Miss Hilary

391

Logistics in China

James Wang, University of Hong Kong

Introduction

China started its transition in 1978 from a centrally planned economy to a market economy. Since then, the country has witnessed a fast and relatively consistent growth: an average of 10 per cent growth in GDP, and 18 per cent in trade from 1980 to 2005. The growth in fact has accelerated since 2001 when China became a member of the World Trade Organization (WTO). By the end of 2005, China was ranked as the fourth-largest economy in terms of total GDP, following the United States, Japan and Germany. With such a back- ground, China’s logistics sector has been experiencing a significant expansion never seen before.

Wuliu, the word for ‘logistics’ in Chinese, has become very popular, although it was very confusing when it began to appear in the 1990s. Literally, wuliu means ‘material [wu] flow [liu]’. Many, including some officials in charge of the sector, took the term as being similar to ‘transportation’. Suddenly, large numbers of companies such as home movers renamed them- selves as wuliu firms, in order to take advantage of any government policies or incentives aimed at encouraging the sector.

Indeed, government policies have been critical in nurturing the devel- opment of the logistics sector in China, as the state machine, including all levels of government, is still the most influential power in driving and shaping changes in the economy, and the logistics sector is not an exception. Two recent developments show this power. First, central government decided to promote producer service industries and logistics activities in China’s 10th Five-Year Plan commencing in 2001. Because of that, each level of government

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A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

EBSCO Publishing : eBook Collection (EBSCOhost) - printed on 6/19/2020 2:22 PM via AMERICAN PUBLIC UNIV SYSTEM AN: 189238 ; Waters, C. D. J., Chartered Institute of Logistics and Transport in the UK.; Global Logistics : New Directions in Supply Chain Management Account: s7348467.main.ehost

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– from county and city to province – needed to work out schemes and plans to boost the logistics sector. Second, China committed at the time of joining the WTO in November 2001 to open its logistics market fully to the world within three years (see Table 24.2), indicating the strong willingness of the state to accelerate the reforms of its logistics sector by introducing pressure from outside.

China has been left behind the most developed countries in logistics, which can be seen by examining the efficiency of logistics activities as revealed by the ratio of logistics spending to GDP. A report by the State Development and Planning Commission (SDPC) (2006) shows that, in 2000, the logistics sector spending, including transportation, inventory storage, and loss and breakage, amounted to about 20 per cent of China’s total GDP. Such a proportion was much higher than those of the United States (10 per cent) and Japan (14 per cent) (see Table 24.1). The three major cost components, transportation, inventory storage and management cost, contribute roughly 57 per cent, 29 per cent and 14 per cent respectively of the total.

Despite the target of the central government to increase the efficiency of its logistics sector and reduce its proportion of the national GDP, the reality has been the opposite. China’s logistics industry grew at an annual rate of 15–30 per cent during 2000–04 – much faster than the national economic growth of 8–9 per cent annually for the same period of time. The total logistics cost accounted for 21.4 per cent of GDP in 2003 and 21.3 per cent in 2004, both in fact higher than that of 2000 (20 per cent). Interestingly, specialist third-party suppliers handled only 18 per cent of raw material logistics, 16 per cent of semi-finished product distribution and 17.6 per cent of final product distri- bution in 2000. In other words, more than 80 per cent of the logistics activities were conducted by producers themselves. This indicates that China is in an early stage of industrialization. At this stage, there is a huge potential market for logistics. Therefore, market expansion, rather than raising efficiency, is – and will continue to be – the focus of most logistics firms.

Logistics operators in China come from five different backgrounds. The first group comprises former subsidiaries of relevant ministries, for example Sinotrans from the Ministry of Foreign Trade. These firms are generally large

Table 24.1 Proportion of logistics spending to GDP, 2000

Country/region Logistics spending as percentage of GDP %

China 20 Japan 14 European Union 10–13 United States 10.3

Source: SDPC, 2006

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in size and have some ‘natural’ connections or guanxi advantages stemming from their previous freight-forwarding or distribution networks. The second group comprises the foreign logistics firms or freight forwarders such as DHL and APL Logistics. With the power and reputation of their brand names, they entered the China market earlier than many others. They enjoy an advantageous position owing to regulations that favour foreign investors with a large registered capital. The third group consists of the logistics departments of certain large conglomerates that expand their logistics opera- tions to serve both their parent companies and some others in the same or a similar industrial sector. Annto Logistics from the Midea Group is an example. It was once the logistics department of the Midea Group, respon- sible for national distribution of Midea air conditioners, and now extends its services to many other producers of home appliances. The fourth group basically consists of the transportation firms that have developed vertically to have their own agents doing freight forwarding and warehousing, such as China Railway Express Co. The last group consists of many private firms. Unlike firms from the other four groups, firms in this group tend to be small in size and usually have their special coverage or focus of business. These small, private firms make a very important contribution in fitting into market niches and helping avoid monopoly. For example, Hercules Logistics in Shenzhen provides special logistics services between the fast-growing Special Economic Zone next to Hong Kong and Siberian cities in the far east of Russia.

Major areas of improvement

Infrastructure development Development of the market for logistics in China has two prominent features – infrastructure development and the prevalence of outsourcing activities with international players.

Regarding the infrastructural development, a total of 728.3 billion yuan (about US $88 billion) was invested in fixed assets for the logistics industry in 2004, a growth of 24 per cent from the previous year (CFLP, 2004). Of this, transport amounted to 604 billion yuan (US $73 billion), or 82 per cent of the total (see Figure 24.1). This shows that the Chinese government has been placing huge emphasis on developing the transport sector. Most of these investments have gone to projects of new railways, highways, deep-water berths and civilian airports. However, the country still lacks a fully integrated transport network for intermodal transportation. For example, all the major ports such as Shanghai and Shenzhen – ranking third and fourth respectively in the world in container throughput – move less than 1 per cent of their containers from or to the railways. This compares with 7–15 per cent in major

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European and US ports – keeping in mind that China is a huge country and its railway network plays a much bigger role than that of other modes of transport in its economy.

Another major area of investment has been the construction of logistics parks. As the sector has been largely pushed by government policies, building logistics parks is regarded as an important measure to promote and upgrade the sector. Starting from Shenzhen, the Special Economic Zone next to Hong Kong, every major city in China has several logistics parks, which were planned and quickly constructed in the past few years through special incen- tives such as land rent exemption or deduction. These newly built logistics parks can be categorized into three types by their expected roles: 1) serving gateway facilities such as airports and ports for international and national trade; 2) regional distribution centres, which are normally located near railway stations or highway junctions; and 3) local services centres for city logistics. From an operational perspective, not many of these parks are running as well as expected for the following reasons:

� Positioning their role wrongly. Some cities set up their logistics parks aiming at high-value-added logistics activities for regional or international distri- bution, but the reality is that, for cities with an export-oriented processing industry, there is little need for regional or domestic distribution. The real

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Transportation 82%

Postal services 1%

Distribution, processing and packaging 1%

Wholesale 11% Warehouse

and storage 5%

Source: Li & Fung Centre for Supply Chain Management and Logistics, Chinese University of Hong Kong, 2004

Figure 24.1 China’s logistics industry – composition of total fixed asset investment in 2004

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logistics activities surrounding their ports, for example, are things such as empty container depots and truck parks.

� Lack of a proper regulatory environment for borderless logistics. In a transitional period from a centrally controlled economy, customs is a key body of central government that monitors imports and exports at all the local gateways where international logistics occur. When local governments try to reform their systems, with deregulation to create a true international environment such as a real free trade zone, they need not only the permission of the State Council, but also local cooperation from customs. This often requires much longer to achieve than constructing a logistics park.

� Abuse of the concept of logistics parks. As China is the country with the world’s largest population, urban land in cities with large logistics activity potential is definitely scarce. Some companies have taken advantage of government incentives for logistics parks by packaging commercial or resi- dential property development into a ‘logistics development project’ to occupy the logistics parks.

� Misinterpretation and poor location of logistics parks. In some cities, it was expected that, when a logistics park was set up somewhere in the city, other logistics firms would also come and work together to achieve some sort of economies of scale. The reality, however, is that, because of the different needs of their own supply chains, firms behave differently and do not move to the same location, even when some incentives are provided.

Prevalence of outsourcing and foreign logistics operators entering China The economic reforms and open-door policy since the 1980s have made China a world factory for both domestic and foreign enterprises. The growing marketization and internationalization have led to huge demands for outsourcing activities and third-party logistics (3PL), particularly after China’s entry to the WTO. Many foreign logistics service providers have established joint ventures with domestic enterprises or wholly foreign-owned enterprises – such as APL Logistics, Exel, Kerry Logistics and SembCorp Logistics, which formed joint ventures with Legend Group Holdings, Sinotrans, Beijing Holdings and St-Anda respectively. These ventures offer 3PL services to most major cities in China.

China’s accession to the WTO in 2001 created many deadlines for opening its logistics markets (see Table 24.2). This further opening of markets is very tempting to foreign logistics enterprises, since the country is now in a stage of fast economic development and urbanization. On one hand, the GDP growth rate was 10.3 per cent on average from 1979 to 2004 and is expected to

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continue at a rate of at least 6 per cent for another decade or two, and its foreign trade volume grows even faster (35.7 per cent in 2004) as the economy depends more on the global market. This means that more global supply chains have their first links or production bases inside China. On the other hand, as there will be about half a billion of the population moving from coun- tryside to urban regions to work in the next 10 years – and 10 million people becoming ‘middle-income class’ by world standards every year from 2005 to 2010 – a huge market for domestic consumption is in the making. This is leading to a rapid expansion of China’s retail sector and ample room for further development of its logistics industry – and 3PL in particular. Major

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Table 24.2 Post-WTO accession regulations in China

By 2002 By 2003 By 2004 By 2005 By 2006 By 2007

Shipping – Majority – – Wholly and freight ownership owned forwarding by foreign subsidiaries.

firms No limit on foreign firms to international freight business

Maritime – Majority – – – – cargo handling, customs clearance

Rail Foreign– – Majority – – Wholly transport PRC joint ownership owned

venture subsidiaries permitted

Road Minority Majority – Wholly – – transport ownerships/ ownership owned

joint subsidiaries ventures

Warehousing Minority Majority – Wholly – – and storage ownerships/ ownership owned

joint subsidiaries ventures

Courier Minority Majority – – Wholly – ownerships/ ownership owned joint subsidiaries ventures

Source: Accenture, 2002

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transnational retail chains such as Wal-Mart, Carrefour, KFC, McDonald’s and Starbucks are already setting up more retail stores – and major 3PLs and inte- grators such as FedEx, UPS, DHL and AT&T are opening offices and cargo- collecting points in as many cities as possible. Some are even moving or establishing their Asian distribution centres in China as well.

Challenges to developing modern logistics

Huge geographical variations The first and probably most challenging reality is the enormous variations within China. When talking about China as a world factory, often people are thinking of the entire China – a country of 96 million square kilometres of land and 1.3 billion people. In fact, it is not really true. Geographically speaking, the real world factory is just the coastal part of China, consisting of 332 cities and counties. Statistics in Table 24.3 show that the coastal provinces, mainly their port cities, have become more and more important in the global market, as their contribution to China’s external trade keeps increasing. Up to 2004, 94 per cent of the total value of Chinese foreign trade was made in the coastal region of 11 provinces. More than 83 per cent of foreign direct investment to China has concentrated in these cities as well. The country is thus divided clearly by the level of international trade and transport connectivity with the outside world. Production in the coastal area is highly associated with the global economy, while that of the inland is still largely for the domestic market. As this trend has been reinforced rather than weakened in the past two decades (as shown in Table 24.3), one can see that logistics development

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Table 24.3 China: international trade by origin/destination in China (1998–2004)

1998 1999 2000 2001 2002 2003 2004 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000 US$’000

National 324,033,642 360,649,443 474,308,185 509,768,127 620,768,077 851,207,294 1,154,791,620 total

Coastal 287,290,620 321,688,892 430,176,402 463,222,811 567,871,428 778,312,733 1,069,529,407 provinces

Inland 36,743,022 38,960,551 44,131,783 46,545,316 52,896,649 72,894,561 85,262,213

Proportion % % ³% ³% ³% ³% ³%

Coastal 88.7 89.2 90.7 90.9 91.5 91.4 92.6 Inland 11.3 10.8 9.3 9.1 8.5 8.6 7.4

Source: China Customs, 1998–2004

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in China is currently a dual-track system. On one hand, there is a fast track in its coastal region, where ports are equipped with the most up-to-date equipment and operate with the highest efficiency of any world top-class container terminal operators. On the other hand, one rarely sees a container truck driving in an inland province, and competition in transport and logistics often comes by overloading trucks or vessels for unit-cost saving. The domestic markets of most products are still largely production-driven rather than buyer-driven.

As a result of such huge unbalanced development, either domestic or inter- national logistics enterprises may need to have local strategies to deal with the situation. For example, Wal-Mart has decided not to have regional distribution centres in China, considering that inland transportation, including railways and highways, is not reliable enough for time-definite delivery. Haier, the top brand name and largest producer of electric home appliances in China (and probably in the world by 2006), has been doing logistics on its own rather than contracting out, as it sees that none of the 3PLs can do a better job than itself.

Absence of a fully integrated national transport network Despite the fact that some efforts have been made by the Chinese government in developing the logistics infrastructure for the entire nation, bottlenecks in transport hamper logistics efficiency. Among major transport modes, railways are the key links between the inland cities and the gateway port cities, and they started to operate unit-trains for containers in the late 1990s. But by 2005, less than 1 per cent of container throughputs at major Chinese ports were associated with railway services. Upgrading railway systems for containerized transport is not easy, since the double-deck trains that are commonly used in the United States are not feasible for most routes in China, which is a mountainous country. Waterborne transport is not as feasible as in some European countries, as only in a very few places are there rivers that are navigable by barges. As a result, highways have become the backbone of land surface containerization. The economic distance of trucking is thus forming an invisible division between container-accessible coastal regions and the rest of China – the former being served by modern transport and logistics that match international standards, while the latter is served by conventional means. The gap in transport and logistics provision is contributing to social inequity in the country, so the question of how to improve it becomes a critical issue not only for the logistics firms, but also for the various levels of government.

Multiple jurisdictions and local protectionism The third challenge in developing modern logistics systems in China is from the local governments. The essence of logistics services is the efficiency of

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getting things and information through supply/demand chains and over space. Strong intervention from governments for local interests has become probably the most difficult obstacle to overcome. Often improvement of logistics is regarded by many local governments as an instrument to help generate more GDP within their own jurisdictions, rather than a way to improve the efficient flow of cargo across them. Individual municipal govern- ments are motivated to compete for logistics hubs regardless of their geographical locations – and none of them is willing to see firms with home bases in their cities set up distribution centres in other jurisdictions. Consequently, there is duplicated construction of regional logistics parks and distribution centres – and even airports in neighbouring cities are common. One scheme by logistics firms serving the nationwide market is to register the firm at a city that charges the lowest tax – but locate the operations wherever best fits the network needs. This may mislead, statistically, the governments of both jurisdictions and cause more duplication of investment in infrastructure.

Absence of trust for the domestic 3PL Although most regulatory regimes have changed to facilitate the growth of 3PL, it is still very tough for 3PLs to be successful in the real world, or even to survive. Many enterprises that say they use 3PL are really transport operators themselves with their own fleets of trucks, vessels or both. They operate more as transport firms; for example, China Merchants Logistics in Shenzhen relies on its transport business – including a fleet of taxis. The major reason, as stated by Mr Chan, the director of Hercules Logistics, a leading private domestic logistics firm in China, is that ‘If we do not have our own transport means, people will never trust us and we will not get any good deals.’ He adds: ‘People consider a real 3PL user [ie without its own fleet of trans- portation] as “tae kwon do” [a Japanese martial art: fighting without any other weapon than one’s own bare hands].’ Such an absence of trust is partly due to the lack of any established brand names in the field, which may take time to build. At the current stage, the challenge to those that are working hard to be one of the brand names in the future is how to keep their transport operations running on a less than economic scale, while surviving and devel- oping their core business. Alternatively, they may seek help or support from international investors – particularly those with brand names in the field – which will eventually result in merging or buying out.

Old-fashioned wholesale marketplaces remain competitive Associated with the trust problem discussed above is the prosperity of conventional wholesale marketplaces in many cities and city regions where the low-end products are traded, and transport and logistics are often taken care of by the buyer. For example, in Foshan, a city near Guangzhou, Canton,

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there is a huge wholesale market for furniture that is 9.5 kilometres long and 150 metres wide along each side of Highway 305. Each day, thousands of indi- vidual consumers – such as new home owners in the nearby cities – or groups come to the Le Cong Furniture Market to do a day ’s shopping. Most of them buy their furniture and truck it back home using their own means of transport. Le Cong has contributed to the local economy for more than 10 years and employed significant numbers of people, and many local govern- ments wonder if the same success could be achieved in their own town. As a result, many wholesale marketplaces (or ‘professional markets’ as they are called in China) have been set up to boost the competitiveness of the local economy by enhancing the logistics and distribution systems. However, since logistics services in China have been developed to different stages of maturity for different types of products, some of these marketplaces have had very short lives before fading away.

New government policies and future prospects The Ministry of Commerce – together with other related ministries and commissions – released a communiqué on 5 August 2004, ‘Notice on promoting the development of China’s modern logistics’. This covers various areas such as administration, management, taxation, financing and market opening, etc. Major policy initiatives suggested in the document include:

� standardizing registration and approval procedures of logistics enterprises; � promoting the opening up of the logistics market and adjusting adminis-

trative procedures – reducing to a minimum the entry requirements for domestic railway freight-forwarding agencies, marine freight-forwarding agencies and other intermodal transport agencies;

� simplifying the taxation on all logistics enterprises; � improving the current practices in regulations to establish a competitive,

fair and regulated market environment.

All the above initiatives aim at encouraging more foreign participation and more consolidation of the logistics industry in China. Although the economic growth of this country is expected to slow down from an average of 8.1 per cent for the 25 years from 1980 to 2004, the momentum of growth is still high and will probably continue for another decade or two. In this period, it is expected that the following trends in development will appear:

� More penetration by foreign logistics enterprises. DHL, FedEx Express, Maersk, and Exel Logistics are investing more in China. The penetration of these transnationals takes different forms. FedEx, for example, has committed itself to move its Asian hub from Subic Bay in the Philippines to Guangzhou by 2008. Exel Logistics has invested in Sinotrans, in order to

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take advantage of its partnership with this leading Chinese logistics firm. Foreign firms may also follow APL Logistics and set up wholly foreign- owned enterprises. For example, FedEx Express announced in 2006 that it would acquire all the shares of its partner DT Logistics in Tianjin to turn their joint venture into a wholly foreign-owned enterprise.

� Consolidation and upgrading of domestic logistics firms. Except for Sinotrans, most leading domestic logistics firms are currently more or less dependent on their parent firms. For example, Annto Logistics (a leading logistics firm established in 2000) was originally a subsidiary of the Midea Group (one of China’s largest conglomerates, with a focus on household appliances). Annto Logistics still considers Midea as its most important client, and its home base is in Shunde, where the headquarters of Midea is located. This is going to change in the near future when Annto’s network expands nationwide and its status is recognized by more clients. This will even- tually lead the firm – and others of this kind – towards real 3PL operations.

� Highly efficient intermodal logistics/transport corridors. To narrow the devel- opment gap in logistics services between the coastal and the inland regions, intermodal corridors linking major inland cities should be the first requirement. According to the State Council, such initiatives should encourage more inland cities to open their airports to international connections, with the Ministry of Railways forced to operate fixed- schedule trains for container shipments along major national corridors, even if such operations are not profitable in the short term.

� More free trade zones opened at major ports and airports. An important new policy initiative from the State Council is called ‘zone port interaction’. From the beginning of 2005, eight major port cities in China started a trial of this. The policy aims at establishing an integrated space within which there is a free trade zone together with some terminals for international transac- tions. Within these spaces, cargo can be handled as if it is outside customs, although it is physically present within the territory of China. This policy intends to set up several ‘mini Hong Kongs’ to facilitate international logistics – including trans-shipment, consolidation and even exhibitions.

� More advanced e-platforms and technologies. The late 1990s was an embar- rassing period for China when it started to introduce new technologies such as electronic data interchange to potential users. After spending a lot of time and resources in human resource training and installation of equipment, most of the EDI systems did not work. Eventually, by the time everything was ready, the systems were out of date and not compatible with the newer systems employed by major international organizations and government departments. Recognizing this problem of compatibility, China is now putting more effort into standardizing and upgrading e-plat- forms among government departments – such as the General Customs and their local offices – in order to improve the efficiency of logistics services, including documentation handled at all international gateways.

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Web-based platforms for freight forwarding and cargo monitoring are becoming popular. The country is also trying to catch up with the developed world by designing and introducing the most advanced tech- nologies in logistics, such as radio frequency identity (RFID).

Concluding remarks

Being a fast-growing economic giant, China is at a stage where advanced technologies and management in logistics coexist with backward and conven- tional ones – the former being employed in its global trading sector, while the latter are largely for its domestic market. A bifurcation is also found between the transnational logistics companies and local firms: the former are pene- trating from individual major coastal cities to regional or inland markets, while the latter are upgrading themselves from transport provider to true 3PL or even 4PL.

Governments at all levels are keen to develop modern logistics, since it is widely believed in China that the logistics sector is one of the key sectors for the country and for the competitiveness of individual provinces or cities in today ’s globalizing economy. Interestingly enough, however, the major obstacles for better provision of logistics services in China also come largely from governments of various levels. They are putting too much effort into manipulating the sector, with over-investment in logistics parks, and protection of local interests through discriminatory regulations against non- local firms.

The injection of high-quality logistics services by international providers after China’s accession to the WTO seems to be regarded as an effective means of raising the quality of logistics services. But this strategy becomes problematic when tensions grow between Chinese firms and transnational companies. After all, perhaps, a more fundamental and long-term solution is to nurture a better market environment, with fair play between domestic and foreign firms, and between the inland and coastal regions. For such a solution, improvements in infrastructure and governance are equally important.

References

Accenture (2002) On the Edge: The changing pace of supply chain management in China, Accenture, New York

China Customs (1998–2004) China Trade Statistics, China Customs, Beijing China Federation of Logistics and Purchasing (CFLP) (2004) Circular released

by CFLP State Development and Planning Commission (SDPC) (2006) National

Statistics, China SDPC, Beijing

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