Five trends support logistics success in China

By Patrick M. Byrne -- Logistics Management, 6/1/2006

Under its terms of entry into the World Trade Organization, China agreed to open up markets and services that had been protected from global competition. One such area was logistics—a sector with huge potential to spur business growth. From a supply chain perspective, however, the road to high performance in China is still riddled with twists, turns, and bumps. Underdeveloped infrastructure, fragmented distribution systems, insufficient technology, and onerous regulations are just some of the challenges managers face.

Given these barriers, supply chain mastery will separate the successes from the failures among companies that do business in China. Supply chain masters generally strive for an integrated, end-to-end presence, with high levels of coordination, standardization, and visibility. But in China today, logistics activities such as transportation and distribution are the most important factors in overcoming these hurdles.

This article will discuss five important trends of interest to any company now operating in or seeking to enter China. Next month, I'll look at the risks companies face in China and how they can overcome these challenges by enhancing their integrated fulfillment operations there.

1. Rapid growth. China's logistics spending as a percent of GDP is twice that of the United States. Selling costs also are higher—proportionately speaking, up to 50 percent greater for many commodities than in the West. Accounts receivable, a key measure of logistics (in)efficiency, often exceeds 90 days. Nevertheless, China's distribution and logistics sector is growing rapidly, with annual revenue growth of 20 percent for 2002, 27 percent for 2003, 30 percent for 2004, and 33 percent for 2005. Much of the credit goes to China's 10th Five-Year Plan (2001–05), which called for massive infrastructure improvements. The accompanying figure shows the status of China's transport infrastructure and the government's plans for improvements. Although China may or may not reach these goals, they indicate the government's decision to make infrastructure construction a high priority.

2. Consolidation of a highly fragmented market. Among the country's 18,000 logistics services companies, not one currently offers nationwide distribution services or commands more than 2 percent of the market. However, consolidation is imminent, due to competitive pressures, increased service demands, and the growth of China's outlying regions. Foreign companies with strong international networks and better management are gaining market share, while many domestic companies rely on underdeveloped local operations.

3. Increased reliance on 3PLs. Although the concept of outsourcing basic logistics functions is still relatively new to most Chinese companies, many multinational corporations are accelerating the adoption of third-party logistics (3PL) services. Companies like Dell, McDonald's, and Nokia have demonstrated the benefits of capitalizing on 3PLs' expertise, capabilities, and assets to facilitate nationwide distribution and logistics services. According to a 2003 report by market analysts IDC, logistics outsourcing in China will grow by about 25 percent annually for the next decade. Smaller domestic firms will participate in that growth by combining operations and partnering with large-volume players.

4. Greater control of downstream distribution. More companies are following in the footsteps of successful multinationals, which are supported by strong, modern distribution networks. For example, Guangdong Honda Automobile Co. Ltd. has initiated exclusive four-in-one franchises (sales, repair and maintenance, supply of parts and components, and information services) in China to strengthen its brand name and position by better controlling service quality, product price, and market information. The formation of the SAIC-Volkswagen Sales Co. Ltd. is another example of the rise in foreign companies seeking to participate directly in distribution by building a dedicated distribution and after-sales support network.

5. Competitive advantages gained through alliances. As the top companies in China combine forces to build competitive national distribution chains targeted to specific industries, it is evident that this trend is fueling a growth in alliances and joint ventures (JVs). The formation of the JV between Legend Group and APL Logistics capitalizes on Legend's position as China's leading PC vendor and on APL's globally recognized brand and expertise. Similar ventures have been formed between the TNT Group and the Shanghai Auto Industry Group, among others.

Perhaps for the first time, China's business and government leaders, multinational companies, and domestic and global logistics services providers are all on the same page: They are seeking high performance by emphasizing infrastructure, leveraging partnerships, and concentrating on core competencies. These efforts will lead to reduced costs, broader solutions, improved information management, closer collaboration, and better customer service. In my next column, I will offer recommendations to help foreign companies capitalize on this environment and succeed in China by optimizing their integrated fulfillment operations.