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A GXS Thought Leadership White Paper B2B e-Commerce Strategies for the Chinese Manufacturing Market A Guide for European, North American and Asia Pacific based Manufacturing Companies

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Page 1: B2B e-Commerce Strategies for the Chinese Manufacturing Market · B2B e-Commerce Strategies for the Chinese Manufacturing Market • 3 A GXS White Paper Source: IHS Global Insight

A GXS Thought Leadership White Paper

B2B e-Commerce Strategies for the Chinese Manufacturing MarketA Guide for European, North American and Asia Pacific based Manufacturing Companies

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Table of Contents

1. Competing in China’s Manufacturing Market .............................................................3

1.1 Today’s Manufacturing Industry in China .........................................................3

1.2 China’s Manufacturing Expansion Around the World .......................................4

1.3 China’s Open Economic Policy ..........................................................................4

1.4 IT Investment Priorities Across China’s Manufacturing Sector .........................5

1.5 Supporting Green Based Supply Chain Initiatives ............................................6

2. Assessing B2B e-Commerce Readiness in China .......................................................8

2.1 Infrastructure .....................................................................................................9

2.2 Technical Support ..............................................................................................9

2.3 Large Business Enterprise Application Infrastructure ..................................... 10

2.4 Small Business Application Infrastructure....................................................... 10

2.5 Technology Focus in China ..............................................................................11

2.6 Current B2B Document Standards .................................................................. 12

3. Defining a B2B e-Commerce Strategy for China ..................................................... 13

3.1 Your Value Chain in China .............................................................................. 13

3.2 Assessing Trading Partner Readiness ............................................................. 15

3.3 Automating B2B Business Processes .............................................................. 17

4. Implementing a B2B e-Commerce Strategy in China .............................................. 19

4.1 Large Customers ..............................................................................................20

4.2 Large Suppliers ................................................................................................20

4.3 Small and Mid-Size Suppliers ......................................................................... 21

5. GXS, Your Trusted Partner in China ........................................................................22

5.1 GXS Resources in China ..................................................................................22

5.2 GXS Experience in China .................................................................................22

5.3 GXS B2B e-Commerce Solutions .....................................................................22

2 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

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1. Competing in China’s Manufacturing Market

1.1 Today’s Manufacturing Industry in ChinaAccording to the 2010 Global Manufacturing Competitiveness Index produced by Deloitte and the U.S Council of Competitiveness, the epicenter of manufacturing is continuing to shift to the emerging markets such as India and more significantly China. The manufacturing sector in China is one of the fastest growing in the world and by 2014 is poised to overtake the United States as the world’s largest manufacturing nation. Even though many countries around the world saw their manufacturing output shrink considerably during the most recent global recession, China was able to ride out the recession due in part to the large pool of low cost workers who manufacture goods at a fraction of the cost of western companies.

Figure 1 – Size of China’s Manufacturing Sector

Until recently the southeast coast of China has been the central hub location for many Chinese manufacturing companies. In fact, southern coastal China is often referred to as the World’s Factory Floor. Many manufacturing companies have prospered along the east coast of China, thanks in part to having a more reliable utilities and telecommunications infrastructure, close proximity to deep sea ports for global exports and the availability of highly skilled, low cost labor. The east coast of China has seen more inward investment from western companies than any other region across China.

In 2010 China faces some tough challenges. Wages along the east coast have increased by an average of 17%, and many companies are facing strikes which are starting to impact the supply of parts to car and consumer electronics manufacturers. The higher labor costs are forcing manufacturers to establish new plants in the inland regions of China. A major advantage of this is that manufacturers will be able to once again utilize low cost labor. But more importantly, the spread of companies across the central and western regions of China will help to develop China’s domestic market and hence reduce their overall reliance on exports. Any move inland will have an effect on logistics and distribution costs—that is, of course, if the road and rail infrastructure even exists. Manufacturers will have to consider all these factors before relocating their plants.

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 3A GXS White Paper

Source: IHS Global Insight Note: Figures starting in 2010 are forecasts

Size of the Manufacturing SectorIn Trillions of 2005 U.S. Dollars, for: U.S. China

‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘140.0

0.5

1.0

1.5

2.0

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Foxconn is one high tech manufacturer who is partnering with numerous PC manufactur-ers in Chongqing, a western city of 32 million where labor costs are 20 to 40 percent lower than east coast towns and cities. The plan is to establish Chongqing as one of the world’s leading high tech and automotive related manufacturing hubs.

1.2 China’s Manufacturing Expansion Around the WorldThe main trend across the Chinese manufacturing sector in recent years has been for western companies to form joint venture operations with domestic Chinese manufacturers. This became prevalent across the automotive industry where most of the world’s automo-tive OEMs established a joint venture of some description with a Chinese car manufactur-er. This arrangement has worked well and has allowed western companies to get a foothold in a lucrative consumer market. This has also allowed Chinese companies to acquire valuable knowledge of how western companies run their plants and manage their supporting ICT/B2B infrastructures.

Today a new trend is developing due primarily to the recent economic downturn. The growing wealth of many Chinese domestic manufacturers has led them to expand their operations and take manufacturing plants closer to key markets around the world. Chinese firms also are acquiring some North American automotive suppliers to get a foothold into the lucrative North American market.

One of the reasons Chinese automotive companies have so far failed to enter western mar-kets is due to the poor quality and safety record of their vehicles. Geely acquired the Volvo Car Company from Ford in 2010. Since it has now acquired the leading designer of cars built to the highest safety standards, it won’t be long before this knowledge of producing safe, high quality vehicles passes across to Geely’s engineers and hence influences the design of their own future vehicles.

Chinese manufacturing companies are also keen to establish a presence in Eastern Europe as this provides a stepping stone into the Western European market. Establishing manufac-turing plants nearer to the end consumer significantly reduces logistics and transportation costs. A good example of this is the Chinese electronics company Huawei that invested in new manufacturing plants in Hungary and Slovakia.

1.3 China’s Open Economic PolicyThe most significant changes in the economic policy are being driven by China’s acces-sion into the World Trade Organization (WTO). Protectionist legislation has tradition-ally restricted foreign participation in the market. The restrictive policies are now being abandoned in favor of more open economic policies. The removal of these barriers opens up one of the largest consumer markets in the world. With increased wealth and consumer spending amongst the middle classes, China is seeing an increasing appetite for western products. Many western high tech and automotive companies are seeing significant interest in their products. For example in the automotive sector, China is the fastest growing market for luxury car manufacturers such as BMW, Audi and Mercedes.

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The recent economic downturn saw the Chinese government pump billions of dollars into the economy thus helping to stimulate consumer spending and make the market extremely attractive for western based companies. Some observers say that the increased wealth of the Chinese middle class population is changing China from an export-led manufacturing economy to one which is consumer driven.

WTO membership has significant implications for the domestic manufacturing market in China.

• Tariffs and quotas—Historically, tariffs and quotas have discouraged foreign OEMs from importing vehicles for sale in China. Tariffs on foreign imports averaged 200% in the 1980s and 100% in the 1990s. With China’s WTO accession, tariffs have been dramatically reduced to levels of 25%. Additionally, in the automotive sector vehicle imports have traditionally been limited to 30,000 vehicles a year. The quotas are also being phased out in the coming years.

• Sourcing—Historically, manufacturers were required to source up to 80% of parts and materials locally from Chinese vendors. These local requirements are being completely phased out with the new WTO legislation.

• Retail and Distribution—Foreign enterprises have historically been prohibited from owning retail distribution networks such as retail dealerships. With the WTO acces-sion, foreign enterprises will be able to own both wholesale and retail distribution entities.

• Financing—Non-Chinese banking institutions have been restricted from provid-ing consumer loans for vehicle financing. Over the coming years de-regulation will enable foreign financial institutions to compete for a piece of the sizeable Chinese consumer loan market.

1.4 IT Investment Priorities Across China’s Manufacturing SectorAccording to a recent Gartner study of IT adoption across the Chinese manufacturing sector, the software products getting the highest priority for investment are business integration tools. In recent years the Chinese manufacturing industry has struggled to improve the quality of certain goods. To maintain orders from western companies, they are investing significant amounts of money to implement quality management systems. In this particular study, the Chinese manufacturers also rated supply chain management solutions higher than ERP. This again shows that Chinese manufacturers are keen to invest in their supply chains to compete with manufacturing supply chains found in western economies.

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 5A GXS White Paper

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Figure 2 – Top Priorities for Software Projects in 2010-2011

One of the challenges faced by Chinese manufacturing companies is finding the relevant skills to manage complex ICT or B2B environments. Many manufacturers simply do not have the internal resources to manage a computer network or maintain software instal-lations. For this reason, according to the Gartner study, there is a significant interest in cloud computing infrastructures. Significant investment is currently being made in tele-communications and network infrastructures in China to encourage western companies to establish a presence in the region. Improved networks will also allow domestic manufactur-ers to utilize hosted applications that require minimal skills to deploy and maintain on an ongoing basis. As long as the manufacturers have access to the Internet they will be able to connect to all of their key business systems online as well as interact with trading partners and customers all over the world.

Figure 3 – Future Spending on IT Projects

1.5 Supporting Green Based Supply Chain InitiativesAnother area seeing significant investment across the Chinese manufacturing community is the introduction of green related IT initiatives. This has in part being driven by China’s plans to reduce carbon emissions by up to 45% by 2020. Along with improving the qual-ity of manufactured products, Chinese manufacturers are keen to follow the latest trends in green computing and develop greener business processes across their respective supply chains. Recently GXS sponsored a green supply chain study. The study found that the adoption of electronic rather than paper based processes was one of the most important

6 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

BI, BA, CPM Software

Quality Management Systems

MES

SCM Software

CRM Software

ERP Software

PLM Software

RatingSource: Gartner (July 2010)0 1 2 3 4

3.92

3.85

3.76

3.71

3.68

3.59

3.56

Cloud Computing

Unified Communications

Green IT Initiatives

Security

Virtualization

Percentage of Respondents

Performing initial pilot projects this yearPlanning to deploy in the next 24 months

0 5 10 15 20 25 30 35 40

10 29

7 17

7 17

2 7

7 2

Source: Gartner (July 2010)

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green related sourcing and procurement-focused initiatives being implemented across Chinese manufacturers. The reduction of paper in contracts and the audit of suppliers were the least commonly implemented initiatives. These indicators are positive and suggest that as technology improves and supply chains become more efficient, green practices will become more prevalent.

Figure 4 – Green Sourcing & Procurement Focused Initiatives

e-Business tools to support green related initiatives in companies are mostly used in logistics and materials management processes, information integration and forecasting. Even though e-business tools are widely used for logistics based processes, a significant amount of paper is being used to handle customs related transactions.

Figure 5 – Use of Electronic Tools to Support Company Wide Green SCM Initiatives

In general the green survey highlighted that almost half the companies surveyed were not using e-business tools extensively across their company’s supply chain. This presents a strong opportunity for greater use and adoption of e-business tools to support green supply chain management processes.

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 7A GXS White Paper

Use electronic processes to create efficiencies

Employ green friendly design and product lifecyclemanagement in sourcing strategy

Embed “sustainability” into supplier relationships

Work with suppliers for Green SCM compliance

Audit suppliers for Green SCM compliance

Reduce use of paper in contracts

Other

51%

47%

46%

44%

32%

5%

5%

Green Initiatives in ChinaGreen Sourcing & Procurement Focused Initiatives

Source : Global Supply Chain Council’s Green Supply Chain China Survey

Logistics and materials management processes

Information integration(forecast, order ship, notice, invoicing, status, etc.)

Forecasting

Collaboration with suppliers and customers

Customs management

Other

47%

51%

46%

44%

32%

5%

Use of Electronic Tools to Support Company-wide Green SCM Initiatives

Source : Global Supply Chain Council’s Green Supply Chain China Survey

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2. Assessing B2B e-Commerce Readiness in China

Three Infrastructure Requirements for B2B e-CommerceDeploying technology in China presents a unique set of challenges. An understanding of these unique local challenges can help to reduce the risks of project delay through proper advance planning.

For a B2B e-commerce program to succeed, three aspects of technology infrastructure are critical: • Infrastructure—The widespread availability and high reliability of data networks and

electrical utilities within China is a critical pre-requisite to e-commerce.

• Technical Support—The availability of local resources with relevant language skills for implementation and ongoing technical support will be critical to success.

• Application infrastructure

– Large Businesses—B2B e-commerce offers minimal benefits without systems to analyze the data received from trading partners. ERP systems must be deployed and utilized before B2B programs can be successful.

– Small and Medium Businesses (SMBs)—For B2B e-commerce to achieve criti-cal levels of adoption, SMBs must be required to have only a minimal level of IT infrastructure including PCs and Internet access. SMB software packages for accounting and finance can accelerate capabilities to exchange orders and invoices.

In the following sections we will explore the current level of adoption in the three categories—infrastructure, technical support and application infrastructure for both large and small businesses.

Figure 6 – Assessing B2B e-Commerce Readiness

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2.1 InfrastructureCompared with North America, Europe and Japan, China’s infrastructure is less mature. Transportation, power and networking systems vary based upon geographic region and suffer from poor levels of reliability.

• Internet Connectivity—Most companies in the manufacturing supply chain are connected to the Internet. However, the public Internet is not as reliable as in many western nations. Connectivity varies based upon geographic region and network carrier. Users in many regions report frequent intermittent outages. As China’s infrastructure continues to expand and modernize, the levels of availability will rise to global standards. In the meantime it is important to plan for some interruptions to service.

• Power—Rapid development of power-intensive manufacturing plants and the emergence of a growing middle class have dramatically increased the demand for electricity. Chinese utility providers have not been able to keep pace. In certain regions, the electrical infrastructure has become overburdened. Unplanned blackouts can take entire manufacturing facilities off-line for several days at a time. Local utility providers are investing heavily to increase capacity with the latest energy generation techniques such as nuclear power.

2.2 Technical SupportLocating the appropriate IT skills can be challenging as well. Few IT professionals with extensive experience in B2B e-commerce are on the market.

• Expertise/Skills—Creating a technologically advanced workforce is a key goal of the Chinese government. Numerous programs exist to encourage youths to pur-sue engineering and computer related degrees. Consequently, Chinese universities graduate thousands of new technical professionals each year. However, experienced personnel are in high demand throughout the region. Locating personnel with prior B2B e-commerce or enterprise application integration experience is very challenging. Multi-national corporations often rely upon IT resources from Europe and North American for technical expertise. It is not uncommon for IT personnel from Europe and North American headquarters to be located on-site in China during major IT initiatives such as an ERP deployment.

• Documentation—Documentation in Chinese is not available from many vendors. The lack of localized materials frustrates users and prolongs implementations. To many, B2B e-commerce, supply chain management and enterprise resource planning are new technologies which introduce new terminology. These new concepts further compound the documentation challenges.

• Implementation Support—Many vendors, including larger multi-national IT ven-dors, do not provide support directly in China. Instead, the vendors rely on a net-work of local consultants and value added resellers to provide implementation and technical support. The local organizations have the necessary language skills and a strong understanding of Chinese customs. However, the local consultants and value

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added resellers lack the broad experience in implementation and technical support that the global IT vendors possess. Lack of experienced local support can prolong project timeframes when unforeseen challenges arise.

• Ongoing Technical Support—Local phone based technical support is a challenge particularly during non-business hours. Larger vendors, who deploy a 24x7 “follow the sun” strategy, route calls to Europe or North America depending on the time of day. Increasingly, English speaking regions such as India and the Philippines are staffing low-cost, 24x7 call centers. The remote call centers typically lack Mandarin and Cantonese language skills. Consequently, Chinese IT personnel who do not speak English are not able to access timely support during off-hours. The problem is exacerbated by the increasing number of factories operating multiple shifts around the clock to maximize output.

• Geographic Variances—Technology support is very challenging in the more remote central and western regions of China. Due to the poor transportation and commu-nications infrastructure, these remote regions are less developed than coastal prov-inces. Government funding and special economic trade zones are concentrated on the eastern seaboard due to its proximity to Pacific Ocean and the key intra-coastal waterways of the Yangtze and Pearl rivers. Manufacturers locating plants in central and western regions may experience more challenges.

2.3 Large Enterprise Application InfrastructureThe success of any B2B e-commerce initiative depends upon the maturity of the company’s internal enterprise application suite. The deployment of an ERP application to manage warehouse, production, transportation and accounting functions is a critical pre-requisite to any e-commerce program.

ERP in the Chinese Manufacturing Community

ERP adoption in China remains quite low outside of multi-national corporations. Studies from firms such as AMR Research suggest that the adoption rate is as low as 5% nationally. Most manufacturers who are not using ERP systems have achieved some level of automa-tion with a stand-alone accounting package, spreadsheet or other packaged application. Manufacturers are expecting to move quickly away from these independent methods to a more comprehensive, integrated approach. It is envisaged that ERP implementations will not necessarily be as broad in scope as in North America, Europe and Japan. Functions such as payroll, human resources, customer relationship management and sales force auto-mation may be excluded from the early stages of implementations. Nonetheless, the trend towards automation is encouraging for B2B e-commerce.

2.4 Small Business Application InfrastructureSmall business accounting packages have a high level of adoption throughout China. Adoption is broadly encouraged by the government, private enterprise and society. Chinese companies prefer accounting packages that are relatively inexpensive and easy to use.

10 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

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2.5 Technology Focus in ChinaThe readiness of the network, power, support and application infrastructure in China is a critical factor in the adoption of B2B e-commerce technologies. Equally important are the attitudes and perceptions of corporations towards technology. The attitudes and investment priorities for multi-national corporations differ in many respects from Chinese corporations.

Multi-nationals headquartered in the heavily developed regions of Europe, North America and Japan face significant cost pressures. Growing labor costs in these regions have driven multi-nationals to invest significantly in computer automation. This automation reduces manufacturing costs by eliminating the need to pay high cost labor rates for routine, low skill tasks.

Unlike the North American, European and Japanese markets, the driver for technology adoption in China is not cost reduction. Prevailing labor costs in China remain very low relative to western nations. As a result implementing technologies such as ERP, Supply Chain Management and e-commerce provides relatively limited cost savings.

Instead, Chinese companies view the value of deploying business applications in: • Theabilitytoscalethroughperiodsofrapidgrowth. • Theabilitytoensureconsistentmanufacturingquality. • Theabilitytoservecustomersaccordingtotheirpreferences.

These factors are leading drivers for technology in China.

Drivers for E-Commerce in China versus North America, Europe, Japan

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 11A GXS White Paper

Small Business Accounting Applications in China

• Over 12 Million Small Businesses in China

• An estimated 98% of all businesses use account-ing based software

• Manufacturing companies represent 27% of all ac-counting users today

Manufacturing companies were the first sector in China to adopt account-ing software packages. Today manufacturers represent the largest user group with 27% of the overall market. Telecommunications and financial services are also large users of accounting software packages.

The Chinese government has a strong influence on the accounting soft-ware industry. China regularly establishes goals for its larger brands to establish international recognition and achieve market share targets. All software accounting vendors must have their applications certified by the Ministry of Information Industries (MII) prior to commercial availability. Each vendor must recertify on an annual basis.

The Chinese accounting software market is very fragmented. Vendors focus geographically on specific sectors and regions. Each of the six dif-ferent regions of China has a different vendor with the dominant market share.

North America, Europe, Japan

Scale for Rapid Growth

Ensure Quality and Consistency

Customer Preferences

Reduce Costs

Customer Preferences

Measure Supplier Performance

China

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Scale—Many Chinese manufacturers are experiencing rapid growth. Today many business processes are manual or heavily customized. Processes based upon spreadsheets, fax and e-mail do not scale effectively. Consequently, Chinese corporations are seeking automation of enterprise functions and supply chain functions through technology. The scalability pro-vided by automation will enable Chinese manufacturers to capitalize on the vast potential of the rapidly growing domestic market.

Quality—Chinese manufacturers are keen to establish themselves as high-quality provid-ers to global companies. High quality in both products and customer service is an area in which the Chinese are still viewed as lacking. Global manufacturers that compare sourcing options between China, India and Central Europe will factor both costs and quality into their decision-making. Electronic exchange of information can be a critical technique for improving both quality and the customer experience. E-commerce eliminates the need to re-key data into back office systems from paper, fax or e-mail. Errors resulting from handwriting misinterpretations and typographical errors are eliminated. Improving data quality raises perfect-order-fill-rate, reduces invoice discrepancies, and prevents unnecessary shipment delays. Improved quality metrics result in higher customer satisfaction, retention and growth rates.

Customer Preferences—Suppliers are increasingly trading with wholly foreign owned enterprises or joint ventures of European, Japanese and American manufacturers. As a result, Chinese suppliers need to adopt business practices that increase their attractiveness to multi-national business partners. Multi-nationals expect electronic integration for forecasting, inventory management, logistics and settlement processes. The maturity of business processes and e-commerce capabilities are often key factors in meeting customer expectations.

2.6 Current B2B Document StandardsUntil 2006 numerous XML based document standards were in use across the Chinese manufacturing industry. XML became so popular because Chinese companies were primarily interested in exchanging B2B documents within their country. With so many western companies establishing joint ventures in the region, and to allow China to work with trading partners all over the world, efforts were made to identify a common standard that could be used across the industry sector.

In 2007 the Joint Automotive Industry Forum (JAIF) conducted a study to gain a better understanding of the various B2B standards that were in use. It was to recommend which standard would be adopted as the main B2B document standard for trading partner com-munication in China and the rest of the world. JAIF concluded that EDIFACT would be used in the short term with an eventual goal of switching to XML once it was able to sup-port all of the various message types that EDIFACT could handle.

In 2010 EDIFACT remains the most popular EDI based communication standard across Chinese based companies. However Forrester found in a recent study that the most com-mon way of exchanging business information between trading partners is via spreadsheets. In China, spreadsheets have become the normal way of doing business in the region, and their popularity is one of the reasons ERP systems have seen such slow adoption there.

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Figure 7 – Leading B2B Document Standards Used in China

The exchange of spreadsheets is common practice in China; but it does present problems from a B2B integration point of view. First, manual data entry introduces a high prob-ability that errors will be entered. Secondly, information within the spreadsheet has to be transferred into another business system, thus allowing other potential errors to be entered. Ideally, information in spreadsheets would be transferred electronically to B2B systems. This would preserve the accuracy of the information submitted by external trading part-ners by avoiding errors in downstream business systems. GXS Trading Grid® for Excel® is one such solution that allows Excel based information to be used as part of an EDI infra-structure. This solution is briefly discussed further in section five of this paper.

3. Defining a B2B e-Commerce Strategy for China

To define a B2B e-commerce strategy for China, three critical questions need to be answered: • Whichvaluechainsegmentswillgainthemostfrome-commerce? • Whichtradingpartnerswillbethefirsttoparticipate? • Whichbusinessprocessesshouldbeautomated?

3.1 The Value Chain in ChinaFirst, let us explore which value chain segments will benefit most from e-commerce. Most manufacturing activities in China can be classified into one of two value chain categories: • Domestic—Manufacturing of goods and parts for sale in China’s local market.

• International—Manufacturing of goods and parts for sale in the rest of the world.

Multi-national corporations will manage these two value chains separately. Local Chinese divisions will have responsibility for defining the manufacturing, sales and IT strategies for the domestic value chain. Corporate headquarters or the appropriate divisions in North America, Latin America, Europe, and the remainder of Asia will have responsibility for the international export value chain. Timeframes, objectives and priorities for local value chains may differ significantly from the goals of export value chains. As a result, distinct B2B e-commerce strategies should be developed for each.

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 13A GXS White Paper

Spreadsheets or other text documents

EDI (X12, EDIFACT, etc.)

Industry standard XML (PID, CIDX,...)

Financial (ACH, SWIFT, FIX)

Flat files

Proprietary XML

Rosettanet PIPs

40%

42%45%

39%

44%42%

36%

37%36%

34%

35%35%

29%

34%36%

North America

Europe

Asia/Pacific

23%

24%29%

14%

32%18%

Source: Q4 2009 Global EDI/B2B SurveyBase: 300 Senior IT Managers from North America, EMEA and Asia Pacific regions

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Manufacturing for Sale in ChinaThe majority of production capacity in China today is focused on meeting the domes-tic market opportunity. Increased consumer spending has seen an exponential growth in demand for consumer electronic devices. Many Chinese consumers are also looking to purchase their first cars; due to the size of the Chinese population this is the main reason China has become the largest car market in the world. The growth in the consumer elec-tronics and new car markets will also see a significant growth in the domestic aftermarket parts to service these growing industry sectors.

The first step in defining an e-commerce strategy for China is to identify and segment the trading partners in the value chain. Trading partners can be segmented into four pri-mary categories: • Customers—For suppliers this may include OEMs, upper-tier manufacturers, or

aftermarket retailers. For OEMs it may include retailers and distributors.

• Suppliers—Includes both direct materials and indirect materials suppliers. These suppliers can be located within China or importing from the rest of the world.

• Financial Institutions—Facilitate payment transactions between participants in the manufacturing value chain.

• Logistics Providers—Include marine, air, rail and ground transportation vendors as well as third party logistics providers.

The diagram below provides a segmentation of trading partners relevant to the local China market. Trading partners are categorized by function in the value chain (customer, supplier, financial institution or logistics provider), location (China or international), country of origin (China or international) and size (large or small).

Figure 8 - Domestic Trading Partner Segmentation

14 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

Customers

Suppliers

Aftermarket Production

Domestic Manufacturing Imports

LargeChinese

Small and MidsizeChinese

LargeMulti-Nationals

LargeChinese

Small and MidsizeChinese

LargeMulti-Nationals

DomesticManufacturing

FinancialInstitutions

LogisticsProviders

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Manufacturing for Sale in Rest of World

An increasing amount of production capacity is focused on exporting parts from China to the rest of the world. The first step in defining an e-commerce strategy for export activities is to identify and segment the participants in the value chain.

The diagram below provides a segmentation of participants relevant to the international export value chain. Participants are categorized by function in the value chain (aftermarket sales, production manufacturer, parts manufacturer or logistics provider), location (China or international), country of origin (China or international) and size (large or small).

Figure 9 - International Trading Partner Segmentation (Manufacturing for International Export)

3.2 Assessing Trading Partner ReadinessNext, let us explore the different levels of e-commerce capabilities amongst participants in China’s manufacturing supply chain.

Value chain participants can be segmented by the level of e-commerce experience. We will segment companies into three categories:

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 15A GXS White Paper

Customers

Suppliers

Aftermarket Production

ExportManufacturing

Third Party Manufacturing

Your Manufacturing

Large Chinese

Small and Midsize Chinese

Large Multi-Nationals

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Trading partners should then be segmented based upon the volume of business transac-tions in the relationship. Automating information exchange between higher volume trading partners will provide the highest immediate impact. Analysis should be performed to determine the highest volume partners. Large multi-national companies with advanced e-commerce skills may not necessarily be the largest customers or suppliers in your value chain.

When trading partners are evaluated based upon both transaction volumes and B2B capa-bilities, the areas of highest impact become obvious. The figure below illustrates the typical trading partner segmentation for a local Chinese supply chain. Automation of trading partners in the upper right quadrant will yield the maximum immediate benefits.

Figure 10 - Sample Trading Partner Readiness

16 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

Category

Multi-national Corporations

Large Chinese Corporations

Small and Medium Chinese Businesses

Multi-national corporations have extensive experience with ERP, EAI and B2B e-commerce technology in other regions. The value proposition of technology is well understood. Multi-nationals will be the first to deploy these technologies in China.

Chinese corporations are new to ERP, EAI and B2B e-commerce. However, China’s Top 100 corporations are quickly learning about the advantages of technology. They are beginning to aggressively deploy B2B programs. Adoption will be slower due to the challenge of balancing the need for rapid growth with the necessity of adopting business processes for ERP.

China’s smaller businesses lack B2B e-commerce experience; so very low levels of participation exist today amongst the SMB segment. The motivation for SMBs to adopt B2B technology will be the desire to grow their businesses with strategic accounts.

B2B e-Commerce Experience

B2B

e-C

omm

erce

Exp

erie

nce

Volume of Transactions per Trading Partner(Varies per Supply Chain)

Highest ImmediateImpact

Low High

Low

High

ChineseCorporations

(Small)

ChineseCorporations

(Medium)

ChineseCorporations

(Large)

Multi-NationalCorporations

(China)

Multi-NationalCorporations

(Imports)

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3.3 Automating B2B Business ProcessesFinally, let us explore which business processes Chinese manufacturing companies are automating. In the automotive industry for example, most OEMs and Tier 1 suppliers are adopting a pull based replenishment model for their supply chains in China. Other manufacturing sectors have also adopted this replenishment model as it helps to reduce inventory levels and maximize production capacity. The diagram below illustrates the electronic information flows between customers and suppliers. A customer in this context could be either an OEM or a Tier 1-N supplier. A supplier could be a manufacturer at any tier of the value chain (Tier 1, 2, N).

The most popular business processes for automation in China are planning, consumption and replenishment. e-Commerce has not yet been widely embraced for payment processes in China due to government regulation. Invoicing and payment transactions are largely manual.

Figure 11 - Pull Based Replenishment Model for E-Commerce

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 17A GXS White Paper

Customers Supplier

Plan

ning

Cons

umpt

ion

&

Repl

enis

hmen

tPr

oduc

tion

Spe

cific

atio

n &

Pur

chas

ing

PurchaseOrder

Management

Sales &Marketing

ConsumptionProcess &

Loop Management

Replenishment

Order Management

PlanningProduction

Scheduling &Control

Specifications

MaterialsRequirements

OrderRequest

Source: AIAG

Purchase Orders

PO Acknowledgement

Planning Information

Ship Notice

Pull Signal

Receiving Advice

Application Advice

ManufacturingReceiving

ManufacturingShipping

Figure 11 - Pull Based Replenishment Model for E-Commerce

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18 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

Pull-Based Replenishment Business ProcessesProduction Specification and Purchasing

A relationship between a customer and a supplier commences with the following processes: sales, selection and purchase order processes. • Sales and Marketing (Supplier)—Customers define product specifications and

pricing for a required part. The specifications are then delivered to a small group of suppliers who bid on the opportunity. After a thorough review of proposals a supplier is selected.

• Purchase Order Management (Customer)—Terms and conditions are negotiated for a blanket purchase order between the customer and the supplier. A series of materials releases will be executed against the purchase order to fulfill ongoing production needs.

Planning

Once a relationship has been established between a customer and supplier a regular planning cycle will be established using the following processes: • Planning Production and Schedule and Control (Customer)—The customer will

send a production planning schedule or material release regularly to its suppli-ers. The planning schedule communicates the material requirements generated by the customer’s production control system. Requirements include the type of part, quantity needed, delivery location and forecast dates.

• Order Management (Supplier)—A supplier will compare the prior planning schedules received to the latest version. Differences will be identified to assess the impact on production planning. The supplier will acknowledge the schedule to confirm acceptance of the new plan.

Consumption and Replenishment

As manufacturing processes occur, materials will be replenished at regular intervals using the following processes: • Consumption Process and Replenishment (Customer and Supplier)—As materi-

als are consumed by a customer’s manufacturing process, replenishment autho-rizations are sent to the supplier. These authorizations are formatted into a ship-ping schedule which provides specific schedule and delivery information for the parts required. The shipment schedule relates directly to the planning schedule in the “Planning” phase described above.

• Manufacturing Shipping (Supplier)—Suppliers send an advanced shipping notice (ASN) or manifest to correspond with each physical delivery. The ship notice is typically sent as the materials leave the supplier’s loading dock. Ship notices must be submitted prior to the arrival of the materials otherwise the customer will not have the proper information to receive the goods.

• Manufacturing Receiving (Customer)—If the customer identifies errors in the advanced ship notices, an application advice will be sent to the supplier. The

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4. Implementing a B2B e-Commerce Strategy for China

The technology gap between multi-national corporations and Chinese corporations will become less significant in the next two years. The introduction of cloud based comput-ing environments will effectively place western and Chinese manufacturing companies on the same B2B platform in the next few years. For simplicity, we will consider both multi-national corporations and large Chinese corporations as one group.

The 2007 study conducted by Joint Automotive Industry Forum highlighted some key trends in terms of how Chinese based manufacturers select their B2B strategy. Ease of supplier adoption was the most important factor given the relatively low levels of B2B technology and the poor telecommunications infrastructure to support these applications. In order to enable 100% supplier enablement, B2B tools must be quick to deploy, simple to use and easy to maintain on an ongoing basis. Cloud based infrastructures can provide these capabilities.

Figure 12 - Factors in Selecting B2B Strategy

GXS recommends dividing your China B2B program into three segments: • LargeCustomers • LargeSuppliers • SmallandMid-SizeSuppliers

The following section will explore the unique requirements of each segment

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 19A GXS White Paper

customer may choose to correct the advanced ship notice directly or reject it completely. Suppliers are required to correct and resubmit rejected ship notices. Once the materials are delivered to the customer then additional verification will be performed. Discrepancies between the materials received and the advanced ship notice will be identified in a receiving advice returned to the supplier.

Ease of supplier adoption

Cost of implementation

Leveraging existing B2Btechnology investment

Speed of implementation

Complexity of Implementation

Mutual decision with suppliers

Other (please explain)

Existing strategy

0 5 10 15 20 25 30 35 40

Ease of supplier adoption and cost of implementation are

leading drivers for B2B strategy

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4.1 Large CustomersFirst, we will explore integration with large customers. Large customers can include: • Multi-nationalcorporationsandtheirjointventuresbuyingfordomesticsales • Multi-nationalcorporationsandtheirjointventuresbuyingforexportsales • Chinesestate-ownedandprivatecorporationsbuyingfordomesticsales

B2B e-commerce will enable your customers to reduce administrative costs for planning and replenishment processes. Integration also leads to higher account retention and growth by reducing the likelihood of errors to orders; simplifying everyday interactions and im-proving the overall customer experience.

Requirements for Integration with Large Customers

4.2 Large SuppliersNext, we will explore integration with large suppliers. Large suppliers may include: • Multi-nationalcorporationsimportingtoChina • Multi-nationalcorporationsmanufacturinglocallyinChina • Chinesestate-ownedandprivateenterprisesmanufacturinglocallyinChina

The fastest return on investment will be achieved by integrating with larger suppliers that supply the majority of volume of direct materials. These larger suppliers often have the resources, expertise and budget to quickly deploy a complementary B2B infrastructure.

Requirements for Integration with Large Suppliers

20 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

Requirement

Integration broker

Translation server

Transaction Manage-ment—Local to China

Transaction Manage-ment—International

Integration with back office applications for real-time import and export of data. Shipping and accounting information will be extracted. Production schedules, receiving and remittance data will be inserted.

Mapping and translation of data into multiple document formats including XML & XML BODs, VDA, EDIFACT, and ANSI X.12 EDI.

Exchange of electronic documents with customers in China using a secure, high performance, reliable transaction processing network.

Exchange of electronic documents with customers in Europe, Japan and North America using a secure, high performance, reliable transaction processing network.

Technology

Requirement

Integration broker

Translation server

Transaction Manage-ment—Local to China

Transaction Manage-ment—International

Integration with back office applications for real-time import and export of data. Shipping manifests for materials in-transit, electronic invoices and logistics data received from suppliers will need to be inserted into ERP applications.

Mapping and translation of data received from suppliers into the appropriate back office formats. Support for popular document types including EDI, XML, SAP IDOC, Oracle Application format and flat files is recommended. Supporting a broader set of B2B standards accelerates and broadens adoption by suppliers.

Exchange of electronic documents with suppliers in China using a secure, high performance, reliable transaction processing network.

Exchange of electronic documents with import suppliers from other regions of the world using a secure, high performance, reliable transaction processing network.

Technology

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4.3 Small and Medium SuppliersFinally, we will explore integration with small and medium suppliers. Once large suppliers are enabled, significant additional supply chain efficiencies can be achieved by integrating with the remainder of your trading partner community. The majority of small and medium suppliers will be manufacturing for sale in China on the local and domestic markets.

Typically, lower volume suppliers will be highly specialized manufacturers with lower revenues. These smaller suppliers are often more challenging to integrate to your extended enterprise. Most small suppliers are constrained by limited resources, expertise and budget. These limitations delay, deter or prohibit the small suppliers from implementing a B2B e-commerce program.

Requirements for Integration with Small and Mid-Size Suppliers

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 21A GXS White Paper

Requirement

Web portal with pre-configured automotive forms

Translation software —desktop or server based

Transaction Management

Education

Consultation

Implementation Support

Testing Services

Local Language Support

Technical Support

Change Management

For small businesses an easy-to-use, low cost solution should be offered. Ideally the solution would require a minimum level of technology infrastructure. Web-based forms are the most popular solution. Only a PC and an Internet connection are required to use such a solution. The web forms should have pre-configured templates for creating popular documents such as advanced ship notices (ASN’s). The web forms should also be able to display and print planning schedules, ship-ment schedules, receiving advices and application advices.

For mid-sized businesses a solution which allows for quick deployment should be offered. This solution should be extensible to a broader set of business processes and trading partners as e-commerce needs grow. Translation software packages are a popular solution and can be either desktop or server based. A translation package should allow for simple, GUI-based mapping of data fields. Translation packages should also support a variety of e-commerce standards which include XML, VDA, EDIFACT and ANSI X.12 EDI.

Exchange of electronic documents with suppliers in China using a secure, high performance, reliable transaction processing network is required.

Trading partners must be educated on the importance of e-commerce programs in the value chain.

Trading partners must be offered consultation on the variety of enablement solutions available.

Once a solution is selected, trading partners will require on-site or phone-based implementation support.

Requires a test with sample data exchange to validate connectivity and interoper-ability—this is a recommended GXS best practice.

Success in the local Chinese market will require offering services in both Cantonese and Mandarin.

Ongoing technical support should be offered for troubleshooting and problem resolution. Ideally, 24x7 support should be offered across multiple channels such as web, chat and phone.

As time passes your B2B e-commerce program will continue to develop. OEMs and suppliers around the world will continue to automate an extended set of business processes. Additionally, each new vehicle and part design year will change your supplier community. It is imperative that your e-commerce program include a process for managing change.

Technology

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5. GXS, Your Trusted Partner in China

5.1 GXS Resources in ChinaGXS has more than ten years experience in serving the Greater Chinese market. GXS China headquarters is located in Hong Kong. Satellite offices provide local sales and con-sulting support in Beijing and Shanghai. E-Skylink, a GXS distributor, provides support for Greater China.

GXS has an experienced staff of consultants, implementation support and customer sup-port located in China. All of our technical support and consultants personnel are local and thus have local language and cultural skills.

5.2 GXS Experience in ChinaGXS has around 2,000 customers in Greater China. Larger customers include many of the biggest, technologically advanced Chinese enterprises. GXS clients include top 10 compa-nies in the automotive, telecommunications, paper, steel, and logistics sectors. New GXS customers benefit from GXS’s experience in implementing B2B e-commerce programs for such industry leaders. GXS can ensure best practices to accelerate growth and adoption of your B2B programs.

China is in the process of dissolving much of the protectionist legislation that existed prior to its accession into the World Trade Organization. The deregulation will follow a phased approach that will occur over a multi-year horizon. The new open economic structure will bring significant change. However, the government will remain a key influence in the pri-vate sector for the foreseeable future. Industry standards organizations have an increasingly important role to play in China’s new economy. Together, the government and standards organizations are collaborating to increase the competitiveness of Chinese manufacturers in the world economy. Understanding the changing dynamics of e-commerce standards in China is a critical element to supply chain success.

GXS has relationships with state agencies such as the Ministry of Information Industries (MII) through its partnership with China ECNet. Furthermore, GXS has a long history of leadership in local standards communities. GXS operates or maintains relationships with most of the key e-commerce exchanges in the electronics, logistics and retail sectors. GXS can leverage its understanding of the market to expedite growth and adoption of your B2B programs.

5.3 GXS B2B E-Commerce SolutionsGXS offers a complete solution for your B2B e-commerce needs in China. A review of the needs for B2B e-commerce integration with customers and suppliers results in four primary requirements: • AB2BGatewaytoextractanddeliverdatatoandfromyourenterpriseapplications

• AnetworktodeliverB2Btransactionstoandfromyourtradingpartners

• Enablersforyourtradingpartnersofallsizes–small,mediumandlarge

22 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

GXS IN ChINA

Offices• Hong Kong• Shanghai

Customers• Around 2,000 in Greater China• Bsteel• Asia Pulp and Paper• OOCL• Sinotrans• China Telecom• China Mobile• Sinopharm • Smartshirts

Support• 24 x 7 Call Center• English, Cantonese and

Mandarin Language Support

Partners and Standards Body Relationships• China ECNet • GS1 Hong Kong• GS1 Taiwan• eSkylink• VICS Asia• AsiaB2B • Agile Supply Chain

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• Afulllifecycleofcommunitymanagementservicestoensuresmallandmid-sizetrading partners are quickly and successfully enabled.

GXS offers a complete e-commerce solution for the Chinese automotive, high tech, retail, logistics and telecommunications markets consisting of all four components discussed above: • B2B Messaging Service—GXS Trading Grid Messaging Service (TGMS), provides

guaranteed message delivery to your customers and suppliers via GXS Trading Grid. TGMS is the only transaction management service in the market which offers global reach. TGMS can be used for both domestic and export production needs. You can exchange electronic documents with trading partners throughout China and Europe, Japan and North America. TGMS supports transaction exchanges using a wide va-riety of communications protocols ranging from File Transfer Protocol (FTP), IBM MQ Series; vertical industry specific protocols such as RosettaNet RNIF, ODETTE OFTP and AS2.

• Trading Partner Enablers—GXS offers a number of e-commerce solutions for your entire trading partner community.

– Large Corporations—Both multi-national corporations and Chinese corporations will require a high performance integration broker to manage a high volume of B2B transactions. GXS offers Enterprise Gateway (described above) for multi-nationals.

– Small and Medium Business Enablers—Small and medium Chinese trading part-ners require a low-cost, easy-to-use e-commerce solution. GXS offers four options – GXS Application Integrator, GXS Desktop EDI, GXS Intelligent Web Forms and GXS Trading Grid for Excel– Application Integrator—is a highly scalable, server-based translation software

package. Application Integrator includes an easy-to-use graphical mapping tool. Application Integrator supports translation of a broad range of e-commerce document standards including XML, VDA, EDIFACT and ANSI X.12 EDI.

– Desktop EDI—is a desktop translation software package. Desktop EDI includes an easy-to-use mapping tool. Desktop EDI supports translation of EDIFACT and ANSI X.12 EDI documents.

– GXS Intelligent Web Forms—Provides a cost-effective way to enable manufactur-ing suppliers to send business documents electronically. The simple-to-use, Web form based environment allows suppliers to get connected to GXS Trading Grid with minimum effort.

– GXS Trading Grid for Excel—Allows any manufacturing company running Microsoft Excel to connect directly to GXS Trading Grid via a pull-down menu within Excel. Excel is widely used amongst small to medium sized suppliers in China. GXS Trading Grid for Excel allows suppliers to be enabled with minimal financial and technical effort.

B2B e-Commerce Strategies for the Chinese Manufacturing Market • 23A GXS White Paper

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• Community Management Services—GXS Expert On-Boarding offers a full life-cycle of services to enable and support your trading partner community including educa-tion, consultation, implementation, testing, technical support and change man-agement. GXS Expert On-Boarding is available in 30 countries and 20 languages including Mandarin and Cantonese.

About GXS

GXS is a leading B2B integration services provider and operates the world’s largest integration cloud, GXS Trading Grid®. Our software and services help more than 550,000 businesses, including 22 of the top 25 supply chains, extend their partner networks, auto-mate receiving processes, manage electronic payments, and improve supply chain visibility. GXS Managed Services, our unique approach to improving B2B integration operations, combines GXS Trading Grid® with our process orchestration services and global team to manage a company’s multi-enterprise processes.

Based in Gaithersburg, Maryland, GXS has direct operations in 20 countries, employing more than 2,800 professionals. To learn more, see http://www.gxs.com, read our blog at http://www.gxsblogs.com and follow us on Twitter at http://twitter.com/gxs. You can also access our public filings with the Securities and Exchange Commission at http://www.sec.gov/edgar.shtml.

24 • B2B e-Commerce Strategies for the Chinese Manufacturing MarketA GXS White Paper

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About GXSGXS is a leading B2B integration services provider and operates the world’s largest integration cloud, GXS Trading Grid®. Our software and services help more than 550,000 businesses, including 22 of the top 25 supply chains, extend their partner networks, automate receiving processes, manage electronic payments, and improve supply chain visibility. GXS Managed Services, our unique approach to improving B2B integration operations, combines GXS Trading Grid® with our process orchestration services and global team to manage a company’s multi-enterprise processes. Based in Gaithersburg, Maryland, GXS has direct operations in 20 countries, employing more than 2,800 professionals. To learn more, see http://www.gxs.com, read our blog at http://www.gxsblogs.com and follow us on Twitter at http://twitter.com/gxs. You can also access our public filings with the Securities and Exchange Commission at http://www.sec.gov/edgar.shtml.

© Copyright 2013 GXS, Inc. All Rights Reserved. July 2013 A

North AmericA ANd GlobAl heAdquArtersGXS9711 Washingtonian Blvd.Gaithersburg, MD 20878US+1-800-503-9190 t+1-301-340-4000 t+1-301-340-5299 fwww.gxs.com

euroPe, middle eAst ANd AFricA heAdquArtersuNited KiNGdomGXS Limited18 Station RoadSunbury-on-ThamesMiddlesex TW16 6SUEngland+44 (0)1932 776047 t+44 (0)1932 776216 fwww.gxs.eu

AsiA heAdquArtershoNG KoNGGXS InternationalRoom 1609-1016/F China Resources Building26 Harbour RoadWanchai, Hong Kong+852 2884-6088 t+852 2513-0650 fwww.gxs.asia.com

JAPAN heAdquArterstoKYoGXS Co., Ltd.3F Akasaka 1-Chome,Minato-ku, Tokyo 107-0052+81-3-5574-7545 t+81-3-5574-7560 fwww.gxs.co.jp