Strategic Location Analysis for setting up of Manufacturing Facility

Case Study

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

company

Dragon Sourcing - 龙源 Your Tailored Sourcing Approach to China

© 2015 Dragon Sourcing. All rights reserved.2

Agenda

1. Context

2. Phase I Analysis

3. Phase II Analysis

4. Phase III Analysis

5. Results and conclusions

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Context

• Client: A global digital security systems manufacturer

• Business Requirement: Our client wanted to select a Free Trade Zone in Asia to set-up a new manufacturing facility in addition to a facility already operating in China

• Dragon Sourcing Approach: Dragon Sourcing conducted a structured 3- phase analysis of 11 FTZs in Asia, pre-selected for the study by both the client and Dragon Sourcing, eliminating FTZs on pre-set parameters in each phase

• 3- Phase Study: Study was conducted in 3 phases and each of the phase is explained in the following slides

© 2015 Dragon Sourcing. All rights reserved.

4

Agenda

1. Context

2. Phase I Analysis





Phase I - Evaluation of Manufacturing Hubs

Objective

•Analysis and ranking of pre-selected Free Trade Zones in Singapore, Manila (Philippines), Ho Chi Minh City (Vietnam), Chengdu (China), Phnom Penn (Cambodia), Johor (Malaysia), Batam and Jakarta (Indonesia), Dubai, Delhi and Chennai (India)

Methodology•DS used publicly available information sources through secondary research, government sources and primary information from local logistics & customs clearance companies to analyze and rank FTZs based on the following parameters:

– Freight capacity of the closest airport to FTZ• Number of freight flights per day to major destinations in US, Canada, Europe and Africa• Number of pallets handled per day

– Lead time for export and import clearance

5© 2015 Dragon Sourcing. All rights reserved.

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


Hub/ FTZSingapore

Manila

HCMC

Chengdu

Phnom Penh

South Malaysia (Johor)

Batam

Jakarta

Dubai

Delhi

Mumbai

Chennai (added)

DestinationsLos Angeles

Philadelphia

Toronto

Montreal

Paris

Amsterdam

Frankfurt

Dubai

Hubs connectivity direct flights all-cargo and passengers lines


Analysis and Scoring of Airports near Free Trade Zones


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


Phase I – Summary

• 7 Free Trade Zones/ Hubs were shortlisted based on the ranking of airports close to the FTZ, which include– Jebel Ali Free Zone/Dubai International Airport– Iskandar (Johor)/ Changi Airport (SG) or KLIA– Batam/ Changi Airport (SG)– Cavite Economic Zone to Manila/ Manila Niny Aquino International Airport (PH)– Tan Thuan EPZ (HCMC)/ TSN International Airport (HCMC)– Chengdu Hi-tech Zone/ Shuangliu International Airport (China)– Sri City/ Chennai International Airport (IN) + Chennai Free Trade Zone, and– Bangkok Free Trade Zone (TH)

• Malaysia, Indonesia, Philippines, Vietnam and Thailand Free Trade Zones/Hubs are considered for Phase II analysis by Dragon Sourcing and the remaining Dubai, China and Indian Free Trade Zones/Hubs will be analyzed by the client


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Agenda

1. Context

2. Phase I Analysis





Phase II - Detailed Evaluation of Manufacturing Hubs

Objective

•A detailed evaluation and in-depth analysis of the FTZs shortlisted in Phase I was performed and the FTZs were scored based on a scorecard developed jointly by the client and DSMethodology

•Dragon Sourcing conducted phase II analysis of the following parameters on FTZs shortlisted from phase I– Tangible Cost parameters like

• Rent of available factory space in FTZs, cost of electricity, water, other utilities and cost labor workforce– Intangible Cost parameters like

• working hours, overtime, public holidays, termination contract and costs, religious and local specific lean periods, availability of electricity, availability of space for factory, income tax and hub incentives, other environmental parameters like logistics, infrastructure, corruption, neighbor industries

•Dragon Sourcing obtained information through desk research from primary data sources (HR resources, government authorities and representative staff) and a multitude of legitimate secondary sources such as websites of FTZ authority, government websites, etc.•Dragon Sourcing created a scorecard and scored the FTZs on the above parameters


Sample Scoring of Tangible Parameters


Rental Charges

Electricity Tariff

Salary

Cost Driver Framework

Structural

• Cost is driven by– Rental Charges– Electricity Tariff– Salary

(Engineer Salary as an example)

Cost Driver Framework

Sample: Comparison of Hubs based on Tangibles and Intangibles


Sample: Labor wage rate scoring


Workforce MeasureMaximum Score per

CriteriaHub 1 Hub 2 Hub 3 Hub 4 Hub 5 Hub 6 Hub 7 Hub 8 Hub 9 Hub 10

Total Cost of an Operator (monthly)

1=More than $4002=$400 to $3503=$350 to $3004=$300 to $2505=Less than $250

5 1 1 5 3 5 4 4 5 5 2

Total Cost of a Technician


5 1 1 3 5 5 5 1 5 5 1

Total Cost of a Supervisor


5 1 2 4 4 5 1 2 4 4 1

Total Cost of an Electrical/Mechanical Engineer


5 1 1 3 2 1 3 1 5 3 1

Total Cost of a Plant Manager

1=More than $2,1002=$2,100 to $1,6003=$1,600 to $1,1004=$1,100 to $6005=Less than $600

5 1 1 1 1 1 1 1 1 1 1

Legend: 1 less than current facility 2 less than current facility 3+ less than current facility

1 more than current facility 2 more than current facility 3+ more than current facility

Phase II – Summary

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


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Agenda

1. Context

2. Phase I Analysis





Phase III – Physical Audit of the selected hubs

Objective•To conduct a due diligence of the Free Trade Zones in the shortlisted countries by conducting a physical audit. The information collected through desk research in phase II was also cross-verified and validated Methodology•Based on phase II study, 4 cities/ countries were selected for phase III analysis- physical audit of the short listed FTZs on the parameters used in phase II analysis to make sure information collected through desk research is correct•FTZs in these 4 cities/ countries were identified and Industrial Estates within these FTZs were identified based on the immediate availability of factory space for move-in•In addition to the parameters of phase II, the following information was also collected during physical visit

– Availability of factory space– Amenities provided by the Industrial Estate and/ or FTZ– Ease of getting labor force onboard through HR consultancies– Local problems that could potentially impact labor and productivity– Interview workers from neighboring companies to understand if there are any unions/ how active they are, etc.– Verify access to Ports/ Airports– Whether the area is prone to flooding/ natural disasters– Availability of potable water– Interview logistics and freight forwarders– Time for customs clearance– Whether the local customs agency is efficient or if any delay can be expected

•Dragon Sourcing visited the free trade zones & industrial estates and estimated the operating cost by discussing with the trade zone authorities and other peer companies thus understanding the real operating conditions. Total monthly cost in each free trade zone is compared to come up with the best suitable free trade zone for the client.


Sample: Phase III Analysis of FTZs


Parameters FTZ1 FTZ2 FTZ3 FTZ4

Section Sub-Section Industrial Estate 1

Industrial Estate 2

Industrial Estate 3

Industrial Estate 4

Industrial Estate 5

Industrial Estate 6

Industrial Estate 7

FTZ

• Is there a ready-to occupy factory available?

NoOnly land

available at present

• Is the factory available for rent?

NoOnly land

available at present

No

• Factory floor space (sq.m) • 9,217 • 12,155 • 11,700

• 8,070 (Total area of 4 small factories)

• 5,640 Expandable twice in size

• 10,000 • (land only)

• 1,950

Location Specific

• Approximate Distance from Airport (km) 72.5 73.5 84 40 147 18 36.5

• Time required to start operations including obtaining permits 4-6 months 4-6 months 4-6 months 4-6 months 4-6 months 9-12 months 9-12 months

Rental

• Factory rent/sq.m (USD) 3.8 3.8 4.8 6.7 7 6 X

• Maintenance cost/sq.m (USD) 0.91 0.23 0.02 0.02 0.02 0.48 0.04• Estimated Renovation Capex(USD) Per

Sq. M* X X X X X X X

Utilities• Electricity cost/kWh (USD) 0.16 0.12 0.09 0.09 0.09 0.16 0.1• Water tariff/cu.m (USD) 1.29 1.4 0.5 0.6 0.7 0.46 0.87• Sewerage tariff/cu.m (USD) 0.2 Nil 0.18 0.18 3.04 0.24 Nil

Sample Analysis of FTZs



Section Sub-Section Industrial Estate 1

Industrial Estate 2

Industrial Estate 3

Industrial Estate 4

Industrial Estate 5

Industrial Estate 6

Industrial Estate 7

Bureaucracy • Administration Efficiency Good Good Good Good Good Poor Poor

• Customs clearance Quick (<24 hours) Quick (<24 hours) Quick (<24 hours) Quick (<24 hours) Quick (<24 hours) Very quick (5-6 hours)

Very Slow (3-4 days)

Eco System

• Availability of Packaging Suppliers (Estimation) 10-15 10-15 25+ 25+ 25+ 10-15 25+

• Availability of Tooling Suppliers (Estimation) 5-10 5-10 25+ 25+ 25+ <5 25+

• Scheduled Power Cuts (Yearly)

1-2 times per year for 1 hour

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

for 1 hour1-2 times per year



for 1 hour1 hour every day

• Unscheduled Power Cuts in 2014 2 times 2 times Nil Nil Nil 3-4 times 10+ times

Tax • Corporate Tax (%) 25% 25% 20% 20% 20% 25% 30%

Sample Analysis of FTZs



Sub-Section Industrial Estate 1

Industrial Estate 2 Industrial Estate 3 Industrial Estate 4 Industrial Estate 5 Industrial Estate 6 Industrial Estate 7

Minimum Monthly Wage (for ref) USD 215 (In 2014) USD 219 (In 2015) USD 145 (In 2015) USD 97 (In 2014)

Worker Termination Compensation

High •2 month per worked year 2 + 15% of monthly allowance

Med•30 days’ for employment period below 120 days,•90 days’ for employment period from 1 to 3 years,•180 days’ for employment period from 3 to 6 years,•240 days’ for employment period from 6 to 10 years •300 days wages for 10 years and more

Low•15 days’ per worked year

Low•15 days’ per worked year

Paid Sick leave • 12 months paid sick leave (with doctor certificate)

• An employee must be granted a minimum of 30 days paid sick leave with pay (by employer) each year. An employee using sick leave for three

• consecutive working days can be required to provide a physician's certificate proving the illness

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

Paid leave allowance 14 (Women get 1 day off every month additional) 13 10 13

Min Wage Revision Period Every Year No systematic. Next revision in 3 years Every Year Every Year

Social/Health Insurance Cost 18% 5% 30% 42%

Approximate time to recruit an employee 60 days 90 days 90 days 60 days

HR Benefits Package• Accommodation, food, access

to prayer hall Food, high bonuses (6 months by auto industry)• Free two-wheeler

service annually, food

• Food, transportation allowance

Contract type (permanent / temporary)

• Temporary: 2 + 1 year then permanent Permanent

• Temporary: 3 + 3 years then permanent

• Permanent

Availability of English Speaking Labor High High Medium High

Projected Labor wage increase (YOY %) 2014-15 14% 0% 12% 12%

Lean Month (Holiday Season in 2015)

Ramzan(Jun-Jul) Songkran (Apr) Chinese New Year (Feb) Diwali

(Oct-Nov)No of official holidays in 2015

(days) 12 15 10 15

Phase III – Summary

• Information was collected on available factory spaces in the Industrial Estates in FTZs of the 4 cities/ countries

• Tangible costs were calculated in the FTZs and compared against client’s current tangible costs in their Chinese facility

• Two Industrial Estates were selected by the client based on both tangible costs associated with those FTZs and intangible parameters like the country’s HR policy, availability of labour force, etc
