Asia Logistics Wrap

M&A Trends in China Logistics Sector

As is happening in Japan, a nexus of competitive pressures, shortage of quality people, government deregulation and rise in fuel prices is forcing an acceleration in consolidation for the logistics industry in China. I have highlighted this phenomenon before with the examples of FedEx and Yellow-Roadway (YRC). Recently, more details were revealed via FTB Asia and their reporter Turloch Mooney in Shanghai. 

He summarizes 2005 as a year when "China's logistics industry underwent significant development," with the country seeing "a large amount of investment and M&A activity among Chinese and foreign logistics enterprises; further expansion of the 3PL and express sectors, and continuing development of transport infrastructure." This is in line with the FedEx article and also the several development reports in my post highlighting East Asia infrastructure funding.

Just to summarize the article's numbers:

- Estimated logistics spend in 2005 grew to an estimated $360bn.
- Estimated annual growth is 10%.
- Expected market value in 2010 is $500bn.
- Expenditure on goods flow in China approximately 30% of a product's total cost.
- Total logistics expenditure is 21% of China's GDP (double the average in developed countries).

Growth is expected to be driven by supply chain efficiencies, which should lower prices and thus drive greater demand for outsourced distribution.

""Demand for logistics services will continue to grow quickly over next year, while total expenditure on logistics should remain stable as the added value of the industry rises," said Ou Xingqian, vice-minister of the National Development and Reform Commission, at a recent logistics event in Shanghai."

M&A Activity Overview

According to the Latitude Capital report quoted by Mr. Mooney, M&A activity basically took three forms in 2005:

1. Mid-sized transactions involving joint-ventures with leading Chinese logistics players
2. Business partner buy-outs
3. Acquisition of industry expertise to gain market share

As an example, the article describes two of the biggest deals in the port and container shipping sector:

- a 57% stake of Hong Kong Asia Container Terminals by PSA for $385m
- the purchase of a 45% stake in Nantong Port Group by Hong Kong's Paul Y-ITC Construction Group for U$53.6m

In terms of inland deals, the major transactions included the YRC deal I linked above.

As for 2006, consolidation is expected to continue. As the report indicates, the logistics industry is highly fragmented "with an estimated 2.5m trucking companies, 7,000 barge companies and 2,000 major freight forwarders in China's private sector." In addition, deregulation drives "the opening of more key transportation sectors to foreign ownership" while competitive pressures force "the gradual exit of mid-sized players from the market."

The 3PL Market Transactions

In 2005, the article touches on some specific 3PL deals illustrating that, "as well as dedicated logistics providers, shipping lines also continued their expansion in the sector with the establishment of new 3PL offices and companies in the country."

The deals and their details include:

- Hanjin: "South Korea's largest shipping company, in September it opened a dedicated 3PL subsidiary in Shanghai. With a capital outlay of $5m, the company will initially provide storage, shipping and overland and air delivery from China and the US."

- Cosco Logistics: "This domestic company took a big step in its 3PL ambitions in November, with the announcement of a planned JV with TNT. The 50-50 JV, which has yet to be named, will begin operating next year, and initially combine Cosco's home appliance logistics business in China with TNT's bulk commodities handling business in Australia."

Mooney quotes Cosco's Captain Wei Jiafu as explainsing that the impetus behind this deal is to "transform Cosco from a port-to-port carrier, which offers little value added, to a more profitable door-to-door logistics provider."

3PL Market Analysis

Mooney reports that with the 3PL market "currently valued at some $12bn a year, it is expected to remain the fastest-growing logistics sector in China, with growth estimates ranging up to 25% a year."

Furthermore, "a mid-year report on the 3PL sector in China from McKinsey said much of the growth in the sector would come from serving the automotive, electronics, FMCG and pharmaceuticals industries." Readers can access one of McKinsey's older reports on the China logistics sector for comparison of past trends here.

Mooney goes on to quote heavily from "Evan Auyang, a senior consultant with McKinsey and one of the report's authors." He stated in an interview "that bi-level shortcomings in the sector would be partly addressed over the coming years by consolidations, mergers and acquisitions. Domestic players, such as Sinotrans and Cosco, are cost-competitive and have strong transport networks. But they generally lack sophisticated industry knowledge, IT platforms and the 'service mindset' demanded by multi-nationals." On the other hand, "international 3PLs may have the technical know-how, but they lack the on-the-ground transport networks, political contacts and are not cost-competitive."

Express Market Noticeables

The express delivery market experienced growing competition leading to "approval of reforms by the State Council, China's State Postal Bureau (China Post), advancing with its scheme to merge its two sub-businesses: the express mail service (EMS) and China Post Logistics Co. The Bureau is being restructured into a regulator that will supervise the sector and set rules, while a separate China Post Group is being set up to run the various postal services, including the mail service, express deliveries and logistics."

Interestingly, these actions come in parallel with Japan's efforts to privatize Japan Post (Financial Times coverage-subscription required), dividing it into four sub-businesses. I will have the opportunity to visit a Japan Post logistics center in May and will report on that first-hand experience at this site. I guarantee that China is following trends in Japan when benchmarking what to do with its own state-run entities.   

To put my previous post on air cargo hubs in further perspective, Mooney reports in this article that:

"...the Shanghai Airport Group tied up with UPS to develop an air cargo hub at Shanghai's Pudong International airport. Set to open in January 2007, the project will have the capacity to handle 200,000 tons a year and contain sorting and handling facilities for express and cargo shipments, as well as provide ramp-handling operations. UPS also said it would launch its first package delivery service in China, offering next-day deliveries between 23 Chinese metropolitan areas."

Consider this in the context of UPS's competitors, as also mentioned in my air cargo hub post:

"Rival integrator FedEx said it would sign a long-anticipated agreement to build a cargo hub at Guangzhou's Baiyun airport in southern China. This project is expected to be operational by 2008, pending approval by the State Council."

Logistics: The Physical Architecture

In regards to infrastructure developments in East Asia, especially China, please again refer to my post on "Broad Applications of Supply Chain Logistics," which highlights a few development reports via the United Nations and the Asia Development Bank.

Mooney reflects on 2005 by saying that infrastructure in China "saw continuing investment in and expansion of the country's transport and distribution infrastructure. With the cost of employing warehouse workers in China less than a seventh of that in the US and Europe, there was a rush to build distribution centres as large foreign retailers sought to do more of their sorting and palleting activity in China."

The article then touches on Yangshan Port, at which "four new berths are scheduled to be completed in 2006 which will raise annual capacity to 5.5m teu. By 2020, 50 berths are expected to be handling some 20m teu a year."

With regards to roads, "highway infrastructure also expanded in accordance with plans for the country to have a total road network of 3 million km by 2020, with 85,000km of highway and 650,000km of second grade and highroads."

A specific example is provided in regards to the more dilapidated north-east sector of China, which has suffered over previous years due to capital flight to other areas of China:

"Ambitious road network development plans were laid down for the coming five years. In the north-east, for instance, total highway mileage is to double from 2,590km to 5,560km over the next half-decade.

"Planned new expressways will link to the rail and water transport networks through transport hubs with logistics centres and container forwarding stations in Dalian, Shenyang, Changchun and Harbin.

"On the rail front, plans were announced to expand investment in the network to somewhere between $25-37bn a year, as opposed to 25% of that currently."

The map to the left shows the north-east sector of China and the cities named above, which border both the remote regions of Siberian Russia, Mongolia and North Korea. Although investment in this region lags the eastern coast, base-level infrastructure investment there will be significant in launching long-term initiatives that further ensure better leverage on issues with North Korea--particularly, creating new and reliable economic flows with the Korean Peninsula.

Inland Distribution Overview

As is well-known amongst those operating in China, the inland region of the country lags far behind the coasts. I have commented on this situation in other posts, and I emphasize again here the role of supply chain logistics in extending "connectivity" to China's "Gap." Mooney illustrates in summary the current stage of progress:

"A combination of incentives through government regional development initiatives (political flows), moves to modernize the country's highly fragmented trucking sector (economic flows) and rising disposable incomes in inland towns and cities (economic flows), resulted in significant developments in the country's inland distribution sector over the year.

"One of the biggest came towards the end of the year when Netherlands based TNT said it was in advanced negotiations to acquire Heilongjiang based Hoau Logistics Group. With more than 1,100 hubs and depots covering all major and second-tier cities with a fleet of over 3,000 trucks and 12,000 employees, the deal will see a major expansion of TNT's China distribution network. (See the map to find Heilongjiang Province (Harbin)--like the USA, if you have never been to China, it is hard to get a sense of locations without a regional map). Eventually, TNT plans to link this network into its Asia Road Network, which will connect China with Vietnam, Thailand, Malaysia and Singapore by 2007." (See again the development reports in this post for how improving Chinese infrastructure positively influences the physical architecture of supply chains in neighboring countries).

Retail Sector Leads the Charge

For those who are familiar with my series commenting on the Supply Chain Brain article discussing "challenges in China logistics," you will have likely read the article's section on the retail industries efforts in inland China. As Mooney also comments on this phenomenon by saying:

"Inland distribution is expected to remain a priority for many logistics companies during 2006 as the liberalization of China's retailing, wholesaling and distribution laws results in consumer goods and retail companies in China expanding operations outside the wealthier first-tier cities.

"At present, the big Chinese retailers are leading the charge inland and snapping-up sites across the country. Companies such as Suguo (supermarkets), Gome and Suning (electronic appliances) and Shanghai Bailian (supermarkets) are rolling out their retail formats. Foreign chains are expected to follow."

COMMENTARY: If you are solely domestic logistics player in this environment, like the firm I work for in Japan, you want to position yourself in one of three ways:

1. The #1 player in a logistics niche
2. An ideal partner for foreign/domestic logistics firms seeking market entry opportunities or strengthening of existing services via differentiation or diversification
3. An ideal acquisition for foreign/domestic logistics firms seeking market entry opportunities or strengthening of existing services via differentiation or diversification

What you are trying to avoid is bankruptcy, and building resilience in this type of business environment starts with people power. Unfortunately, good people are hard to come by in the logistics industries of Asia--thus there is a great demand for imported knowledge and expertise here in Japan as well as in China.

Military Supply Chain Logistics: Insight from Iraq (UPDATED)

In a conflict/post-conflict environment like Iraq, many of the dynamics I explored in my post on "the role of supply chain logistics in shrinking the Gap" are in full force. These dynamics can be framed within the FAR matrix that I have introduced at this site, and thus allows me to expand on the "security flow architectures" portion of that visual aid.

On April 14, Brigadier General Rebecca Halstead, commander of the 3rd Corps Support Command, provided an operational update from Iraq within Logistical Support Area Anaconda in Balad, Iraq. This brief is great because it presents examples of each architecture that Joseph Cavinato lays out as essential in high performance supply chains.  Keep the picture graphic to the left for reference.

You might ask "How does Iraq connect to the logistics scene of East Asia?" Well, during the recent Tokyo meeting of the CSCMP (Council of Supply Chain Management Professionals) on March 24, I spoke with a Commander in the US Navy (General Counsel) who described how frequently the Yokosuka base supplies operations in Afghanistan and Iraq and in general the Middle East (CENTCOM area of operations). This includes people as well as equipment. Also, as General Halstead points out in her brief, US military operations in South Korea also are part of the supply chains supporting CENTCOM operations. These are very extended supply chains.

First, General Halstead discusses the complexity of the military's physical architecture. I have posted on the importance of people power in logistics, where people are the most important aspect of the physical architecture of any supply chain. In case of the military, General Halstead's brief explains that the focus is the same:

"Let me begin by telling you, first and foremost, about our most important and valued resource, the centerpiece of our organization: our brave men and women who proudly and expertly serve in the 3rd Corps Support Command.

"We come from all 50 states and from Guam, American Samoa and Puerto Rico.  And some of our units deployed to Iraq from -- excuse me -- from Korea and Germany. We also have an augmentation of over 5,000 civilian contractors, which we consider our ninth brigade in the command.

"Just as diversity is our nation's strength, I really believe it's the strength of the 3rd Corps Support Command as well.  My number-one priority will always be on the people, our soldiers and leaders and civilians and their families.  Our men and women are on point for our nation.  They are America's sons and daughters.  They're willing to live for our nation by serving.  They're trained and disciplined. They're competent and confident.  And they are the ones who accomplish the mission every single day.

Describing some more of the physical architecture:

"Our mission is critical to the success of the Multinational Corps (the customer).  Quite simply, our main effort is the receipt, storage, issue, transportation, security and distribution of logistics required to support the major commands (the customer) across the entire area of operations.

"Now, on a daily basis, what that means is, we move over 120 combat logistics patrols.  That is, on average, over 17,000 trucks a  week.  We produce over 7 million gallons of bulk water a day.  We distribute over 1 million gallons of fuel, over 9 million short tons of ammunition and over 80,000 cases of water.  That's a day."

Jumping to innovational architectures, General Halstead illustrates how her group provides value-added activities to the supply chain:

"Now, I am pleased to report, however, that we have just begun production of water at our second water bottling plant in Iraq. This enables us to reduce the number of trucks and drivers that we put on our road every day.  We also prepare over 500 pallets of supplies that are flown each day.  Again, this keeps us from having to put additional trucks and personnel on the road."

And of course, we also have relational architectures in action to raise supply chain performance even further:

"We execute our logistics mission in concert with many other organizations, like our partners in the Air Force, who support us with a variety of aircraft to help us maximize the air movement and minimize the ground movement. In the month of March, for instance, we reached an all-time goal of moving over 16,000 pallets by air.  We also have a partner brigade from the Army Materiel Command, largely made of civilians.  They provide critical services in the areas of maintenance, armoring vehicles and also for fielding of new equipment.  That's just to name a few. None of us operate solely independently.  Our success is clearly a team sport."

Within the security flows driven by Multinational Forces, the Iraqi supply chain architectures are being built and cultivated in parallel. Ideally, the resulting dynamic will be two parallel sets of supply chains that can be interchangeable at designated levels. First, as illustrated above, it is important to establish the people portion of the supply chain for Iraqi forces. That is in full force and completely interchangeable at around 35%. Another portion of about 35% is in development and the remaining 30% of security flows must be maintained solely by Multinational Forces. General Halstead illustrates the effort behind standing up this critical, people portion:

"Another aspect of our mission is to support and train the Iraqi security force.  As you would imagine, there are different levels of logistics units in the Iraqi army, just as we have in our own forces. So in the 3rd COSCOM, our mission is to partner with the Iraqi army's motorized transportation regiments.  We call those MTRs.  We also provide technical support and assistance to the Iraqi army national depot and the regional support units.  They provide maintenance and supply support.

"The Iraqi army is organized into 10 divisions, and there will be nine MTRs.  The Iraqi Mechanized Division does not require an MTR.  As of today, the 3rd COSCOM partners with three MTRs, and we will receive our fourth MTR by the end of the month, and we will partner with a total of eight by the end of 2006.  The British will partner with the ninth MTR. Our goal is to bring them to a higher level of readiness in preparation for them being assigned to their Iraqi army division.

"For the national depot and the regional support units, our focus is mainly on training them on warehousing operations, assisting them with the development of their logistics concepts for their support systems, like ordering parts and supplies, prioritizing their work and their maintenance and coordinating the distribution to support their army units and sustain their readiness."

As for the non-people, physical architectures like the national depot discussed above, it comes into play at this segment of the brief:

"...in terms of equipping, as you know, MNSTC-I is the command and agency that does all the equipping for the forces, and they're still in the process of equipping units.  And we're seeing some great progress in that.   We assist at Taji National Depot to help move equipment to units. And we've moved in the last several months over a thousand pieces of equipment -- and I see "we" -- we have helped the Iraqis move this themselves.  We have not moved anything personally.  It's just helping them in their system and in their process." 

Next, General Halstead illustrates how the airborne physical architectures are integrated into an intermodal dynamic:

"The way the air piece works is, as you identify a requirement to move things by air, the Air Force is really good at planning then sorties for us.  So we give them (via informational architectures) what we anticipate that we can move by air pallets and have ready for them.  And our goal is that no aircraft, no vehicle, no truck moves around empty, because, you know, we want to maximize both the ground and the air.

"Deciding what goes in the air is -- there are many factors.  As a logistician, we look at weight.  We look at the urgency that the supply is needed, how long -- you know, there are airfields that have to receive it, so you're looking at point of departure, point of arrival, the type of aircraft available.  So there's a lot of factors in there.  And that's why it's hard to maximize sometimes, because there are many different airfields, many different types of aircraft, and there's a lot of different ways to build your pallets."

Regarding a question on how improvised explosive devices (IEDs) hamper supply chain operations, General Halstead hints at the additional informational architecture on hand to deliver supply chain intelligence:

"And I think the last piece was, with the movement that we do have on the ground and the combat that we experience with IEDs and this  sort of thing, how are we doing out on the roads is the way I would sum it up. I would like to tell you that -- and I can tell you -- that in the 3rd COSCOM we're doing really, really well. But I think if you remember in my opening statement, none of this happens alone.  We don't operate in isolation.  We get wonderful analysis and assessment from our intel folks on what is the threat out on the road.  We travel in other maneuver commanders' terrain, and so it's an absolute important need to communicate with them as we travel, to get the latest information.  If there's been an IED, we stop a logistics patrol from going into the same area till the area is cleared."   

The effectiveness of this informational architecture delivers high performance results:

"And so in terms of casualties -- that was another part of your question -- I would just like to tell you that we had a soldier killed on 26 October to enemy -- and that's the last soldier that we have had killed to enemy fire.  So you might say with an organization of 20,000, that's a great statistic.  But what I would tell you, to that soldier's family that's 100 percent.  So I think it's better that we don't talk in those terms or numbers, because every single soldier matters."   

This supply chain is illustrated nicely here in the simplest of terms:

"And when we go out on the roads, every vehicle is looked at as a system--the team that's in the vehicle, the armor they're wearing, the armor they're riding in, the intel they've been given, the communications they're talking on--and that's a system that's moving down the road." 

As for establishing a parallel Iraqi force supply chain, General Halstead comments on the number one challenge:

"One of the challenges is parts.  It's not maintenance.  I have never seen such a capability of people to fix.  I told them I'm going to bring my Jeep over here so they can fix it.  I mean, it's amazing.  They can take something that you would not even believe would ever roll again and completely fix the vehicle.  I often tease that I understand that concept, however, because I fly around Iraq a lot, and when I look out, you know, it can be miles and miles and miles and you'll see a shepherd -- that has a truck out there, by the way.  And you just go, there is no Jiffy Lube, there is no gas station, but that truck is running around out there in the terrain. So they have great skill sets for fixing.

"But it is the parts that become an issue because there are different fleets of vehicles, and then moving those parts around.  And I think that may be the greatest challenge."

Here again we see the importance of the Taji National Depot--a supply chain node--to the complete supply chain dynamic:

"Once the parts are ordered and come into regional support units to the Taji National Depot, then getting them out to the sites where the national maintenance contract teams are--I think that's going to be one of their biggest challenges.  And what they're trying to come to grips with is they have a concept to prove--and I applaud them for this--the MOD has approved the concept, and now they're trying to really put some meat on how they're going to do--is it going to be civilian contracted in some areas?  Is it going to be all military in some areas?  And as that starts to mesh, we're helping them to understand and develop systems to do that."

Above you can see how an assessment of supply chain security determines the choice of architectural components--military or civilian transport systems? The steps and rule-sets involved in the transition from a military-level security to civilian-level security (public police and private security organizations) would be highly aided by an "enterprise resilience management" system as described for the FAR matrix.

In response to the question below, General Halstead comments on how the use of 3PLs (third-party logistics providers) reduces the military, physical architecture employed. In this case, the financial architecture available to deploy/manage cash becomes important for establishing this 3PL arm:

"Donna Miles, American Forces Press Service: I'm curious.  You talk -- at the end of this effort, you'll have about 3,000 support troops -- I believe that's what I heard you say -- and I'm curious -- in light of a 250,000-member force, that seems like a very small logistics piece to support that.  Will that be able to sustain?

"GEN. HALSTEAD:  Okay.  A very -- 20,000 seems like a very small number to -- considering the 250,000 of the force that's over here. Well -- and I would just tell you that although it's a logistics command, one entire brigade of the eight brigades provides security on our routes.  They do escort security of the combat logistics patrols.

"I think probably one of the reasons why it sounds a little small to you would be because we really have learned the value added of leveraging contracts in our civilian workforce.  And as I'm sure you know, for instance, we put money back into the economy over here by using, for instance, the Iraqi truck company.  They--it's their drivers, their trucks, and they--you know, they provide some of the movement of logistics, and that's a great news story.  It allows us to have a smaller footprint."

General Halstead clarifies this dynamic further after the question was reiterated:

"...I would not want to give the impression that they're the only Iraqi logistics forces.  When I mentioned in my opening statement that there are different levels of logistics units in the Iraqi army, just like there are in our forces, there are what they--they have what they call HSC companies, headquarter supply companies.  And there are almost a hundred of those companies.  They're out with the maneuver brigades. So the partnership in the division goes down to the brigade and battalion level.  So there are many other logistics units out there that are being trained and partnered by coalition forces.  In the 3rd COSCOM, our focus is on the -- are on the MTRs.  So there are many, many more logisticians and log units out there in support of that very large ISF, Iraqi security force."

As can be seen from this briefing, the complexity in military logistics is enormous. Although the informational architecture wasn't fully explored in terms of specifics, such as IT networks, communications tools, and equipment procurement, I can only assume this is extremely sophisticated given the details General Halstead provided above.

However, given that logistics aren't often considered a flashy or sexy topic of conversation, the civilian population likely hears very little, if anything at all, about these operations. But if your goal is "shrinking the Gap" in an environment like Iraq and elsewhere, in the midst of a conflict/post-conflict or post-disaster scenario, military logistics truly make the "world-go-round" until supply chains for the civilian infrastructure--across the four flows of economics, politics, security and people--can be sustained in parallel and in-sync.

UPDATE: Vets for Freedom blog has an update on another logistics center in Iraq. Please visit for the details!        

The China Logistics Frontier: Wrap-Up

Although any readers with a particular interest in China will have already likely finished reading the Supply Chain Brain article I have discussed as a short series, I am going to wrap-up the last portion of the article as a way to catalogue it for future reference. With many online magazines, there is always the possibility an article will eventually be removed, resulting in a "dead link." By bringing the key points of such articles to this site and then cataloging those points under one link such as "China logistics" provides a convenience not only to myself but also to, I hope, my current and future readers.

I will skip the discussion of the retail industry and move right into the "advice" portion of the article. Again, I suggest readers to consider how these recommendations in navigating the supply chain logistics environment of China relates to existing supply chain architectures as framed in the FAR matrix, which is applicable at micro- and macro-levels. For example, a micro-level architecture for economic flows could be one distribution center. A macro-level architecture for economic flows could be an entire transnational network of distribution centers. The framing process is the same for either scenario.

The article first concludes with the following comments: 

"Logistics costs in China can be 25 to 30 percent of overall product costs. According to Robert Spira, a transportation lawyer with Benesch, Friedlander, Coplan & Arnoff LLP in Cleveland, which advises companies on Chinese business and logistics issues, overall logistics costs in China are 19 percent of gross domestic product, compared to just 7 percent in the U.S."

""The inefficient logistics system is a function of geographic barriers in China that can make the movement of goods difficult,” says Spira. “The system is a victim of political barriers created by multiple bureaucracies. The result is a highly fragmented, underdeveloped logistics industry where inefficiency is the norm rather than exception.""

For example:

"Moving goods from Chungking, China’s main manufacturing city in the west, 3,000 kilometers east to a port city such as Shanghai, can take four days by truck or 10 days by rail. The government is devoting enormous resources to building highways, as well as rail and inland waterways."

Obviously, that is not stopping anyone since "no one doubts the eventual rewards for those companies that persevere. "Today, China is the factory for the world," says Nippon Express’s Uchidate. "We all know that tomorrow China will be the biggest market in the world, so we must be there ready to compete.""

Next the article lists what it sees as the primary challenges in China. I am listing them here in whole for the convenience of readers and future reference.

10 Key Challenges for the Chinese Logistics Industry

1. Poor infrastructure: One of the key challenges facing the Chinese logistics industry is the state of the country’s transport infrastructure. At present, despite some large-scale projects, companies in the region complain of insufficient integration of transport networks, IT, warehousing and distribution facilities. Outside of the main economic centers, the logistics sector tends to be of low quality, highly inefficient and with little technological competence.

2. Regulation: Although it is slowly opening up to outside competition, the Chinese transportation and logistics market is one of the most highly regulated in the world. Regulation exists at a number of different tiers, imposed by national, regional and local authorities. Regulations often differ from city to city, hindering the creation of national networks.

3. Bureaucracy & Culture: Getting the go-ahead for any logistics project still relies heavily on the strength of contacts within Chinese bureaucracy. There are still high levels of “cronyism” which require companies to build links with members of the Chinese Communist Party at various levels. Many western companies also find it difficult to repatriate profits generated in the country.

4. Poor training: Training in both the 3PL sector and the manufacturing and retailing sectors is very weak both at a practical level, such as IT, driving and warehousing, as well as at a higher strategic level. Many do not realize the benefits of best practices in logistics and are not interested in outsourcing or supply chain management techniques. This has been compounded by the failure of the government and other regulatory authorities to promote logistics programs.

5. Information and communications technology: Outside of the main logistics centers, information and communications technology and infrastructure is unreliable. There is a lack of IT standards and poor systems integration and equipment. At a very basic level, the consistent supply of energy is also problematic leading to interruptions in communications.

6. Undeveloped domestic industry: The Chinese logistics sector is fragmented and dominated by commoditized and low quality transport and warehousing, providing little base on which to build a modern industry. This also makes it difficult to meet the growing supply chain demands for industrial and commercial enterprises.

7. High transport costs: Some estimates put the cost of transporting goods in China at up to 50 percent more than in developed regions such as Japan, Europe and North America. These costs are increased by high tolls on roads. Logistics costs (including warehousing, distribution, inventory holding, order processing, etc.) are estimated to be two to three times the norm and in excess of 20 percent.

8. Poor warehousing and storage: Poor facilities and management are to blame for high levels of loss, damage and deterioration of stock, especially in the perishables sector. For instance, it is estimated that 30 percent of China’s fruit and vegetable harvest is damaged every year by the inability to store and move it appropriately, costing $1bn for this sector alone. Part of the problem is insufficient specialist equipment, i.e. proper refrigerated storage and containers, but it is also partly down to lack of training.

9. Regional imbalance: China’s economy is characterized by wide variances in levels of economic activity and development. This is problematic in terms of distribution as there is a major imbalance of goods flows from the developed east of the country to the more undeveloped west. This has resulted in difficulties in finding backloads, leading to higher costs for Chinese haulage companies which are then passed on to their clients. Internationally these imbalances also exist between China and the rest of the world, leading to difficulties in re-positioning empty containers.

10. Domestic trade barriers: Although China’s accession to the WTO has lowered trade barriers such as tariffs and quotas for international shipments, there are still problems related to moving goods around China itself. Goods can be subject to unofficial border tolls when moving between provinces. This is particularly evident when shipping from an inland manufacturing location to a port city or vice versa.

A future post will comment on an article regarding China's M&A activity in the logistics sector. Some additional, excellent insight into doing business in China can be found at the Asia Business Intelligence blog. Specifically, here is a post on the China business environment, with additional links to previous posts on the subject.

Direct Response to Comments on Steve DeAngelis' TCS Daily Article (UPDATED)

I have mentioned Steve's article before with this post. But I think most of the commenters do not give the article a fair treatment. I posted my own comment there, and will repeat the post below:

Some of the comments above approach this article too narrowly:

"Maybe Rumsfeld and our author didn't notice that Iraq still is in the first phase, waiting for the shooting to stop and the streets to be safe."

or are pretty ridiculous:

"You put your finger on it. This article is a roadmap for world domination by corporate militarists. The future Ike predicted continues to spread its tentacles and prosper."

This article's importance is not limited to "outlining an approach to planning for Iraq that should have been." Where many focus only on the mistakes made in Iraq, Mr. DeAngelis and Tom Barnett see in those mistakes opportunities to improve and do something better. They are looking beyond Iraq not just geographically but temporally as well.

However, that attention on the world and extending the reach of globalization is not part of an effort for "world domination" but a sincere effort to see the benefits the developed world often takes for granted within reach of the underdeveloped world, "the Gap." For those that adopt the Marxist critique of the Liberal worldview, this article will seriously be lost on them.

Another commenter writes:

"But finally, the idea of bringing our "best practices" is mired in either 1970s Liberal paternalism (Hubert Humphrey's "Basic Human Needs" legislation) or neocon hubris. I can't tell which until I read their plan."

This is a strange leap to make from this article. The dynamic database of best practices that Mr. DeAngelis describes is not a one-way street--it is a two-way dynamic, shaped in real-time by global performance standards regularly adapted to local requirements. Although the initial database effort will rely on well-known, best practices in the "Functioning Core" and "New Core" (to use Barnett's language), these best practices through DeAngelis' concept would be highly adaptive to new challenges and before-unexperienced adversity on the ground. Thus, a country like Iraq is as likely to export best practices during its conflict/post-conflict/post-disaster phase as it is likely to import "baseline practices." Such a system would wholly exclude any "Core" best practices that were deemed/proven unsuitable for the region of concern--DeAngelis is not suggesting we force pegs into square holes. As he states, "Flexible, spontaneous, boundary-free collaboration -- as exemplified by "Development in a Box" -- is the framework that we need today."

In regards to the general comments about the security situation in Iraq (again a very narrow view of this article), such a system as DeAngelis describes is not ignorant of any security situation at any level of conflict, and indeed it would be highly integrated with military institutional activities at every stage of conflict--from scenario and contingency planning to post-conflict/post disaster stabilization activities. In fact, such a system if ably employed end-to-end could more likely result in a strengthened security dynamic with reduced variation in conflict--rather a steady abatement of conflict. At the same time, such a system can be utilized even mid-conflict, implemented in progressive modules.

This article is the start of a positive dialogue. If we want to shape it with the value of our own experiences, constructive, reasonable, well-thought criticism is absolutely necessary.

UPDATE: This is a little belated, but Mark Safranski at Zenpundit also has made some excellent comments with a different angle than my own:

Most TCS readers are libertarians or conservatives with libertarian leanings who have great affection for free market economics( a position I generally share) but the response of that reader comes from libertarianism's older, darker and reactively purist traditions. Aside from missing the point of the article, being entirely wrong about Steve's motives and daft with the historical analogies, this is not a very constructive political stance for libertarians to take. One they still take all too often, rather than pragmatically influencing the political process ( or the world, in the case of Development in a Box) to move further in the direction of freedom.

Broad Applications of Supply Chain Logistics

Increasingly, my thinking on supply chain logistics is dominated by its broader applications beyond just private sector demands. I believe this is obvious in reading my previous post on "flows, architectures, and resiliency." Thus, my appetite is enormous for information where supply chain logistics is discussed in the context of those political and security considerations that, combined with people and economic considerations, describe the flows of development driven by globalization. The "FAR matrix" in my previous post illustrates this nexus.

One resource I have previously overlooked when studying the role of supply chain logistics in the development of East Asia is The United Nations. Mostly in the news for all that is bad, the UN contains agencies that do much good in terms of collecting and synthesizing regional information for public consumption. It is unfortunate that many of us likely don't realize these valuable resources exist for our benefit. The UN agency highlighted here is:

United Nations Economic and Social Commission for Asia and the Pacific (ESCAP)

I don't know how I ever missed this organization, but there are several reports published and publicly available for download regarding supply chain logistics infrastructure, primarily under the labels of trade and transportation. I encourage readers to browse the site at your own leisure. For your convenience however, I have selected a couple reports that are both fairly current and in line with the mission of this blog in further educating readers on the East Asia region, in addition to driving additional discussion amongst those already familiar with the region like myself.

Another resource in the same vein is the Asia Development Bank (ADB). I have known about the bank in general for a while now, but had not browsed any of their recent projects and related documents. However, the other day I came across an excellent document entitled "Connecting East Asia," and seems to segue nicely into Tom Barnett's "shrinking the Gap through connectivity" discussions. However, the focus of this report is on how infrastructure (including logistics) drives this connectivity to realize the many benefits targeted by ESCAP. 

The reports I want to highlight are all listed below for downloading, which are quite large and comprehensive. They are meant to be digested over time, or browsed for very specific content:

ADB:

Connecting East Asia

ESCAP:

Infrastructure Development and Disaster Management

Regional Ports as Logistics Centres

Shipping and Ports Development in Northeast Asia

Developments in Asia-Pacific Transport 2005

In reading these types of extensive reports, I believe it is important to have specific questions in mind:

1. In what area of supply chain logistics do I want to enhance my knowledge base?
2. How do the contents in these reports affect the both the supply chain architectures in place for my firm and those that need to be built for the future?
3. How do the contents highlight the current areas where my firm's supply chain architectures are insufficient, or non-resilient? What disadvantages and/or advantages exist for improving resiliency in the short- and long-term?

Most firms are naturally focused on the supply chain architectures that support their economic flows of trade. The next priority, or parallel priority, that has strengthened considerably post-9/11 is security. What security flow architectures are needed in parallel with your economic flow architectures? Beyond that, how do the East Asia region's political and people flow architectures negatively or positively affect economics and security? In the end, what are your options for building resiliency in these areas?

Using the FAR matrix to frame your firm's issues in regards to supply chain logistics for a particular region will enhance not only your decision-making, but also your contingency planning. Mistakes made due to over-reliance on reactive management will be reduced due to an increase in proactive management designed to ensure certain mistakes happen only once.

Any suggestions or constructive criticism regarding the use of the FAR matrix tool are highly appreciated. I would like to again emphasize that the three primary components of the matrix are not my own concepts. However, framing the nexus of these three concepts via this matrix is, I believe, wholly unique. My effort is simply aimed at adding power to these concepts above and beyond what they deliver individually.

I look forward to any feedback.

Flows-Architectures-Resiliency Matrix

Since the time I wrote my essay “The Role of Supply Chain Logistics in Shrinking the Gap,” I have felt more and more that there is something in that post that provides a fairly universal approach towards putting all of my other posts on logistics into context. However, that essay was written mid-thought regarding the convergence of Tom Barnett’s ideas and some core supply chain concepts I discovered at Thunderbird via Dr. Cavinato. Later, with another perspective on the essay provided by Steve DeAngelis, CEO of Enterra Solutions, at his Enterprise Resilience Management blog, the role of that essay in terms of my future thinking and writing has reached another level of clarity. This primarily involves the modules of the “Development in a Box” solution-vehicle, described in one essence here, and creating a practical visual for building those modules conceptually.

From my perspective, I believe “Development in a Box” could be a solution-vehicle at any stage of an entity’s development process. I believe both Barnett and DeAngelis feel the same, but the focus of most of their writing is post-conflict/post-disaster scenarios. As Tom Barnett explains with his four flows concept, a particular entity will engage in economic, political, security and people flows at any stage of its development in the process of globalization. In his work, he most often refers to regional and state entities whose flows are influenced by a variety of transnational entities in this process—businesses, NGO’s, government dispatches and deployments, terrorist organizations, amongst many others.

Download Flows_Architectures_Resiliency_Matrix.ppt (one click starts/stops animation)

The above flows-architectures-resiliency (FAR) matrix seeks to explain at its core essence what “Development in a Box” might encompass for a particular scenario—it is in sum the entire matrix of possibilities matching Tom’s four flows to Cavinato’s five architectures and made adaptable and sustainable by Enterra’s ERM framework. Ideally, the overall effect of the entire “Development in a Box” solution transcends the sum of these parts. Personally, I feel ERM frameworks are what primarily drives this possibility of transcendence.

It is safe to assume that the large majority of targeted entities, especially “Gap” entities, will not possess the conditions required to absorb the content modules of an entire “Development in a Box” delivered solution simultaneously given a specific scenario. In this case, customized modules can be delivered via the ERM framework ensuring timing and sequencing capability, degrees of granularity, scalability, connectivity and continuity between and across modules, in addition to ensuring an entire layer of system adaptability and sustainability in the face of advantageous and disadvantageous system perturbations of various criticality. (That was a mouth-full!) The ERM framework would consist of triggers that are “pulled” based on both scenario complexity and scenario hierarchy that signal the necessity for task, process, or strategy level change(s). In this type of matrix, any development solution can be broken down into individual modules, or any combination of individual modules that would then comprise the appropriate solution set.

Of course, depending on the conditions of the regional, state or local entity in question, the appropriate module configuration and granularity in regards to sequencing and timing will vary. Since all entities will be in some stage of development, it becomes necessary for the solution provider to modularize what has already taken place using the above matrix, assign measurements of progress, determine the ongoing sequence and timing, and then establish the ERM framework that will align those modules to an entity’s particular strategy and necessary rule sets that build in the adaptability and sustainability required for the environment in question.

Since I only started this phase of thinking last night, it is still even somewhat abstract for me. Thus, I will put forth an example that is a unquestionably a critical, global issue in the world today: immigration.

Our Hypothetical Client: Japan

Since I am in Japan, and am an immigrant working in Japan, let’s imagine we have been asked by Japan to produce a “Development in a Box” delivered solution on its current immigration scenario. Japan, with a rapidly aging population and long-time restrictive approach to immigration, is foreseeing some major system perturbations over the next 10-20 years.

How can we use the above FAR matrix to define the client’s current development state towards transitioning to a more adaptive and sustainable state? Let’s attempt a very rough application.

Defining first the four flows:

Economic: All transactions involving immigrants that create value; most notably the transaction where the immigrant provides a service (labor) and receives some sort of benefit (cash, etc.). Other transactions include scenarios where the immigrant exchanges cash for a particular service, transfers their cash overseas, or contributes cash to a government entity in the form of taxes/fees. In all of these scenarios, additional value is created by the immigrant’s presence in Japan.

Political:  Laws and regulations that govern the immigrant’s presence in Japan.

Security: The cross-border security mechanisms that ensure that the immigration process runs absent of criminal and violent illegal activity and/or entities.

People: The movement of the immigrants themselves and/or those people involved in managing the immigration process.

Each flow must be then described across the five supply chain architectures. For example, we can take the economic flows and begin to assess the physical architecture involved in managing the flow of cash/benefits involved in any transactions between the immigrant and another economic entities. The most obvious example is a bank system where cash reserves are physically stored. The financial architecture is the set of actual systems and processes in place to manage and govern the flow of cash generated by the immigrant’s presence—these include available investment vehicles, transaction processes, fee requirements for delivering cash overseas, etc. The informational architecture is that which captures, analyzes and manages all data related to an immigrant’s economic presence in Japan—taxes/fees paid, financial statements from employers regarding immigrant labor costs and benefits, etc. The relational architecture is that which enhances the relationship between the immigrant and Japan for the economic benefit of both—immigrant catering economic organizations, scholarships, etc. Lastly, innovational architecture is that which seeks to further enhance the economic value created by the immigrant’s presence in Japan—subsidized language training and assimilation programs that by their nature innovate the immigrant’s presence in Japan.

As can be seen I hope, architectures created for economic flows alone are quite vulnerable to parallel failings in non-integrated architectures designed for political, security and people flows. This is where the ERM framework says “Oh, for that module you are working on, and with the given constraints, these are the best practices catalogued for a matching political flow informational architecture on immigration process management.” How cool would that be? Well, I believe that is what Barnett and DeAngelis are aiming for (although they can correct me on that one of course!). And because such a system can be accessed to reassess immigration at a future date based on modules of updated, global best practices, Japan in this case receives an adaptive, sustainable solution that drives the resiliency it desires.

Ok, this post is way long. Any questions--send them my way!

Air Cargo Hub Strategy in East Asia

The supply chain lines that extend into and from East Asia are fed primarily by transport by sea and air. This is not surprising given that the region is separated from most of the developed world by ocean or fairly difficult overland terrain where efficient and reliable supply chain networks require rail and road infrastructure that: 1) does not yet exist, 2) is too suspect in terms of quality, speed and cost, or 3) stretches across regions difficult to secure at costs competitive with sea and air alternatives.

Since the nodes for sea and air transport lines are ports and airports respectively, it is also no surprise that supply chain professionals managing operations in East Asia will gravitate towards locations with ports and airports in relative proximity. The April edition of Air Cargo World showcases an article by Ian Putzer, who leads off his story "Where to Hub?" by saying:

"The prospect of accessing the explosive Chinese cargo market and tapping into growing intra-Asian freight traffic has operators throughout the world dreaming of air hubs in the Asia-Pacific region. Many carriers are swooning over Shanghai, but others see Seoul as a more viable option. Some carriers are focused on Hong Kong and Guangzhou, while others are still banking on Tokyo."

For a sense of where these hubs are located, I have created the below PowerPoint page highlighting the above mentioned cities:

Download east_asia_supply_chain_hubs.ppt

Positioning a hub in terms of location and timing, as somewhat illustrated in my previous post regarding Caterpillar's hub strategy for China, is obviously critical because it constrains any long-term strategic decisions:

"Carriers and forwarders' decisions in the next several years could play a big part in determining long-term air shipping patterns in Asia. It appears that the biggest airports in the largest markets, such as Shanghai, have the advantage in courting the world's cargo players."

Shanghai: Everybody's Going!

Since the end of October 2005, I have flown into Shanghai's Pudong Airport four times. The city seems to be a business black hole, sucking in supply chains for not only larger, global firms but also smaller firms sourcing a variety of products through the Shanghai corridor. This influx of investment is driving further investment up the Yangtze River into mainland provinces, first and foremost Jiangsu--China's richest province. (See the China province guide at Asia Times). In light of this phenomenon, how do air cargo firms view this hub?:

"Jack Boisen, vice president of cargo for Continental Airlines, also wants a bite out of the industry's favorite cherry. Having mounted Beijing flights last year, Continental now is in pursuit of traffic rights to Shanghai. "We're waiting impatiently to see if we're going to get Shanghai," said Boisen.

"UPS is taking its investment in Shanghai a giant step further. The integrator announced plans last year to build its Pacific hub at the city's Pudong airport. Designed to handle up to 200,000 tons a year, the facility is expected to open in 2007, when the U.S.-China air services treaty allows American carriers to set up hubs in China.

Of course, jumping on the hottest business trends is always going to rub the wrong way those who don't see "following the crowd" an appropriate strategic move. Putzer reports on why DHL takes this approach:

"With Shanghai the focal point of international companies' drive into China, Pudong's facilities are bursting with cargo originating at its own doorstep. Propelled by a 14.5 percent surge in tonnage, the airport leapfrogged sites such as Paris and Miami to jump from 14th place in 2004 to No. 8 in the global hierarchy last year, according to Airports Council International figures.

"For this reason, DHL does not envision a hub role for Pudong. "Shanghai is full," said Charles Kaufmann, DHL Global Forwarding's director for North Asia. According to one airline executive, problems with transloading and issues with customs add to drawbacks that could disqualify Pudong as a hub for many carriers.

But once the herd gets going, it is hard to slow it down:

"Several U.S. carriers are flying to Shanghai, preparing to fly to Shanghai, or hoping to get traffic rights to Shanghai soon. The latest entrant is American Airlines, which was to launch flights to the Chinese metropolis at the end of March. Polar Air Cargo, which entered Shanghai last year, plans to add three weekly frequencies this year."

Seoul: The Perfect Middle

Aside from being regularly irritated by its troubled brother to the north, South Korea has come a long way in building an infrastructure that enables it to market itself as an advantageous hub location.

"South Korea has pursued a multimodal expansion policy with ample investment in port and airport development. Incheon, which opened in 2001 with the capacity to process 2.7 million tons of air freight annually, is due to boost capacity to 4.5 million tons in 2008 and 7 million tons by 2020.

"The first phase of a foreign trade zone located on a plot adjacent to the airport opened its doors last month. The enormous "Airport LogisPark" covers 10 million square feet, with room to double that.

I discovered an interesting video online highlighting the Songdo Techno Park at Incheon. It is all in Korean, but visually entertaining. Technology parks like this are put into context regarding the entire Incheon Free Economic Zone (FEZ) complex. Be sure to check out the English PR materials. It seems Mr. Kaufmann of DHL has been sold on the Seoul-Incheon hub concept:

"To Kaufmann, Seoul is a better option for regional hub status. "As a hub, Korea definitely plays an important role," he said, pointing to the presence of strong air and ocean carriers, a well-developed infrastructure and its location. "We use Korea very much as a hub. We have a lot of cargo from Southeast Asia going through Incheon."

"That's music to the ears of Ken Choi, president of Korean Air Cargo. He describes the development of Incheon as a regional hub as the essence of KAL's strategy, reflected in the fact that 65 percent of the carrier's volume going through the airport is transit traffic. KAL is in the process of expanding its cargo terminal at Incheon, adding nearly 50 percent more capacity. Rival Asiana Airlines completed its third cargo building at the airport last year.

Putzer describes the concept behind what I call "the perfect middle:"

"KAL and Asiana's transit ambitions enjoy the enthusiastic backing of the South Korean government, which foresees Incheon as a logistics hub in a triangle with Japan and China. In this view, China provides the manufacturing and Japan the design and development expertise while Incheon serves as the ideal hub for cargo movement. (my emphasis italicized)

This concept is visually illustrated in the PR materials mentioned above, or can be imagined by referencing my PowerPoint file above.

Tokyo: Pain in the Ass

Air cargo firms have never really liked flying into Tokyo's Narita International Airport. This was clearly evident to me when I attended a logistics committee meeting at the American Chamber of Commerce Japan (ACCJ) in Tokyo during the summer of 2003. The bulk of the conversation by executives from all the major cargo companies regarded how expensive it is to land a plane at Narita, how the government justified landing fees, and how the government stonewalled any attempt by foreign firms to push reform. Thus, it is no suprise that Narita gets not only a brief mention in this article, but also a fairly negative one:

"With its grandfather traffic rights in Tokyo, Northwest Airlines is using Narita as a hub and actually gave up fifth freedom rights between Seoul and Hong Kong last year. But other operators prefer Seoul to the major Japanese airports. Proximity to China is one factor and the higher costs in Japan are another.

"Equally important to DHL is that, unlike Narita, there is no curfew at Seoul. For its part, Japan Airlines intends to overcome that obstacle by slotting affected flights though Haneda, Tokyo's domestic airport, which is due to open to some international flights in 2009 with the opening of a new runway."

Guangzhou: Up and Coming?

I have never traveled to Guangzhou, which can be seen on my map above to be at a nexus with Shenzhen and Hong Kong. It seems that Shanghai has pulled many business' center of gravity from Hong Kong, but the mainland counterparts of Guangzhou and Shenzhen must obviously not be ignored:

"While UPS picked Shanghai as its regional hub, FedEx opted for Guangzhou in the South. The integrator will invest $150 million at Baiyun airport, which will replace its present regional hub at Subic Bay in 2008. The planned 882,640-square-foot facility will be able to handle 24,000 packages per hour, twice the capacity of Subic Bay.

"Guangdong Airport Management Group intends to spend some $290 million on infrastructure development at Baiyun. Another $50.7 million is earmarked for a third cargo terminal. Slated for completion in 2007, the three million-square-foot building will be able to handle up to 800,000 tons of cargo a year. The new facility will be dedicated to international cargo, while the existing two freight terminals will handle domestic shipments.

"Some 50,000 tons of international cargo moved through the Guangzhou Baiyun International Logistics Center in the first five months of last year. The center projects its international freight throughput could double over the coming five years. In 2004, the airport's overall freight throughput increased 16.2 percent to 632,000 tonnes.

As a foreign firm aggressively pursuing access to the China market so as to strengthen one's regional supply chain capabilities, the presence of Chinese cargo haulers is a significant consideration. Although these firms' strategic decision-making is still improving on a global scale, the decisions they make regionally can deliver clues as to how a foreign firm should shape its market entry:

"However, the airport's biggest cargo player to date, Guangzho-based China Southern Airlines, shows little inclination to push cargo activities in a similarly aggressive fashion. A few years ago, senior China Southern executives were declaring plans to build a fleet of 10 large widebody freighters, but the airline now seems content to keep its current freighter line-up level of two 747-400s. Instead of acquiring more cargo planes, the carrier concentrates on the regional freight market with "quick-change aircraft," which operate in passenger configuration during the day and are reconfigured for overnight freighter activities, said Jeff Ruffolo, a spokesman for China Southern.

"He noted other Chinese carriers have likewise eschewed large orders for freighters even as they have made massive deals for passenger planes. "Cargo ex-China is gigantic; the problem is the back end," said Ruffolo. "That's the quandary for Chinese carriers: How do you position a freighter so it's not half empty on the return leg?" China Southern's two freighters do not operate out of Baiyun. Instead, they fly out of nearby Shenzhen, halfway between Guangzhou and Hong Kong. "Baiyun is great, but Shenzhen gives us other opportunities," Ruffolo said." (added emphasis italicized)

Other firms' positioning in this corridor varies:

"Northwest Airlines is doubling its freighter flights to Baiyun this April from two to four frequencies a week. Jim Friedel, Northwest's president of cargo, said he expects better opportunities there than in Hong Kong. "I don't see any significant challenges or changes in Hong Kong, but growth is in Guangzhou," he said.

"Polar Air Cargo, on the other hand, has no intention of mounting service to Guangzhou. Kirsti Krepp, vice president for the Asia-Pacific region, said per-kilo costs in Baiyun are lower than in Hong Kong, but she cited operational and capacity issues. "The infrastructure in Baiyun is not adequate yet," says Friedel. "It's maturing."

Both Northwest and Polar are convinced there's enough cargo coming out of the Pearl River Delta to fuel growth in Hong Kong and Baiyun as well as in Shenzhen.

Hong Kong: Oldy but Goody

With Hong Kong, Guangzhou, and Shenzhen so proximate to each other, there is bound to be a back-and-forth dynamic in terms of cargo handling that ensures growth for the entire Pearl River corridor as suggested above. But it seems that strategically a foreign firm is better off focusing in on one facility for the bulk of its core services:

If anything, DHL is even more bullish on Hong Kong. Last year, the integrator unveiled a $110 million investment to expand its regional hub at the territory's Chek Lap Kok International Airport. This almost doubles DHL's footprint at the airport to 376,736 square feet and boosts its processing capacity from 20,000 parcels per hour to 35,000.

That DHL would expand its hub at some point was bound to happen, but it wasn't expected to materialize so soon. The decision came six years ahead of schedule, just 14 months after the integrator opened its regional hub in Hong Kong.

Scott Price, chief executive officer of DHL Express Asia Pacific, said the earlier expansion of the hub was the result of rapid growth in the area. More than 70 percent of the integrator's traffic to and from China moves through Chek Lap Kok, which handled an estimated 30 million shipments last year.

Having increased its regional airlift capacity in Hong Kong through additional aircraft and the launch of direct overnight connections to several key Asian markets between April and November, DHL added a trans-Pacific link last December. The connection came courtesy of Malaysian freighter airline Transmile, which has since been running MD-11 freighter flights from its home market via Hong Kong to Los Angeles and DHL's North American hub in Wilmington, Ohio.

DHL handles its own traffic at Chek Lap Kok, but even without that volume, 2005 produced record tonnage for HACTL, which handles the lion's share of Hong Kong's air freight. The handler processed 2,432,759 tons last year, up 7.5 percent from 2004.

Chinese Competitors: Upstarts On the Way

In terms of strategic planning and operational sophistication, Chinese carriers are behind that of international carriers. But knowing the local scene ensures that they will still have a leg up in navigating business procedures and markets for domestic cargo links. At the same time, joint-ventures will be leveraged with foreign firms to help mutually feed this links:

The Chinese airlines may have left much of the cargo initiative to international carriers, especially the express operators, but new players are emerging. Over the coming years, three Chinese airports stand to enjoy bigger roles in international cargo traffic as the hybrid cargo carriers born out of joint ventures between Chinese and international carriers take off.

The first of the lot, Shenzhen-based Jade Air Cargo, is expected to commence operations in July, according to stakeholder Lufthansa Cargo.

Great Wall Airlines, the venture driven by Singapore Airlines, is expected to be the next out of the starting blocks. It will make its home in the crowded Shanghai market.

And Okay Airlines, the planned cargo offspring of Korean Air and China's first budget airline, still has some hurdles to clear, according to Choi. Like the passenger carrier, it will operate out of Tianjin.

China's Military-Market Nexus: Managing Access to Air Space

This is sort of an addendum to my discussion of the above "Where to Hub?" article. In today's Wall Street Journal Online, there is an article on China titled, "China Clears New Lane for Planes," by Bruce Stanley. I have discussed before how supply chain logistics in quickly developing regions of the world often squares off the interests of the private sector against the interests of the military sector. In this scenario, the question is how to maintain regional security while allowing the private sector access to an increased number of supply chain routes--in this case air routes.

"After six years of talks, China has agreed to open a new corridor through its tightly restricted air space that could save airlines a total of $30 million in annual fuel costs and trim an average of half an hour off flight times between China and Europe, according to the International Air Transport Association, the main trade group for the world's airlines.

"The savings is important but not huge, given the blow that high fuel prices have dealt airlines. Still, creation of the new route is the first of several steps the IATA wants Chinese authorities to make to unclog the country's sparse network of air corridors and prevent lengthening delays in flights to and from China's biggest cities."

As the Air Cargo World article above illustrates, "the need to ease restrictions on China's air space has gained urgency, the IATA says, because of the profusion of foreign airlines flying to the country and the torrid growth of China's own carriers."

The article does an excellent job of describing the nexus where the military sector and private sector meet and develop compromises (added emphasis italicized):

Although Chinese aviation authorities generally support the liberalization the IATA has been seeking, China's armed forces, which have ultimate control of the country's air space, have been more reluctant. They perceive foreign airlines as a possible threat to national security and prohibit them from flying over military bases and other sensitive installations.

Only 30% of China's air space is open to civil aviation, making it one of the world's most restricted countries. Airlines flying over Chinese territory must follow rigid and often meandering routes replete with doglegs and 90-degree turns, each of which means that flights take longer and burn more fuel than if they followed a straighter line.

David Behrens, the IATA's director of safety, operations and infrastructure in the Asia-Pacific region, helps put this decision by the Chinese in a global context:

Although military control of air space isn't unusual elsewhere, armed forces in most other countries have cooperated more readily with the IATA to improve access to air space, Mr. Behrens said. India, Pakistan and Iran took just two years to approve new air routes, while in China, a wait lasting four to six years "is not uncommon," he said.

Still, Mr. Behrens welcomed approval of the new route across western China as a sign of a new, more accommodating approach. "That's the good news. I think that China as a whole is realizing that things are changing rapidly and that's going to require changes in air space," said Mr. Behrens, who helped lead the IATA's negotiations with the Chinese. "We are having more dialogue with the military than we have had in the past."

The fact of that final sentence illustrates not only the critical nature of the military-market nexus, but also having the personnel capable of managing this nexus successfully in developing supply chain logistics strategy and resource deployment.

Trans-Pacific Trade

A person could spend a never-ending amount of time mining the web for information on specific subjects and never end up satisfied. At other times, some great information just falls in your lap when browsing for something entirely different. That happened to me today. I ran across the site for Tompkins Associates, a consulting firm in the supply chain field. They provide a lot of helpful information up-front and free through white papers and such. One such paper is on Trans-Pacific Trade from 2003, but a nice summary of the key issues with a general guide of how to be successful. The document is linked below for your downloading ease:

Download transpacifc_trade.pdf

This weekend I will be posting on how airports in the Asia-Pacific drive the strategy behind a firm's establishment of a supply chain hub in the region.

Everyone have a great weekend!

Virtual Networking

Just like in the physical world, here in the virtual world networking is a valuable exercise towards expanding one's opportunities in advancing towards a specific goal. Recently, I have had the pleasure of my blog being linked to by Tom Barnett's blog for my post on the role of logisticis in "shrinking the Gap." Although it sounds cheesy, Tom Barnett is in many ways an idol of mine in both his work and the way he has managed his life and career. Much of what he says resonates with me and inspires me to think about my own profession and career path in new ways. The above linked post of mine was inspired in this way.

I was even more surprised and excited when I learned from Tom's site manager tonight that I was linked by Tom's current boss, Steve DeAngelis of Enterra Solutions, at his new Enterprise Resilience blog. I have returned the favor and linked to his site in the sidebar. I look forward to regularly following Mr. DeAngelis' writing from here on, and I hope my readers will take a look.

I feel this blog is an opportunity to contribute to a community of thinkers and do my best to help educate those new to supply chain logistics and also learn from the constructive criticism and comments of supply chain professionals around the world.

People Power in Logistics

This week in Japan is the first week of work for most college graduates beginning their first job. Since this phenomenon is fairly uniform across each industry, at firms big and small, on Monday there were TV specials discussing this year's hiring data and interviewing the new hires as they began their first day of training.

Last night (Tuesday Japan time), there was another special.  Basically, the theme was "the message to today's young people from some prominent elder personalities." For example, the manager for the Japan team that won the World Baseball Classic had some quotes, along with others. At the beginning of the show, it was noted that 850,000 college graduates will start work this week. It was also noted that since the 1970's the number of college graduates seeking a workplace where they can "show their individuality" has grown by 50%. However, under current conditions, one out of every three college grads quits their first job within three years. For Japan, this is a problematic ratio because the employment systems of most firms are not built to survive this turnover. For example, the pace of training is based on older systems of long-term employment where a college grad will not necessarily contribute a large portion of their potential until after 3-5 years of employment. Although more and more companies are employing a performance-based evaluation system, in the scenario where college grads leave before 3 years, most will leave under-trained, but the company they leave has under-utilized that employee realizing little or no ROI in the process. In this environment, the employee doesn't do their part to drive their career and the company fails to act as a cultivator or guide in the process. As a result, Japan ends up with a majority of 30-year olds who have fallen far behind their Western counterparts. This is why in many cases Westerners surpass Asians early career despite Asia's touted test scores in the areas of science and math versus their Western counterparts at the high school level.

Several companies I am familiar with are no different. On Saturday, April 1, my firm welcomed seven new employees from the college ranks. Out of the seven, four are women and three are men. As our company is quite traditionally Japanese, we all formed a standing half circle around the meeting room while the seven new employees stood in a line in front of us. Each one introduced themselves very briefly in formal Japanese fashion, each one receiving a kind applause. I could tell they were pretty nervous, which I pretty much expected. Perhaps most interesting was each student's major of study in college.

Now, my undergraduate major was in art, but because of the American system's flexibility, I also minored in international economics with an unofficial minor in Japanese. During that time, I had an internship in NYC, one year of study abroad in Tokyo, and another three months in Tokyo for my senior thesis. In addition, my high school studies were geared towards an engineering major in college before I took my turn towards studying art. So, given that background, I tend to think that my MBA and MIM degrees along with a career in logistics are not that hard to fathom despite my art major.

But in Japan, the general educational system at the university level is not near as rigorous nor as flexible. A great deal of vision and ambition are required to achieve a significant level of individual excellence inside and outside the classroom. The best graduates will have had at least one year of study abroad in the USA, Europe, or elsewhere with a rigorous curriculum and excellent campus environment. However, this experience is relatively rare and most of these students are picked up by the leading firms in each industry.

For a medium-sized, logistics company, it is not possible to compete for the best students as described above. Therefore, you must try to acquire the "best of the rest." The majors I heard on April 1 from our new hires included two in literature, two in commercial science, one in liberal arts, one in economics, and one in humanities. However, since we will not expect these students to apply much of their college education to their future responsibilities, what we are truly seeking from this group is adaptability driven by a strong desire to learn. Such a person is highly teachable and has great potential for advancing along the learning curve faster.

The other half of the equation, as inferred from above, is ensuring the work environment we place these new hires in will cultivate them to excel above and beyond their current abilities. This is where many middle-market firms will fail and "stunt" the growth of perfectly capable college grads. It is also extremely frustrating for myself to work in this type of environment, although in my case I am more prepared and in a stronger position to take my personal development into my own hands and pursue the right opportunities in the face of stubborn superiors.

As for logistics as an industry, Japan is not alone in terms of "people power" being under-appreciated and under-utilized. An article with FTB Asia titled "People Power" delves into this area (FTB doesn't maintain a free archive, so access the article now to print or copy). It quotes a Dr. Gattorna who provided a seminar for DHL:

"The biggest threat to achieving high-performance supply chains comes from within your own organisation, rather than external competitors in the marketplace." So said logistics "thought leader" Dr John Gattorna at a DHL seminar in Hong Kong He pointed out that much of logistics derives from management theory on optimised performance design.

"Now is the time for logistics companies to spend more effort on human resources to hire the right people, " he said.

Dr. Gattorna describes the appropriate investment mix that will best leverage "people power" within a logistics firm:

By Dr Gattorna's count, the design and operation of modern supply chains is 45% human behaviour, 45% systems technology and 10% infrastructure.

The potent effect of human behaviour is felt in two main areas, namely outside organisations with customers and suppliers, and inside organisations including boards, management, and employees.

"You cannot grow and prosper as an enterprise by incessantly cutting costs in these two areas of human presence; investment in performance-enhancing supply chains is essential for success in all businesses, " he insisted.

Much of optimum supply chain theory is built on the shoulders of standard management theory in which personality and culture are not factored in.

What is the mindset that plagues today's logistics firms? Dr. Gattorna explains that an obsession with the wonders of technology and equipment are a key culprit:

Instead, modern enterprises must be designed to meet the multiple needs of customers with the equivalent array of supply chains, all configured to align with pre-defined customer segments "It is disappointing that after all the man-years of academic research, numerous articles in respected journals, a myriad of consulting assignments, and the work of practitioners inside enterprises, few if any commentators in the logistics/supply chain field 'get it', when it comes to understanding that human behaviour really powers modern supply chains, " he said.

For some reason, he suggested, supply chain practitioners behave as if people simply don't exist in this context, perhaps because they don't understand or feel comfortable dealing with the behavioural sciences. "Instead we continue to put all the emphasis on technology and systems, and infrastructure as the solution, " he remarked.

In the dialogue that followed, the audience agreed that the better solutions were those in which supply chains would not function until there was a strong investment in people solutions; probably by spending the kind of money companies have spent on technology.

One executive suggested it would be useful to highlight the benchmarking of training spend in transport and supply chain companies against other industries. "Most of us have a pretty good feel for the technology spend benchmarks. Few of us know how our training spend compares, " he said.

Dr Gattorna estimated that most organisations dedicated 5% of expenses to managing human behaviour, 45% to technology and the remaining 50% to infrastructure such as distribution centres and factories. The more appropriate formula, he said, is 45%, 45% and 10%, respectively.

"Technology is still very important but it has to be balanced, " he said.

Of course, for those with any management education, the warnings of treating technology as a cure-all are not new. This is expressed often in such management tools as The Balanced Scorecard, expressing technology as a strategy-enabler and one component in the foundation of a firm next to organizational culture and human capital. The problem is that these tools are not often employed in the logistics industry, if at all in Japan's industry.

UPDATE: Found an interesting article at College Journal, through the Wall Street Journal. It provides a good illustration of the current employment conditions in Japan.