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Localisation as a challenge

By Jan C. Harder1

Government spending is increasingly a tool of strengthening not only the industry modernisation and the infrastructure in the country but more and more a tool of securing new industries and local manufacturing.

Nowadays industries face the challenge in the export business to meet different levels of localisation required by the Public authorities and state governed companies when participating in public procurement tenders. From region to region the details of the requirements are different in extent but in total there is a tradition to promote the national business, society and economy in government spending.

In the US, the Buy American Act passed in 1933 by Congress and signed by President Hoover on his last full day in office. The Act required the United States government to prefer U.S.-made products in its purchases. Since 1941 during the Second World War the Berry Amendment requires the Department of Defence to give preference in procurement to domestically produced, manufactured, or home-grown products, most notably food, clothing, fabrics, and specialty metals. During the Reagan era in 1982 with the Surface Transportation Assistance Act the United States government created a comprehensive transportation funding and policy to address concerns about the surface transportation infrastructure (highways and bridges). In an accompanying Act the federal government secured the financing by adding a nickel to the gas tax, four cents dedicated to restore interstate highways and bridges, and one cent for public transit. Further disadvantaged business enterprises should in future participate up to 10% in federal-aid projects.

In response to the crisis of the financial markets the US government enacted the American Recovery and Reinvestment Act in 20092 with approximate cost of the economic stimulus package of up to $831 billion between 2009 and 2019. To respond to the Great Recession, the primary objective for ARRA was to save and create jobs almost immediately. Secondary objectives were to provide temporary relief programs for those most impacted by the recession and invest in infrastructure, education, health, and renewable energy. This Act included a protectionist 'Buy American' provision, which imposed a general requirement that any public building or public works project funded by the new stimulus package must use only iron, steel and other manufactured goods produced in the United States. In February 2014, the White House stated that the Act saved or created an average of 1.6 million jobs a year between 2009 and 2012 and by this preventing another Great Depression to erupt within the United States.

In Russia on April 5, 2013 the President signed the law “On the Federal Contract System in the Sphere of Public Procurement3” , which replaced the previous legislation on public procurement, and in particular, the Federal Law No. 94-FZ of 21 July 2005 "On Placement of Orders for Delivery of Goods, Performance of Works and Rendering of Services for State and Municipal Needs”. The law states that national regime for foreign countries should apply under the conditions provided for by Russia's international treaties, and that the Russian Government could establish conditions for access of goods and services originating in foreign countries to public procurement.

The new law in Article 14 stipulates that national treatment will be extended to foreign goods and services if and only if a specific international agreement Russia is a party to explicitly say so. Furthermore, a list detailing such specific international agreements will be established and published by the competent Russian agency for public procurement. These rules are a deterioration of the situation of EU businesses in Russia compared to the status quo ante. Russia has committed itself to join the WTO Government Procurement Agreement (GPA) and notify this intention to the WTO Government Procurement Committee at the time of accession. Russia would become an observer to the GPA and would initiate negotiations for membership within four years of its accession. Russian government agencies would, upon accession, award contracts in a transparent manner.

The Republic of Kazakhstan adopted changes and amendments to the Law on public procurement No. 156-IV on 4 May 2009 (entry into force on 5 May 2009) introducing a local content clause in the public procurement law for goods, services, and works. This law was subject to further amendments by law No. 233-IV of December 2009, 'Concerning the introduction of amendments and additions to certain legislative acts of the republic of Kazakhstan on matters of Kazakhstan content', which entered into force on 22 January 2010. It introduced a 'local clause' in the public procurement law for goods - 20%, services and construction - 15%, thus limiting the purchase of foreign goods, services and works4. A company with more than 50% foreign shareholding is considered as foreign and therefore excluded from participation in public procurement tenders, unless it fulfils all of the following criteria making it a 'national producer': a) the company is resident of Kazakhstan, b) the company produces finished products in Kazakhstan, and c) the company uses no less than 85% of local workforce. Despite these rules, local branches of foreign companies created as a public limited company (LTD) in accordance with national regulations are refused access to public procurement tenders5.

On 18 January, the president of the Republic of Kazakhstan signed the law “On amendments to some legislative acts of the Republic of Kazakhstan on public procurement”. The Law came into force on 30 January 2014. The Law introduces a concept of “national regime”, which means a regime that allows goods, works, and services of foreign origin to participate in public procurements in Kazakhstan on equal grounds with goods, works, and services of domestic origin, provided that the requirement to grant such a regime is set by the international treaties ratified by the Republic of Kazakhstan and pursuant to the terms and conditions set forth in such treaties. To date, the national regime for the purposes of participation in public procurements is provided only for Belarus and Russia.

In the wider context, the Customs Union, created in July 2010 between Belarus, Kazakhstan and Russia, aligned provisions on government procurement of the three countries in the Agreement on Government Procurement, which introduces scope for further restrictions. Today the next stage of the integration of cooperation — the Common Economic Space agreed and the intention to establish the Eurasian Economic Union until 1 January, 2015 declared.

Buy Ukrainian Policy: Government Resolution of 24 June 2009 No. 647 "on amendments to the Resolution of 17 October 2008 No. 921 on public procurement of goods, works and services" foresees that public procurement of goods, works and services (except for procurement of periodical printed materials) is done from local producers or their representatives, dealers and distributors. Only if those goods, works and services are not produced in Ukraine they may be purchased from non-residents or their official representatives. However, another provision of the same resolution foresees that "local and foreign bidders participate on equal grounds in tender procedures". On April 10, 2014 the Ukrainian Parliament (Verkhovna Rada) adopted a new wording of the Law of Ukraine No. 2289-VI “On Public Procurement” (the “Law”).

The Law applies to all companies in which 51% or more of the shares are state-owned and regulates state-funded procurement in amounts equal to or in excess of 100,000 UAH (approximately US$7,700) — for goods and services, or more than 1 million UAH (approximately US$77,000) — for works.

The main changes to the Law affect the publicity of the public procurement process. In particular, under the new wording of the Law the customer (with respect to the public procurement) is required to publish information about self-funded procurement, about modifying the terms of the contract after completion of a tender and about further information on the performance of the contract6.

In Turkey, the national economy has been growing and strengthening. Turkey is currently the 16th largest economy in the world and the sixth largest economy relative to the EU. Turkey is being increasingly recognized as a country that is modernizing rapidly, growing a competitive economy that is moving up the skills chain, and with increasing capability. Market sectors that are expanding include electronics, white goods, automotive sectors, and defense and aerospace. Here the railway infrastructure development is enjoying a period of significant and sustained investment. A commitment to invest US$45 bn. has been made (US$23.5 bn. before 2023) in a program up until 2035.

The Turkish public sector gives some preference in procurement tenders to Turkish products. For procurement of goods and services, Turkish government contracting authorities may insert provisions into tender documents that restrict foreign companies’ participation in public procurement. Also, domestic bidders are allowed a price advantage up to 15 percent higher than foreign bidders, as long as the procuring Ministry confirms the goods and services receiving such preference are domestic in origin.

In supply chain rail areas, there has been extensive collaboration with overseas companies, so the sector has a great deal of experience in technology transfer. The desire for local content, if not production, remains strong. Performance will be admired, particularly for products or services that can facilitate reductions in costs and energy consumption. As an example the delivery of High Speed trains of Siemens AG can be noted here. Siemens has stated that it would consider producing a “Velaro” type train in Turkey, adapted for local use, and capable of running at 400 kph. During the Eurasia Rail exhibition, there were reports that the technology transfer could open with 20 per cent local content, rising to 50 per cent or more in future.

The short overview on the limitations for non-local business to enter the local government supply market in the US, Russia, Kazakhstan, Ukraine and Turkey show the specific instruments established to restrict participation of foreign companies. In reality, however, international companies are present in those markets meeting the challenge of the different legislations. Of course one of the main questions for the local governments is to balance the interest of increasing the country’s competitiveness by government procurement on one side and the protectionism of the local industry. The latter is not always able to secure the fastest track to modernization and innovation. In certain cases local industry is not capable to secure the development of innovations or new approaches quickly enough and international expertise is needed. However, all involved parties shall be aware on the timely and challenging process of securing such localization with foreign partners.

Local partnerships or acquisition of companies, creation of joint ventures are means to cope with these challenges by creating alliances with local players in the first line. Here mutual interests must be reflected and secured in offering long term stability of the investments and security of safeguarding existing IPR rights. However the localization requirements mostly go even beyond and concentrate even on second tier suppliers. For example this can be visualized with the manufacturing and assembly of trains. Here we can see in the Railway market that nearly all suppliers, as e.g. the top three Alstom, Bombardier, Siemens, are driving an international strategy to secure the industrialization in countries of their customers.

Alstom for example was creating a modern plant in Astana for electric locomotives together with Kazakh Railways KTZ and its Russian strategic partner Transmashholding (TMH) with the aim to produce locally the locomotives7.

Siemens formed a joint venture with the Sinara Group in Yekaterinburg, Russia named Ural Locomotives8 to firstly deliver joint engineered locomotives and secondly regional trains from the Russian manufacturing site. This approach is a trend to be identified also in the automotive, energy and other sectors. Before the aim was to participate at the profits of the operations of international suppliers, now the target became more sustainable stipulating the task to revitalize traditional local industries and oblige selected suppliers to invest in the local market from abroad. This indirect stimulus in the local economy safeguards the creation of new industries or at least is revitalizing existing industries. They have a taxation advantage for the state and also a social sphere of creating jobs. Thus localization experience show that there is a positive effect of transforming national industries and economies into stronger position in a long term perspective.

But the localization requirements are not stopping here they are going beyond the Rolling Stock level and just the final assembly of the Rolling Stock is not sufficient in the view of the customers and authorities. The train is consisting of subsystems such as e.g. interior, car body, bogies, traction systems and of course the relevant materials and components9. In some cases even penalties are stipulated for reaching the certain level of localization based on a deeply realized scrutiny. This is challenging the industry and the related Supply Chain activities while realizing the projects depending on scope, means and flexibility in localization.

Modern supply chain management is concentrating in securing the balance in the triangle between first availability of supplies, second productivity to secure sustainable competitiveness of the business and third quality of the supplies. Strong requirements of localization are challenging all the three since new approaches not for the global activities but for local markets have to be developed in most cases initially on short notice.   

Of course they bear also opportunities since constantly new supply markets are to be investigated and in the long term also new suppliers for the global market can be developed. Best example in this context is the global value sourcing with Chinese suppliers in the last 20 years to become global players. But supply Chain Managers shall be recommended not to expect a quick win here since the development of suppliers takes time even in home markets and being even more complex facing intercultural, language and technological differences. This will make localization task not easier and ongoing control as a form of risk management has to be implemented in form of audits to secure continuous performance in all aspects of the operations10.

But how Supply chain Managers can cope with this task and secure the business success even for project and operations in countries with strong localization requirements. How to be successful and reach sustainable and secure solutions?

First of all this can be secured by early involvement of the Supply Chain team in those activities and should normally start before being facing tender activities. SCM participation in the strategic business planning process of the company where usually target markets and regions shall be defined and strategic measures shall be anticipated to be ready for tender at some stage. Here in a SWOT or GAP analysis the positioning of the company in the markets must be discussed with involvement of SCM to identify the roadmap to close gaps to address this market successfully. The level of localization requirements demonstrates an entry barrier and long term investment in preparing for each market shall be ideally secured. This would allow SCM to scout the supplier market in cross functional teams together with Engineering and Quality experts to identify potential suppliers in the target market. This is a revolving task and one of the key reasons to justify strategic SCM activities with the target of Global Value Sourcing, Global Pooling aligned with Strategic risk evaluation. This approach of course includes also the study local standards and enable the organization to meet the local formalities and, if necessary, with the local homologation or certification processes. The latter are traditional costly barriers to enter markets which even in the European Union are still to be harmonized. In some regions out aged technical standards are impeding the introduction of new technology because they are not covered by the existing standards. In other regions however standards of certain applications are missing and the referral to European or International standards ease the market entry.

It should be stated that localization requirements of local governments are aligned with the trend in the industry to push much more for regionalization of their operations today as it was decades ago. Major markets are targeted already and companies have invested into local organization either independently or jointly with local partners together. Andersson & Segerdahl11 are referring to an increasing trend to regionalization of the studied and interviewed companies and propose to differentiate along the value chain into factory regionalization, supply base regionalization and regionalization of R&D. They point out that there exist many advantages of regionalization in form of increasing customer and market intimacy, risk reduction of financial as e.g. currency fluctuations12 and political risks. In total according to this study 43% of the participating companies will be regionalized by 2020 with regional Supply Chain Hubs. Here it must be stated that without OEMs for Suppliers this value is at 55%. In this context also the collaboration of central and regional supply chain management organization are discussed and most of the interviewed continue to favor the centrally organized and driven SCM organization. This is also driven by corporate targets, values and control which remain highly important in daily operations for example compliance, risk management, international accounting standards, methods and processes and sustainability.

Due to competitiveness of the Railway market globally of course productivity cannot wait for the realization of the project but is essential in the tender phase to be used to win. Here localization requirements if not clearly analyzed at tender phase bear a risk of non-conformance costs. This could easily happen if the offers are established based on central managed category databases indicating average costs without recognizing the need of localization and the associated risk of delay due to time and the associated costs due to redesign or reengineering internally and externally.  

Here of course a regional organized well in the central or HQ embedded organization can play a vital role if being cross-functional organized consisting out of engineering, quality and SCM specialists. Those shall be involved from the start of scouting, qualification up to the full localization phase of the project. Thus these aspects must be included already at this tender phase.

The target of localization and Local Content Requirements are reasonable at first sight from a government perspective but they have to enable the industry to cope with these challenges. Localization firstly needs time for the supplier and his sub-suppliers’ base to prepare for the local requirements. The public customers shall be ready to accept a gradually increasing localization and not base their expectation on a certain level to be immediately reached. Technology transfer and quality and risk avert localization is a costly process and commercially reasonable if the market is sound and justifies the long term investments.

This has to be safeguarded for both the foreign technology supplier and the local industry to secure availability of materials, production facilities and qualification of local work force. In the railway industry for example it takes in average two years to reach first article inspection with new suppliers even in existing markets. A timeframe you normally do not have when realizing projects.

The SCM organization of suppliers in government programs have to secure upfront extensive research on the availabilities on the market and pre-invest in the qualification of suppliers including but not limited to relations building process. Here a sometimes underestimated aspect is the intercultural and language barriers on both sides. They can originate in protectionism for the existing supplier base and relations in headquarter versus the local challenge to identify new suppliers in the foreign, unknown markets. Most SCM organizations are not ready to meet this challenge especially without local interlocutors either being consultants or existing personnel. A recommendation here is that trust in this operations is one of the most important aspects and the delegation of a trusted headquarter expert will be an excellent decision to safeguard HQ principles and guidance on one side and to manage and educate local SCM managers including external consultants if used for this.

The second lessons learned is to align the SCM scouting activities with engineering and quality to leverage on one side the know-how and on the other the skepticism against SCM driven groundbreaking approaches. An excellent supplier from the perspective of an SCM organization must be able to be widely accepted and respected not to create hurdles for any cooperation from the beginning. The third recommendation is to secure fair and trustworthy relations with new partners in the local market.

This could be best done by publicly published questionnaires and also feedback sessions explaining to the potential candidate the gaps for a cooperation and to revisit the agreed measure implementation at a reasonable point in time. Finally if your business is requested to localize why not require from your trusted value chain the same. Some of your suppliers could share your strategic move to a new market and see it as a chance to justify investments in the market either by own means in local set ups either alone or with local partners.

SCM organizations have also to be aware of non-availabilities of certain products or materials or even expertise in the local market and alert the commercial organizations being in contact with the government customers to lobby for exclusion of those from any local content or localization requirements. The lobby mechanisms of industry or supplier associations shall be used in challenging the government interest in protecting the local industry. Here localization commitments can also be granted customs exemptions to enable foreign industries to secure the delivery in time, at reasonable costs and at the necessary quality and safety. For SCM organizations these requirements do not require them to define new approaches for meeting the main targets of the triangle between availability, productivity and quality. They will result more in an internationalization or regionalization of SCM organizations of a company and need the necessary investments and expertise locally, so to say localizing the SCM function as well.

Governments and state customers keeping these requirements have to invest in this in offering profitable and sustainable projects to foreign companies to justify their investment into the local markets and creating a new value add in the region entered. Thus meeting localization or Local Content Requirements will result in an increase of the international competitiveness of business and SCM will master if supported by the organization and the management.


1 The views and statements in this article are no official statements of Alstom Transport and are only reflecting the personal views of the author.http://www.recovery.gov/

2For actual developments and results of the ARRA see the website of the official U.S. Government website for the Recovery Accountability and Transparency Board at http://www.russianlawonline.com/content/public-procurement-0

3see White Case at Russian Law Online:

4Further information can be found at the Kazakh egovernment site:http://egov.kz/wps/portal/Content?contentPath=/egovcontent/bus_business/for_businessmen/article/e_procurement&lang=en

5See British embassy Astana Local Content Kazakhstan review to be found at http://pubs.iied.org/pdfs/G02761.pdf

6See Chadbourne & Parke LLP Client alert April 17, 2014: “Ukrainian Parliament Adopts a New Wording of the Law on Public Procurement” to be found at http://www.chadbourne.com/files/Publication/ca4353a3-96c3-4779-8f65-6e3e182af8f3/Presentation/PublicationAttachment/ff68d771-4acd-410b-9cd0-6e67391d62ab/ClientAlert_PublicProcurement.pdf

7see website of the JV EKZ at http://ekz.com.kz/ picture at courtesy of Alstom S.A., KZ4A locomotive for Kazachstan 

8see website of JV Ural Locomotives at  http://ulkm.ru/

9See e.g. White Paper of company Nexans cable and cable harnesses : Netze und Schienenfahrzeuge: rolling stock Herausforderungen und Möglichkeiten, 2003 at http://www.nexans.de/upload/objects/20041022/WhitePaperBahnindustrie.pdf 

10See Mike Hales and Raj Amurugam, The case for supplier Development, in Supply chain Management Review March/April 2012

11Andersson, Martin and Segerdahl, Rickard in Supply Chain Localization Strategies for the Future, A study of Swedish AIE companies, Master thesis at Chalmers University of technology, Goeteborg 2012, Report No. E2012:041 

12Just refer to the example of Kazakhstan on February 11, 2014 devaluating the Tenge by 19% see Bloomberg at http://www.bloomberg.com/news/2014-02-12/kazakh-devaluation-shows-currency-war-stirring-after-ruble-drop.html


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