River of opportunity
The Yangtze River offers an efficient way to reach China's fast-growing population centers in the interior. But shippers should proceed with caution.
By Kris Knutsen and Clarence Kwan -- Logistics Management, 10/1/2006
Since China opened to the global economy 25 years ago, the Pearl River and Yangtze River deltas have become the country's most economically advanced industrial centers, overtaking those of the northeast and central interior.
What made that possible is access. Economic activity, including trade and foreign direct investment, concentrates where connections to the global economy are strongest. China therefore built its remarkable export economy along the coast, a development that prompted the largest migration of labor in human history.
But fissures have begun to emerge in that strategy. More than 60 percent of China's population lives in the interior, where the average per-capita income is just 40 percent of that in the coastal regions. China's leaders are acutely aware that to ensure the country's continued growth and stable development, income disparities between regions will have to be closed. Work will need to be brought to the workers—a change that will require a thorough reassessment of the issue of access in China.
To foreign investors, these internal strains are evident in rising land costs, erratic power availability, and—most remarkable of all—wage inflation and labor shortages in the highly developed regions along the coast. Some labor-intensive manufacturing, including Chinese-owned capacity, is already decamping to Southeast Asia and beyond.
But for companies that are willing to look westward, China's competitive advantages remain undimmed. Manufacturing wages in interior provinces are much lower, and prime industrial real estate is both more readily available and a fraction of the cost of land in the crowded coastal zones. Some of China's fastest-growing and most underserved consumer markets also beckon.
But the essential question for many companies still boils down to access: How can we reach those markets, and do so economically? The answer may lie along the banks of the Yangtze River. One-quarter of China's population lives along the 1,500-mile river basin that stretches westward from Shanghai to Sichuan, and the seven provinces through which the river passes account for 40 percent of the country's GDP.
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Improving capacity of the locks at the Three Gorges Dam complex, shown here, is a priority for both the national and local governments. |
The Yangtze, the world's third-longest river, is one of the most heavily utilized waterways in the world. Before 2000, traffic on inland stretches was almost exclusively bulk cargo, but as inland economies have grown, containerized traffic has markedly increased. Even today, the Chinese government estimates, 80 percent of the iron ore, 72 percent of the crude oil, and 83 percent of the coal delivered to manufacturing enterprises along the Yangtze is carried by barge.
Given the alternatives, barge service is the safest, most cost-effective way to move boxes over long distances in central China today. The rail system is almost entirely dedicated to supplying coal and other raw materials to the energy-starved coast. The government is now building the infrastructure to support a network of high-speed, double-stack intermodal trains along segregated routes, but that system is at least five years from completion.
At the same time, larger, more efficient trucks have yet to appear in great numbers on China's gleaming new expressways, 90 percent of which charge tolls. Long-distance trucking is very feasible in China today. But little of this traffic is containerized and it is costly—roughly five to six times more expensive per TEU (20-foot equivalent unit) along a comparable river route like Shanghai-Chongqing (see “What Does it Cost to Go West?” below). And that differential is likely to increase: Government and industry analysts predict that the cost of shipping containers by barge could fall by as much as 40 percent by the end of the decade.
In the short term, at least, expanding container capacity on the Yangtze will plug critical gaps in the existing road and rail network and will link huge areas of central and southwestern China to the coast at relatively low cost. The government has therefore moved quickly to improve conditions on the river through dredging, reef demolition, and, most particularly, navigational improvements associated with the Three Gorges Dam project. It has also coaxed more than two-dozen inland container ports into existence as far as 1,500 miles upriver. As a result, the river itself has emerged as a crucial enabler of expanded intermodal trade in China's interior.
The vast majority of international trade to and from large upriver centers like Wuhan and Chongqing already moves by barge. Thirty-five companies now offer container-on-barge service; together they shipped 2.6 million TEUs in 2005, up 44 percent over 2004, and forecasts call for 4.5 million TEUs by 2010 and 15 million TEUs by 2030.
A major stimulus for the long-term development of Yangtze shipping is the massive expansion of container berths now underway at Shanghai. In December, the first phase of Shanghai's new deep-water container complex opened, adding 2.2 million TEUs of additional capacity to what is already the world's third-largest container port.
Yangshan, located 21 miles off the coast, will eventually add between 15 million and 20 million TEUs to Shanghai's total handling capacity—more than the 2005 throughput of the top three U.S. container ports combined.
With a six-lane causeway that provides the only direct link to the port short of capacity, and the timeline for introducing rail service uncertain, expanded barge service clearly will be required to move traffic between Yangshan and the mainland. Port planners now expect container barges will move more than 30 percent of that traffic by 2020, and barge companies all along the Yangtze already are moving to upgrade their fleets.
Some operators are even experimenting with seagoing barges; the first one began serving the port of Yangshan directly from Nanjing in December. These deeper-draft, more powerful vessels will significantly cut transit times on the river and open the possibility of direct container-on-barge service from deep in China's interior to seaports as far away as South Korea and Japan.
Logistics Sector OpensCompanies that are contemplating a move inland will need to consider not only improvements to infrastructure but also the capabilities and reach of their third-party logistics (3PL) service providers. Logistics costs in China have hovered around 20 percent of GDP in recent years, almost twice the percentage in the United States, Europe, and Japan. One reason for that gap is that too many Chinese companies are conducting logistics activities themselves, and are doing so inefficiently. If China's government is to achieve its aim of cutting these costs in half by 2020, a viable market for 3PLs will need to emerge.
Despite annual growth in the neighborhood of 25 to 30 percent in recent years, the market share enjoyed by 3PLs is less than 10 percent of total logistics spending—probably a lot less. Heavy restrictions imposed on the industry prior to China's accession to the World Trade Organization (WTO) meant that majority ownership for most logistics sectors was not permitted until 2004, and equity and geographic restrictions were not completely eliminated until this past December.
The logistics industry is still burdened by a complex licensing system, but just six months after liberalization the sector is already being reshaped as the big, global 3PLs and their old joint-venture partners square off to compete for market share. Consolidation of China's highly fragmented logistics industry is also under way as companies seek synergies in networks, local expertise, physical assets, and customer bases.
These developments should lead to the emergence of true national logistics players with the necessary resources to complement China's massive investment in transport infrastructure. Most shippers that are considering whether to extend their supply chains inland will find that their global third-party logistics partners are already present and working through the cost issues.
Beneficiaries of AccessOne city that is certain to benefit from increased logistics access via the Yangtze is Wuhan, which straddles both banks of the river about 500 miles west of Shanghai. The city is sometimes called “Chinese Chicago” because of its crucial location at the crossroads of major north-south and east-west transportation routes.
With 80 percent of China's cities located within a 1,200-mile radius, Wuhan is a natural choice for companies seeking a site for nationwide distribution. The city has two main container ports, one in the central district and a new facility at Yangluo that will eventually supplant the first. The construction of Wuhan's main rail/container hub near Yangluo as well as a six-lane suspension bridge with a span equal to the Golden Gate Bridge (to be completed in 2008) should greatly enhance the port's value. The downside: Because of its location, more than 5,000 foreign-invested enterprises already operate in Wuhan, and some costs may be closer to those in the coastal areas than companies considering relocation would like.
A better vantage point for witnessing the Yangtze's potential to transform inland economies is Chongqing, China's newest provincial-level municipality and the last major container stop on the Yangtze. With a population exceeding that of Canada, Chongqing has emerged as a leading transit hub for a hinterland of 170 million people. It has also been one of China's fastest-growing cities, with growth in both industrial output and retail sales well above national averages.
Chongqing is served by two main container ports, one of them opened just this year. In 2001, fewer than 40,000 TEUs were handled by the city's ports. That figure has more than quadrupled in just four years, a trend that will be reinforced by plans to spend an additional $16 billion on local transportation infrastructure over the next 10 years, including $2 billion to upgrade ports.
The development of the Yangtze as an intermodal corridor will affect industries at different rates, but clearly the automotive and consumer-goods sectors will be early winners. Wuhan and Chongqing are China's third- and fourth-largest vehicle producers, respectively, and both cities plan to double their output by 2010. In August, both cities were among eight national automotive-export centers designated by the central government. Other beneficiaries will include a whole range of labor-intensive industries, from apparel and shoe manufacturing to white goods and electronics. Some price-sensitive and intrepid manufacturers, often Taiwan- or Hong Kong-based firms, have already relocated inland.
Domestic investment in Chongqing, meanwhile, rose by more than 50 percent in 2005, and in May 2006 the city announced new incentives designed to attract coastal businesses. Western manufacturers are also scouring these cities for opportunities, while “big box” retailers such as Wal-Mart and Carrefour are now setting up sourcing operations within a stone's throw of their new retail locations.
For global retailers, the situation has become a “virtuous circle”: The wealthier Chinese entrepreneurs and workers become by supplying their overseas markets, the more attractive they become as customers.
Factors to ConsiderAny decision to shift segments of a global supply chain to China's interior must inevitably take many factors into consideration. For some producers, even a marginal increase in lead time may be sufficient to override other cost benefits. For those that do go, conducting day-to-day business with local authorities, suppliers, and other business partners that are less familiar with global best practices will remain a challenge for the foreseeable future.
And although manufacturing labor costs in the interior are lower, staffing other positions will not be easy, as competition for technical, managerial, and logistics talent will be intense. Companies might expect their own expatriates to balk at an inland assignment, but they may be surprised to find that their Shanghai or Beijing hires view such opportunities like an Angeleño who's been offered a post in Akron.
For foreign investors that have considered logistics access to be a de facto veto over inland-expansion plans, the situation is changing very rapidly. As access to China's interior continues to improve—both in terms of infrastructure and the quality of logistics-service providers—companies that are agile enough to seize new opportunities will have the greatest chance of generating maximum shareholder value from their China operations over the long run.
| Chongqing-Shanghai | Distance (miles) | Transit Time (Days) | Cost (US$, 20-ft. container) |
| Road | 1,300 | 3–4 (40 hours) | 1,500 |
| Rail | 1,600 | 7–10 | 540 |
| Barge | 1,500 | 8 (11 upriver) | 315 |
| Source: Deloitte & Touche USA LLP | |||
| Date Announced | Investor (Nationality) | Deal Size (US $m) | Cross-Border Deal | Target Business |
| 1/06 | FedEx Express Corp. (United States) | 400 | Acquired the remaining 50% stake in FedEx–DTW International Priority Express from DTW Group | Express delivery services |
| 9/05 | TNT NV (Netherlands) | 135 | Will acquire 100% of the target HOAU Logistics Group Co. Ltd. | Cargo transport services |
| 9/05 | China Airlines Ltd. (Taiwan) and consortium members | 57 | Acquiring a 37% stake in Yangtze River Express Airline Co. Ltd. | Air cargo services |
| 8/05 | Paul Y-ITC Construction Holdings Ltd (Hong Kong) | 54 | Acquiring a 45% stake in Nantong Port Group Ltd. | Logistics services |
| 6/05 | YRC Worldwide (United States) | 45 | Acquired a 50% stake in JHJ International Forwarding Co. from Chinese parent | Freight forwarding |
| 11/05 | Sime Overseas Sdn. Bhd. (Malaysia) | 20 | Acquiring an 80% stake in Weifang Sime Darby Port Co. Ltd. | Port services |
| 6/06 | Keppel Telecommunications & Transportation Ltd. (Singapore) | 6 | Acquiring a 35% stake in Wuhu Annto Logistics Co. | Logistics services |
| 8/05 | Titan Group Investment (Hong Kong) | 2 | Acquiring a 25% stake in Guangzhou Titan (Nansha) Petrochemicals Development Co. Ltd., bringing total stake to 70% | Storage services for petroleum products |
| 5/06 | BALtrans Logistics Ltd (Hong Kong) | 0.4 | Acquiring remaining 10% stake in BALtrans Logistics (China) from partner | Freight forwarding |
| 7/06 | DSV (Denmark) | n/a | Acquiring remaining 34% stake in DFDS Transport (China) Co. Ltd. held by partner, JHJ International Corp. | Trucking |
| Source: Deloitte & Touche USA LLP | ||||
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