China Logistics

Special Challenges 5.1 Policy

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5 Special Challenges

5.1 Policy

Policy has always played an important role in the development of logistics. Before 2001 foreign investment was highly regulated in the field of transportation, DC setup, brokerage, courier delivery, etc. China's accession to the WTO will also bring a decisive change to the regulatory regime on foreign investment in this sector. In freight forwarding, majority ownership in joint ventures will be allowed one year after accession, while wholly foreign-owned subsidiaries will be allowed within four years of accession. Foreign companies will no longer be restricted to international freight forwarding activities. In most logistics sub-sectors, including storage and warehousing, express delivery and ground transportation, majority-owned joint ventures will be allowed one to two years after accession, while wholly-owned enterprises will be allowed in three to six years. Railways will be gradually deregulated in the next six years.
Retail and chain stores constitute an important segment in the opening of the distribution sector. In China foreign companies will gradually be allowed to hold a controlling share in Sino-foreign joint-venture retail enterprises. China will open all provincial capitals to foreign investment, and remove geographical, quantitative, equity and incorporation restrictions. By the year 2005, the only foreign majority ownership restrictions will affect department stores with a floor area of over 20,000 sqm and chain stores with more than 30 outlets. Based on these commitments, foreign chain-store operators will be able to develop on a larger scale. In fact Wal-Mart opened its Beijing Mart immediately following China’s entry into WTO and intends to open 10 additional markets the next two years.
On June 20, 2002 the Ministry of Foreign Trade and Economic Cooperation (MOFTEC) announced “Notification of Setup of Foreign Investment Logistics Enterprises (FILEs)”, identifying eight regions selected to enjoy more favorable and flexible logistics policy for MNCs. The eight regions are Juangsu, Zhejiang, Guangdong, Beijing, Tianjin, Shanghai and Shenzhen. The new FILEs must have a registered capital no less than 5 million US dollars and less than 50% foreign ownership. FILEs are allowed to engage in an integrated logistics services combining transportation, warehousing, valued-added processes, import & and export, etc. The permitted activity includes international logistics and third party logistics.

5.2 Geography

In the west of China, drivers must be cautious to navigate the steep-slopes around the mountains. The terrain restricts vehicles to speeds of 10 miles/hour for long periods. Only very skilled drivers can ship bulky products in this way. In fact, drivers from the east often employ local drivers to help them over the mountain roads.

In the north, the main challenge is the very cold winter. Currently there are two routes to this region: one is by land from Beijing by truck or -- a distance of more than 1000 kilometers; the other is by ferry from the Bohai Gulf overnight from Yantai on the Shandong Peninsula to Dalin and then by truck. For many commodities, the hot sales season is just before the Spring Festival. During this period, both routes operate at capacity and producers are hard pressed to deliver products to the region at this peak period. Rail delivery usually takes one or two weeks to this region because of frequent interlining, and the thick-snow and ice in road slows truck travel to tortoise pace. Ferry delivery, storm is subject to the volatile winter weather around the gulf and ferry capacity is limited.
A famous beer manufacturer in China typically relies on rail, getting its products to the northeast region in 5 or 6 train components of 300 tons per shipment. During the peak Spring Festival, all products are immediately shipped out once they reach the end of production line. Sometimes the manufacturer resorts to ferry and truck delivery.

5.3 Transportation

The development of road infrastructure had promoted the development of private fleets. Even state-owned transportation corporations have sold vehicles to individuals in response to market pressures. As a consequence, transportation brokerage has evolved. The intermediaries play an important role in the domestic transportation market. They are in charge of market development, shipping schedules, shipment consolidation, just like freight forwarding companies, but generally on a very small scale. The drivers find backhauls on their own because most brokerages are local and do not have access to loads at the destination unless they have partners there.
To make a living, drivers accept loads far in excess of the truck’s capacity. The annual fees local transportation bureau levy for a truck are based on the registered capacity of the engine, not the weight of the loads it hauls. Similarly, local tolls, which can account for 15%~25% or even 30% of total transportation cost are based on rated engine capacity. It is common for 20 ton trucks to haul more than 30 or even 40 tons. Over-loading the vehicle can reduce these charges, but sometimes leads to penalties or fines. This makes rating a challenging business.

Over the road the Ministry of Communication administers transportation, while the Ministry of Railway administers the railroads. This sometimes leads to a painful absence of coordination and integration. For example, the dimensions of road containers are not compatible with those for railways. Consequently container-on-flatcar intermodal operations are not available in China. Road containers are compatible with ocean containers.

Unlike the US, a tractor and its trailer are licensed as a unit in China and so cannot be operated independently. The MOC is currently exploring the situation.

5.4 Distribution Management

The transportation and logistics sector has historically been under the control of state monopolies and its liberalization will be a complex process as it involves the coordination of inter-modal transport both at the provincial and national level. The fact that various logistics sub-sectors are under the control of many different government bodies does not facilitate the transition. At present, there is little integration in the provision of logistics services in China. Most companies participate in one or a few of the sub-sectors, rather than provide truly integrated services.
The Chinese government encourages and supports logistics services and commodity distribution in order to speed the reform and modernization of the logistics industry. The policy for opening the distribution sector to the outside world encourages and even requires foreign investors to invest in logistics and distribution facilities. Some corporations have already established their own distribution centers that offer value-added services. For example, Japan's Mitsubishi has built an integrated distribution center in Guangdong. Situated close to Hong Kong and well-served by the Beijing-Guangzhou and Beijing-Kowloon railways as well as a number of newly-built superhighways, this center is ideally located to support inter-regional distribution.
Some foreign corporations have also built their own fleets of trucks. Perhaps the best example is McDonald's. The company delivers buns, meat and other foodstuffs to warehouses throughout China everyday and has established its own transportation company to ensure timely deliveries.
Congestion in urban streets cannot be overlooked. Although urban transportation infrastructure has developed rapidly, neither urban road construction nor traffic control are able to keep pace with the growth in traffic volume. Today, traffic congestion is a major bottleneck for urban delivery in big cities like Beijing, Shanghai, Guangzhou and Shenyang. To overcome this problem, some foreign corporations use bicycles to deliver goods. For example, Coca-Cola employs hundreds of "neighborhood committee" members to make deliveries on pushcarts and bicycles to areas not easily accessible by motor vehicles due to traffic congestion. These flexible distribution methods have proved to be immensely successful.

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