Why China is HOT
Chinese chemical imports are up 14% as buyers search for lower prices and new sources of supply
By Gordon Graff -- Purchasing, 11/7/2002 2:00:00 AM
Until recently, foreign chemical companies have bought raw materials in China mostly to supply their manufacturing operations there. Now, cost-conscious chemical makers are turning to China to source key ingredients for their global supply chains. Former concerns about product quality and reliability of delivery are easing as more and more foreign firms station personnel in China to scout out the best suppliers. Assisting in these transactions is the Internet, which is helping buyers and sellers in China make initial contacts.
For purchasers of chemical raw materials "China's extensive capacity resources, intellectual property resources, and overall human resources—all at very competitive costs—represent a vast opportunity," says a spokesman for DuPont, a company with a major sourcing initiative in China. The main benefits of purchasing chemicals in China are "cost reductions and the opportunity to develop alternative suppliers to established supply sources," says a procurement executive at Bayer. Time reductions in the development or improvement of a chemical product are another possible benefit, he adds, because Chinese suppliers are "quite flexible and will start investigations even without a concluded supply agreement." BASF , meanwhile, has realized "substantial savings" by buying chemical raw materials in China, notes Mark Volmer, the company's purchasing director for the Asia-Pacific region.
At Sartomer Co., an Exton, Pa.-based subsidiary of Atofina Chemicals, Sandra LeMaster, manager of corporate procurement, says China offers "an opportunity for us to look at lower cost alternatives" to U.S. suppliers of her firm's vital chemical intermediates. Other North American and European chemical companies say they have turned to China because some of their key ingredients are no longer available locally at any price.
Current statistics bear out the growing interest in China as a source of chemicals. According to the United States International Trade Commission, the value of chemicals imported from China into the U.S. reached $1.23 billion in 2001, up 11.5% over the year before. And for the January through July period of 2002, some $836 million worth of chemicals entered the U.S. from China, a rise of 13.7% over the same period in 2001.
Vitamins and their precursors, along with antibiotics, represent the largest classes of chemicals imported from China into the U.S. in terms of value (see table on pg 16C10). Among specific chemicals regularly imported from China are aspirin, aspartame, vanillin, monosodium glutamate and plastics additives (see table pg 16C12). Newer markets for Chinese imports are emerging. For instance, AVF Industries, Inc., a small Norcross, Ga. reseller of chemicals imported from Asia, reports a brisk U.S. business for such China-sourced products as antimony trioxide, bisphenol A, caffeine, citric acid and furfural. The firm's other top-sellers from China are ethylene bis-stearamide beads, menthol, oxalic acid, sodium saccharin, titanium dioxide, and pigment intermediates.
The quality of most chemicals purchased in China today is up to world-class standards, purchasers report. "We've had no quality problems and no delivery problems—none whatsoever—in our sourcing out of China," says LeMaster of Sartomer, whose company has been buying chemicals in China for the past five years. Quality and reliability of chemicals procured in China "have improved substantially in the last few years," says the Bayer source. One reason, he notes, is that Chinese producers "started some years ago to invest a lot of money in training of their staff and in modernization of their production sites." Most larger companies, in fact, say they will not even consider purchasing from manufacturers in China—or elsewhere—unless the suppliers can verify that they are capable of consistent product quality and on-time deliveries.
New initiatives
To ensure a steady stream of quality materials from China for their global supply chains, chemical makers are stepping up their procurement efforts in that country. DuPont, for instance, has just established a new procurement team that will shortly begin work in Shanghai. Members of the team, says the DuPont spokesman, will help the company's existing Asian regional sourcing organization to identify and qualify new suppliers in China. Visiting and inspecting plants to ensure compliance with DuPont standards will be part of the group's duties, he notes. The effort in China, the DuPont source continues, is part of a company-wide thrust to find new low-cost suppliers around the world, including elsewhere in Asia, and in Mexico, Eastern Europe and South America.
Around 30 people in different organizations carry out Bayer's purchasing activities in China, the company reports. Sourcing for export is done by a holding company, Bayer China Ltd., while procurement for local needs is split up among 10 companies, some of them joint ventures, others wholly owned by Bayer.
BASF, which started sourcing in China in the 1980s out of an office in Hong Kong, moved its raw materials procurement activities to Shanghai in 1999. There are currently four permanent staff members in the office. "We constantly scan our complete global raw materials product range for [sourcing] opportunities" in China, says Volmer. "Our objective is to have direct relationships with the producers wherever that is possible."
Dow Chemical is another company with extensive sourcing operations in China. The company says it has purchasing staff stationed at all its manufacturing sites in China. The firm also bases some regional and global purchasing personnel in the Dow Pacific office in Hong Kong.
Atofina's purchasing program in China is in the "beginning stages," says LeMaster. While the company has no office in China devoted specifically to purchasing, she says, an Atofina staff member in China was recently assigned the task of assessing which of the company's raw materials could be sourced in that country. That staffer will also visit and audit facilities in China to evaluate their potential suitability as Atofina suppliers, says LeMaster, who is using her China sourcing experience at Sartomer to help Atofina with its current efforts.
Arch Chemicals has a small office in Suzhou, just outside Shanghai, that is primarily a sales and marketing site but doubles as a purchasing center, says a company source. "We're adding to staff there and trying to build a larger presence" in China, he adds.
Albemarle Corp. has had a chemical purchasing office in Shanghai for the past 18 months, reports a company representative. The operation in China is still modest but "we're looking to expand our position there," he adds. Chemicals bought by Albemarle in China are typically intermediates for specialty chemicals, the company source notes. These materials, he says, are used in the firm's manufacturing facilities in Europe and the U.S.
Celanese Chemicals purchases chemicals in China but does not have an office there devoted to sourcing for its worldwide supply chain. All chemicals purchased in China by Celanese are used by the company's Chinese manufacturing operations, the company says.
Eastman Chemical also purchases chemicals from China but is still formulating a systematic sourcing strategy. "We're trying to centralize and standardize some of our practices" for buying in China, says a company spokesman.
Huntsman Corp., meanwhile, is planning to open a purchasing office in China that will supply raw materials for a large polyurethanes facility it is building in that country with its joint-venture partner, BASF. That unit, which will make methylene diphenyl diisocyanate (MDI), is scheduled to start up in early 2005. According to Brian V. Ridd, senior VP for purchasing and distribution at Huntsman, the company previously sourced "a substantial amount" of antimony trioxide flame-retardants in China for its polystyrene resins business, which it sold in 1998.
For many firms, buying raw materials in China is part of a global sourcing strategy aimed at lowering costs. DuPont, for example, typically invites bids from potential raw materials suppliers all over the world. "We're doing global sourcing to take advantage of the leverage of our volume," says the firm's spokesman. "So a material that, for instance, is consumed at several sites could come from a single supplier, perhaps a supplier that has various distribution points."
BASF "considers the world its market in terms of sales activities as well as for its procurement activities," says Volmer. He adds "there is a personal commitment of BASF's senior management to develop China as part of our supply base." One of the company's newest initiatives, Volmer reports, is to link the China supply base to BASF's R&D programs around the world to ensure that new products can be made at lowest cost. Bayer too has a global procurement program and says its sourcing activities in China and the rest of Asia "are a more and more important part" of that initiative.
For companies that want to integrate China-sourced raw materials into their worldwide supply chains, procuring chemicals in China is typically done in several steps. "We have very formal procedures that we follow before we even start doing business with any company" in China, says LeMaster of Sartomer. "First we have to evaluate their quality systems, then they have to agree to meet our specifications and our other requirements such as product stewardship."
Procurement personnel in China usually try to establish industry contacts to identify potential suppliers in the country. Bayer, for one, is making an effort to build up "a direct business relationship" between Chinese producers and the end-users within the company, says a company source. Bayer also uses "reliable and strong" brokers or trading companies within China as part of its procurement effort, he adds.
Increasingly, the Internet plays an important role in helping buyers and sellers get together. Large international companies may put out "request for proposals" or "request for bids" on various e-commerce sites to find which suppliers in China are interested in dealing with them. By the same token, a growing number of Chinese chemical companies, or even manufacturing plants, are advertising their availability on the Web.
Once initial contacts are made, interested Chinese suppliers may be invited to bid competitively on contracts. DuPont uses online reverse auctions as one approach to locate low-cost suppliers. To narrow the field further, the company insists that a potential supplier verify compliance with its quality, delivery, health and safety standards. One of the functions of DuPont's new Shanghai procurement group, says the company spokesman, will be to visit plants and inspect them to ensure that they are capable of meeting these standards, and to help noncompliant plants attain the standards. This effort, he notes, "will take a lot of groundwork, especially in a country as vast as China."
Like DuPont, BASF takes an active approach to qualifying suppliers. The company "cooperates with and develops supply companies in China with the potential to achieve" its worldwide quality, safety and health standards, says Volmer.
Small to medium-sized companies who want to source chemicals in China, but can't afford to hire a full-time procurement team there, may rely on brokers or distributors who deal directly with Chinese suppliers. These distributors follow many of the same procurement methods as their large corporate counterparts. At importer AVF Industries, General Manager Victor Tan says that many of his initial contacts with Chinese manufacturers come through the Internet. Later, the firm uses part-time agents in China to evaluate the facilities of some promising suppliers it has identified online. Company personnel also make regular trips to China to meet with their suppliers. Tan says his customers in the U.S. are interested in quality and reliability as much as price. AVF provides assays and standardized packaging for the imported Chinese materials it sells, Tan notes. "Our customers look at us as part of their domestic supply chain," he says.
Getting connected
Meanwhile, the online world is quickly adapting to the growing interest by foreign purchasers in Chinese materials. Some Web sites are merely bulletin boards where buyers and sellers from inside and outside China can post messages. But others are venues where bids are made, orders fulfilled and paperwork processed.
One of the oldest and largest online chemical marketplaces, ChemConnect, has launched a special effort to cater to the Chinese market. Last year the Houston-based company formed a partnership with China Chemical City on the Internet (CCCOI), a Chinese exchange with 20,000 members, to establish ChemConnect China. This joint venture allows members of each exchange to interact online. For example, members can post requests for quotes, requests for proposals and requests for information. They can conduct online auctions and keep abreast of market information and pricing. After their negotiations are complete, they can make use of ChemConnect's fulfillment tools, which include invoicing, logistics and automated documentation.
According to Michele Hincks, vice president of marketing for ChemConnect, its members who tap into the China market are "primarily North American and European companies who are looking for new, lower cost sources of supply," as well as "companies in China who are looking to extend their reach." Hincks notes that the largest chemical companies— she declines to name them—are among the top users of ChemConnect to locate new sources of supply in China. Materials sourced in China through ChemConnect are "pretty varied," Hincks reports, but are seldom commodity chemicals.
Chemical companies are also using online contacts to streamline the qualification procedures for new suppliers in China, Hincks asserts. Many of the initial issues, she notes, including discussions of product specifications, finance and logistics, are being worked out upfront via the Internet, she says, "so that now all the buyer has to do is test the product quality and maybe meet the seller personally."
Despite the utility of the Internet, language and cultural barriers remain for companies sourcing in China. These are fading, however, as the larger chemical companies have set up procurement offices in China and become familiar with the business environment there. Still, establishing a solid working business relationship between a foreign purchaser and a Chinese supplier "is a little more time-consuming and probably more personal" than in Europe and the U.S., says a Bayer official. But the effort can pay off, he points out. While contracts and supply agreements obligate buyer and seller in China, just as they do in the West, he says, if a problem does occur between the parties, "it is most likely the good business relationship that will help solve the problem."
Vitamins and antibiotics head top-ten list of China chemical imports by value
| Chemical Class | U.S. chemical imports from China, 2001 (millions of dollars) |
| Source: U.S. International Trade Commission |
|
| Provitamins and vitamins, natural or synthetic | $94.6 |
| Antibiotics | $77.1 |
| Heterocyclics with oxygen heteroatoms | $68.1 |
| Carboxylic acids with added oxygen function and their anhydrides and derivatives | $66.0 |
| Compounds of yttrium or scandium | $60.9 |
| Heterocyclics with nitrogen heteroatoms | $41.4 |
| Hydrazine, hydroxylamine and derivatives | $41.3 |
| Carbides | $40.8 |
| Binders for foundry molds or cores | $35.9 |
| Hydrogen, rare gases and other nonmetallic elements | $30.2 |
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