What and how China Tower Corporation buys

The Tower Online Platform officially launched in the summer of 2015, one year after the creation of China Tower Corporation (CTC). As of 5 September, 2016, there are 723 suppliers officially registered in the system, with 74% having been shortlisted and 58% having successfully received purchase orders; spending reached CNY ¥26bn. With 27 major product and five major service categories, and continued demand for new sites from three operators, efficient, streamlined procurement will continue to play a major role. Read on for a comprehensive guide on this unique procurement model, created by the world’s largest towerco to drive supply chain efficiency.

CTC was created under the philosophy of “change, innovation, and open cooperation.” In keeping with this focus and recent e-commerce trends, and motivated by the drive to maximise the benefits of shared economics, CTC built a new procurement model known as the Tower Online Platform. By hosting all required operational resources and services on the platform, it allows for centralised control, layered implementation, frontline ordering, unified payment processing, increased speed and efficiency, and transparency to drive the health of the industry.

In a presentation in 2015, CTC highlighted seven mechanisms for the success of the online platform:

1. Platform operation and protection (?????????)

2.Supplier evaluation (???????)

3.Dynamic, interactive operation (??????)

4.Price control (??????)

5.Quality assurance (??????)

6.Supplier and/or product exit (??????)

7.Information security (??????)

By bringing procurement online, CTC created a platform that it describes as business-to-business (B2B) and online to offline (O2O).

Pilot testing of the platform began in June 2015 across seven provinces. After user and partner feedback, it became fully operational in August.

According to a letter addressed to partners in July 2016, CTC noted the platform to be generally well received by its 377 branch offices across the country during its first year of operation. It also disclosed having eight procurement management staff at headquarters and just under 500 full-time and part-time procurement personnel across the country.

The first transaction through the Tower Online Platform was recorded on 15 July, 2015.

As of 18 September, 2015, within the first few months of operation, the site processed 2,292 orders, resulting in 7,434 product items purchased at a value of CNY ¥170mn. This initial round of procurement involved 396 suppliers. Registered suppliers at this point totaled 644.

One year later, orders executed on the platform have been reported at 2mn, with over CNY ¥26bn in transaction value. While from the perspective of the three operators this number wouldn’t be considered significant since they were used to spending CNY ¥200bn annually, for a towerco it was still quite substantial, said CTC vice president Dong Xiao Zhuang at a presentation in Beijing in September.

Spending in the first few months of the platform going live climbed steadily, followed by a noticeable drop in the first two months of 2016. This downturn in activities was attributed to the Chinese New Year holiday and operators being preoccupied with year-end reviews, and therefore a drop in tower-related requests. Procurement picked up in March again, hitting a peak in May.

In total, purchases made through the Tower Online Platform represent 60% of CTC’s total spend. Dong stressed this is cumulative since the platform launched, however, if tracking just from January 2016, 80% of total spend is undertaken through the online procurement platform. He accounts the slower uptake at the beginning due to doubts by some provincial offices and inability to keep up with some of the urgent operator build demand last year.

The first group of products to be procured online were monopoles, non-monopoles, and integrated cabinets. The next phase brought on 13 more product categories, with more following since.

Today the platform boasts 27 major supplier and five major service categories including:

• Tower (??)

• Integrated cabinet (?????)

• Battery (???)

• Air conditioning (??)

• iDAS antenna (????)

• Power cable (????)

• Distribution cabinet (????)

• Generator (??)

• Point of Interface (POI)

• Passive devices (????)

• Leaky coaxial cable (??)

• Switching power supply (????)

•Field survey unit (FSU)

•Feeders (??)

•Fiber jumper (????)

• Shelter (????)

• Cable/fiber (??)

• iDAS (????)

• Engineering design and supervision (???????)

• Construction (??)

• Other ancillary equipment (??????)

Editorial note: What’s listed in bracket is sourced straight from CTC.

There are said to be over 2,400 product types in the system right now.

CTC believes the online procurement platform can close the gap between supply and demand, tighten the trading chain, reduce process costs, and ultimately bring greater economic and social benefits to the industry supply chain. CTC’s messaging has been around trust, win-win, cooperation, and harmony with its supplier partners to drive telecom infrastructure growth and development.

As of 5 September, 2016, there are 723 suppliers in the system, with 534 having been shortlisted by CTC provincial offices, and 417 having successfully received purchase orders.

Over 95% of the registered suppliers are said to be private enterprises.

Registration on the CTC platform is free, as long as the supplier meets the following criteria:

1) Hold valid manufacturing license in China (for product providers)

2) Registration with the State Administration for Industry and Commerce of the People’s Republic of China (SAIC)

3) Successful third-party audit, such as by the Ministry of Industry and Information Technology of the People’s Republic of China (MIIT)

One source we spoke to mentioned increasing pressure on the supplier side as CTC is now the main and only client compared to the past with the three operators. A lot of smaller players for one reason or another are not on the platform and instead, work through those that are and act as sub-contractors.

Breaking through boundaries of information, marketplace, and time, the online platform allows direct interaction between supply and demand.

CTC describes the procurement process as a closed-loop:

1. Centralised quality assurance: After certification, product and service suppliers set up a virtual store on the platform, publishing key information related to qualification, product information, pricing, service, and more.

2. Layered process of ordering: Provincial offices can leverage the information provided on the platform, then take into account any local factors to select their desired suppliers.

3. Frontline staff participation: In consultation with city offices, frontline staff are directly involved with procurement; everything is on-demand and in real-time.

4. Material distribution to site: Products are delivered directly to point of installation.

5. Unified payment system: All purchases on the platform are paid out through head office.

6. Full transparency: All information related to suppliers, product pricing, sales volume, supply, post-evaluation, et cetera are all available on the platform, allowing for full monitoring, disclosure, and feedback of the various units, procurement process, and results.

The system allows frontline staff to do real-time comparisons across the whole of the market place.

Through the platform, for any given tower, any staff at CTC would be able to see who made the purchase, from which manufacturer, at what cost, plus comments and ratings on product quality, delivery, service, et cetera. This level of transparency is said to decrease the risk of corruption.

It also means there is greater clarity on purchasing decisions made across different business units and offices across the country.

Also, unlike before, frontline staff can now make purchase orders. Once the order is placed by the technical staff, it represents a contract, whereby the signing of paperwork is no longer required. This was described as akin to buying on Taobao, the Chinese online shopping website similar to eBay and Amazon, where once you place the order, there is mutual trust between the buyer and the seller on the legitimacy and activation of the order.

The platform fully embraces a key feature of online buying platforms, which is the star-rating and commenting system. Within the context of local environmental factors and service capabilities, suppliers are rated against pricing, product, and service.

In a presentation last year, CTC outlined some of its evaluation factors. All three categories are rated against five stars.

Pricing

• Five stars = preferred (??)

• Four stars = should choose (??)

• Three stars = optional (??)

• Two stars = alternative (??)

• One star = limited (??)

Product

• Raw material inspection (???????)

• Factory inspection (??????)

• Selection test (????)

• Unannounced inspection (????)

• Arrival quality evaluation (??????)

• Post-product quality evaluation (???????)

Service

• Post-sale service channels (????????)

• Delivery cycle commitment (??????)

• Engineering service capability (??????)

• Fault response system (??????)

• Spare product and parts inventory (???????)

• Logistics capabilities (????)

• Timeliness of delivery evaluation (???????)

• Post-engineering service evaluation (???????)

As of the beginning of September 2016, a total of 407 suppliers have delivered on their orders, receiving average ratings of 4.72 stars out of five.

Tied to the concept of supplier evaluation is the notion of “survival of the fittest” and healthy competition, which in theory could lead to the exit of a supplier and/or product at a certain point in time. CTC identifies three ways as part of its elimination/exit framework.

1) Product removal: This is defined as a product not meeting new technology and/or business requirements or product quality testing not meeting technology and/or business requirements.

2) Self-removal: This is when a registered supplier is no longer offering products and/or services for its own reasons.

3) Forced removal: This is defined as a registered supplier committing acts against the law and/or fraud; breach of contract in relation to quality, supply, service, et cetera resulting in serious consequences; continued and long-term poor evaluation ratings on the platform.

All product pricing on the platform is visible to internal and external parties through searches. Suppliers are free to list prices as they wish and CTC does not ask for pricing discounts. This level of transparency enables suppliers to act in a “reasonable manner.”

To illustrate the marketplace nature of the platform, CTC shared a few charts on the pricing movement for monopole, non-monopole, switching power supply, and lithium batteries over the course of seven to ten months. Unfortunately, no actual or relative pricing figures were given on the y-axis.

Nonetheless, CTC uses monopoles as an example, citing the cost to manufacture has been very competitive in the past year, given the price of steel had been on the decline since October 2015, going as low as ¥1,840 per ton. In December, prices clearly went back up, potentially due to governmental influence. Nonetheless, supplier prices increased accordingly, but still lower than the rate of increase for raw materials. Given this, CTC feels the prices inputted by suppliers into its platform have been very reasonable.

Out of the 700+ suppliers registered with CTC, one of our sources approximates over 200 to be tower manufacturers.

Pricing for non-monopole and lithium batteries continue to come down gradually. Though this is not believed to be the result of suppliers negatively bidding like in an RFP situation where the baseline is not always known.

CTC believes the online platform allows for natural price adjustment based on market dynamics.

The first year of the platform inevitably brought some hiccups. In its partner letter in July 2016, one year after the platform going live, CTC acknowledged issues regarding payments, which it took seriously and acted swiftly with measures to address the matter.

This includes the integration of the online procurement platform with a financial system which simplified the overall process and therefore increased efficiency.

CTC also introduced another first, where once the order arrives and is inspected and accounted for, it automatically enters into the payment cycle, reducing human intervention and expediting payment. This negates the partial payment cycles of the past where collection is still needed post order completion.

In addition, CTC has increased payments from once a month to twice a month.

In theory, most accounts are paid within two months of order fulfillment.

When it comes to long-term funded projects with longer payment cycles, the provincial unit would coordinate with China Development Bank to manage the process.

It’s clear CTC is keen to drive as much procurement as possible through its Tower Online Platform. What would be interesting moving forward is to 1) see what new product categories will get added, particularly as CTC has repeatedly made mentions of business model diversification and innovation to include things like billboard ads, sensors, weather and environmental monitoring, et cetera, 2) the number of suppliers that get registered, shortlisted, and awarded orders, and 3) product pricing patterns give the transparent nature of the platform.