China confronts logistics challenges
Logistics logjams are everywhere in China, but things are quickly improving. Here's a sector-by-sector snapshot of what's happening.
By John Kerr -- Logistics Management, 5/1/2004
If you're importing goods from some parts of the world—let's say Düsseldorf, Germany, for example—you'll almost certainly be able to track the shipment throughout its journey, pinpoint the arrival date, accurately estimate total costs, and automate much of the paperwork. But what if you're buying from a factory in Chongqing in central China? Well, that's a very different story.
That situation is changing, but it will take years before trading with China becomes as efficient as trading with Europe. And change is inevitable as China's economic achievements exert pressure on its logistics infrastructure.
The country is awash in economic superlatives: Industrial output in January and February 2004 rose nearly 17 percent on the same two months last year. Rail freight traffic jumped 6 percent and inland waterways tonnage was up 8 percent year-on-year. China's port traffic increased by 18 percent in that time, and Shanghai is now the world's third-largest container port.
Those soaring numbers belie the sheer difficulty of moving goods in and out of the country. "China is very much a developing nation," explains Peng Yen Koay, president of Greater China operations for transportation conglomerate APL. For example, the country has only begun building an interstate highway network. Rail systems are creaky, and hardly coordinated. Domestic air cargo is still in its infancy. And bottlenecks and inefficiencies abound. He cites the situation at the bustling port of Shanghai, where APL's freighters must finish loading in deeper water because of draft limitations.
Observers peg China's logistics costs at about four times greater than those in developed nations. Hong Kong's General Chamber of Commerce estimates that logistics spending in the People's Republic amounts to about one-fifth of gross domestic product (GDP)—twice that of the United States. Other figures are even more worrisome: It can cost 50 percent more to move goods inland in China than in Europe or North America. Says Shanghai-based Craig Rawlings, supply chain practice director for consulting firm Capgemini: "It takes my client up to 18 days to move product by rail from Shanghai to some western cities. There's no intermodal capability, and product is loaded and unloaded by hand."
Beijing's bureaucrats are responding on several fronts. Since China was admitted to the World Trade Organization (WTO) in 2001, the nation has been rapidly opening up to foreign expertise and funding. As the consulting firm A.T. Kearney points out, the People's Republic has become the premier location for foreign direct investment, with distribution and logistics services on the hot list. Most of the world's largest logistics outsourcers—conglomerates such as APL, Maersk, UPS, TNT, Exel, and many others—have a well-established presence there already, and they are expanding fast, chiefly through joint ventures with Chinese firms.
A key element of provincial economic development involves investment in logistics. China's latest five-year plan, for 2001 through 2005, mandates massive public spending on everything from ports to roads. The challenge, however, is such that even with greater investment, there will still be huge bottlenecks, particularly away from coastal cities such as Shanghai and Hong Kong.
With that broad-brush view in mind, here's a quick glimpse of what's happening in key logistics sectors in China.
Ocean shipping
The breakneck pace of port investment is no match for the steady increase in both inbound and outbound freight volumes. At some harbors, larger ships have had to wait for weeks before they can berth. Congestion problems won't be solved overnight. Chinese port authorities have brought in foreign terminal operators such as Maersk, P&O, and Hutchison, but even with the subsequent efficiency gains and service improvements, they will be pressed to keep up with import and export volumes and with the need to accommodate larger liners with deeper drafts.
The availability of reliable service between North America and China's ports is improving almost daily. Chinese-flag container lines have upped their sailing frequency, and many foreign carriers are adding new port calls and cutting transit times. Ocean carriers also are working to improve the quality of their shoreside services. U.S.-flag carriers in particular will benefit from a new five-year bilateral agreement that will allow them for the first time to offer logistics services on their own, handle their own vessels, and gain direct access to new markets.
Inland waterways
Much of China's domestic freight travels on inland waterways. Given that China has the most developed inland-waterway transport sector in the Asia Pacific region, it's no wonder that foreign companies are increasing their use of barge transportation. China's biggest rivers can host container ports far inland; much of the Yangtze is navigable by ships of 1,000 tons deadweight or more. The partially completed Three Gorges Dam project on that river, moreover, will raise water levels to make Chongqing accessible to larger ships by the end of the decade.
Railroads
China's railroads are unlikely to play a prominent role in moving finished goods as they are designed primarily for transporting bulk materials, such as grain and iron ore. "Most manufacturing and port facilities do not have rail sidings, and there are limited multimodal facilities to facilitate moving goods directly from wagon to ship or truck," explains Capgemini's Rawlings.
Demand for intermodal service is soaring, however, and Beijing is pouring $30 billion into improving rail infrastructure. But the task of restructuring is so complex that the government is focusing on spinning off or better using assets such as rail storage facilities. According to Paul Clifford, managing partner for China at Mercer Management Consulting, buyers of those facilities are combining them into large-scale intermodal operations. What intermodal service is available is operated by foreign vendors, such as OOCL.
Air cargo
Some good news for U.S. shippers: China's regulators are liberalizing aviation agreements, planning to adopt an "open skies" policy that will allow foreign carriers to fly cargo in and out of Shanghai within three years. The other good news is that Beijing has ordered a consolidation among 10 domestic airlines. China Southern Airlines and Air China are emerging as dominant carriers; China Southern has very aggressive plans to develop its cargo business.
Domestic air cargo volumes are projected to grow by more than 10 percent annually for the next 15 years. But that sector will remain restricted for foreign aviation firms, and it will continue to suffer from poor integration of information between freight forwarders and airlines, as well as from limited ground facilities.
Trucking
Truck transportation remains a bright spot. "Domestic trucking is already well developed and efficient, and is the primary method for moving product," says Mercer's Clifford. By year's end, WTO stipulations require that China's trucking sector be fully opened to foreign firms. That market is very fragmented, so it's ripe for consolidation and significant overseas investment. The government is plowing $120 billion into road construction and a new interprovincial highway system is nearing completion. That's encouraging formation of large, long-distance trucking firms as well as interest from foreign truck manufacturers.
Warehousing
Under the WTO agreement, China has agreed to open up its warehousing sector by the end of 2005. That isn't holding back foreign logistics services providers. Just two of many examples: APL Logistics has opened the 14,000 square-meter first phase of a sophisticated flow center in Shanghai's Waigaoqiao Free Trade Zone to establish a long-term presence in central and northern China. From Australia, chemicals transportation specialist Tennant plans to triple its physical presence with a new distribution center in Shanghai and another in Tianjin, the closest seaport to Beijing.
Logistics outsourcing
For all its investments in infrastructure, China still lacks the kind of integrated logistics capabilities typical of more developed economies. Local firms—none has more than a 2-percent market share in China—provide mostly basic transportation and warehousing locally, or regionally at best. Yet the global third-party logistics providers (3PLs) are still struggling to provide services in China's interior because of regulatory constraints and the complexity of operating where Chinese competitors have the advantage. The best option may be to use one of the global 3PLs as a lead provider working in established joint ventures with local 3PLs. Marrying local contacts, knowledge, and assets to world-class technology and management capability brings the best of both worlds.
Despite its immaturity, the 3PL sector is expanding at up to 25 percent annually. Still, China's logistics providers continue to lag in their use of technology. (See chart.) That's not surprising when, according to Mercer, more than 60 percent of Chinese companies don't track their own logistics costs. Again, though, the scene is changing swiftly. "There has been a dramatic shift towards electronic business transactions among our Asian customers, particularly in China," says APL's Peng Yen Koay. "The Internet is the great equalizer; it provides small and medium-sized shippers with powerful IT tools without having to make significant outlays in their own IT systems."
Reason to Hope
On-the-scene observers agree about one thing: Logistics pros are likely to find that moving their goods into and out of China efficiently and cost-effectively will remain a challenge for a long time to come. The country's astonishing size, its still-powerful (and sometimes competing) national and provincial bureaucracies, and the magnitude of the infrastructure deficiencies it must overcome mean that incremental improvements will be the rule for the foreseeable future.
Yet the government's recognition of the critical role transportation and logistics play in supporting economic development offer shippers good reason to keep their China business plans moving ahead.
John Kerr is a veteran business journalist who frequently writes on supply chain management issues.
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