Georgia Tech/National University of Singapore Dual Degree Program
Logistics has become a booming industry in China especially after the country’s accession to the WTO. International corporations pay close attention to trends and developments in this land of opportunities, but must also be prepared to face the challenges of Byzantine regulations and fragmented operations. This report surveys the logistics environment in China. It focuses on describing the major logistics players, special challenges and current business strategies in Chinese Logistics. The report concludes with a case study illustrating many of the issues.
This document is based on a report prepared in fulfillment of the requirements for the Dual Master’s degree at the Georgia Institute of Technology and The National University of Singapore.
China Logistics 1
Executive Summary 3
1 Geography and Demographics 5
Geographic Characteristics 6
Political Divisions 7
1.2 Demographics 9
2 Infrastructure 12
2.1 Roads and Trucking 12
2.2 Rail 13
2.3 Waterways 15
2.4 Air 18
3 Logistics Policy & Organization 21
3.1 Governmental Organization 21
3.2 Logistics Policy 22
3.3 WTO Impacts on Policy 25
4 Logistics Players 27
4.1 Freight Forwarding 27
4.2 Ocean & Air Carriers 29
4.3 In-house Player 32
Haier Group (In-house Player) 32
Company Background 32
Logistics Operation & Facilities 32
4.4 3PLs 32
China Merchants Logistics Group Co., Ltd. 32
Company Background 32
Shenzhen ST-Anda Logistics Co., Ltd. 34
Logistics Services 35
Key Customers 35
APL Logistics China (Shanghai) (APLL) 35
Company Background 35
Customer Service 36
Hutchison Tibbett & Britten Logistics (HTBL) 36
Company Background 36
Customer Service 37
5 Special Challenges 37
5.1 Policy 37
5.2 Geography 38
5.3 Transportation 39
5.4 Distribution Management 39
5.5 Cost 40
Case Study: China Spirits Bidding Year 41
1 Geography and Demographics
As China opened up in the late 1980’s, many Western consumer goods manufacturers set up plants or formed joint ventures there in an attempt to tap the huge market potential of the country. By the 1990s, most Fortune 500 companies had branch offices in China. Other manufacturers come to China for low cost labor and find the rapidly growing internal market a secondary benefit. At the same time national manufacturers are working to transform themselves from the old command economy and to compete on an international scale.
Today, with China’s accession to WTO, MNCs are busy shifting their Asian headquarters to China and new players everywhere are entering the fray in a scramble reminiscent of the gold rushes of the Wild West. Some contend that China is poised for a renaissance and will resume its crown as Asia’s economic center. No one can deny that it is becoming the manufacturing center of the world.
What is China’s allure? Is it really an important market place for MNCs? Data from the World Trade Organization point to the answers. Since 1978, China boasted a GDP average growth rate close to 10% and its per capita income has quadrupled1. The value of imports and exports as a share of GDP tripled from 1978 to 1995.2 In 2000, China’s trade in goods represented 43.9% of GDP3. The nation’s economy is increasingly integrated with world economy. Now, China is among the top five nations of the world in terms of trade and direct investment. Foreign Direct Investment (FDI) soared from $2.3 billion in 1987 to $45.6 billion in 1999.4 In 2001, labor costs averaged $0.60/hr and GDP growth was 7.3%.5 The country’s merchandise exports were $293.7bn and imports were $266.5bn, creating a trade surplus of $27.2bn for the first 11 months of 2002 and FDI is predicted to exceed 50 billion USD.6 Rapid, sustained economic growth has made China's economy the world's third largest (based on the World Bank's purchasing power parity adjusted measures (PPP)).7 In 1998 China’s GDP, measured at purchasing-power parity (PPP), was $3.8 trillion, according to the World Bank’s latest World Development Indicators. This makes it the second-biggest economy in the world, ahead of Japan’s $3.0 trillion. It stands poised to become the world's second largest economy by 2015. The Chinese people have benefited from this growth, which has put more money in their pockets. Nearly 50 million Chinese enjoy an annual income equivalent to at least $18,0008 adjusted for purchasing power; by 2003, this number is expected to triple.9 Massive growth in international trade and domestic economic activity has raised China to a prominent position in the strategic plans of nearly every multinational firm. Many of these firms have already made China a substantial part of their businesses. Nevertheless, as China races rapidly forward as a manufacturing base, distribution in the country is still a challenge complicated by geography and outdated infrastructure. This section focuses on China’s geographic features, political divisions and demographics.
China covers roughly 9.7 million square kilometers making it slightly larger than the US. Superimposing maps of the two countries demonstrates some interesting similarities. Beijing and New York are roughly on the same latitude, as are other major cities like Shanghai and Atlanta. However, a topographical map shows huge differences. The geographical features change from west to east in three steps in China. While the US has both east and west coasts, the west of China is filled with mountains, plateaus and deserts. Mid-China is full of valleys, rivers and meadows. Fertile soil is mainly concentrated in the east. “Transportation between East and West China is like playing squash, while in the US it is like golfing.”10 In China, only one third of the land area is flat. As such, distribution in China must be adapted to suit the needs of different regions. For instance, in the case of Urumuqi, large shipment sizes (enough to cover demands for a few months) during the summer are necessary as most roads into the region are usually covered by snow and impassable during the winter.
In the US, the long coastline gives western cities wide access to the sea and blesses them with oceanic weather. In contrast, the west of China abuts the Mid-Asia Mountains and Plateaus. This region alternates between the dry monsoon and the cold Siberian winter. Annual rainfall along the Mongolian border is below one inch, while areas along the southeast coast like Guangdong and Zhejiang receive over 75 inches. Under Deng Xiao Ping’s policies, the east has developed over time into a relatively rich region with a strong agriculture base and ports to support international trade, while the west has continued to struggle with poverty and unemployment. Hence there is a wide discrepancy between the prosperous east and the poor west in the goods transported.
After years of relative neglect, China’s environment has improved over the last decade. Energy per capita use in 1997 was equivalent to 903.3 kg of oil.11 Per capita electricity use was 701 kwhs.12 In the past decade CO2 emissions have dropped, and the water quality has improved. However, the cost of development in China is still higher than in other countries larger than 7million km2. “Something you can do with USD$1 in common situation and other places of this world will cost you USD$1.5 in China”.13
As a result of its geographic characteristics, logistics in China is a huge operational challenge. Matching loads is difficult and vehicles often face an empty backhaul. Most containerized goods move east to west, logged wood from northeast to southeast, and coal, oil and minerals from west to east. For example, a multi-national corporation in the food industry explored the possibility of selling its premium brand ice cream in Xinjiang in the summer. While a normal truck would cost around Rmb9 ($1.10) per ton per km, even at a premium charge of Rmb12 ($1.46), few truckers would undertake this long journey. There is little produce that requires a refrigerated truck for the return journey from Xinjiang. An integrated logistics service provider with large-scale operations should be in a better position to exploit these imbalances.
Figure 1 China's Political Division (source: Economist14)
Figure 2 GDP Per Capita in China
(Data Source: China Economic Information Center http://ce.cei.gov.cn/)
China is a country of multiple, separate, self-reliant provinces. The majority of the 31 provinces deem self-reliance as the engine of prosperity, a legacy of the post-1949 Maoist doctrine. Consequently, local governments have created redundant, but often incompatible industrial, economic and political infrastructures; overcapacity in manufacturing and distribution; minimal synergies among provinces; complex and inefficient bureaucracies; and a highly unproductive emphasis on local protectionism. For example, most Chinese wholesalers and distributors sell only in their regions. Informal provincial barriers and protectionism can prevent local companies based in one province from operating in another. As a consequence, the thousands of trucking companies and hundreds of wholesalers make logistics coordination very difficult.
Trucks licensed in Beijing, for example, can operate in any province of China, but must wait until midnight to make deliveries in Shanghai. Local governments and different local administrations establish multiple toll collections. Besides highway toll stations, the local management also collects other fees under different titles. The transportation time and cost from the north to the south are amplified by frequent tolls and fee collections.
China’s local governments hold great power compared to their US peers and so the lack of a coherent coordination logistics policy is likely to persist.