An interesting article published in Business Week (titled: Chinese Logistics: Its Upgrade Time) is reproduced here:
Getting cheap goods out has never
seemed too much of a problem for the Chinese. The country has cemented its
position as one of the central pillars of global trade by exporting staggering
quantities of cheap manufactured goods, and is arguably now second to none as
the economic hub of
Logistics provider FedEx Express
certainly thinks so, judging by its plans to establish a US$150 million Asia
Pacific hub in Guangzhou. "In very practical terms, China is going to be at the center of our entire Asia network," said David Cunningham, the
company's president for Asia Pacific.
recently overtook
as the world's third-largest country in terms of foreign trade volumes. Exports
have more than doubled over the last five years and are expected to double
again by 2010, accounting for 11% of the global total.
Rampant growth in logistics
revenue points to an industry in good health. According to the China Federation
of Logistics and Purchasing (CFLP), logistics industry revenue grew 20% in
2002, 27% in 2003, 30% in 2004 and 33% in 2005.
Viewed through a different lens,
though, the picture changes. As volumes expand, cracks are being exposed.
inefficiency, with CFLP figures showing that logistics costs accounted for
21.6% of GDP in 2004. Given that logistics costs come to 9% of US GDP and 11%
of Japanese GDP, it could be argued that China wastes around one-tenth of
its total GDP through logistical inefficiencies.
the breaking point. The total handling capacity of
over one billion tons, and capacity is increasing quickly. But not quickly
enough.
Speaking in January, Shen Yihua,
vice director of the commerce ministry's Waterway Transport Planning Institute,
said that China
cannot expand port facilities quickly enough to meet rising demand. In 2005,
the turnover capacity of coastal ports was officially 2.52 billion tons, but
3.38 billion tons were actually handled.
development of port construction should be faster than economic growth,"
he told state media.
Internally, logistics networks
are even more stretched, creating problems as retailers and manufacturers look
beyond the largest Chinese cities to those in the tier two and tier three
categories.
difficult for manufacturers and retailers sourcing in China to reach
inland markets than export to the rest of the world.
AMBITIONS FOR GROWTH
Despite this, both local and foreign retailers have big expansion plans. As
retailing accounts for 75% of logistics activity, foreign logistics providers
are moving away from their typical export-only remit to meet this growing
domestic demand.
For all intents and purposes, the
market is now open for wholly owned foreign enterprises, in accordance with China's WTO
accession commitments. Overseas players no longer need to work with a local
joint venture partner (See: Two's a crowd: Life outside of a JV) and so most
now have a presence on the mainland.
sailing, with a variety of regulatory-driven inefficiencies waiting to cling to
those who come in.
consultancy JHK Hong Kong, is all too familiar with these problems. He blames
some of this on the logistics companies themselves, but says
"institutionalised bureaucracy" is most responsible.
Motorola's problems are instructive.
The company produces its mobile handsets through both a joint venture and a
wholly-owned subsidiary. However, because the units have a different legal
status, Motorola must use separate distribution channels to meet duty, tax and
other bureaucratic processes, preventing cost savings through economies of
scale.
SCENIC ROUTE
It is also often cheaper for a provider trying to move goods between two
provinces, or even within a province, to export the goods to Hong Kong and then
back into China,
even though it is less efficient in time and actual shipping costs.
For example, a company that
manufactures a component in Zhuhai for incorporation into a product made in
Dongguan – two cities on either side of the Pearl River Delta – will ship the
goods via Hong Kong rather than directly. Just passing through Zhuhai
customs can trigger an immediate 17.5% value-added tax (VAT) rebate.
Zhuhai to Dongguan and then the finished product was exported from there, the
original company has to wait for a daisy chain of events to occur before they
can claim back the VAT tax," said Oldbridge.
"The cost per tonne per
train or per ship is not so expensive – it is the convoluted process that
drives the cost up." Another problem is that up to five
government organizations are involved in the logistics function in China, many of
which operate on a provincial level.
"I guess in any country
those types of processes can be streamlined," said Jaime Bolton, Greater
China and North Asia supply chain management lead for consultancy Accenture.
"If you look at the facts and you see that logistics is double the cost of
elsewhere, I think there are certainly opportunities for streamlining."
The government is moving in the
right direction with legislative reform, said Mark Millar, honorary chairman of
the China Supply Chain Council, but differences in the interpretation and
enforcement of rules between different regional customs authorities slows the
process.
For Christophe Vincent, general
manager of Dachser Shanghai, a wholly foreign-owned logistics company, it is
these regional variations that cause the biggest headaches. But they are not
insurmountable, he stresses, provided you understand how the different systems
work.
"We have the usual
administrative delays which are still happening, but as long as you incorporate
these in your business plan you don't see it as a drawback. It goes with the China way of
doing business."
Incorporating delays into a
business plan may work, but those shipping goods, and their clients, have to
meet the costs. Competition between local
jurisdictions is also a complicating factor. Many local authorities won't let
trucks from other provinces cross the border, requiring unnecessary unloading
and reloading.
In other areas, the truck can
cross, but the drivers must be changed. Toll fees are usually about 20%
of total transport costs and many operators meet tight profit margins by
dodging these fees. They do this by overloading, slowing deliveries and
increasing the damage rate of goods by taking sub-standard roads. Savings are
not passed on to customers.
Regional protectionism has
contributed to great fragmentation in the industry. The CFLP says there are now
more than 700,000 logistics enterprises registered in China, mostly
small and medium-sized operators. Even the largest logistics providers have
less than 2% market share.
planning, trained personnel and systematic management. They tend to operate on
a local or regional level, meaning supply chains must rely on multiple service
providers.
For example, Wal-Mart needs some
15,000 suppliers to service its 60 or so stores in China. In America
services 3,800 stores with only 61,000. Meanwhile fashion label Liz
Claiborne has to manage an army of third party logistics suppliers (3PLs),
integrators and freight forwarders used to link its factories to its regional
distribution hubs throughout China
and on to its offshore retail operations.
The dream for most retailers and
manufacturers is to be able to rely on one or a handful of logistics providers.
anybody to do that," said Oldridge. "Most of us can do some of it but
nobody seems to be able to do everything yet." While this is a problem for
manufacturers and retailers, it presents a prime opportunity for logistics
operators. Those who can offer integrated services will be in the ascendancy
and this is expected to drive consolidation in the market.
This is likely to result in the
industry being dominated by a handful of big companies, offering a full range
of services and geographic locations. They will be supported by niche operators
in highly specialized areas such as medical supplies and a few smaller regional
players.
"I don't think there will be
much in between," said Millar. "The people in the middle should
either look to consolidate together to compete with the big ones, develop a
niche, or get bought."
APPROACHING MATURITY
There are signs that consolidation is already taking place. In January,
Qingdao-based SITC Maritime, China's largest private shipper, merged with
Beijing's
New Times International Transport Service, the biggest airfreight forwarder in
export terms, to form SITC Logistics, with assets valued at US$127.7 million.
In addition, around 15,000 domestic
logistics companies have listed themselves on various databases as available
for acquisition, said Millar.
Takeovers are playing a key role
in the expansion of foreign players. TNT China is pressing ahead in its
acquisition of China's leading freight and parcels transportation operator, Heilongjiang-based Hoau
Logistics Group.
hubs across all tier one and tier two cities to TNT's existing web of 25 wholly
owned operating branches and presence in over 500 cities, will turn the company
into China's largest private transportation network for freight and parcels.
Many of those looking to enter
the Chinese market see the inefficiencies in the system as a way of improving
on the tight margins competition has forced them to accept in their home
markets.
In Oldridge's view, this may be
wishful thinking. Western transport companies are lean, but they depend on
modern infrastructure and smooth regulation. The same inefficiencies that
plague domestic operators will also affect new entrants.
"Put someone on the Tianjin to Beijing
road and try and do what we do between Melbourne and Sydney," he said.
"It's just not going to happen. Every morning when the fog comes along,
someone kills themselves and the road shuts down for eight hours."
INTEGRATED SOLUTIONS
The advantage foreign entrants have is experience in offering an end-to-end
supply chain management system. These integrated services are where big savings
can be made and it is an area that domestic firms have so far been unable to
crack.
Again, Oldridge blames this on an
excessively bureaucratic infrastructure but he believes the situation is
changing rapidly as more savvy domestic operators emerge. The window of
opportunity for foreign entrants is narrow.
"The overseas investment has
to get a return very quickly because it won't be long before the competitive
edge is eroded," he said. "You can bring modern technology and
processes into third world countries, you can export 25 years of knowledge and
know-how – but it takes about 25 minutes to copy it."
Source: Anonymous, 2007. "Chinese Logistics: Its Upgrade Time," Business Week (online), 1 February, 2007.