Asia Logistics Wrap

Resiliency Lessons from China

Today there was an excellent op-ed in the Wall Street Journal on multinational, high-tech firms operating in China. I think this is an excellent spin-off piece from a recent op-ed in The Financial Times by IBM's Chairman and Chief Executive Officer, Samuel Palmisano, and discussed extensively at the Enterprise Resilience Management blog by Steve DeAngelis.

The op-ed is titled, "Middle Market Kingdom," and written by Ingo Beyer Von Morgenstern and Xiaoyu Xia, both of McKinsey & Co., and much of what they write indicates the need for a higher-level of resiliency--a transition to Palmisano's "globally integrated enterprise."   

"If you can't beat them, acquire them." This has become the mantra favored of late by multinational high-tech firms in China as they face fierce competition from Chinese firms. Our research into 1,000 Chinese high-tech firms shows them to be growing on average three times as fast as multinationals. So what are multinationals doing wrong?"

The above opening lead to the editorial reminds me of a comment that Viveca Chan, CEO, Grey Global Group, China/HKSAR, made at the 2004 Asia Business Conference at the University of Michigan Business School, paraphrased by me as: "In the past, the ruling phenomenon in business was that "the big fish eat the little fish;" however, in China, it is "the fast fish eat the slow fish." By this, she explained that "size and scale prevails" is not the rule of strength in the Chinese market. The authors go on to explain the failure of large multinationals:

"By sticking too rigidly to product specifications for developed markets, and high prices, multinationals in many sectors have squeezed themselves into the thin, high-end market in China. To succeed in China, these firms would do better to focus on the faster-growing mid-range segment of the Chinese high-tech market, where products cost an average of 20% to 30% less than their high-end counterparts."

Rigidity is a killer of resiliency. Basically, there is a specific phenomenon of smaller, agile Chinese firms quickly working their way up the value chain from the lower tiers of technology while large multinationals linger at the high-end, making themselves susceptible to losses in overall market share:

"Take electrical equipment, a $60 billion industry comprising sectors such as automation and power generation. While multinationals focused almost exclusively on the high end of the market, mid-range Chinese players -- led by emerging contenders such as Chint, a maker of low voltage electronics, and Shanghai Electric, maker of power generation products -- have expanded their share of the overall market to 65% from 55% over the past five years. This segment is growing almost twice as fast as the market for electrical equipment as a whole. As a result, multinationals as a group saw their share of the market drop to 35% from 45% since 2001."

Exclusivity is also a killer of resiliency. On their current pace, smaller agile Chinese firms--the fast fish--will be overwhelming the larger multinationals--the slow fish--in a very short time frame:

"Local firms such as auto-electronics-maker Hangsheng Electronics or medical-equipment-maker Shinva may not yet be household names, but such enterprises are sweeping to dominance in their industries. By 2010, we estimate Chinese companies will hold as much as 80% (worth about $260 billion) of China's high-tech market, up from 67% in 2004."

Without the management systems in place to instill the resiliency necessary for China, the large multinationals resort to "eating the little fish" to recapture lost market share:

"Some multinationals have responded to the erosion of their market share by buying into the new breed of mid-range Chinese winners in order to quickly build up a competitive mid-range product line for the Chinese market."

However, this acquisition strategy does not work towards adapting the multinational's foundations for resiliency. In fact, conditions on the ground in China illustrate the limits of this strategy:

1. The multinational out shopping faces a number of obstacles in its path. First, there's the question of what they should be looking for. Simply spotting a suitable company is a challenge in a market characterized by a lack of transparency.
2. When a multinational tries to buy a local company, it may find Chinese competitors, which have been fiercely battling each other for survival, close ranks against a perceived foreign threat. The local companies may enlist the support of government officials to require foreign players to find a local partner before bidding for a project, or to require a certain amount of locally made components.
3. Chinese companies can also squeeze foreign competitors out by pushing down prices. Chinese companies are used to operating on very thin margins: last year, the top 1,000 electronics firms in China earned an average net margin of only 2.5%.

Companies that can acquire the smaller, more agile Chinese firms and integrate them successfully into a more resilient enterprise will succeed, although current examples have not had a long enough track record to judge long-term success:

"...some foreign companies are overcoming these hurdles. For example, one multinational maker of industrial electronics last year bought a Chinese company with a 30% share of the mid-range segment and 25% annual growth. To ensure that customers and employees didn't flee post-merger, the acquirer enticed key management to stay put by allowing the Chinese firm to maintain day-to-day management control. While it's too early to judge the outcome of the deal, initial signs look positive: in the first quarter of this year, sales increased by over 60%."

The authors conclude with the following:

"That is a trend which other multinationals can be expected to follow. China is becoming an increasingly competitive market, and the route to success for foreign companies will lie in eschewing their past preference for the high-end in favor of carving out stronger positions in mid-range products."

I would go further in saying that the route to success for foreign companies will lie in eschewing such old paradigms as "succeeding by acquisition" and adopting the new paradigm of succeeding through enterprise resilience management systems. In this way, acquisitions become simply one option and foreign companies will have in place the ability to adapt earlier and more appropriately to competitive threats within and across markets and products.

NOTE: For always excellent, running commentary on foreign firms operating in China, visit China Law Blog.

Pusan Port Feeling the Heat

This is officially my 100th post, but I won't be doing any lengthy writing to celebrate. Rather, I want to highlight an article that complements some of my earlier posts on ports and logistics hubs.

Considering that South Korea is very intent on strengthening its logistics infrastructure so as to be a high-value supply chain hub in Northeast Asia, the following article from Cargo News Asia shows this effort will face unrelenting competition:

China is dominating the maritime logistics business in East Asia and endangering Korean ports, officials at the Maritime Ministry and Korea Institute of Maritime and Fisheries Technology warned.

The officials noted that in Busan, 1 million TEUs were processed in April, a drop of over 3 percent from the same figure last year. The aggregate amount of containers processed at Busan Port in the first quarter of this year was 3.9 million TEU, a 1 percent increase from the same period last year.

The three new berths at Busan New Port were almost empty. The new port opened almost two months ago, but only 37,000 TEUs have visited the port, far less than was predicted.

In China, however, the Port of Shanghai, processed 1.8 million 20-foot containers in May, a 19.6 percent increase over that of the same month last year. The new Yangshan Port, which has five berths for ships and is only six months old, processed 230,000 TEUs creating an aggregate of 8.2 million TEUs just this year. It was a 17.1 percent increase over the previous winter.

The winners and losers of this battle will be determined by which hubs provide the greatest customer value:

"As Shanghai's port improves in terms of service and business processes, it is 'stealing' freight from Busan," an institute official said.

The last sentence in the article refers back to the announcment I posted on previously:

The official said the situation is serious, and that they would think of ways to make Busan more competitive in terms of infrastructure or high value-added logistics, not scale of freight.

What would be interesting is a survey specifically identifying why port users switch business from Pusan to Shanghai. Is it more location-driven? Is it more of a services-driven decision? Is it based more on port users' customer requirements? If there is a strong correlation to location-based factors, then there isn't too much South Korea can do. But if it is truly operating a sophisticated logistics hub, it will have "feeler surveys" in place periodically to not only identify reasons port users have switched, but also help catch and resolve current customer concerns that could lead to additional defections.

Making CSR a Part of SCM (UPDATED)

Recently, my site was the focus of a post by Andrew Leonard at his Salon.com blog "How the World Works." That excellent post spawned some additional, quality conversation in the comments section to which I contributed. My comments were aimed at the article's comments as well as comments by posters "RJStanford" and "sonofa:"

I believe one of the risks for supply chains operating towards "shrinking the Gap" is that the public infrastructure build-up, especially in the early stages, will be utilized not just for good, but for bad. For example, the supply chain architectures that are allowing Afghanistan to open up are also allowing its heroin trade to explode. As with North Korea and similar countries, it allows exploitation of resources, including human capital.

True "high performance" supply chains will ensure that utilization of infrastructure by the bad guys is minimized in trade only if they have in place the architectures that are linked to parallel supply chains for the flows of: laws and regulations (whether private or public), security, and people. With Afghanistan, and even Iraq, we can see that the supply chains for laws and regulations and security lags that of trade--thus, even though trade is allowed to travel regularly into Iraq, it doesn't mean it will arrive secured let alone according to existing laws and regulations.

This is the complexity of the environment supply chain managers face if they are involved in Core-Gap trade/development (more transformative) relative to Core-Core trade/development (more iterative). The key is in not allowing Core-Gap and Gap-only supply chains to be isolated from making the necessary progress with proper political, security, people flow architectures.

In my view, by at least having a framework to approach these topics allows for more constructive dialogue. My attempt is to help develop or facilitate such a framework or frameworks in terms of supply chain management so when taking on a sensitive topic such as Kaesong or even China, the conversation isn't defined by a single approach (such as political or human rights).

In response to my comment, poster "sonofa" offered this further exchange (emphasis on what I feel are unconstructive generalizations):

Thanks for stopping in and offering your thoughts. My perspective as an American is that although dialogue about global supply-chain management, as with every aspect of globalisation, may sometimes be fixated upon politics or human rights issues, but in fact the actions that are taken (by who?) have almost nothing to do with either. They are instead entirely (really?) directed toward the aforementioned "efficiency." "Efficiency" is for some reason defined (by who?) as maximising profits for the upper echelon, and externalizing all (really?) expenses. "Externalizing" expenses directs their impacts toward the communities or governments surrounding the supply chain, even when these communities or governments see absolutely none of the profits or benefits (examples?), and even when the working classes are impoverished and disenfranchised (examples?). When I see a statement like "efficiency is here to stay," what that means to me is that "wealth being ever further concentrated into ever fewer hands is here to stay." Is it? Can that really continue forever? Are we certain that such a seemingly unending increase in the number of desperate people can indeed continue forever?

If politics and human rights issues are dominating the public discourse about global business practices, they are being completely ignored (really?) as the globe's businesses make their decisions, take their actions, and decide the fate of the world daily (fate of the world?). What's worse, the consolidation of corporate power over our actions (huh?), and the "streamlining" of the supply chain, capital and labour flows, and factory siting decisions, is all directed negatively (ALL???): Lower costs. Monopolize innovation, by disallowing research begun on company time and property, and hence, depriving researchers of the income that would accrue from new inventions, and hence, effectively clamping down on such innovation. Fund legislation to prevent independent action, where such action would impact the company's bottom line (such as when an American utility company recently cut off service to some private users who had generated too much power from their home's solar generator). Relocate factories abroad, where wages, environmental protections, and benefit costs are lower. These are all negative acts, not only to stifle individual freedom, but to degrade the common weal. Politics, human rights and poverty, to say nothing of the positive, constructive things the human race might do together cooperatively, are not to be shunned as diversions of the debate (not what I was arguing for); they have been shunned enough. Our political systems, our cooperative efforts as a race, our human rights, and indeed our poor themselves, are dying from lack of care. The multinational corporation can do some good, in its proper place (proper place decided by whom?), like religions or governments; but like the religions or governments of old, the multinational corporation has gained too much power (measured by?). We need to remember that the world's poor, disenfranchised by efficiency (huh?), do not go away. We must find a way to enfranchise all of our people.

And in an even later comment:

The strange thing about corporate hegemony is that we can all see the destructive effects that it has (like?), but the corporate decision-making mechanism is such that it defies any real decision-making at all (huh?). The fixation on the bottom line has actually removed power from all the human beings involved (what???). It's very bizarre.

Now, I understand the emotion behind "sofona's" post, but there are just too many sweeping generalizations that are simply wrong, let alone conducive to a constructive argument.

Since I have some further ideas on this, I wanted to add a more in depth response at this site for the rest of my audience to digest. In particular, I disagree with the notion that an intense focus on the bottom line by firms when operating supply chains either domestically or globally is mutually exclusive to operating a socially responsible supply chain. At the same time, I agree with the notion that efficiency, or optimization, in itself cannot be the primary driver of a great supply chain. For if we are simply optimizing bad processes, efficiency as an end-goal means very little. My belief is that true "high performance" supply chains not only have great architectures in place, they also have a strategy that includes Corporate Social Responsibility (CSR) as part of its key set of business processes in driving bottom line profits that allow reinvesting in its core businesses, returning value to investors and enhancing the work environment of the firm's most valuable resource: its community of employees throughout its supply chain(s). Employees in turn have the responsibility of designing a career plan that allows them to contribute fully to supply chain innovation and the creation and implementation of community initiatives.

How CSR can be integrated into a corporate strategy that feeds the bottom line while enhancing communities is instructively illustrated by Kaplan and Norton's strategy map template. Within the internal perspective, one can see the role of regulatory and social processes in driving a firm's relationships and image in the context of its customers and operating environment. This in turn feeds the financial objectives that shape a firm's bottom line. Important not to forget is the human, informational and organizational capital that must be applied to these processes to make them work appropriately.

In this ideal sense, a firm does not need to let go of a bottom line focus in order to successfully deploy CSR in the supply chain. It simply ensures that the causal links behind that focus are properly constructed to integrate CSR. Of course, to address critics making sweeping generalizations of global firms, supply chain managers must put principle into action to illustrate that such generalizations are far off the mark. Fortunately, many firms have integrated CSR into the supply chain--in particular, HP has an extensive initiative in practice to raise the performance level of its global supply chains whether they traverse the "Core" or the "Gap" to use Tom Barnett's terms.

I believe that a case study of HP illustrates that, when confronted with the speed at which today's firms deal with global diversity and adversity, the impact of global supply chains on social and natural environments cannot be simplified into a generally negative or positive trend that allows a statement like "the corporate decision-making mechanism is such that it defies any real decision-making at all...the fixation on the bottom line has actually removed power from all the human beings involved" offered by "sonofa." Case-by-case, however, we can analyze an entity's supply chain architectures at a variety of levels (individual, group, organization, region, nation, etc), their operating context, and study how their business processes are constructed to either integrate or not integrate CSR towards driving bottom line profits/benefits.

Important to note, this post is not intended to ignore the "bad apple" supply chains; rather, it is to show that, despite a great deal of political and social rhetoric in regards to "corporate hegemony," "bottom-line fixations," and general corporate opportunism, the majority of large firms in the world have developed a socially conscious corporate strategy. Of course, where operations are outsourced to less resource-rich firms, there will be performance gaps in terms of building the supply chain architectures that support CSR innovation (primarily informational, relational and innovational architectures). But many of these firms, and by extension their communities, would be far worse off without a business relationship that provides at least the right foundation to build upon.

Thus, my opinion is that if the heart or core of a global firm is rooting a CSR-related initiative into its corporate strategy, I believe that this will over time lead to a higher level of CSR performance in all its supply chain partners. However, if the firm does not have a rooted CSR-related initiative in its corporate strategy, then its core managerial decision-making would need to be looked at with skepticism in the sense that CSR ignored "in-house" is likely ignored "out-house."

Returning to HP, which is the focus of an article from Logistics Today, another online source for logistics news that I recently have come across. The title of this very timely article, believe it or not, is "How to Manage a Socially Responsible Supply Chain."

HP is doing the right thing by focusing on empowering its people:

High-tech manufacturer Hewlett-Packard Co. (HP) has launched a year-long training program aimed at providing the management staff of its suppliers in China with the knowledge to improve social and environmental responsibility practices in their factories.

HP links strategy to metrics through a number of objectives and desired outcomes:

The Focused Improvement Supplier Initiative (FISI) provides clear and measurable benefits for supplier factories, including increased productivity and quality and reduced worker turnover, injuries and illnesses.

Some of the tools and methods to achieve the desired outcomes are as follows:

Over the year, suppliers will work to minimize factory risks, share best practices, access social and environmental responsibility content experts in China, improve the skill sets of key factory managers, and demonstrate progress toward conformance to the Electronic Industry Code of Conduct. The code of conduct outlines standards to ensure that working conditions in the electronics industry supply chain are safe, that workers are treated with respect and dignity, and that manufacturing processes are environmentally responsible.

HP's initiative strengthens the relational architecture of its supply chain:

Business for Social Responsibility's China Training Institute and Foxconn will work with HP on the initiative. "HP operates one of the IT industry's largest supply chains, and we are eager to implement FISI to provide global suppliers with the training they need to make successful social and environmental responsibility improvements," says Bonnie Nixon-Gardiner, global program manager, Supply Chain Social & Environmental Responsibility, HP.

HP emphasizes that accountability in adhering to CSR principles is essential:

All FISI participants are required to commit factory management staff, including human resources and environmental, health and safety managers, to attend monthly social and environmental responsibility training in the Shenzhen and Shanghai regions during the next year. FISI participants also are required to provide monthly reports on the progress of corrective actions, key factory metrics, trends and improvements, and to contribute case studies on corrective action efforts made at their facilities as a result of the training.

The above article provides a nice summary, but it doesn't do much justice to the initiative HP is driving. For an extremely thorough and convincing description, this HP site is an absolute must read in understanding their approach to integrating CSR initiatives into supply chain management.

Here is a quote I like from the site:

"When the program kicked off, there were a lot of doubts from suppliers and HP employees questioning if HP was enforcing an unrealistic goal and imposing Western standards. After two years of effort, we see changes from the suppliers and HP auditors. They are coming to believe in the global citizenship philosophy. The HR and operations managers and workers in the factory see SER is a good program. Conformance to HP’s Code can help firms hire and retain good employees. Happier employees can make the company more successful, benefiting everyone."
– Chi-Luen Lee, HP Global Procurement Services, Greater China

The key here is that building a CSR-inclusive supply chain is a gradual process--not something that is brought about via magic wand. CSR initiatives are really part of the relational and innovational supply chain architectures that are often the last and most difficult components to build in a high-performance supply chain. In addition, a socially and environmentall responsible supply chain is not just one where firms give back to communities directly from profits, but a supply chain that also creates a working environment where its employees and partners are empowered and encouraged to contribute back to their communities.

It is my experience that employees can take their surrounding communities for granted just as much as a firm's leadership. Thus CSR is ultimately a partnership between a firm's leadership, employees, and indirect stakeholders of the communities in question. There is the distinct chance that any group could negatively or positively affect such a partnership--for the worse in the case of the former and for the better in the case of the latter.

Communities aiming to attract or maintain supply chain investments must recognize the key components of such a partnership and be prepared to show the value that can be added to a firm's supply chain via investment in their particular community versus another. If a community in the USA cannot compete on cost versus a Chinese community, can it compete at the relational and innovational levels? If not, what needs to be done to instill that ability? In other words, how can the community work with firms to create a mutual resilience to globalization's challenges?

Answering this question will first require critics of multinational firms to recognize many firms are doing the right things and for skeptical corporate leaders to realize they need to do much more. Only then can we move on to the constructive conversations that will lead to improving underdeveloped communities around the world.

UPDATE: For another angle with a focus on China, please visit the China SCM blog here.

Trends in China Supporting Logistics Success

Browsing Logistics Management Online, which I always do about once per week, I came across a nice article looking at trends benefiting logistics opportunities in China. It was published on June 1 and written by Patrick M. Byrne, who produces the "Byrne on Excellence" column in each issue and who's bio is as follows:

Patrick M. Byrne is managing partner of the Accenture Supply Chain Management practice, which provides consulting and outsourcing services for strategic sourcing, procurement, product design, manufacturing, logistics, fulfillment, inventory management, and supply chain planning and collaboration. Based in Reston, Va., he can be reached at pat.byrne@accenture.com

As many are aware, China's entry into the WTO brought with it a variety of obligations across the major industries, with finance and telecommunications being two of the most prominent. Logistics is another industry highly protected by China in the past that is now under the deregulatory microscope. However, as Mr. Byrne explains, there are several obstacles in the China logistics "jungle:"

"From a supply chain perspective, however, the road to high performance in China is still riddled with twists, turns, and bumps. Underdeveloped infrastructure, fragmented distribution systems, insufficient technology, and onerous regulations are just some of the challenges managers face."

With these in mind, Mr. Byrne moves on to explain the trends we should focus on:

1. Rapid growth: China's logistics spending as a percent of GDP is twice that of the United States. Selling costs also are higher—proportionately speaking, up to 50 percent greater for many commodities than in the West. Accounts receivable, a key measure of logistics (in)efficiency, often exceeds 90 days. Nevertheless, China's distribution and logistics sector is growing rapidly, with annual revenue growth of 20 percent for 2002, 27 percent for 2003, 30 percent for 2004, and 33 percent for 2005. Much of the credit goes to China's 10th Five-Year Plan (2001–05), which called for massive infrastructure improvements (summarized below).
2. Consolidation of a highly fragmented market: Among the country's 18,000 logistics services companies, not one currently offers nationwide distribution services or commands more than 2 percent of the market. However, consolidation is imminent, due to competitive pressures, increased service demands, and the growth of China's outlying regions. Foreign companies with strong international networks and better management are gaining market share, while many domestic companies rely on underdeveloped local operations.
3. Increased reliance on 3PLs: Although the concept of outsourcing basic logistics functions is still relatively new to most Chinese companies, many multinational corporations are accelerating the adoption of third-party logistics (3PL) services. Companies like Dell, McDonald's, and Nokia have demonstrated the benefits of capitalizing on 3PLs' expertise, capabilities, and assets to facilitate nationwide distribution and logistics services. According to a 2003 report by market analysts IDC, logistics outsourcing in China will grow by about 25 percent annually for the next decade. Smaller domestic firms will participate in that growth by combining operations and partnering with large-volume players.
4. Greater control of downstream distribution: More companies are following in the footsteps of successful multinationals, which are supported by strong, modern distribution networks. For example, Guangdong Honda Automobile Co. Ltd. has initiated exclusive four-in-one franchises (sales, repair and maintenance, supply of parts and components, and information services) in China to strengthen its brand name and position by better controlling service quality, product price, and market information.
5. Competitive advantages gained through alliances: As the top companies in China combine forces to build competitive national distribution chains targeted to specific industries, it is evident that this trend is fueling a growth in alliances and joint ventures (JVs). The formation of the JV between Legend Group and APL Logistics capitalizes on Legend's position as China's leading PC vendor and on APL's globally recognized brand and expertise.

Mr. Byrne wraps up by stating that "perhaps for the first time, China's business and government leaders, multinational companies, and domestic and global logistics services providers are all on the same page: They are seeking high performance by emphasizing infrastructure, leveraging partnerships, and concentrating on core competencies."

Time will tell whether "these efforts will lead to reduced costs, broader solutions, improved information management, closer collaboration, and better customer service" as Mr. Byrne insists.

Summary of China's Transport Infrastructure

The data below is divided into three categories:

• Type of transport Length of transport routes in 2004
• Number of transport equipment in 2004
• Government investment plans (11th Five-Year Plan, 2006-2010)

Rail

• 74,408 km (track in operations) 528,000 rail containers
• Annual investment will be about $8 billion by 2010.
• Half of the rail investment is planned for western China projects, including the world's highest railway that will link Qinghai and Tibet.

Road

• 1.87 million km (highways) 8.93 million vehicles (average capacity is about 2 tons)
• Annual investment will be about $80 billion by 2010.
• Plan to build 0.4 million km expressway

Sea

• 34,000 (shipping berths) 1,500 vessels (capacity of 37 million DWT)
• Annual investment will be about $8 billion by 2010.
• Plan to double the number of deep water berths.
• Specific deepwater port projects include Shanghai, Dalian, Qingdao, Tianjin and Shenzhen. 

Inland Water

• 123,300 km  210,000 vessels
• Annual investment will be about $1.1 billion by 2010.

Air

• 2.05 million km (civil aviation routes) 890 airplanes
• Construction or renovation of about 35 airports.

NOTE: Other articles of potential interest:

Surviving the China Riptide, Supply Chain Management Review and commented on here.

How to Win Friends and Influence Supply Chain Leaders, Logistics Today and Accenture

Korea Ramps Incentives to Reach Hub Goal

In previous posts, I have touched on South Korea's aim to model the country into a logistics hub for Northeast Asia. These posts include:

The Kaesong Series

Korea Logistics Brief 2006

Air Cargo Hub Strategy in East Asia

To maintain momentum with its marketing efforts and towards executing its strategy, South Korea is making moves to further open its economy for the changes necessary. A brief article in Asia Times, via Asia Pulse/Yonhap news services, touches on these moves. In essence:

"South Korea plans to modernize its port facilities and streamline their operations in an effort to attract more foreign shipping lines and become a logistics hub of Northeast Asia, officials said.

"The plan is designed to promote a profitable logistics industry, a turnaround from simply competing with Japan and China for bigger amounts of cargo in Northeast Asia," said Woo Ye-jong, a senior official at the Ministry of Maritime Affairs & Fisheries.

What this means is that South Korea hopes to increase its value-added services versus focusing only on throughput levels--how can we handle goods/services better versus how can we handle more goods/services? For anyone in the supply chain management field, value-added services are what drives profitability, and so that is where I make the link. A simple example is of a warehouse that not only stores product but repackages an international product for local market specifications.

The article outlines some of these value-added services the Korean government plans to put in place:

"Under the plan, the government will revamp ports' infrastructure by setting up an automated operation system, enhancing security standards and lifting a ban on nighttime operations."

The government will also spearhead initiatives for attracting additional investment activity:

"To spur Chinese and Japanese investments in the domestic logistics industry, the government will move to ease regulations on hiring foreign stevedores and to complete clearing sites for cargo terminals in the ports of Busan and Gwangyang ahead of schedule.

"The government will also establish a system on financial aid for mergers and acquisitions among local port operators and try to nurture internationally-renowned logistics firms like Hong Kong's Hutchison Whampoa Ltd. and the Middle East's Dubai Ports World."

As already evident in my posting on the publication of the Northeast Asia report on logistics collaboration:

"Efforts will also be made to hold ministerial-level talks on logistics among South Korea, Japan and China regularly to boost cooperation among the countries. The first round is slated for September this year.

"The ministry said the government will also seek the participation of Russia and the Association of Southeast Asian Nations."

I have a couple articles on hand that discuss in more detail the future of the Korean logistics industry and also the educational system being developed for producing more logistics professionals. These I will be translating from Korean over the next few days and hope to post within the month.

Human Resources in China

Regular readers of this site know that I often write about China. It seems that my attention is drawn into China just as much as businesses are being drawn in across the globe. But for me, working from Tokyo in supply chain management, China is just as much my territory as is Korea and Taiwan because I view Northeast Asia as my general sphere of work. At the same time, physically working in Tokyo requires me to work harder to stay up on news from China--so I probably sacrifice some news in Japan for that from China, and even Korea.

Long-term, Japan is one stop of a rotation I plan on doing through Northeast Asia. That plan puts China in my sights as a future location of work, and so ever since I did an internship in Beijing during the summer of 2004 I have been interested in the China job market, especially assessments by firms like Wang & Li Asia Resources.

Recently, Richard Brubaker, a fellow alumnus of Thunderbird in Shanghai, produced a nice report on the characteristics and status of expats and "halfpats" in China at his China Strategic Development Blog. This report is downloadable at no expense, and so if you are interested in either searching for work in China or perhaps involved in hiring foreigners in China, you will probably like to have this report on hand as quick reference.

I found my internship in Beijing via a headhunter firm, Abroad China, testing the waters as an educational institute that combined language classes with internship placements. These were basically internships that didn't require Chinese language skills and thus paid a modest stipend or no compensation at all.  However, the network I have gained has paid for the costs incurred that summer many times over.

Basically, I was a "halfpat" in the sense that I went to China of my own will, and by the end of my internship was in the position to find a decent "stepping-stone" position as described in Rich's report. As Rich alludes to, what kind of position you can obtain is based a great deal on what you bring to the table from overseas. Combine this knowledge with a good deal of adaptability, which many Chinese don't have, and I believe there are a number of opportunities for the taking.

As a supply chain person, my personal suggestion is that even if you don't have domestic experience in China, think more in terms of a potential employer's supply chain. Do you have non-China experience that could support links in their global supply chain while based in China? Can you help them build stronger sales channels in their China business via an understanding of customers from your home country? Try to look for the back-door, the commonalities between you and the firm that links both of you to China. Once you get your domestic knowledge up and running, you will be able to explore spin-off opportunities even further.

China, India Revisit Silk Road Connectivity (UPDATED)

Today in Bloomberg Online, columnist Andy Mukherjee discusses how ancient Silk Road ties between China and India are now being revisited as additional links between the two countries. I find this article fascinating not only because it touches on logistics but also because in the bigger picture it captures concepts often covered by Tom Barnett when discussing China and India at his blog.

Mr. Mukherjee does a great job of leading in with this story by weaving the past in with designs for the future:

"The Western world's rediscovery of China and India has produced an important side effect: It has become a trigger for the two rising Asian superpowers to renew their own 2,000-year-old acquaintance. It's still early days in the courtship, though if it continues, 2050 may not look much different from 1750 when the two nations together controlled as much as 57 percent of the world's manufacturing output. This month, China and India will reopen the only all-weather overland trade route joining them through the Himalayas at 14,500 feet above sea level. The Nathula Pass was once part of the thriving Silk Route, connecting ancient China with India, the Middle East and Europe."

Mukherjee also illustrates why most of the discussion of China cross-border logistics at this site focuses on air and sea ports rather than cross-border highways. He also explains the horizontal influence of economic connectivity on political connectivity and vice-versa: 

"Nathula is still a work in progress: The crossing, in its present form, is suitable for mules, not big trucks. The more important point about the reopening of the pass -- it was closed after China and India fought a brief but bitter war in 1962 -- lies in the political symbolism of the move. By opening Nathula, the two countries will be shaking off the diplomatic mistrust -- and the resulting economic constraints -- that has hindered the development of China's southwest and India's northeast and prevented the nations from tapping a reservoir of power, gas and oil in their backyards.

With international trade having built so much momentum in these "New Core pillars", it is no surprise that the prospects for additional trade via this route can "move mountains"--or in this case literally go over them:

"The resumption of trade along the 62-mile (100-kilometer) road that connects Gangtok, the capital of the northeastern Indian state of Sikkim, to the Tibetan town of Yatung in China's southwest involves subtle shifts in foreign policy that neither country acknowledges publicly.

"The reopening of Nathula will underscore the Chinese government's abandonment of its policy treating the erstwhile Himalayan kingdom of Sikkim as an independent nation ``annexed'' by India in 1975. As part of the grand bargain, India, too, has decided to soften its stance on Tibet. Even as it continues to host Tibet's spiritual leader, the Dalai Lama, who has lived in exile in India since 1959, the Indian government has unequivocally accepted China's sovereignty over Tibet and agreed to forbid Tibetan settlers in India from carrying out anti-China activities. With territorial politics largely out of the way, economic forces can finally take over." 

Using the map I have provided below as a guide, Mr. Mukherjee describes the regions of both China and India that could benefit very positively in the long-term. As he states, "the scope for trade is immense:"

Download modern_silk_road.ppt

"Landlocked parts of China's southwest, comprising the autonomous regions of Tibet and Guangxi and the provinces of Sichuan, Guizhou and Yunnan, have been left behind even as coastal regions in the east have benefited from investments and jobs in trade-linked manufacturing.

"India's northeast has similarly suffered because of its geographic isolation. If the two contiguous regions were developed in sync, they could become an economic powerhouse together, trading not just with each other but also with Bangladesh, Bhutan, Myanmar and Nepal."

Mutually, "China's southwest and India's northeast have 200 billion cubic meters of natural gas, 1.5 billion tons of crude oil and 900 million tons of coal reserves, according to economists Biswa Bhattacharyay at the Asian Development Bank in Manila and Prabir De at the Research and Information System for Developing Countries in New Delhi."

In addition, "the Ganges and Brahmaputra rivers, which flow through India's east and northeast, have the potential to generate 90,000 megawatts of electricity annually. Only a fraction of this potential is being exploited because it is too expensive to transport the power to industrial centers in northern India."

With both a needs convergence in terms of resources and a physical convergence in terms of adjacent economic development, finding common ground in tackling the difficulties in relinking this region is reached more quickly:

""Massive investments are required for the development of the hydropower resources of the Ganges-Brahmaputra basin and can be productive with enhanced cooperation between China and India," Bhattacharyay and De say. "Hydropower in India's northeast can be marketed in the southwest provinces of Bangladesh, China and Myanmar." Natural resources are becoming increasingly vital for both China and India. At the same time, policy makers in both countries are aware of the need to reduce regional economic disparities to preserve social harmony. For six years now, China has been urging international enterprises to look beyond coastal China. The Chinese government's "Go West" policy has prompted companies such as Motorola Inc. and Intel Corp. to set up units in Chengdu, the capital of the western Sichuan province. With a matching "Go East" policy in India, China will find it easier to take investors further into the Chinese hinterland, into Yunnan and Tibet."

This whole process of relinking an ancient logistics pathway challenges the assumptions that China and India are in a zero-sum, economic rivalry--rather, this initiative emphasizes that the two countries "are quietly finding ways to work together, including making joint bids for oil assets to control acquisition costs."

In terms of overland links, "the Indian port city of Calcutta is about 700 miles from Lhasa, the Tibetan capital. And Nathula is one of several links that can be prepared to handle efficient motorized cargo transportation between Calcutta and Tibet."

Mr. Mukherjee admits that "cooperation between the world's two fastest-growing major economies is still nascent--it was only four years ago that China and India got their first direct flight between the two countries." However, he emphasizes that "since then, progress has been rapid. From April to December 2005, China and India traded goods valued at $12 billion, a 55 percent increase from a year earlier. In the next four years, Tata Consultancy Services Ltd. and Infosys Technologies Ltd., the two biggest Indian software companies, plan to have at least 15,000 employees in China between them."

If only Marco Polo were alive to witness the rebirth of what Mr. Mukherjee calls this "modern version of the Silk Road," he would likely be one of the first supply chain managers to manage it successfully.

UPDATE: For perhaps a more ugly angle of the complicated China-India relationship, China Confidential has a post up on arms sales to Nepal from China and facilitated by India.

UPDATE II: Some more commentary tangentially related to this news can be found at The Peking Review.

Positive Commentary on Asia Logistics Wrap

Having been an attention-seeking artist in the past, I will be honest in saying that I always enjoy any positive attention this site receives across the web. When reflecting on what to write, I always believe that the quality of a particular post will help it either "thrive" or "dive." Recently, I have had some very positive feedback and responses at two blogs--one I am becoming pretty familiar with and another I just discovered.

The first, China Law Blog, presents a flattering summary of this site's content and flavor. I can't say enough about China Law Blog and its post production and quality!

The second, How the World Works, has just been brought to my attention via Dan Harris at China Law Blog. I had seen some referrals coming in from Salon, but had no idea why until Dan's post caught my attention. I have added "How" to the blog roll, so please visit despite the advertisement along the way, especially the post referring to this blog titled "Shrinking the neo-orientalist Gap." I look forward to reading more into the future.

I will be putting up some new posts, in addition to the continuation of my Kaesong series--which I have neglected from finishing due to my busy May and an equally hectic June.

Thanks to all those visiting and I look forward to any feedback!

Delving Further into China's Ports

I have made several posts in the past on ports and port development, especially in regards to China. As a review, below is a list of these posts:

Update on River Ports in China

China Trip Impressions: Jiangyin

Shanghai's Yangshan Port

Update on China's Ports

Recently, another article on ports has appeared from Reuters via The Edge Daily, discussing a wide range of port topics. The phenomenon that drives this article is that while efficiency gains continue to be sought in the larger coastal ports, supply chain management professionals will also look inland to reign in bottlenecks there. These bottlenecks involve road, rail, air and river transport, with river transport typcially being the cheapest and yet most inefficient. The Chinese government seeks to facilitate these efforts towards enhanced efficiency:

"China is developing a blueprint for its booming ports to try to free up persistent bottlenecks, while curbing over-zealous capacity expansion before it drives away much-needed foreign investment. Surging foreign trade has led to an explosion in Chinese port expansions. Shanghai is now the third-busiest container port city in the world, while cargo volume at Pearl River ports is growing at a rate that surpasses Hong Kong.

As mentioned above, and in my earlier posts such as with Jiangyin, where there are bottlenecks there are business opportunities:

"Planners are turning their attention to relieving bottlenecks with feeder ports, especially along the Yangtze, while making sure competing plans for new ports and expansions do not dilute returns on existing investments. As an example of both increased competition and continuing bottlenecks, Shanghai's newly opened Yangshan port -- which is connected to the mainland by a 32 km bridge -- recently cut shipment transfer fees to attract more ships from the older but more convenient Waigaoqiao port."

Cities like Jiangyin are very anxious to promote their ports for foreign investment and I believe the desire of planners to relieve bottlenecks strategically will bring the desired attention and investment consideration to a city like Jiangyin. At the same time, I am not sure whether allocating functional logistics responsibilities to designated feeder ports is a great idea--such plans, as described below, should not build-in too much rigidity: 

"Plans under consideration would promote liquefied petroleum gas port facilities along the Yangtze and Pearl rivers, and set capacity targets for oil and iron ore terminals, said Wang Ming, deputy director general of the Institute of Comprehensive Transportation at the National Development and Reform Commission, China's top planning body.

The true crux of the matter is explained below, and was also my concern when first looking at the Jiangyin port infrastructure and development:

"A national blueprint would help rein in overly enthusiastic local governments, whose competing port plans risk cannibalising flagship projects, Wang said during a recent conference. "The problem now is that the scale of the national plans and that of local plans isn't always the same. Added together, the local plans exceed the national plan, and this is a paradox.""

How are the leading firms approaching this coastal port-feeder port dynamic?

"Multinational terminal operators like A P Moeller-Maersk's APM Terminals and Hutchison Whampoa have earmarked billions of dollars for Chinese port investments, to serve an economy growing at 10 percent a year. But they are getting more cautious. "We don't blindly go in and say we want to invest. The world is getting so much more competitive, and China is sometimes a bit too successful in creating capacity," said Peter Wong, Asia Pacific managing director for DP World. "That could create some problems down the road in terms of the return on projects, so we are watching it fairly closely. Some ports are much more diligent in terms of matching supply and demand than others.""

For a glimpse into its port-hedging strategy, DP World--now infamous for its foray into the US market--generally explains its approach and what it views as successful positioning:

"...DP World is still interested in additional investment in terminals along China's southern coast, Wang said. The state-owned Dubai firm recently bought the global assets of British ports group P&O. It has terminal investments in Hong Kong and in the mainland ports of Tianjin, Qingdao and Yantai. Longer term, the winning investment will be in the ports that capture the flow of goods as China's central and poorer western regions catch up with the wealthier coast, Wong said."

Basically, we can see that the top firms are carefully weighing the cost/benefit ratio of establishing inland investments in comparison to the more architecturally secure coastal areas. By architecture, I am referring to the five supply chain architectures I often refer to at this site--physical, financial, informational, relational and innovational. Although I don't expect even all of the top firms' analysis to be this sophisticated, the threshold for going forward with a supply chain investment such as a port facility would probably be limited to meeting some sort of physical, financial and informational architectural standards. Relational and innovational architectures are more like frosting on the cake, sort of second or third phase investments whose returns are more difficult to calculate.

"Rising labour costs along the prosperous coast and in the south are pushing multinationals to invest further and further inland, and development of Yangtze River ports would help move goods from the central provinces of Sichuan, Hunan and Hubei. The recently completed Three Gorges Dam could spur consolidation among barge operators along the Yangtze, since larger ships will be able to carry cargo from as far upstream as Chongqing once the Gorges' dangerous rapids are flooded."

For example, in regards to some of the physical limitations still in place:

"A sandbar at the mouth of the river and a low bridge at Nanjing will still prevent ocean-going container ships from entering the river. Port expansions at the industrial river cities of Chongqing and Wuhan are in the works, Wang said. But investors would have to be careful when evaluating container and bulk port projects along the river, since unapproved local projects could be blocked from getting loans, said Bo Frank Nielsen, managing director of Modern Terminal's Taicang port project, in eastern Jiangsu province. "A lot of multinationals are eager to come and invest, and now that we are open to the outside world you can't arbitrarily say they can't. But they need to fit into the plan," Wang said."

Really, as a potential investor in port facilities in China whether coastal or inland, a supply chain manager really needs to understand the entire network of ports for a particular river delta system, such as the Yangtze River Delta (YRD). For example, if your target hub for moving goods or providing services will be Shanghai, in the least a SWOT analysis should be done of all the ports up the river to Nanjing. Better yet, combine this with using the FAR matrix I created some time ago for really analyzing the meat of each port's supply chain architectures in the context of economics, politics, security and people. In some cases, such analyses may lead to 100% investment in one location. Other analyses may lead to a split investment where 80% is coastal, and 20% is inland as a precursor to potentially larger future investment and development plans.

Simply put, understanding an entire economic zone even if your firms operates within one particular area will be necessary to remain resilient and aware of the right opportunities at the right times in the right places around China. 

Logistics for Perishables in China

Working for a logistics company focused on the food and beverage market in Japan, I am always curious about logistics services for this industry in China and Korea. However, there never seems to be many publicly available sources on Asia for reading in English--either in the news or in the form of special reports.

Fortunately, this week I came across an article on logistics services for this industry in Shanghai. The article, titled "Shanghai Perishables Firms Out on a Limb," is from Cargonews Asia and written by Lily Su. From my experience so far in Japan, I can really relate to many of the problems communicated in this article.

The article first discusses the primary problem, using the example of a firm called Sinodis:

"More than 300 food suppliers in Shanghai have a common problem - they cannot find a good third party logistics (3PL) provider. And it is much harder to find one in the south or southwest. Sinodis, a distributor of food products such as cheese, ham and chocolate imported from Europe, Australia and New Zealand, has hunted for a 3PL for three years but to no avail."

Unfortunately, with the industry hampered in this way, it forces companies to keep operating businesses they aren't really good at, ensuring that costs remain high:

"Chen Mingjing, Sinodis logistics manager, said the company was forced to handle its own logisitics and it was struggling to keep costs down to 10 percent. Sinodis owns a temperature-controlled warehouse in Shanghai and one in Beijing and supplies food to the south and southwest. He said finding a suitable 3PL in those areas is much harder than in Shanghai."

One of the problems seems to be that there are no experienced, independent cool-logistics service providers:

"The top domestic cold-chain 3PL in Shanghai is Speed Fresh Logistics which was set up in 2004 by parent Bright Diary and Food, the largest diary products company in Shanghai. Speed Fresh executive director Zhang Darui said his company's hands were tied as 90 percent of its business came from its parent. "We are planning to reduce that to 50 percent in three to five years," he said. Zhang acknowledged there was big demand for 3PLs offering quality cold chain facilities, but said "it is like the gold mines underground. We know they exist, but getting the gold takes time and effort.""

It will take some real reform to reduce that number from 90% to 50% in three to five years. Not only is it difficult to break away from a parent company with that much buyer power, but also it is difficult to grow business enough through investment in physical and intellectual capital in order to offset such a large customer. Other options for Speed Fresh to grow would be through acquisitions as a platform company.

Speed Fresh expands more on its problems:

"The biggest challenge for us is the immaturity of the market," Zhang said. "We often find clients are unfamiliar with the concept of logistics." He said that with every 10 potential clients they talk to only one succeeds to reach a deal. "It's like dating," he said. "We are all enthusiastic, but there is a strong possibility it may not work out." On average, it takes 18 months to settle a deal with a partner, he added."

If clients are still at such an early stage of development, it is likely that many potential logistics partners serving this industry are as well. Sinodis actually looked at Speed Fresh as a potential partner, but the large buyer power of Speed Fresh's parent nixed the deal:

"Sinodis told Cargonews Asia it had approached Speed Fresh to handle its operations but the talks failed because of a conflict of interest. Sinodis' business includes dairy products, which is the major line of Bright Dairy."

Basically, in a company like Speed Fresh, Bright Dairy will be given top service priority. Therefore, if it handled Sinodis distributed product, Sinodis would be concerned about any manipulation of product handling that would favor Bright Dairy in distribution and market access. If Speed Fresh is able to diversify its customer base as planned, and then establish a solid track record servicing non-parent clients, Sinodis may again come knocking.