Back in August while browsing FTB Asia, I came across an article on trucking in China that was written by Paul French out of Shanghai. FTB always has some interesting articles online during each month, but there is no freely accessible archive to refer back to for future reference. Thus, for now I am linking the overall website itself prior to going into this article.
Because a truck is a truck, in the end there are going to be a similar set of constraints and factors involved in trucking no matter which country a company decides to establish a new supply chain. Obviously, equipment, roads and terrain are primary considerations in the least sophisticated environments. At the other end of the spectrum, it is necessary to consider the systems and regulations that attempt to influence, organize and shape entire transportation networks. In China, it is quite possible to see both extremes, with a number of regions in transition trying to bridge the gaps. The FTB article very much illustrates this transition.
First, Mr. French paints the context:
It is going to get progressively more expensive to run trucks in China. This is not great news for a logistics sector yet to feel an easing of road loads, as rail freight takes a long time to expand and river transport continues to lag behind coastal port development.
Looking at the roads landscape across China, we see a number of factors that will push up costs: rising fuel prices, the government's continuing anti-overloading campaign, the introduction of toll-on-weight (TOW) schemes and more new expressways scheduled to become toll roads.
In essence, we have a China shifting from an "anything goes" environment on its roads towards establishing new rule sets as evidence in the anti-overloading measures and toll charging schemes. The hope is that this will encourage more sophisticated behavior in terms of utilizing the nation's growing transportation networks:
The good news is that if the various measures work, then more roads will be available linking the coast to the hinterland and more heavy duty trucks will take to the roads. The horrendous number of road accidents involving trucks should also be reduced and damage to road surfaces should be less, prolonging the life of the roads and limiting damage to cargo.
Of course, those that have up until now benefited from a loose regulatory environment will come under new pressures to innovate:
Toll-on-weight has been a controversial measure in China. So far it has not been introduced nationwide and the results in those provinces where it has been brought in are mixed. Anhui Expressway (AHE), the listed company that operates Anhui Province's expressways, recorded stagnant traffic growth in 2005 and attributes this to the introduction of a TOW scheme in the province in late 2004. However, revenues from levied tolls for AHE rose by 32% after TOW came into effect.
Other operators are expecting a boost:
TOW is now expected to be introduced into more provinces this year, with Guangdong and Zhejiang being the likely first entrants to the scheme before it goes nationwide. Zhejiang Expressway, the listed company that operates Zhejiang Province's expressways, saw tariffs increase 4.4% in 2005, due to the anti-overloading campaign being enforced rigidly and consequently more trucks (though less heavy duty trucks) using their roads.
This should be seen in all the major expressway operators following the central government directive that meant that all road operators reduced their tariff for trucks with over 10 tonnes capacity by 13% to 20%. The directive was intended to improve fuel efficiency and relieve toll expenses for trucking firms hit by both rising fuel prices and the anti-overloading campaign.
While China's TOW program is just ramping up, I would just like to mention that Japan's tolling system is very extensive and, like the US, has implemented electronic toll gates that improve expressway efficiency and results in toll discounts for trucking companies. However, the toll fees are very high, reflecting the cost of maintaining highways in a country accustomed to government largess, the high cost of imported materials and the need for earthquake prevention measures (i.e. expressway structure reinforcement).
When reforming entire networks, such as a transportation network, the result will be the need for reciprocal reforms in all the related industries:
The anti-overloading campaign has seen a high-profile crackdown by the government, both on overloaded trucks on the road and manufacturers advertising their trucks with exaggerated load capacity--for example, DongFeng Truck, one of China's largest producers, was instructed to pull advertisements that overstated their vehicles' load capacities by 25%.
However, the government has seesawed on the campaign. After an initial crackdown, the pressure was relieved slightly as companies such as Weichai Power, China's major producer of heavy truck engines, saw a serious decline in sales as the campaign depressed demand for heavy trucks. Weichai had a 70% market share in the high-power 15-tonnes+ capacity truck segment. However, when the campaign eased slightly, sales took off again immediately as fleets expanded again and Weichai sold a record number of heavy truck engines in the first quarter of 2006.
Japan is an interesting comparison. Like the United States, it has progressed further along the curve than China in terms of industry regulation. As with toll regulations affecting truck sales in the example above, in the US new requirements on engine emissions set to start over the next couple years has catapulted current year truck sales to new records--companies want to make the investment in equipment prior to the rise in prices expected in trucks with the newer, more environmentally friendly engines. In Japan, very stringent environmental regulations on trucking emissions greatly influences the costs of operation.
Of course, along with environmental considerations, fuel efficiency is a constant issue for trucking firms and transportation management officials. I have discussed this issue previously in the context of Japan, but since the Chinese government sets fuel prices across the country, delving into China provides an interesting contrast:
The government continues to artificially restrain petrol prices though staggered rises. Rather than introduce full market pricing for petrol, the government would rather see more fuel use efficiency first. To do this, it is introducing a staggered fuel tax with the aim of encouraging those trucking firms that currently prefer to use highways rather than toll road expressways to switch.
Despite the cost of tolls the expressways give greater fuel efficiency than highways.The result has been greater loads on the expressway system and less congestion and damage on the highways. The major expressway operators are all having to cope with rising demand as China's economic growth continues and investment moves inland, driving demand for coast-tohinterland transportation and private passenger car ownership rises adding to overall road use and congestion.
With the considerably rapid increase in traffic volume, upgrading infrastructure has already become a key concern in ensuring China's ability to keep pace with it's overall economic growth:
Those that developed their expressways first are having to upgrade ? both Jiangsu Expressway (JSE) and ZHE, which built fourlane expressways across eastern China in the 1990s, are having to upgrade them to eightlanes as the Yangtze River Delta continues to be China's primary economic powerhouse. JSE recently reopened its flagship Shanghai-Nanjing expressway after extensive renovation and expansion from four to eight lanes.
However, Guangdong remains crucial and Shenzhen Expressway (SZE) is also having to upgrade and widen roads as the exportoriented economy remains strong and private car ownership boosts traffic numbers in southern China. SZE is the fastest growing of the four major listed toll road operators, having acquired the Wuhuang expressway in 2005 and opening the Yanpai expressway (linking Yantian Port to the Pearl River Delta) in 2006.
As has been and still continues to be the case in Japan, regional differences in regulations and procedures in relation to trucking raises the costs of doing business in China. In terms of procedures, this can include how to register trucks, the transfer of trucks from one office to another, how to register new offices, and how to carry-out vehicle inspection and maintenance. Regulations that vary include the type of emissions equipment required, parking restrictions, weight restrictions, vehicle age restrictions, etc. In Japan, because most prodecures are handled manually, many foreign companies hire third parties to manage it or fail to understand the true costs associated with such paperwork. Japanese trucking companies are quite adept at navigating the procedures but seem to be part of the issues that keep the overall system from reforming and streamlining. Mr. French touches on the regional barriers that place upward pressure on costs:
According to a recent report from CLSA Asia-Pacific Markets, logistics providers already face administrative costs of 14% in China compared to just 3.9% in the US. The major reason for this is China's persistent regionalism which means that tolls (both official and unofficial) proliferate the more provincial borders a truck must cross.
Even more costly and inefficient is that however good the road network, it is still often necessary to use more than one trucking operation to move goods across multiple regions and provinces, meaning that too many trucks in China are still operating with no load on their backhauls--but the tolls still apply.
That last part I highlighted in bold is exactly what the case was in Japan. Only now that prefectural barriers to entry have been reduced are small- to mid-sized Japanese companies seeking nationwide efficiencies and synergies by collaborating with other firms to solve such problems as backhaul. Due to the deep entrenchment of traditions in Japanese firms, this process is moving very slowly. I expect that the Chinese will move faster in reforming, but the question is how well they execute when facing such a steep learning curve.
