The changing face of Asia: How it affects logistics

As Asia's economic structure evolves, shippers must consider how these changes may affect where they locate logistics operations.

By Toby B Gooley -- Logistics Management, 2/1/1998

From half a world away, it's easy to think of Asia as a single, monolithic entity. In reality, Asia is extremely diverse. Not only are cultures, governments, legal systems, infrastructure, and business practices unique to each country, but distance and geographic barriers to commerce often create regional differences within a single nation.

Given such diversity, companies that want to locate logistics operations in Asia should examine each country individually, advises Howard Leibman, a consultant with Andersen Consulting in Sydney, Australia. "Thinking of 'Asia' as a single region with particular requirements is a mistake. ... It is important that individual markets be specifically targeted and Asia not be approached as if it were a homogeneous region," he says.

This makes the site-selection decision for logistics operations in Asia a complicated one. Adding to that complexity is the current turmoil in some Asian countries. Collapsing stock markets, currency devaluations, rising prices, and falling wages are damaging confidence in formerly robust economies. (See News & Analysis, Page 17.) Whether it turns out to be a short- or a long-term situation, the economic crisis bears watching, as it will profoundly affect political conditions, consumer markets, sourcing patterns, and demand for logistics services--all factors in the site-selection decision.

Four Factors

When choosing a location for logistics operations in Asia, there are many factors to consider. These can vary from company to company, depending on each firm's strategic plans, products, and markets. Some issues, however, are important to all companies, regardless of what they make and where they sell their products. For anyone considering locating in Asia, the following four factors provide a framework for evaluating changing conditions throughout the region.

*Geography and physical infrastructure: Infrastructure quality, efficiency, and capacity vary greatly from country to country. Some, such as Japan, South Korea, Hong Kong, and Singapore, boast efficient ports, airports, highway connections, rail service, and customs authorities. They have benefited from their governments' willingness to commit considerable resources to upgrading the transportation and administrative infrastructure that is vital to the growth of international trade.

Unfortunately, some of the most successful countries have become victims of their own success: Freight volumes in Hong Kong, for example, have outstripped capacity at its port and airport. The resulting congestion, combined with rising costs, has led some manufacturers to relocate to mainland China or Southeast Asia. But Hong Kong is fighting back by building a new airport, which will include state-of-the-art cargo-handling facilities. The container port, on the other hand, is not faring as well; although some new berths have been added, political wrangling has delayed construction of new terminals. As a result, new ports in China's Pearl River Delta are drawing cargo away from Hong Kong.

In other Asian countries, by contrast, transportation infrastructure and services are so inadequate that congestion has become the rule. Indonesia, the Philippines, and Thailand all have endured this problem to varying degrees, and now they are taking steps to alleviate it. Thailand has built the port of Laem Chabang, improved intermodal connections, and opened bonded inland container depots. Indonesia, meanwhile, revised work rules and installed more cranes at some ports. And the Philippines has taken advantage of its central location, turning former U.S. military bases into transportation hubs that are home to the likes of Federal Express and DHL Worldwide Express. The Philippines' location also makes it an ideal place from which to serve the fast-growing intra-Asian transportation market, observes Geoffrey Bye, public relations manager-Asia-Pacific region at DHL in Hong Kong.

Nowhere, though, has the inadequacy of transportation infrastructure been more apparent than in China. China's explosive growth as a manufacturer, coupled with bureaucratic inefficiencies, literally overwhelmed the country's transport operations. As a result, most multinationals have been unable to distribute products nationwide, says Leibman of Andersen Consulting. Some of the more successful companies have taken control of their entire supply chain in China, he notes. One example is McDonald's, which started its own trucking subsidiary to ensure reliable deliveries.

After years of forcing trade through the funnel of China's inadequate ports and airports, the country now is trying to relieve the pressure. One helpful change is that foreign forwarders and carriers now may open their own offices; they no longer need a Chinese joint-venture partner to do business in China. The government also has been granting more operating licenses for logistics services. Companies like American Consolidation Services, TNT Logistics, and Sea-Land Logistics now are able to offer warehousing, distribution, transportation, and consolidation services in China.

In an equally important move, the government is awarding construction and operating concessions for airport and ocean-shipping facilities to foreign companies. Badly needed port modernization, for example, is mostly in the hands of experienced companies like P&O Nedlloyd and Hong Kong International Terminals. Intermodalism, too, is taking off under the guidance of Orient Overseas Container Line and others, while new highways connecting to ports are under construction.

But there's still one piece of the infrastructure puzzle that China lacks, and that is a modern telecommunications system. In China, telecommunications lag far behind systems in the West, but enterprising states like Hong Kong and Singapore are using their state-of-the-art technology to attract logistics and transportation companies. The need for highly developed infrastructure and communications systems, in fact, played a major role in DHL's decision to locate its regional Express Logistics Centers in Hong Kong, Tokyo's Narita Airport, Singapore, and Brisbane, Australia, says Geoffrey Bye.

*Proximity to suppliers and customers: Most Asian nations are crowded, with populations crammed into relatively small areas along the coasts or concentrated in a few large cities. From a distribution standpoint, this kind of concentration has pluses and minuses. On the up side, it means that a single warehouse or distribution center can serve a huge customer base.

The down side is that a densely populated urban area, like Hong Kong or Manila, can be a tough place to make a delivery. In each country, says Scott A. Rasco, managing director-Asia for UPS Worldwide Logistics, "there are unique customs regulations, handling requirements, environmental constraints, traffic curfews, zone restrictions, and other challenges that affect the way our customers --and we as their partner--can deliver goods."

Proximity to manufacturers and suppliers also is important when selecting a logistics site. The need to serve electronics manufacturers on a just-in-time basis, for example, has strongly influenced Singapore's growth as a logistics center.

One of the world's largest producers of electronic components, Singapore also is home to a growing number of distribution centers. Among the companies that recently have chosen to locate logistics centers in Singapore are Volkswagen, DHL Worldwide Express and its partner Singapore Technologies, United Parcel Service, UPS Worldwide Logistics, and Emery Worldwide. "Singapore remains an ideal choice for a regional logistics hub, as it offers excellent infrastructure [with] ample flights and state-of-the-art telecommunications, skilled labor, good security, and a pro-business government. It also has quick access to local emerging markets," observes Rasco.

Singapore's next-door neighbor, Malaysia, also is growing fast due to its superior access to Thailand and Vietnam, says Leibman. Last year, international logistics company MSAS Cargo International opened an 82,400 square-foot logistics center in Kuala Lumpur. Kuala Lumpur also boasts a new airport, where a Malaysian-German partnership will build a new cargo-handling system. Kuala Lumpur doesn't get all the country's logistics business, however: Intel recently announced that it would build a $30 million regional logistics facility in Penang. Penang is generating enough exports, in fact, that UPS now operates six flights weekly to that city.

* Political and tax considerations: Attitudes toward foreign businesses vary greatly across Asia. Some governments, such as Singapore and Taiwan, are very pro-business. Others, such as China and Japan, often throw bureaucratic roadblocks in front of foreign companies. But even business-friendly countries may not be so accommodating when it comes to taxation. Recently, IBM withdrew its plans to locate a component logistics center in Taiwan over a tax dispute. The Taiwanese government wants to tax all throughput at 2 percent of the value, which IBM decried as being too costly. According to a report in an electronics-industry magazine, IBM is not alone in its decision: Hewlett-Packard, Philips Electronics, Texas Instruments, and Taiwan's own Acer Inc. also have considered and rejected Taiwan as a logistics site for the same reason.

In addition to taxation, it's wise to consider a country's overall political and economic climate. For example, businesses are waiting to see how Hong Kong's reversion to Chinese rule will affect them, but Leibman believes that it will have little impact on logistics. "The role of Hong Kong as a door into the Chinese market has been reinforced by the rapid development of infrastructure linking Hong Kong with southern China. This has not changed with Hong Kong's return to Chinese rule," he says.

*International trade conditions: Customs regulations can have a great impact on overall logistics costs. Some countries are fairly liberal in this regard, while others are notorious for imposing high duty rates to protect uncompetitive local industries. Other issues to consider include border-crossing and entry procedures, restrictions on foreign investment and currency management, regional trade agreements that affect duty rates for shipments between trade-bloc members, and the availability of international transportation services and equipment.

Further complicating matters is the fact that most governments consider freight transportation to be a vital national interest, so it often is governed by international treaties. This has a direct impact on what kinds of services carriers can offer. An ongoing dispute between the United States and Japan over the meaning of an aviation treaty, for example, has temporarily stymied FedEx's plans to serve other Asian countries from a base in Japan.

Make the Right Decision

So many factors enter into the site-selection decision that we can't address them all here. From a logistics standpoint, however, the four topics covered in this article encompass the primary concerns for anyone planning to transport, store, or distribute raw materials, components, and finished goods in Asia. Clearly, intensive research, including "what if" scenario planning, cost modeling, meetings with government and customs officials, and site visits to seaports and airfreight facilities, is vital to making the right decision. A trusted business, consulting, or logistics-services partner also can help in choosing the best location for your logistics operation.