Achieving Breakthrough Savings by Sourcing From Low-cost Countries

by Alan Beebe, Anant Kumar and Jan Nicholas, PRTM

Virtually all industries have been impacted by the economic downturn. The slumping housing market has reduced new utility connections, the industrial slowdown has decreased power consumption and the credit crunch has delayed planned infrastructure projects.

This has affected the financial performance of utilities, forcing companies to focus on operational improvements to lower operating costs. Many state utility commissions are reluctant to increase power tariffs, further diluting utilities’ ability to maintain profit margins.

Strategic sourcing is a proven approach to achieve major cost savings because of the direct impact lower procurement costs have on profitability and the relatively short time required for implementation.

Robust sourcing strategies–especially for equipment and materials–should include an evaluation of the potential opportunities of sourcing from low-cost countries such as China, India and Mexico.

Low-cost country sourcing delivers sizable savings, and expanding the potential supply base can help utilities ensure supply once energy demand returns to historical levels.

Low-cost country sourcing has some risks such as exchange rate fluctuations and supplier management, but they can be mitigated.

The Growing Importance of Low-cost Country Sourcing

Utilities can capture significant savings by forging relationships with lower-cost suppliers from Asia and, to a lesser extent, Latin America.

Most North American utilities rely primarily on U.S. or European suppliers for their equipment needs and have established strong working relationships with these incumbent suppliers.

But recent market and competitive trends have challenged this traditional relationship. Utility executives have turned to strategic sourcing to realize significant savings. U.S. and European suppliers, themselves, are expanding into low-cost countries, and suppliers from low-cost countries are keen to enter the large, attractive, North American market.

Our experience shows that utilities can achieve savings in excess of 10 percent on a range of equipment and other products through sourcing from low-cost countries–even considering international transportation, communication and other costs.

Furthermore, this sourcing strategy expands the supply base and stimulates competition, which helps drive down prices from established suppliers.

Recently, a $10 billion U.S. utility spending nearly $100 million per year on power transformers sourced high-voltage units from China and Korea and achieved more than 15 percent in net savings. Inclusion of new suppliers into the bidding process also helped drive down prices from their incumbent suppliers.

Key Countries for Low-cost Country Sourcing

Which countries should utilities focus on for low-cost sourcing opportunities? Our experience suggests Asia and Latin America hold the most promise.

In Asia, China’s huge industrial base and rapidly growing market makes it a prime target for low-cost country sourcing. Chinese suppliers traditionally have focused on their home market, but a growing number of Chinese companies have expanded their presence overseas–first to Southeast Asia, Africa and the Middle East, and subsequently to Europe and the Americas.

For example, one of the largest power transformer companies in China, TBEA Shenyang Transformers, plans to increase the proportion of its international sales from 5 percent today to 20 percent within the next five years.

“China is a large and important market for us, but international expansion is essential for our long-term success,” said Cui Yuan Zhong, head of international sales at TBEA Shenyang Transformers. “We need to expand our presence in the United States and other countries to become a true global industry player.”

Korea’s mature industrial base is comprised of many suppliers with well-developed export capabilities. During the past decade, they have successfully entered the North American market with products such as wire and cable, gas transmission pipes, power transformers and switchgear.

India also has an emerging, competitive supply base for fabricated metal products such as steel lattice towers and gas transmission pipes.

With all the attention on Asia, Latin America sometimes is overlooked as a source of manufactured goods. Mexico and Brazil, in particular, have developed manufacturing capabilities and skilled workers and benefit from favorable trade agreements. They are sources of fabricated metal products and electrical equipment.

Multinational electrical equipment manufacturers such as ABB, General Electric Co. and Siemens also serve the U.S. and local markets from Latin America. For example, ABB’s switchgear plant in Mexico exports products to North American utility customers, as do Siemens’ power transformer plants in Brazil and Colombia.

Some North American utilities with limited global sourcing experience might find sourcing from multinational suppliers in Latin America–coupled with the benefits of proximity, similar time zones and the general availability of Spanish-speaking staff–is more attractive in the short term than pursuing Asian suppliers. (See sidebar.)

High Potential Products, Attractive Savings Opportunities

As a starting point, utilities should focus on products where labor and overhead are significant to the product’s total cost structure. In most cases, savings from low-cost country sourcing will be driven by lower labor and overhead costs.

In our experience, potential products include:


  • Electrical equipment: This category includes power transformers, instrument transformers, switchgear, geographic information systems, circuit breakers, reactors, capacitors and other equipment. Potential savings: 10 to 20 percent.
  • Wire and cable: Low- and medium-voltage manufacturers in China and Korea export products to North America directly and through distributors. Potential savings: 15 to 20 percent.
  • Pipes, valves and fittings: Hundreds of manufacturers from China, Korea, India, Mexico, Turkey and other countries export pipes, valves and fittings to North America, often through major distributors. Large utilities might consider importing directly from manufacturers. Products such as ERW and line pipe from China, however, are subject to steep countervailing and dumping duties and might not be competitive with other countries for the next two to three years. Potential savings: 15 to 25 percent.
  • Metal fabricated structures: Structures such as labor-intensive lattice transmission towers are natural candidates for sourcing from Mexico, Brazil, India and China. Potential savings: 15 to 25 percent.


Risks, Challenges and Ensuring Success

Low-cost country sourcing has numerous real and perceived challenges, including supplier relationship management, product quality and supply chain risk. Utilities can learn from early adopters of low-cost country sourcing, such as electronics companies and telecom operators, that have developed effective practices to mitigate these and other challenges.

First, successful companies maintain proactive and frequent interactions with foreign suppliers to avoid misunderstandings and manage supplier relationships effectively. Often they have a dedicated team that travels abroad regularly to deepen relationships with suppliers, understand supplier operations and implement rigorous supplier management programs requiring frequent, open communication.

Next, successful companies clearly define quality expectations and work closely with their suppliers on quality performance. They rigorously qualify new suppliers, conduct quality audits, provide suggestions for improvements and hold frequent progress reviews.

Leading companies such as Vodafone and Deutsche Telekom have overseas offices with dedicated supply chain, engineering and quality staff to support the sourcing, supplier qualification and product quality control processes.

While stationing staff in foreign countries is not required, utilities need rigorous processes to ensure product quality and conformance to specifications, particularly in the early stages of supplier relationships.

Finally, successful companies deliberately source from different countries to mitigate supply chain management risks. Although it might be tempting to simplify supplier management by focusing on one country or region, unexpected events in that country or region such as political instability, natural disasters or rapid changes in currency rates can have a significant impact on the supply chain.

Utilities embarking on low-cost country sourcing initiatives should remember the following key success factors:


  • Secure executive commitment: Secure commitment of business executives to explore low-cost country sourcing opportunities. Executive commitment sends a clear signal to existing and potential suppliers and helps overcome potential internal resistance to low-cost country suppliers.
  • Build capabilities and skills: Ensure your sourcing organization has the right skill sets to identify, qualify, negotiate with and manage foreign suppliers effectively.
  • Do your homework: Understand the range and nature of potential suppliers in low-cost countries to ensure your organization makes well-informed decisions when identifying, evaluating and awarding business to low-cost country suppliers.
  • Include multinational suppliers: Evaluate the savings opportunities by purchasing from incumbent suppliers with plants in low-cost countries. Doing so could offer attractive savings without the additional time and expense required to evaluate and qualify new suppliers. We recommend including incumbent suppliers as part of a broader, low-cost country initiative to stimulate competition and ensure the best price from the existing supply base.
  • Conduct supplier visits: It is critical to gain a firsthand understanding of the potential capabilities and products of foreign suppliers early in the sourcing process. Relying solely on requests for information and requests for proposals and long-distance communication can lead to costly mistakes later.

 Leader or Follower?

A well-defined, low-cost country sourcing strategy focused on high-impact spend categories and key Asian and Latin American countries will provide substantial long-term benefits to your company and ratepayers. Similar to early adopters in other industries, you can integrate low-cost country suppliers into your supply base while effectively minimizing risks.

Low-cost country sourcing is a proven strategy to achieve savings and expand your supply base. The time is right to realize these benefits.




Key Countries and Products for Low-cost Country Sourcing


  • Large supply base of government- and privately owned companies
  • Key products: transmission and distribution electrical equipment, wire and cable, metal fabricated structures, pipes, valves and fittings
  • Key strengths: competitive prices and abundant engineering talent
  • Key challenges: English language capabilities and trade tensions


  • Experienced, export-oriented supply base
  • Key products: transmission and distribution electrical equipment, wire and cable, gas transmission pipes
  • Key strengths: competitive prices and track record in the U.S.
  • Key challenges: currency fluctuations and geo-political risk


  • Emerging base of suppliers
  • Key products: metal fabricated structures, pipes, valves and fittings
  • Key strengths: competitive prices and language capabilities
  • Key challenges: small size and scale of companies

 Mexico and Brazil

  • Domestic and multinational suppliers
  • Key products: selected transmission and distribution electrical equipment, metal fabricated structures
  • Key strengths: competitive prices and proximity to North America
  • Key challenges: currency fluctuations, relatively concentrated supply base, small size and scale of companies


 Alan Beebe is a principal at PRTM Management Consultants based in Shanghai, China. He has more than 15 years experience advising companies on their business and operations strategies for Asia. Reach him at

Anant Kumar is a principal at PRTM Management Consultants and a leader in its global utilities practice. He has more than 15 years of industry and consulting experience in utilities, high-tech and service industries. Reach him at

Jan Nicholas, a manager in PRTM Management Consultants’ Supply Chain Innovation practice, has more than 10 years of experience in the utilities, high-tech and consumer products industries. Reach him at

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