Cross Border Journal

Shanghai's Yangshan Port Up Close

Back in 2006, I wrote a few posts commenting on China's multiple ports, including the newest project at Yangshan near Shanghai. On my most recent trip to Shanghai earlier this month, I took the opportunity to personally visit Yangshan's Deepwater Port and ask questions about its progress and success, especially in the face of the Global Financial Crisis (GFC).

I recommend first reading what I wrote in 2006:

• Previous posts on China's ports

One of the concerns early on with Yangshan was whether it would:

• too directly compete with Shanghai's existing ports,
• be too far for transport of goods exported from the mainland or goods imported to the mainland,
• build in too much capacity, contributing to lower utilization across all ports, etc.

My personal visit to Yangshan helped to alleviate some of these concerns, but need to be reconsidered in the face of impacts resulting from the GFC.

The Highway to Yangshan

The visit to Yangshan was coordinated via my father-in-law, who is an official with the Shanghai City Government. While driven from Shanghai to the main entry toll-way of the bridge to Yangshan, I could find nothing to complain about regarding the roads or traffic. In fact, the ride was a bit dull as there is little scenery to take in, especially on a gray and dreary morning as we had on November 11th.

Up to the Yangshan toll gates, the trip is just over an hour at a distance of 100km from Shanghai. Before passing through the gates, we rendevouzed with officials from Tongsheng Logistics:

"Shanghai Tongsheng Logistics Park Investment and Development Co., Ltd. is located in Yangshan Free Trade Port Area. As one of the chief investors for the development of auxiliary projects around the Yangshan Deep-water Port, the company also specializes in the development of logistics property and bonded logistics business. Relying on the deep water port, the company endeavors to provide customers with first-class facilities and convenient services."

A Tongsheng official then guided us through the Yangshan toll gates and immediately on to the 32km bridge that weaves its way above muddy, ocean waters out to the Yangshan port itself. For carriers, the bridge toll is free; for all other vehicles, the toll is 20 yuan one-way. Obviously, the toll for carriers was waved to better reduce the total cost of logistics providers using the port, thus making it more attractive to additional clients.

Along the bridge, Tongsheng has also been trying to diversify its investments from an energy perspective through building an above-water wind farm. Its intent is to provide electricity to the Yangshang Free Trade Port Area, but I did not hear how viable or productive this investment has been so far. During my visit, I saw only one windmill moving despite being right on the ocean and exposed to the wind from the sea.

As we began to reach the islands upon which Yangshan was built over the past 4-5 years, construction of the final phase (Phase 4) could be seen just off to the right of the bridge.

Phase 1 of the port construction ended in December 2005 after 1.6km of berths were in place. Phase 2 followed with 1.4km finished a year later in 2006, Phase 3 with 1.35km completed in 2007 and Phase 3B with 5.6km completed by the end of 2008. Total designed, throughput capacity as of today is 11 million TEU, and the port processed approximately 8 million TEU in 2008 (i.e. port utilization was at  73%). By comparison, the designed capacity of both Waigaoqiao and Baoshan ports together is 15 million TEU.

Once Phase 4 is completed, Yangshan would have an official designed capacity of 15 million TEU, but I was told by the port engineer that this has already been purposely delayed due to the GFC and resulting drop in forecasted TEU growth per year. Growth in TEU per year had initially been based on the fact that since 2004, Shanghai was processing an additional 3 million TEU per year, with the total TEU processed in 2004 being 14.5 million TEU against the 15 million TEU designed capacity of Waigaoqiao and Baoshan ports.

In 2008, the total TEU processed by all Shanghai ports was 28 million against a designed capacity of 26 million. After pressing the Tongsheng and port officials for an estimate, they said to expect 2009 processed TEU to be approximately 24 million for all of Shanghai, down about 14%.

When arriving at the center of the port infrastructure, there is a welcome center and small-scale version of the existing and projected port facilities that combines with an interactive video. The entire exhibit helps put the port facilities in perspective as it is difficult to take in entirely due to its sheer size.

It is important to note that all of Shanghai's ports are managed by representatives and departments of the Shanghai City Government. Yangshan in particular has been built with distinct advantages and with diversification from the capabilities of ports closer to Shanghai a key objective. These advantages include:

• 14-18 meter natural water depth as opposed to the 12.5 meter natural water depth closer to Shanghai; this provides the exclusive capability in Shanghai to handle the largest, recent generation container ships
• Officials mentioned a special agreement between China and the U.S. regarding container inspection at Yangshan that excludes other Shanghai ports. This allegedly allows containers having undergone inspection at Yangshan to transit to final destination within the U.S. without inspection at U.S. ports. However, I have not found any online sources documenting any agreement outside of the Megaports Initiative.

After going through the welcome center, I was taken over to the Yangshan viewing platform to better see the entire expanse of the port. Pictures do not do the port justice, but I tried to capture a feeling of the facility's massive size.

In the above picture, you can see all of the unmanned, unloading berths. Below is a more direct view of the container yard and automated container movement vehicles. The entire port is very lightly manned beyond security personnel, drivers and required administrative personnel.

There are currently no housing facilities and there are some adjacent service facilities built to service the port, such as docks for repair ships and fuel (see below).

 

Overall, the Tongsheng officials claimed the port owns the world record in container processing time at 850 / hour. Also, true to its strategy, currently 40-50% of its volume is trans-shipment container movement. In an effort to facilitate non-trans-shipment traffic, Shanghai port management has waived the fees at Yangshan for container movements between it and other Shanghai ports, such as Waigaoqiao and Baoshan.

After my visit, I became convinced that Yangshan is on the path to becoming Asia's leading trans-shipment point and one of the world's top ports in terms of technology, operational efficiency and service quality. So, amongst the early concerns regarding the port, the key question is whether utilization of its facilities, including newly planned services, can remain high enough to make the port profitable as early as forecasted in the face of the current slowdown in international trade across the world, and even after delaying Phase 4 construction. Otherwise, it will be some time before the port reaches its full potential.

Note: The data mentioned in this post is quoted from Tongsheng and Yangshang port representatives. It has not been independently verified.

Two Tales of Chinese Investment Overseas

As Chinese businesses become increasingly assertive in evaluating and executing investments overseas, they are learning lessons critical to managing supply chains across borders. These lessons highlight not only the existing weaknesses of Chinese supply chains but also their growing strengths, and serve to illustrate the very real need for China's supply chain managers to understand how global trade, security, regulation, and development intersect in their areas of operations.

Two recent articles in the Wall Street Journal and New York Times provide excellent examples of this dynamic, both focused on aspects of China's intense effort to invest in and develop commodity resources overseas. The first, by the WSJ's Alex Wilson, is titled "As Commodity Prices Rebound, Australia Limits Foreign Investors" and reports on Australia's effort to slow the pace of Chinese investment in Australian companies in the mining industry.

Chinese businesses focused on the import and development of the various commodities that feed into its high-growth, manufacturing engine have taken advantage of the Global Financial Crisis to execute deals with overseas suppliers in multiple countries. They have done so by making wholesale acquisitions or by injecting significant amounts of cash in companies that were short of revenue and hungry for sources of capital to simply remain in business, or continue with the capital-intensive investments so common in the mining industry. This has been a boon for Australia's mining-rich economy, sitting in China's immediate backyard.

As the WSJ article mentions, Australia's quick rebound in the resources sector has resulted in a greater confidence within the mining industry and government alike that they can take a stronger stance on China's increasing appetite for investment with reduced risk to the economy:

"A strong rebound in commodity prices and thawing debt markets this year have led to a recovery in the Australian resources sector, with fewer distressed miners seeking foreign cash to shore up their balance sheets or to fund projects.

"This has emboldened Australian regulators to take a tougher stance against foreign investment that has been entering the country.

"Australia's resources industry needs foreign investment to develop new projects, however, and the government is keen not to shun interest. The government has been able to firmly enforce its preference for foreign investors to take minority stakes rather than opt for a takeover."

The article goes on to show how Chinese investors have initially reacted to the increased scrutiny by the Australia government on various deals:

"Market participants say this has been the government message behind the scenes for some time, and Chinese investors now seem to have acknowledged it by tailoring deals over the past year to meet the government's preference for stakes in Australian miners to under 50%.

"But recently China pitched a number of deals above the 50% mark, and one investment banker said FIRB's comments may be Australia's attempt to send a message to China that it won't approve any more of these deals.

""They have been saying it privately to the Chinese and the Chinese keep bringing [deals that require more than a 50% stake], so maybe they have decided now to make it public to try to convince them not to do it," said the banker.

"For Chinese investors, the FIRB's comments provide some clarity on a foreign-investment-review process that has been criticized by some for its uncertainty and lack of transparency."

I believe the above hints at the sophistication Chinese business investors are developing in making overseas investments, probing markets for the best deal until regulation becomes additionally restrictive, and then looking for the best deals within the new legal framework. The absence of rash decisions or a highly reactive backlash provides a sense of how integrated and sensitive Chinese supply chains have become in the globalized economy. This will only serve to drive further progress in supply chain relations and innovation. 

The second article, by Timothy Williams, is titled "China Oil Deal is New Source of Strife Among Iraqis" and reports on China's struggle in moving forward with its Iraqi oil field development while maintaining peace with local Iraqi communities:

"When China’s biggest oil company signed the first post-invasion oil field development contract in Iraq last year, the deal was seen as a test of Iraq’s willingness to open an industry that had previously prohibited foreign investment.

"One year later, the China National Petroleum Corporation has struck oil at the Ahdab field in Wasit Province, southeast of Baghdad. And while the relationship between the company and the Iraqi government has gone smoothly, the presence of a foreign company with vast resources drilling for oil in this poor, rural corner of Iraq has awakened a wave of discontent here.

""We get nothing directly from the Chinese company, and we are suffering," said Mahmoud Abdul Ridha, head of the Wasit provincial council, whose budget has been cut in half by Baghdad in the past year because of lower international oil prices. "There is an unemployment crisis. We need roads, schools, water treatment plants. We need everything.""

This experience for China is not new; it has been facing similar reaction in Africa, as often highlighted by Dr. Tom Barnett, and who's comments brought me to this article. Whereas China is operating in a mature market with well established rules in Australia, Iraq's market is in the very early stages of developing rules at a national and local level that help it deal with foreign direct investment by countries and businesses with varying degrees of experience. China may be able to keep much to itself in totalitarian regimes such as Iran and Sudan, but it as an Iraqi puts it below, investing in a young democracy has its implications:

"The result has been a local-rights movement — extraordinary in a country where political dissent has historically carried the risk of death — that in the past few months has begun demanding that at least $1 of each barrel of oil produced at the Ahdab field be used to improve access to clean water, health services, schools, paved roads and other needs in the province, which is among Iraq’s poorest.

""No one would have dared to ask for such a thing during Saddam’s regime; if he did, he would definitely be executed," said Ghassan Ali, a 43-year-old farmer who lives near the oil field. "But now we are a democratic country, so we have the right to ask for our rights like any other province in Iraq.""

"The basis of the complaints here is that, aside from the hiring of a few hundred residents as laborers and security guards at salaries of less than $600 a month, the Ahdab field — a roughly $3 billion development project — has provided no local benefit."

The response by the Chinese is representative of how its understanding of global supply chain management remains immature across industries and markets, suffering a lack of holistic thinking and ability to see the direct links between investment success and the success of surrounding communities:

"China National Petroleum says it needs relatively few workers because it is still in the exploration phase of its 23-year project at the Ahdab field. Oil production is not scheduled to begin for two and a half years.

"Now, the field’s 100 or so Chinese workers rarely leave their spartan compound for fear of being kidnapped, the company said, even though the Iraqi government recently deployed extra security to the area.

"More trouble could be on the way next spring when 1,000 Chinese workers arrive to build a central processing plant.

"Mr. Han said hiring Iraqis to do the job was out of the question. “We don’t have enough time to train local people to do that work," he said."

With this perspective, the Chinese make their work at the nexus of cross border trade unnecessarily difficult in the short-term and with increasingly negative effects downstream in the long-term as local tension is brushed aside and ignored.

Over time, Chinese businesses will internalize lessons learned from one market, deploy them where applicable in another, and develop the skills and talent required to tailor their investment decisions and execution for a wide range of operational environments. Cross border professionals need to ensure that the natural flow of globalization and corresponding rule sets will gradually work to hold the Chinese and other nations accountable for their actions across borders and in communities like those of the miners in Australia and farmers in Iraq. 

A Lesson in Managing Relational Architecture for Supply Chains in China

Relational Architecture

"the appropriate linkage between a supplier, the organization and its customers for maximum benefit; includes internal supply matter relationships throughout the organization."

If you haven't ever read the Silk Road International Blog, today is the day to start. The posts there consistently provide great insight into on-the-ground business in China. Earlier this week the blog's author, David Dayton, wrote extensively on the disconnect between Chinese suppliers and Western buyers. The post delves into their relationship and in my mind provides a lesson on managing relational architecture in supply chains that traverse China. Bob Ferrari of the Supply Chain Matters blog does a nice job of summarizing David's key points:

"You will note that this blog posting points to six deep ethical differences between Chinese suppliers and western buyers:

1. The Chinese supplier wants to know first and foremost who you are to determine first and foremost if they are going to be paid on a timely basis.
2. Westerners forget that the West has, in general, been pretty nasty to the Chinese for hundreds of years. The Chinese do not forget.
3. Business is about getting you, the buyer, to sign agreements and pay deposits. Promising the moon and figuring out how to get it to you comes later.
4. Chinese suppliers have their own interest in mind first and foremost, and no one knows what’s around the corner 3, 6, or 12 months from now.  The resultant attitude is "get it now while the getting is good."
5. The current world economic crisis implies a growing sense of desperation in China.
6. There is a completely different sense of what is right and what is wrong. While Western culture is guilt-based, driven by a spirit of laws and doing the right thing, China is shame-based, meaning that getting caught and the resultant public humiliation is the definition of what can be considered wrong."

Basically, I get the sense from these that the Chinese are currently "deal-focused" while willing to sacrifice quality in supply chain execution to maintain the deal. The pitfall for Western buyers is in thinking a solid deal will result in solid execution by the Chinese counterpart, and so the best approach is to treat them separately and follow several of the tips illustrated by David in his post. In the end, the goal is to make sure partners mutually understand where each other fits in supporting your supply chain architectures.  Based on this, possible performance gaps--say a Chinese emphasis on financial architecture (i.e. how they get paid) vs. a Western emphasis on innovational architecture (i.e. execution quality)--can be identified in advance and shored up early on.

Rough Waters for China's Shipbuilding Industry

China Law Blog has posted in parts one and two on the 2008 Maritime Conference in Wuhan, China, where Dan's colleague Steve Dickinson was attending. Since shipbuilding is a key industry in making the world's supply chains go 'round, there is some solid insight to take away from these posts. The first post provides the following highlights:

"The presenters all agreed on the following. The downturn in shipping is having a profoundly negative effect on all segments of China's maritime industry.

• Shipbuilders are finding that their shipbuilding contracts are being extensively breached. Since shipbuilders in China are mostly new companies, they are heavily in debt. These breaches threaten the life of the entire shipbuilding industry in China. 
• Vessel owners are finding that charter parties are refusing to pay charter payments. Some charter parties are demanding revisions to charter agreements. In more extreme cases, the charter parties are simply abandoning vessels in mid-voyage. [Editor's note: charter party agreements are essentially agreements to rent out a ship] 

Shippers are finding that their customers are refusing to honor long term shipping agreements and are demanding extreme reductions in shipping rates.

• Ports are finding their volumes rapidly decreasing. This is an especially serious problem with smaller and newer ports. It is also a problem with ports in the middle of ambitious expansion plans."

Read the rest for some additional evidence of how companies are dealing with the collection of debts as companies lose business or fall out of business completely during this financial crisis. This all strikes at the heart of a supply chain's financial architecture. Because the funds generated from this architecture is essentially what maintains every other architecture--physical, informational, relational, innovational, and human--companies must decide which aspects of their business will have to take the hit and which receive scarce funds. Of course, in extreme situations the whole supply chain can collapse.

In the second post, Dan highlights a Q&A session where Steve acted as moderator:

"In my role as moderator, I then posed the following questions/comments to the speakers and to the audience:

"Steve: The shut down in bank financing will have a severe impact on the Chinese shipbuidling/shiprepair industry, right? Answer: Correct.

"Steve: Historically, in the U.S. and Europe, when worldwide bank financing dried up, local banks usually stepped in to provide financing. Are Chinese banks stepping in to fill the financing gap? Answer: No, they are not. Chinese banks have no appetite for risky loans right now. Further, they do not understand international ship financing and they have no real desire to learn.

"Steve: It appears China's shipbuilding industry is taking a passive approach to both the contract default and financing issues. Answer: Yes.

"Steve: It therefore appears China's ship building/ship repair industry will be heavily impacted over the next 18 months, with few companies surviving. Answer: The audience did not answer. The presenters agreed that this seems to be a reasonable conclusion. These Singapore and Hong Kong lawyers are therefore turning their efforts towards cementing their relations with Korean and other national shipbuilders they think will survive the current situation. Even during private discussions after the formal presentation, the Chinese company representatives remained silent about their plans for dealing with the key issues facing their industry.

"It is not clear to me whether the Chinese industry will wake up to the situation in time to resolve the critical issues facing the industry. In the interim, however, it appears there will be some very good deals on new vessels from Chinese yards as customers begin to abandon existing contracts. I also think there will be very good deals on Chinese shipyards, many of which are state of the art. It is also possible, of course, that China will institute a stimulus package that will save at least some of its shipyards."

It seems the financial crisis will last beyond when many companies will need the economy to pick back up to survive; thus, as Steve mentions above, there is likely to be some consolidation of the existing capacity with perhaps some of the strongest players in the shipbuilding market looking for deals on any failing shipyards.

China's Bailout: Accelerating Logistics Infrastructure Investment

The Wall Street Journal today highlights a key part of China's announced bailout: accelerated investment in roads, bridges, and other related infrastructure:

"Much of the $586 billion stimulus package China unveiled this week will go toward building highways, railroads and airports. Already, according to official estimates, infrastructure spending had been increasing by an average of 20% annually for the past 30 years -- a tried and true engine that has helped power the Chinese economy's explosive growth."

China's supply chains stretching into the less developed western regions have often been hampered by less than ideal public infrastructure--such as roads, rail and airports. This physical architecture can greatly enhance performance in existing supply chains and allow entrepreneurs to develop new opportunities where the quality of public infrastructure either makes or breaks a business:

"Yang Zhenghua, a genial 34-year-old with a buzz cut, makes the run from Qijiang to Chongqing most days, bringing a truckload of farm produce to a wholesale market in the city. Traveling on the new highway, he can now get to the market earlier in the day, when demand is highest. The shorter journey has trimmed transport costs -- his biggest single expense -- by around 100 yuan ($15), to around 600 yuan ($90) a load.

"For 14 years, Mr. Yang has distributed produce from around Qijiang, supplying farmers with seeds and ordering crops in advance. Last year, he started raising crops himself on land leased from several farmers. "Without the highway, we wouldn't dare to develop this," he says, gesturing toward his fields of corn, eggplant and chili peppers. He has 20 farmers working for him on this site, and he is adding more at other locations. Other local farmers are expanding plantations of papaya and Sichuan peppercorns, both high-value crops that can now be sold in bulk because of access to big-city markets."

However, the resulting industrial growth of these expanding and more efficient transportation networks will strain the environment:

"The last decade's explosive growth in automobile use has also come under more public scrutiny in recent years, as air quality worsens. China is the world's biggest emitter of sulfur dioxide, a major component of the urban air pollution that causes 350,000 to 400,000 premature deaths a year in China, according to a joint report last year by the World Bank and the Chinese environmental agency."

This is why high performance supply chains require tuning of every supply chain architecture, and environmental problems are opportunities where businesses can develop the use of green technologies as part of their innovational architecture towards improving the environment for Chinese communities. Financial and physical architectures are usually the first to get attention in building supply chains, with the other architectures being developed as supply chains develop and become more sophisticated in order to maintain competetive advantages and increase efficiencies.

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."