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