Asia Logistics Wrap

China Logistics Report 1

Even though I am in Japan, since I now work for a global company I am more frequently coming across news on China logistics via one form or another. Whether it is through a friend in the industry or via reading China-focused blogs, it is easy to find articles and posts to point out to readers.

Over at the logistics blog at China Economic Review, they mention a new air hub being established by UPS in Shanghai. That is right on the heals of news regarding DHL's new contract logistics hub in the area.

Over at All Roads, Rich has posted a nice write-up on infrastructure investments in warehousing on the Mainland, along with an update on the Three Gorges Dam. I don't currently have time to analyze the warehousing post, but I want to come back to it in a later report.

Lastly, be sure to follow all the links on China at 3plWire--there are a few on recent ports data. Tomorrow, the Logistics Report travels to Korea!

Dealing with Workforces in China

I try to subscribe to some good online magazine mailing lists to reduce my search for good news and articles to post on here at the site. One of those online magazines is Workforce Management, and recently I was happy to learn that they have set up an entire section on China's labor market. Included so far are:

• Articles: HR on the Hot Seat in China and Vendors' Fast Boat to China
• Blog: China Matters--Ed Frauenheim writes on issues in HR in China.
• Podcasts: A nice slew of podcasts I am meaning to get through.

It is really too bad there is nothing like this for Japan, as there are a number of changes taking place here as well and as I have written on in the past. But in the meantime, we can enjoy this kind of reporting coming out of China.

For some additional takes on foreigners in China--the non-executive types--see All Roads Lead to China and their recent "halfpat" series.

Railways a Mode Towards Shrinking China's Gap

Some articles just jump right out at me as easy posts, and this was so when I saw a link summary in the WSJ titled "Narrowing the Gap" and discussing railways in China. The link takes you to an article titled "China Expands Rail System in Effort to Narrow Prosperity Gap," which is written by Bruce Stanley with contribution from Juying Qin. Directly or indirectly, China railways been covered before here, as well as at other blogs, notably in the posts listed below:

• Asia Logistics Wrap: "Going West" Along China's PRD
• China Economic Review: Railways Post Archive
• All Roads Lead to China: China Transportation Network

But what I like about this article is how it takes a topic I have been interested in since reading Tom Barnett's work--that is his work on "shrinking the GAP"--and melds it with the role of supply chain logistics in making that shrinkage happen. This melding was my entire inspiration behind the FAR matrix I created almost one year ago (image below).

Basically, before even reading the article, we can begin to brainstorm via the matrix above just how a physical architecture such as the railway network in China will have an impact on the above listed flows. From the article's title, we can assume it leans towards focusing on economic and people flows, and the first few lines confirm this slant:

China, worried about the wide income gap between its highly developed coastal areas and its lagging interior, is looking to railways to help spread the wealth.

In recent years, China's breakneck economic growth has lifted millions of people out of poverty. But the economic divide that growth has left behind poses a challenge for the ruling Communist Party, which has staked its legitimacy on its ability to make people richer and is worried about the potential for social unrest.

That last comment illustrates just how interconnected flows can be (economic and political, in this example), and the article goes further to illustrate the current Chinese Premier's concern:

Chinese Premier Wen Jiabao addresses the wealth gap in speeches and policy initiatives. The government's latest campaign: upgrade China's vast -- but overburdened -- rail system to link more parts of the country to one another and to overseas markets. Or, as China's policy makers put it: "to build up a harmonious socialist society, the development of railways has to be sped up."

The data here is pretty hefty, and one can just imagine the connectivity that will be driven by each section of railway being laid to the earth:

The plan calls for the government to nearly quadruple its investment in the nation's railroads to almost $200 billion by 2010. The aim is to create 10,500 miles of new track, much of it in underserved central and western China. By the end of the decade, if China meets its goal, the rail system will have grown to more than 56,000 miles.

For readers of this blog and other logistics blogs commenting on Asia, it is no surprise that the current status of China's inland infrastructure is lacking and behind the pace of its own economic growth, and most significant advances in logistics, along its eastern seaboard. WSJ provides a nice summary without digging into my archives, where you can find more details:

The investment would provide a missing link in China's logistical infrastructure. The nation's seaports are among the world's most modern and efficient, but its railroads, which could be supplying these ports with a lot of the goods they send abroad, aren't up to the task.

In many other countries, railroads carry as much as 20% of all containerized freight; China's historically underfunded tracks transport less than 2% of its shipping containers. Almost all of China's exports arrive dockside via truck. Yet trucks in China are cost-effective only over distances of roughly 300 miles, or a single day's road journey, according to transportation experts.

Of course, that state of this physical architecture impacts the decision-making of businesses around the world when considering China for investment:

Investors who want to produce goods for export have balked at building factories in provinces where reliable transportation links to seaports are scarce. As a result, investment in Chinese export-oriented industries has been concentrated overwhelmingly along the coasts and major rivers near China's ports. James Wang, a transportation geographer at the University of Hong Kong, calculates that no less than 94% of China's international trade value is generated within 150 miles of the coast. This investment pattern deepens the country's internal economic fault line.

Where economic flows don't reach the people, the people go to where they can tap into it themselves:

Large numbers of Chinese have moved from inland regions to find better-paying jobs in coastal enclaves. Economist Sir W. Arthur Lewis, who studied Britain's colonies, noted the propensity of people to migrate to the capitalistic sector if wages there were attractive.

"The pattern of development that you are seeing in China is very similar to an African, colonial model. It centers on the seaport -- that's where globalization came in," says Becky P.Y. Loo, who, like Mr. Wang, is a transportation geographer at the University of Hong Kong.

Because China's inland ground transportation and mobility has been so poor, I believe that the growth of China's inland cities has a great deal to do with the concentration of large populations as well as the airport infrastructure being the first priority of investment by the government up until now. When necessary, businesses in these areas deal with the ground logistics difficulties while anticipating future improvements. In terms of models, Tom Barnett has before mentioned the westward movement of people in America's own history when discussing China's "Go West" policies, and the WSJ also notes the parallel:

Railways offer the prospect of bringing China's two economies closer together. If the colonial model is in some respects where China's rail system finds itself today, the transformation of the U.S. economy in the late 19th century is closer to where Beijing wants to go. In the U.S., the completion of the first transcontinental railroad in 1869 connected the industrializing eastern states with the Pacific coast. That rail link and others built in later years were crucial in opening the sparsely settled Western territories to settlement and making possible the development of ranching, mining and other businesses.

And back to the flows:

China already has a rail link to distant Tibet, completed just last year. The railway buildout, however, could have an important impact on the flow of people and goods and on the spread of prosperity in the nation.

And circling back again, step 1 is ensuring that physical architecture is solid:

A centerpiece of the plan is the creation of 18 logistics centers to expedite the distribution of containers throughout China. The plan also seeks to boost railway container traffic by promoting the use of double-stack container cars.

Those crunching the numbers on a daily basis for supply chains around the world know the benefits of reducing total logistics cost via intermodal benefits, and it is satisfying the Chinese are being aggressive towards providing more logistics efficiencies via higher quality in intermodal options. In the end, the actual results of this initiative will be evaluated on the ground rather in the total outlay of investment cash.

Rolling on the (Yangtze) River

I have been meaning to get to this article for some time, and it has been touched on already at 3PLWire. I just can't pass up going through it here because of my own recent, and albeit short, experience along the Yangtze River--particularly Jiangyin.

The article is "River of Opportunity" by Kris Knutsen and Clarence Kwan from Logistics Management Online, and was published on October 1 this year. The article is quite long and so I will just pull some pieces that add some context to my own trip along the Yangtze.

"...for companies that are willing to look westward, China's competitive advantages remain undimmed. Manufacturing wages in interior provinces are much lower, and prime industrial real estate is both more readily available and a fraction of the cost of land in the crowded coastal zones. Some of China's fastest-growing and most underserved consumer markets also beckon."

From conversations with Jiangyin officials, visits to sites with both utilized and available commercial real estate, and time spent downtown and in the parks taking in the local flavor, I can personally vouch that the above statements describe Jiangyin.

"The Chinese government has already spent billions of dollars to facilitate use of the river and to develop the roads and rail lines that parallel it. Much of that investment has been focused on “containerizing” China's inland economy; in other words, encouraging the use of containers to transport goods, by road, rail, or barge. For foreign investors looking for new opportunities to source, manufacture, and sell in China, the emergence of the Yangtze as a modern, multimodal transport corridor will be of tremendous significance."

This is an important marketing point for Jiangyin.

"The Yangtze, the world's third-longest river, is one of the most heavily utilized waterways in the world. Before 2000, traffic on inland stretches was almost exclusively bulk cargo, but as inland economies have grown, containerized traffic has markedly increased. Even today, the Chinese government estimates, 80 percent of the iron ore, 72 percent of the crude oil, and 83 percent of the coal delivered to manufacturing enterprises along the Yangtze is carried by barge."

As a result, in my Jiangyin post, you can see the new port equipment just prior to opening the second container berth. As the article states:

"In the short term, at least, expanding container capacity on the Yangtze will plug critical gaps in the existing road and rail network and will link huge areas of central and southwestern China to the coast at relatively low cost. The government has therefore moved quickly to improve conditions on the river through dredging, reef demolition, and, most particularly, navigational improvements associated with the Three Gorges Dam project. It has also coaxed more than two-dozen inland container ports into existence as far as 1,500 miles upriver. As a result, the river itself has emerged as a crucial enabler of expanded intermodal trade in China's interior."

One of Jiangyin's hopes is to increase direct-to-export shipments coming out of its ports by utilizing its own custom clearance authority. This will reduce costs by eliminating the need for many exports to transfer shipment at Shanghai. The article confirms what I heard from Jiangyin officials:

"Some operators are even experimenting with seagoing barges; the first one began serving the port of Yangshan directly from Nanjing in December. These deeper-draft, more powerful vessels will significantly cut transit times on the river and open the possibility of direct container-on-barge service from deep in China's interior to seaports as far away as South Korea and Japan."

In the meantime, until cities like Jiangyin become more strategic as a logistics hub, the growth at Shanghai ports pulls business through the smaller Yangtze ports:

"A major stimulus for the long-term development of Yangtze shipping is the massive expansion of container berths now underway at Shanghai. In December, the first phase of Shanghai's new deep-water container complex opened, adding 2.2 million TEUs of additional capacity to what is already the world's third-largest container port.

"Yangshan, located 21 miles off the coast, will eventually add between 15 million and 20 million TEUs to Shanghai's total handling capacity--more than the 2005 throughput of the top three U.S. container ports combined.

"With a six-lane causeway that provides the only direct link to the port short of capacity, and the timeline for introducing rail service uncertain, expanded barge service clearly will be required to move traffic between Yangshan and the mainland. Port planners now expect container barges will move more than 30 percent of that traffic by 2020, and barge companies all along the Yangtze already are moving to upgrade their fleets."

The article goes on to highlight Wuhan and Chongqing as worthy target locations for new waves of investment. But only looking at these cities means locations closer to the Shanghai-Nanjing corridor will be missed. Although I am biased, Jiangyin is one of those cities that deserves some investigation--not just for its available and growing logistics infrastructure but also for the city environs that I believe are quite hospitable to foreign crowds but without the congestion typical of the coastal cities. And of course, it is only a 1-2 hour drive from Shanghai making weekend getaways to the city entirely reasonable.

Supply Chain Design Considerations for China

Dustin Mattison, writing at the China Supply Chain and Logistics Strategy blog, posted regarding "Sales and Distribution in China" on November 1. This post is particularly interesting because it essentially discusses the struggle of supply chain integration when trying to serve both the domestic and foreign markets from the same sources within China. For example, a company that has perhaps established its China supply chain primarily for export to non-China destinations may experience problems down the line when trying to reach the domestic market on the same infrastructure.

Dustin first touches on a possible cause of this short-sightedness:

There is no shortage of supply chain and logistics seminars in China, with practically at least 1 such event per day in Shanghai alone, not to mention Beijing, Guangzhou, Chengdu, etc. At such events one can gain insight into the mentality of government planners as well as logistics and supply chain professionals in China.

The recent CSCMP event in Shanghai is a good example. Discussions mainly centered on assets, infrastructure, capacity utilization, etc. Little focus was placed on the demand side of the equation. Currently, the majority companies in China believe they need to operate in a single "lean" fashion.

Dustin then follows up with a mention of John Gattorna (who I have posted about previously in regards to DHL and people power) and summarizes a recommendation:

However, as John Gattorna mentioned to me, a mistaken view of many companies is that they assume all customers act as one in a 'lean' buying behaviour...Companies selling in the China market need to conduct a detailed analysis of the buying behavior of their target customers, followed by an assessment of how the behaviors can be segmented according to different supply chain service strategies.

Because issues with the physical architecture of the supply chain can tie up so many resources within a firm, naturally companies follow up much more slowly with improving the other architectures necessary for a high-performance supply chain--financial, informational, relational and innovational. Thinking simply of the term "supply chain," it itself implies a "push" dynamic where the term "demand chain" might be recommended in instilling a "pull" dynamic that feeds off of the end customer or consumer. The most famous pull system is that employed in the Toyota Production System.

For reference on supply chain types, my former supply chain professor at Thunderbird, Joe Cavinato, long ago wrote an article for Supply Chain Management Review titled "What's Your Supply Chain Type?" John Gattorna also has a fairly new book out that I am looking forward to buying soon titled "Living Supply Chains."

Lenovo CEO on China

This past Thursday I had dinner with an expat friend from UPS and a halfpat friend from DHL. One of the topics that came up was the benefit of having a Westerner in the top leadership positions of branch offices in Asia. My DHL friend summarized that because Westerners are comfortable taking on significant amounts of responsibility, Asians feel more comfortable deferring to that leadership, answering commands, and avoiding the risk associated with assuming more leadership themselves. On the other hand, my friend argued that once an expat position is handed over to Japanese leadership, major decisions end up more in "committee" to better disburse responsibility. As a result, he said, decisions are likely to be less decisive and successful.

Personally, I feel this is in line with the characteristics commonly associated with Asian societies: greater collectivism (decision-by-committee) and high risk avoidance (disbursing responsibility to the point no one person can be held accountable). My friend at DHL said his own experience verified this dynamic. Obviously, working as I have for a Japanese company the past 1 year and 4 months has provided an environment for me to see the "decision-by-committee" approach as well as risk avoidance in action. As the only Westerner in the company, I have many times felt like a droplet of oil in a pan of water.

This past Friday, November 17, the Wall Street Journal posted an interview with a Westerner leading an Asian company: Bill Amelio, CEO of China's Lenovo. By Jane Spencer, I read the interview looking for Mr. Amelio's perspective on the dynamic my friends and I had just discussed the previous evening. Below are the selected highlights:

WSJ: What kind of cultural issues come up between the American and Chinese sides of the company?

Mr. Amelio: Every day there's something. On both sides, you need to have great trust in your colleagues to know that their intentions are good, even though the words might not come out right.

In the U.S. and Europe, we have highly opinionated executives who like to make their voices heard. The China team tends to listen more and express themselves more thoughtfully. The Americans and Europeans need to know that if a Chinese colleague is nodding silently, it doesn't mean they're agreeing. We also have a program in place to teach our China team better confrontational management skills.

The Chinese team also tends to be very, very thorough -- and sometimes when you want to get something implemented, it's important to have conciseness.

Sometimes it's great to rally the whole team around something that everybody is interested in. Last week, we had an event where we brought in the 1992 Chinese Olympic ping pong champion, and had him play our executives. Our chairman is the reigning champion [at the company].

WSJ: You've said that American companies typically use a "colonial approach" when they enter the global market. What's different about Lenovo's strategy?

Mr. Amelio: [With a colonial approach] you send an effective executive on an expat assignment to Asia. They hire talent in-country. The downside is that you tend to hire people through the filter of the language that you speak, and you don't get the best talent. It's hard to identify talent if you're conducting the job interview in English.

In all the previous jobs I had before Lenovo, the struggle was finding midlevel managers in China. What I came to learn at Lenovo is that there's a lot of talent, but a lot of the best people aren't at a high level of English proficiency. If you look inside Lenovo, we've been hiring without a screen for English for years, and that means we really have depth when it comes to talent in China. Now we're working with our Chinese midlevel managers on English skills.

With more and more Westerner "halfpats" acquiring jobs overseas, certainly in Asia, there will be less and less of a language barrier in placing Westerners as top managers. The above answer by Mr. Amelio assumes that expats aren't proficient in the language of their assignment location in the traditional approach. But I think this assumption is generally correct, especially for Asia where the languages are quite different from Western languages and thus much more difficult to learn. 

China's Port Investments Boosting Overall Capacity

Below is the full text of some news from Logistics Management:

China has spent over 10 billion US dollars to enhance the handling capacity of Chinese ports by 18 per cent to 5.5 billion tonnes by the end of this year, the state media reported (November 9).

These ports are expected to handle 94 million TEUs (twenty-foot equivalent unit) this year, up 24 per cent over 2005, Minister of Communications, Xu Zuyuan said at a national navigation industry meeting held in Tianjin, the largest port in north China.

By the end of 2006, the minister said, China will have invested USD 7.59 billion in building 166 new port projects. With completion of these projects, the country's seaports handling capacity will be increased by 548 million tons to reach 3.44 billion tonnes.

Investment in inland river ports will reach USD 2.78 billion, which were used to build 165 new berths with an additional handling capacity of 19.5 million tonnes, Xu said.

At the end of the year, China's investment in coastal harbour construction will reach USD 7.5 billion, accounting for 45 per cent of the total investment in the country's 10th five-year plan period (2000-2005).

Over the next five years, China will increase investment in infrastructure construction of waterway transportation, Xu said. The construction will focus on building specialised ports for handling coal, oil, ore and container in inland waterway transportation. By 2010, the minister said, China will further upgrade the handling capacity of coastal harbours by 2.1 billion tonnes.

Logistics Managers on Positioning in Greater China

An interesting article from Cargo News Asia covers a recent logistics panel in Texas on operating logistics operations in China. In particular, I wanted to point out the author Greg Knowler's focus on the panelists' regular mention of the operational disconnects that still exist between the mainland and Hong Kong and Taiwan:

The limitations of a Hong Kong presence were raised by the panelists time and again. There was surprise that having this "China" office did little to open up access to the mainland.

"We find that Shanghai does not talk to Hong Kong," said Brock. "A mainland forwarder would rather lengthen the supply chain than go directly to Hong Kong."

Honeywell had the same experience, and Jay Fortenberry, vice-president of distribution and logistics, said communication between the mainland and Hong Kong - and between the mainland and Taiwan - was poor.

"We do a lot of boots on the ground business and find that even though we are in Hong Kong and have been there for years, the relationship between that office and China is not good," he said.

In the United States, it can be difficult to explain the differences between the countries of East Asia to non-observers, let alone those differences within a country such as China, expanded to Hong Kong and Taiwan. Therefore, it is understandable that proximity to China can be deceiving in regards to leveraging Hong Kong and Taiwan capabilities in connection with the mainland. Of course, a number of factors are involved here that are not simply infrastructural disconnects but also cultural. It will be interesting to see how these walls break down over time, and in the case of Taiwan, perhaps logistics can play its part in helping cultivate a more peaceful coexistence with the mainland.

In for the Long-Haul

Just as she reported recently on the challenges Wal-Mart faces in its attempt to expand its China footprint, Mei Fong of the WSJ followed that story up with a look at primarily two US trucking firms looking to establish their own China-wide footprint in long-haul trucking.

Rich at All Roads Lead to China took a shot a commenting on this story from his seat in Shanghai, and it is worth reflecting on his comments:

"What is most interesting to me in reading this article is Schneider’s intention to go it alone (a move I wholly support as JVs in this industry have been difficult to say the least). The investment that will be required will be huge, and I can only hope that they have customer(s) who have already committed to taking full lane and warehouse space in order to minimize the massive risk of underwriting the venture.

"Most of the providers I have met and have come to know are intent on a national network, and view it as a competitive advantage, but few plan to own much of it due to the complexity and level of investment."

With deregulation of China's logistics industry accelerating in order to meet WTO requirements, there is sure to be a great deal of activity to report on regarding the big and small players alike. It is definitely a very dynamic and exciting time for logistics professionals in Asia, even with all the headaches that come with operating in the various countries of the region.

Logistics Hurdles in Wal-Mart's China Bid

In the Monday, October 23 Wall Street Journal, reporters Mei Fong and Kate Linebaugh in Beijing and Gordon Fairclough out of Shanghai discuss the spectrum of challenges facing Wal-Mart assuming it is successful in its bid for Trust-Mart, a Taiwanese competitor operating in China. It is no surprise that logistics are one of the key challenges Wal-Mart will face and below I have highlighted the logistics-related sections of the article. This reporting is a nice case-study when considering I just posted on trucking in China yesterday:

"...perhaps the biggest challenge is the sheer difficulty of building and running national chain in China...roughly the size of the continental U.S., China still doesn't have a nationwide logistics network of trucks, highways and warehouses that can efficiently deliver supplies from farm to shop shelf."

One of the factors affecting transportation decisions is of course the type of product being carried. Perishables require another level of sophistication--a continuously controlled environment along the supply chain from supplier to customer that involves not only temperature controlled facilities and transportation, but also a rigorous inspection process to maintain quality requirements. In Japan, where quality control requirements are quite extensive, the inspection process and standards on acceptable product/packaging are quite stringent. China hasn't reached that level yet, but if Wal-Mart eventually intends to introduce nation-wide, or even region-wide efficiencies, the challenges are illustrated below:

"And, in a country where refrigerated trucks are still scarce, it is hard for modern hypermarkets to match the fresh produce -- not to mention low prices -- of typical wet markets, the no-frills, open-air venues featuring livestock in cages, where most Chinese traditionally shop. The lack of refrigerated trucks also encourages each region to develop its own dairy, beer and meat industry, making bulk purchasing harder.

"Half of every dollar spent on food in China goes to live and fresh products, according to Merrill Lynch & Co. Inc. estimates. "So it's very difficult to run a national chain and get efficiencies," says Merrill analyst Denise Chai.

"That's why China's retail stores are still highly fragmented, with the top 100 companies accounting for less than 10% of total retail sales, according to official statistics.

"In a business where size and scale are paramount, "nobody has a national footprint yet," says Yang Fan, a retail analyst at Euromonitor."

For logistics managers, it is obvious right away that total logistics cost are going to be significantly higher, and the WSJ goes into this further:

"These international retailers are facing some growing pains in the country, such as the high cost of deliveries. In China, transportation and distribution costs make up at least 16% of overall product costs, compared with less than 4% in many more developed countries, according to American Chamber of Commerce estimates. Refrigerated trucks are still rare, and only about a fifth of China's freight trucks are containerized, so the majority of cargo is vulnerable to damage on open flatbed vehicles.

"Carrefour, which is starting to penetrate China's interior, is finding it hard to keep transportation costs down. The company opened several outlets in Xinjiang province, which is about three times the size of France, and it takes about a week to truck produce between Beijing to Urumqi, Xinjiang's capital."

It seems there is a great opportunity in China for logistics companies with expertise and capital to invest in operating a perishables supply chain.