Enter the dragon

Vehicle sales in China are increasing by the millions every year and the region is now the third-largest vehicle producer in the world. But a number of factors are proving to be very challenging in getting product to market. Christopher Ludwig reports.

April is a busy time for the automotive industry in China. Apart from its main annual motor show which alternates between Shanghai and Beijing, several auto parts and service-related conferences were held, including the fifth annual Automotive Logistics China event, held for the first time in Beijing.

Representatives from more than 20 domestic carmakers attended this year’s conference and it was evident that finished vehicle logistics was probably the major topic on everyone’s minds.

Heavy interest in China’s finished vehicle sector is evident not just from the major US and European 3PL providers, but also from vehicle carriers and US West Coast ports, many of whom had delegates at the conference. A strong Russian and Eastern European contingent was also present, as the export of vehicles and parts from China to, in particular Eastern European countries continues to grow.

The Chinese motor industry: No slackening in pace

China’s burgeoning auto industry is not breaking news, but it does hold tremendous untapped potential for export growth. Major foreign carmakers are dramatically increasing their parts sourcing operations in China for export to both mature and developing markets and a positive aspect is the Chinese government’s wholehearted support of the automotive industry.

But the pressure is on. Recent reports suggest that car prices in China fell by a third during 2000-2007 while in the same period prices for raw materials, fuel and electricity increased by 36 per cent. During the Beijing Auto Show, Winfried Vahland, Volkswagen’s President and CEO for China, said that shrinking margins “have put great pressure on the profitability and even the survival of automakers in China.”

However, shrinking margins are not impeding growth. According to Shen Jinjun, Secretary-General of the Automotive Logistics Association of the China Federation of Logistics and Purchasing (CFLP), China produced 8.8 million cars in 2007, which is expected to grow to 10 million cars by 2010. To put things into perspective, in 2001 there were 18 million vehicles in China, while six years later, this jumped to 42 million vehicles. China is now third largest vehicle producer, following only the US and Japan.

The most interesting numbers, especially for those eyeing finished vehicle exports, are in the import and export data. In 2007, China imported 314,130 vehicles – a year-on-year growth of 38 per cent, and exported 614,412 cars, representing year-on-year growth of 79 per cent. Most of these exports are to emerging markets, but mature markets too are thinking of the longer-term potential for Chinese finished vehicle exports, borne out by the strong presence of delegates from US west coast ports at the conference.

China by numbers….
 

  • 1000 – the number of OEM carmakers in China – some exporting only one or two cars a year
  • €1.5 billion- Fiat Group’s China sourcing target by 2010
  • 18 million cars in 2001
  • 42 million cars in 2007
  • 10 million – the number of cars China will produce by 2010 (CFLP)
  • 79% – year-on-year growth in finished vehicle exports from China (614,412 cars were exported in 2007)
  • 60% of parts manufacturers surveyed in China don’t use pallets
  • $12.2 billion – the value of vehicle parts exports from China in 2007 (up from $8.9 billion in 2006)
  • 44.9% – the increase in volume of cargo transported by rail in 2007

The key issues: China logistics costs are still high

Automotive Logistics China reaffirmed that logistics costs are still significantly higher in China compared to the US and Europe and infrastructure requires attention. Forty eight per cent of the more than 200 delegates at the conference indicated that infrastructure is the biggest issue facing vehicle logistics in China while 34 per cent said that sufficient warehousing, trucking, rail and shipping capacity are the most important issues.

Karl Neumaier, Director, Asia Pacific Supply Chain Management, Visteon Corporation commented: “Our logistics providers do things we don’t like to see. The operational stream is not necessarily there – they are focusing on a general level rather than on a specific customer.”

Chinese manufacturers seem to concur that logistics services in the region are lagging. Lei Xiaoyang, President’s Assistant at Chinese carmaker Brilliance Auto agreed. “The logistics quality of Chinese suppliers has some problems; we are trying to find solutions, one by one, with suppliers,” he said.

Wei Yong, division chief of transport and logistics in the Economic Operation Bureau of China’s National Development and Reform Commission added, “The logistics business is one of the critical aspects of China’s growth and development.” He emphasised that the “allocation of resources to the logistics industry must be in line with market demand”.

He told delegates of the projects that the government is involved in to encourage the growth and development of logistics services in China. These include favourable tax and land-use policies, insurance products designed for the logistics industry, greater development of rural economies, improved IT infrastructure, and the breakdown of regional barriers, among others.

Yong said that Chinese companies continue to think internationally: “We encourage strategic partnerships and encourage promising Chinese logistics companies to expand abroad,” he said.

“China is still a developing country”

Robert Strain, Director of Logistics, General Motors Asia Pacific Supply Chain noted that while there have been “tremendous improvements over the past five years, inland infrastructure is still immature; there is a lack of rail and water transport and auto is far down on the list for rail development”.

There was agreement that Chinese logistics companies are not yet at the point where they can compete at an international level and provide the service that is expected of them. “With China’s economic growth continuing, most Chinese companies are not able to meet demand from industry,” admits Wei Yong, while Wojtek Wojcik, Logistics Manager Asia Pacific, Delphi Corporation added that “We believe we can do logistics better than our suppliers.”

One of the reasons why logistics costs in China are high, according to He Liming, Executive Vice-President of the CFLP, is that regardless of oil and labour costs being lower, China is still in the process of industrialisation and, he said, “We have to admit that China is a developing country”.

But Xu Yugeng of Anji-TNT-SAIC believes that another contributing factor is that capacity is not shared. “Our customers don’t want to share their warehousing and transport capacity, which means higher overall costs.”

An issue raised by Greg Lehmkuhl, Vice President, Global Automotive, Menlo Worldwide Logistics, is that some companies get favourable prices on fuel, while smaller carriers might not be able to secure the price at the government rate. He believes this issue needs to be addressed as well.

One obvious solution to the logistics challenges in China, which came up repeatedly during the conference sessions, is a necessity for companies to work together at all levels, to improve efficiency. Sixty one per cent of delegates indicated that collaboration could improve the service from LSPs.

Same bed, different dreams

Supplier development is really just another form of relationship building, another issue which was highlighted again at this year’s conference. William Cook, General Manager of Emerging Market Supply at Chrysler noted: “A major focus of our group is to work with suppliers using a variety of models to develop their capabilities.”

“Currently, the supplier bears all the risk for transport in a pay-on-usage model. The situation might increase OEM cash flow, but eventually it pays for the inefficiency and lack of consolidation that such a model causes,” David Zhang, China Logistics Manager, Delphi Automotive Systems commented.

The pressure that some suppliers in China feel from OEMs is evident in the stringent standards that Chrysler sets for its suppliers, similar to those set by other major vehicle makers. “Supplier delivery performance had, on average, been around 47 per cent, and this has now increased to 78 per cent. But it is still below the 86 per cent Chrysler benchmark for retaining suppliers. They didn’t shut down plants but they were high risk suppliers,” said Cook.

Another way to improve supplier relationships is to get the involved as early as possible. This point was reiterated by Martin Lockstroem, Director of the Supply Chain Management Institute of China. “Early involvement of suppliers is key to successfully managing product and people costs,” he told delegates.

The core issues: It’s all in the packaging

A maturing industry in China and a greater focus on leaner and greener supply chains mean that components of the supply chain such as packaging are coming under increasing scrutiny. “The strengthening of the yuan, higher labour rates, a tightening credit market – all these impact on the costs and competitiveness of the Chinese auto industry,” commented Norm Kukuk, Senior Automotive Marketing Manager, Orbis Corporation. “With returnable packaging, tied with logistics we can have a positive impact and reduce some of the burden of those costs on the competitiveness factor.”

Shuai Luo, a post-graduate student at Tsinghua University, reported on research he conducted in association with Gefco and the CFLP on packaging in the auto parts industry. His research (published exclusively in Automotive Logistics magazine in 2007) found that some companies such as General Motors have separate packaging management systems while less than 10 per cent have an independent packaging management system. According to Luo, “Ninety per cent of respondents indicated that standardisation of packaging is their biggest concern.”

He told delegates, “There is no pooling management for packaging in China, partly because of non-standardisation. Part of the problem is the vast geography of China and different practises used regionally, coupled with a lack of understanding of best practices.”

Often there is a direct link between packaging design and costs savings, as Orbis’s Kukuk demonstrated. “By reducing the size of one particular container by a few centimetres, we were able to get an extra row in the trailer, which helped us to save US$544,000 in a year.”

Luo told delegates that environmentally friendly concerns are the least important consideration in packaging design in China, and rates of packaging management – for example cleaning – are very low. This, he emphasised, highlights the vast gap in packaging best practices in the country.

But on a positive note, he told delegates that both industry and the government are “attaching more importance to standardisation”.

On the grapevine…. 

 

“Logistics is like oil for the engine, you don’t necessarily know it’s there, but if you don’t have it, the engine won’t really work”
Wojtek Wojcik, Delphi Corporation

“Chinese OEMs are catching up with world-class standards. I’ve been to the Chery Factory – they are very lean”
David Zhang, China Logistics Manager, Delphi

“We need to take advantage of the opportunity to cooperate with global companies, to improve our marketing and improve our product”
Lei Xiaoyang, Brilliance Auto.

“…Packaging is one of the most critical elements in terms of controlling our costs and maximising the spend that we have for logistics”
Robert Strain, GM

“Standardisation is one of the key issues in the automotive industry. The more we can get into standardisation, the better for everyone.”
Peter Reinsheigen, Gefco

“Lean manufacturing is not a set of tools, it’s a philosophy and a mindset that you have to use”
Karl Neumaier, Visteon

“The reason for such a high [packaging] loss rate is because companies don’t know where their equipment is being lost”
Amy Zhang, Chep Shanghai

The finished vehicle imperative

Finished vehicle logistics brings its own set of challenges. “Not until very recently did China focus on car exports, so we are looking at ways to design policies to assist these exports,” said Wei Yong of the National Development and Reform Commission.

In a survey done in the finished vehicle logistics sessions, more than 50 per cent of respondents mentioned capacity constraints as the biggest challenge that they face in China. Routes for shipping vehicles to Eastern Europe were discussed extensively in one session. Solutions that were proposed (from LSP Gefco) included a deep-sea route from Shanghai to Zeebrugge, rail transport across Mongolia, and a short-sea route to Zarubino, near the border of Russia and China, close to Vladivostok.

Delegates also indicated that Russia is considered as the most promising growth market for finished vehicles from China – hence the increase in trade routes by both sea and land from China to Russia.

The railway sector in China has long suffered under-development as rail capacity for cargo played second fiddle to the military and passengers. This has shifted in the past few years as the Chinese government starts to pay attention to rail development. “In 2007, the volume transported by rail increased by 44.9 per cent,” according to Zhang Xiaodong, a professor in the Transport College at Beijing Jiaotong University.

However, one negative aspect of rail is that it does not always give lead-time advantage, commented Owen Xie, Senior Manager (Automobile Logistics) of NYK Car Carriers China. “Road is better for lead time,” he added.

In addition to greatly expanding railway track across China – 90,000 kilometres of tracks are planned by 2010 – the government has created railway hubs in 33 first-tier cities and 75 second-tier cities. Several test runs rail cargo shipment of cars and parts from Beijing to various destinations in Eastern and Western Europe have been carried out this year.

Free choice comes at a price

The concept of mass customisation, successfully implemented by Dell with its personal computers and now popular in the FMCG sector with clothing and shoes, is a growing trend in the vehicle industry in China. But a wider choice brings bigger logistics headaches.

Zhu Weidong of SsangYong Motor (a Korean joint venture with SAIC) said the company prides itself on its ‘free flow option’ in which customers can add their features of choice onto a car – the Kyron model, for example, has more than 600 options; Audi’s A6L has 7,840.

Weidong noted that in Korea, the trend is to reduce options, while in China, the availability of options is seen as a luxury but this is where the problems start. He said, “We have to ask ourselves if we really want to increase free flow options for China, as this means increased logistics complexity and higher inventory levels.”

Adding value to the service

China still lags Europe and North America in its ‘lean’ manufacturing strategies. This is changing fast as companies look to cut costs. “In China, lean manufacturing will be an ongoing trend,” noted Visteon’s Karl Neumaier. Value-added services will also increase in this region and according to LSP Mosolf, value-added services can be an additional source of income, and would be an important lesson for China in the future.

A trend for the future is likely to be a rise in 4PL providers and perhaps even 5PLs (this suggestion raised a few eyebrows) but there were some questions as to the viability of 4PLs to manage the activities of various 3PLs and provide more strategic direction.

“We see a number of OEMs who are interested in a 4PL/LLP model, but we have yet to see any to emerge,” said Cheng Peng of the Guangzhou Fengshen Logistics Company. Visteon’s Neumaier also argued that it can be difficult to justify a 4PL in China: “Often it is easier to move to consolidation centres and source a local provider.”

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