The Inbound Logistics - October, 2004 China:
The Dragon Awakens
Chinese
cities are
teeming with manufacturing initiatives, prompting numerous expansions
of the country’s transportation and logistics infrastructure.
With a population of 1.3 billion,
representing 25
percent of the world’s population, China is one of the fastest-evolving
countries from a logistics, manufacturing, and production perspective,
says Rick Moradian, vice president of international logistics for APL
Logistics, a third-party logistics provider based in Oakland, Calif.
Although the Chinese government is
investing
heavily in roads, rails, air and ocean ports, as well as
state-of-the-art material handling equipment to improve and expand its
infrastructure, continuous manufacturing growth keeps outpacing these
efforts. That causes some to refer to aspects of China’s infrastructure
as ‘spotty.’
“The existing infrastructure cannot handle
the
volume of growth effectively, and these issues will haunt China for
some time,” Moradian says, adding that transportation costs for cargo
can be considerably higher in China than in countries with more
developed infrastructures.
U.S. and other foreign companies surging to China’s shores to set up shop and take advantage of attractive incentives – including low-cost labor – find China is a country of jarring contrasts, both from a business and socio-economical point of view. “There’s a split between the old and
the new in
China, with a lot of poverty in the west and a growing middle class in
the east, where all the good jobs are,” says Richard Lancioni, Ph.D.,
professor of logistics at Temple University, Philadelphia. “The
country is highly regionalized and its inhabitants are loyal to their
home provinces."
In some ways, China seems like a collection
of
different countries in terms of its various cultures, language
dialects, and habits,” says William Dodson, managing director of
Chicago-based Silk Road Communications, which offers business
development services to U.S. companies considering a China presence.
China’s transportation and logistics
infrastructure is also marked by dramatic contrasts such as carrier
trucks sharing modern highways and dirt roads with donkey carts.
Despite some of the challenges, U.S.
companies
are reaping the benefits of operating in China. China’s imports
grew
40 percent and its exports grew 35 percent in 2003, notes Rosalyn
Wilson, author of the 15th annual State of Logistics report.
“China is home to nine of the world’s top
50
ports, which account for about 27 percent of the world’s containerized
cargo,” Wilson says.
Just a few years ago, Moradian referred to
logistics services in China as “primitive.” But that has changed.
“Tremendous advancements have been made to facilitate seamless product
flow throughout the country and to U.S. destinations,” he says.
Today, China’s logistics industry generates
between 18 and 20 percent of the country’s Gross Domestic Product –
double the U.S. level, notes Chelsea C. White, III, ISyE Chair of
Transportation and Logistics, School of Industrial and Systems
Engineering at Georgia Institute of Technology.
“One reason is that China’s economy is
based on manufacturing, while the U.S. economy is based on service,”
White says.
Even so, the country still lacks a
fortified and cohesive logistics infrastructure, notes Moradian.
(Source:
http://www.inboundlogistics.com/articles/features/1004_feature04.shtml)White adds the relatively inefficient
Chinese
logistics industry will likely undergo heavy consolidation. “This will
be a function of the regulations China is beginning to put together to
influence the development of a modern and efficient logistics
industry,” White says.
Individual provinces interpret national
logistics laws differently from one another, so national cohesiveness
remains a goal.
Geography and
Infrastructure:
Blending the
Old with the New
To better understand the challenges and
benefits
of operating in China, it helps to get a handle on the company’s
geography and transportation infrastructure. For thousands
of years,
river transportation has been a major mode in China.
And it’s more than tradition that keeps
commerce
flowing efficiently on rivers even into the 21st century.
Take, for
example, Ford Motor Company’s recent pledge to invest significantly in
the Chongqing area along the Yangtze River.
“Why would a company like Ford choose to
enter a
joint venture with Changan Automotive, one of China’s largest
automotive manufacturers, located in what appears to be the middle of
nowhere?” Dodson asks. “The draw for Ford was its customer needed to be
supplied and the nearby waterway is used to ship parts via containers
on barge.”
Ford will also invest another $1 billion in
the Nanjing area, further east and north of Chongqing on the Yangtze.
The vitality of the river is its east-west
direction because there are no inter-provincial or national east-west
highway systems in China – just a major north-south highway from
Shenyang south to Guangzhou near Hong Kong.
“This kind of development begins and ends
with
the customer and you have to follow your customers around the globe,”
Dodson says.
Jordan Industries, a manufacturer of
bicycle
reflectors and small motors based in Deerfield, Ill., knows this all
too well. “Because most of the world’s bicycle manufacturing has moved
to China we were in the position of losing all our business unless we
moved there too. We needed a local presence to supply manufacturers
with our bicycle reflectors,” says Andrew Rice, vice president.
Another benefit of river transportation is
Free
Trade Zones (FTZs). “FTZs are great if you export from China. From an
infrastructure point of view, they are set up along the seacoast or
riverway cities such as Ningbo, across the Yangtze River delta from
Shanghai, and Dalian in the north,” Dodson says.
In addition, several state-approved
Economic
Development Zones such as those in Suzhou, Kunshan, and Ningbo also
incorporate Export Processing Zones (EPZs), which can expedite customs
processing.
“The Economic Development Zones are where
U.S.
companies want to set up because the infrastructures are most
developed,” Dodson notes.
China’s ports are modern and
well-developed, with
Shanghai, Hong Kong, and Shenzhen the top three busiest ports in the
world, boasting highly automated material handling equipment, he
adds.
East Vs.
West
China’s eastern coastal cities are as
modern as
any of the world’s top commercial hubs. About 15 percent of China’s
land mass on the east coast supports about 80 percent of the country’s
wealth. Yet, about 80 percent of China’s population inhabits the west,
which is virtually undeveloped. Five key provinces on the eastern
coast of China produce between 70 and 80 percent of all exports.
“The proximity to ocean and river ports
allows
manufactured goods to be exported without any hindrances or domestic
constraints,” says Moradian.
Cities in this region include, from south
to north, Macau, Hong Kong, Guangzhou, Shanghai, Nanjing, Tianjin, and
Beijing.
The Chinese government, it seems, has a Go
West
policy, encouraging manufacturing companies to locate inland to create
more jobs. But that policy is still far from reality.
Current road
and rail networks and inland ports - whether airports or river ports -
have not expanded enough to handle this type of migration,
Moradian
says.
Foreign investors, as well as the Chinese
government and domestic investors, are helping to bolster the
interior’s infrastructure. Infrastructure in the Shanghai area is
growing overheated and stressed, says Silk Road’s Dodson.
“Companies are flocking to Shanghai, and
the
provinces of Jiangsu, where Suzhou and Nanjing are located, as well as
to Zhejiang, where Hangzhou and Ningbo are located,” he says.
“About
45 to 50 percent of foreign investments flow into China within these
three areas.”
With such intense squeezing of the
infrastructure’s resources, companies are already beginning a westward
migration, first toward Suzhou, Dodson says. “Five or 10 years ago,
Shanghai was the place to be, but it’s becoming congested and costs
there are rising phenomenally,” he says.
Suzhou’s proximity to the Yangtze River is
a
benefit that the manufacturing community recognizes. “The inevitable
westward expansion of foreign investment may see Nanjing, or even Wuhu
in rural Anhui province, become the next manufacturing hot spots
in
China in the near future,” Dodson says.
Further west into the interior, cities such
as
Xian, Chengdu, and Lanzhou also are being developed, with Xian
experiencing some major development. Chengdu is already home to a
Motorola R&D facility and Intel is building a $200 million plant
there.
“The region overall is seeing considerable
investment in new roads and other infrastructure components to
encourage businesses to locate there,” Runckel says.
Economic
Backbone
China’s economic structure consists of
three main
regions: Hong Kong in the southeast, Shanghai in the central east, and
Beijing and Tianjin in the northeast.
“These economic regions are exporting from
China
and they have a mission to establish a domestic market in the future,”
says Victor Mok, managing director for Exel in East Asia.
Shanghai is the most modern city in the
country,
with a thriving population of 17 million. Although Shanghai is a major
port, it cannot accept deep vessels, so factories located in the region
have to send their shipments to Ningbo, about 60 miles north. But the
port is projected to be the world’s largest in the near future, as the
government constructs deep seaports there.
Guangzhou, south of Shanghai and north of
Hong
Kong, developed several years earlier, so the high costs of operation
there cause companies to choose other locations, Runckel says.
While the roads leave something to be
desired in
some areas, White notes the investment China is making in
developing a
highway network is substantially larger than what the United States
spent to build the Interstate Highway System in the 1950s.
The Taiwan
Issue
About 500 miles from Hong Kong off the
coast of China, Taiwan enjoys a vibrant economy as a separate country.
“The Chinese government refers to Taiwan as
a
‘rogue province,’” notes Lancioni. “It’s still a sticking point.
U.S.-China relationships can be a lot closer if the Taiwan issue is
resolved.”
Chinese citizens need permission to travel
to
Taiwan, and the port of entry is in Shanghai exclusively. “If a U.S.
company has operations in Taiwan and China, travel back and forth could
present some challenges,” notes Lancioni.
Operating in
China: Incentives and Bottlenecks
The recent U.S.-China maritime agreement
means
U.S. companies can operate within China as easily as Chinese entities
operate within the Americas. The agreement also means more capacity in
China to move products to the United States. Business incentives
are
getting more competitive as cities vie to win over U.S. companies.
“Cities are offering land at a
discount,
subsidizing the cost of building your facility, and giving relief on
import duties,” says Rice at Jordan Industries. In return,
companies
are expected to meet certain sales goals and to employ locals – similar
to U.S. cities and states competing by offering attractive incentives
packages.
Technical universities also are popping up
within
these areas, so there is a supply of well-trained people to make up the
workforce.
Joint
Ventures: Caution!
Siva Yam, president of the Chicago-based
U.S.-China Chamber of Commerce, cautions against entering China through
a joint venture (JV).
“In the old days, that was the only way to
go
because joint ventures offered good incentives to both parties,” he
says. “The Chinese were looking for foreign capital, new technologies,
and access to foreign markets in exchange for facilities, a workforce,
and ‘guanxi’ to help get licenses, permits, and other required
documentation.”
Even so, joint ventures still thrive in the
country. For instance, Shanghai Automotive is a five-year-old JV
between SAIC, China’s largest automotive manufacturer, and GM-China.
The partnership was established to provide automobiles to the Chinese
market – primarily Buicks, regarded locally as popular and prestigious.
GM also sources components in China and ships to the States for
assembly in its plants there.
Sourcing
Costs and Benefits
A growing trend among the Big Three
automakers is
to source components from China, then ship back to manufacturers’ U.S.
warehouses, where they will carry up to 40 days’ worth of inventory due
to uncertainties in the longer supply chain.
“Generally speaking, if the total cost of
sourcing internationally is 25 percent less than the domestic cost, it
becomes economically viable to consider,” says Robert Handfield, head
of the Supply Chain Consortium at North Carolina State University,
Raleigh.
With the benefit of sourcing in China come
some
costs, however. Components and products heading to U.S. shores can be
held up for some time while waiting to call the ports in
California.
The tremendous bottlenecks at West Coast ports are felt all the
way
back to China, affecting a wide range of manufacturers and retailers
all along the supply chain.
“At any given time up to 10 ships could be
in the
Los Angeles harbor waiting to deliver materials, and they could be left
waiting for days or up to two weeks,” Handfield says.
One mission of the Supply Chain Consortium
is to
identify supply chain risks and to provide solutions so companies can
more effectively manage the long and involved international supply
chain.
Avoiding
Other Bottlenecks
Documentation is another issue that can
bottleneck the supply chain. “The various regulations to be aware of,
and what and where to file, can be mind-boggling,” says Wilson.
Bureaucratic regulatory constraints – from
permit
requirements to rules and regulations that vary from province to
province – can hinder the free flow of goods, Moradian adds.
Just about every logistics function –
freight
forwarding, warehousing, distribution, trucking, air freight,
importing, and reverse logistics – requires a permit.
“In Asia, a single missing document can
hold up
your goods for months,” Moradian says. “The Council of Logistics
Management defines three logistics flows: product flow, information
flow, and funds flow. Operating in Asia, however, add a fourth:
document flow. If you don’t do the fourth, none of the other three
matter in the Asian environment.”
3PLs to the
Rescue?
Some U.S. companies find working with a
third-party logistics provider can make operating in China a lot
easier.
“Part of APL Logistics’ role in China is to
internationalize the processes we provide, so those services don’t
change whether you are operating in China, Europe, or the Americas,”
says Moradian. “This means handing off to local trucking companies,
ports activities, customs clearance, or resolving documentation or visa
issues.”
APL Logistics plays the role of
facilitator, able to handle whatever variables might hinder the
movement of goods.
“The world is a lot different today and we
have
to consider unstable political structures, which could include local
issues such as port strikes or blackouts,” he says.
Blackouts in particular are an issue
because
China’s electrical infrastructure is overstressed, with shortages
causing manufacturers to shut down operations for two or three days
during the week. Although companies compensate by operating during
evenings or weekends, “it affects the rhythm of manufacturing
processes, and you have to build this into your process planning,” Rice
says.
Third-party logistics provider Exel also
helps
companies get established in China. Exel provides what it
calls
“inbound to manufacturing” services. Once Exel has helped U.S.
companies move their capital equipment to China, it helps them plan
distribution.
“We help them with domestic sourcing to
support
their local factories – as well as domestic sourcing to support their
overseas factories,” says Chung.
Exel and other 3PLs help ensure companies
have
the licenses and other documentation so products can flow unhindered to
and from airports and ocean ports and within the country, especially
from province to province.
Exel’s consolidation services provide
purchase
order management and origin pre-distribution programs for manufacturers
and retailers - including factory pickup, origin trucking services, and
freight consolidation from multiple vendors within a geographical
region.
“We also offer value-added services such as
pick-and-pack, barcode scanning, bundling, labeling, and a DC bypass
program,” says Michael McIntyre, vice president for Exel’s Asia Pacific
consolidation services business.
The DC bypass program involves
consolidating
freight at origin from multiple vendors or factories within a region.
Instead of being shipped to the manufacturer’s U.S. distribution
center, the products are sent directly to the end customer’s U.S.
distribution center.
In addition, 3PLs can ease customers
through the
import and export process using technology for increased visibility of
distribution and logistics operations says Exel’s McIntyre.
On the U.S. inbound side of the picture,
companies such as Sinotrans Shipping Agency (NA) can help U.S.
companies ensure seamless delivery of their cargo.
“Our company works with cargo receivers on
the
origin and destination ends of the supply chain,” says Patrick Dinon,
president of the Long Beach, Calif., agency which is part of Sinotrans
Group, a logistics company in China employing more than 50,000
people.
About 50 percent of inbound cargo remains
in
southern California and is either shipped to other West Coast
destinations, or stored in the extensive warehousing and DC network
there. On the outbound side, the majority of cargo heading to
China
includes waste paper and raw material such as cotton.
“For example, American Chung Nam, one of
the
largest exporters in the United States, operates major mills in
Mainland China, manufacturing boxes that often are exported back to the
United States,” Dinon explains.
Future Vistas
U.S. companies can profit by operating in
China,
despite some of the inherent pitfalls. One such pitfall was experienced
by Suzhou-based Univertical, which manufactures anodes and chemicals
used in the plating and PCB industries.
“A lack of a thorough understanding of
customs
law cost us about $30,000 in fines, freight, and equipment,” says Kevin
Williams, Univertical’s general manager.
Another major challenge facing China and
many
other emerging economies is to ensure that the legal system represents
an enabling infrastructure for international business.
“In China there is a saying that once a
contract is signed, serious negotiations begin,” White says.
The Growing
Middle Class
Although many Chinese still live in
conditions of
poverty, the number of workers with disposable incomes in the East is
growing into a new middle class. This phenomenon is encouraging to U.S.
manufacturers in China, who also have the Chinese market in which to
sell products.
“The Chinese middle class is the
fastest-growing
sector in the world,” says Wilson. “If trends continue, by 2007 the
Chinese middle class market will be larger than the entire U.S.
market,” says Wilson.
The Chinese economy is built on a
value-oriented
methodology. “The country is producing things to sell, so it’s bulk
product in and finished goods out,” Lancioni says. “Countries with this
kind of characteristic trade flow tend to have more rapid growth and
fewer fluctuations compared to a country bringing in exports and
shipping out bulk commodities. That scenario is what helped Japan grow
so rapidly.”
The recent World Trade Organization
agreement has
resulted in an open-door trade policy between China and the rest of the
world. This means many new opportunities for U.S. companies to pursue.
“China welcomes foreign companies to help
shape
and expedite change, and it recognizes the importance of
collaborating with overseas and foreign investors to speed
development,” says Mok.
Operating in China presents many opportunities, but is fraught with challenges and obstacles. Doing your homework, proceeding cautiously, and enlisting help where needed can help ensure success. |
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