favorable responses than last year ➤ Despite losing some market confidence, China still holds the leading position as the most prominent destination sourcing 21% 15% 9% 9% 8% 6% 6% 5% Europe China Vietnam United States Mexico Turkey Philippines India Malaysia Bangladesh Other COPYRIGHT © 2023 ARC Consulting. All rights reserved. 19#20China is the most popular destination for new sourcing activity followed closely by Southeast Asia and Europe in the past 12 months • • 90% of the respondents who took the survey have started new sourcing activities across China, Southeast Asia, and Europe. China is the most popular sourcing destination • 100% Despite China remaining the primary destination, Southeast Asia and Europe are gaining attraction as the next big sourcing markets. Respondents shared the new sourcing activity in the last 12 months 90% 35% 90% 80% I T I 70% 27% 60% I 50% I 40% 28% I 30% 20% 10% 0% Have new sourcing in China SEA Europe China, SEA, and Europe COPYRIGHT © 2023 ARC Consulting. All rights reserved. I 10% No new sourcing in China, SEA, and Europe 20#21Diversifying supplier base, together with improved communication and processes are important risk reduction measures ➤ The majority of companies plan on diversifying their supplier base to another country as a risk mitigation strategy ➤ Enhancing communication with current suppliers helps ensure that orders are fulfilled and prepare for any risks that might be approaching. Diversifying the suppliers base to other countries 44% Respondents adopted COPYRIGHT © 2023 ARC Consulting. All rights reserved. № 31 RA UBER Enhancing communication with suppliers 38% Respondents adopted Developing new risk management processes while continuously tracking changes 24% Respondents adopted 21#22Summary ➤ Companies experience a more stable supply chain, with less delays and less pronounced cost pressure ➤ China remains a key sourcing market, yet about 30% of respondents indicated plans to relocate at least parts of their sourcing within the upcoming year. Nevertheless, few other markets offer the same competitiveness, Southeast Asia and Europe are expected to be increasingly important sourcing locations., and companies express wish to nearshore to Europe ➤ The key reasons companies are looking at alternative sourcing markets include cost savings, improved logistics, distribution capabilities, and risk mitigation. The main barriers companies face when entering new markets include quality risks, insufficient knowledge, and production capability risks. ➤ Companies are more likely to attain and assess data regarding fair labor carbon footprint, pointing to a with a marked increase in Carbon data collection, less focus on Corporate integrity data and governance ➤ Companies much rely on own factory visits to assess the suppliers' sustainability performance. COPYRIGHT © 2023 ARC Consulting. All rights reserved. 22#23ARC CONSULTING Thank you for your time [email protected] +86 185 0048 6766 COPYRIGHT © 2023 ARC Consulting. All rights reserved. 23