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Growth ‘unstoppable’ for Chinese automotive logistics

Carmakers called for consolidation and higher quality services among logistics service providers in China, while LSPs point to the need for higher standards and less cost pressure from OEMs. We report from Beijing

Just as China’s new car sale growth hardly missed a step throughout the global recession of 2009, Automotive Logistics China went ahead without a hitch -despite Iceland’s Eyjafjaliajokull volcano grounding most European flights and causing massive disruption to passenger movements and freight supply chains. But while there was discussion among the roughly 300 delegates attending over the backlog of car parts building up in Asia or Europe following the disruption, the circumstances only underlined what appears to be China’s unstoppable emergence for the automotive logistics industry.

In 2009 China sold more than 13m vehicles to become the world’s largest market and manufacturing base for automotive. By 2020 sales of vehicles in China should exceed 20m units, according to He Liming, executive vice president of the Chinese Federation of Logistics and Purchasing (CFLP). “Twenty million is a conservative estimate, and it will probably be more than 28m,” He said, based on findings from industry analysts and auto executives.

The government continues to play an important role in car sales in China, as policies in 2009 boosted sales with tax breaks for small engine vehicles. This year the government is pushing auto financing schemes, opening up the possibility of purchases to a larger portion of the population. “These government policies have made car buying accessible to lower income groups,” said Xu Changming, director of the National Information Centre.

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Calls for consolidation

But as the vehicle market continues to expand, carmakers at the conference said they wanted to see consolidated providers emerge which could offer both domestic and overseas, multimodal logistics services. Yang Yulong, general manager of Dongfeng Nissan Automobile’s passenger vehicle supply chain management division, said logistics providers in China tend to concentrate on a single mode each, leaving the market fragmented. “Lots of companies just concentrate on road, or on railways,” says Yang. “Plus there are too many inexperienced players and newcomers in the industry.”

Jenny Jin, vice president of Geely Automobile’s international division also called for an integrated system. “We now deal with many companies to pick up vehicles and get them to distribution centres, but we would like an integrated single system,” she said.

Calls for an integrated supply chain extended down to packaging. Jean-Luc Guenard, director of Automotive Services at CHEP, called for more communication between OEMs, tier suppliers, 3PLs and packaging providers. Dan Roovers, vice president of automotive sales at Orbis Corporation, said Chinese OEMs and suppliers have begun to consolidate their choice of packaging and to use reusable packaging, but the industry is still a long way from the methods used in the rest of the world.

Brand name does not guarantee service

While global logistics providers often claim to be one-stop shops for all methods and modes of automotive logistics, the reality is not always the case. “The brand name of a logistics provider does not guarantee the same logistics service from one country to another – I plead with LSPs to come up with a standard process and standard service,” said Richard DeMuro, director of material planning and logistics for Ford in Asia Pacific and Africa.

DeMuro stressed that local Chinese LSPs are not necessarily too far from competing with established global LSPs. “In China we do have local LSPs and they are quite good – if you have the capacity for growing you should be able to have the same standard in any country,” he said.

Who controls the logistics?

Heated discussions between service providers and carmakers developed during the conference over different ways of managing logistics. Chrysler’s Xuebing Zhang, who manages the carmaker’s north-east Asian supply chain, said that although Chrysler recommends LSPs to parts suppliers, it is up to the supplier to manage the shipment to Chrysler’s manufacturing bases. All deliveries are made on a delivered duty paid (DDP) basis, where the supplier bears all costs and risks.

“We want to reduce risks for Chrysler – so all the risk is on the supplier,” she said, emphasising the need for visibility among 3PLs. In contrast, Dongfeng Nissan’s Yang Yulong says that in China it is the company’s policy to manage all logistics, including collecting parts from supplier factories.

Leo Yin Chery

Global logistics providers are not major players within China’s domestic automotive logistics scenario, and the conference revealed that Chinese OEMs often believe such providers do not have the cultural advantage and networks of the local LSPs. This perception is critical, as it is the Chinese OEMs who appear to have the most say in choosing domestic providers within joint ventures.

“The choice of the logistics provider is the choice of the Chinese joint venture partner, as they know the type of market and behaviour and other habits of the local market,” said Yang Yulong of Dongfeng Nissan. The choice of technology and parts suppliers often fall with the foreign joint venture partner, according to Yang, but logistics is the local partner’s choice.

According to Chery’s Leo Yin, this decision depends on who is the majority controller of the venture. Yin said that, in countries where Chery has wholly-owned factories, then Chery chose the logistics providers. Where there is a local joint venture partner, then they are responsible for the logistics.

Regulations rule

“Here [in China] regulation is a big driver of efficiency,” said Gerry Mattios, SCM service line leader for Greater China at IBM. Regulation can come both from the central government as well as from market pressures, according to Mattios. But one perennial issue at Automotive Logistics conferences has shown no signs of abating, which is the overloading of trucks. Chen Gang, president of Beijing Changjiu Logistics, said that trailers made in China are built even longer as fines increase.

“Longer trailers bring more fines, but the higher the fines the more the industry tries to get away with things,” he said, adding that drivers actually have the fines ready in cash in their pockets.

The impetus comes from carmakers demanding lower costs, and wanting the cost of a single vehicle transported to be low. Logistics providers then need to add more vehicles on to trailers by extending trailers illegally. Trailers now carry loads well beyond the maximum capacity that their tractor and engines were made for, resulting in higher consumption of fuel and leading to yet higher costs.

Local logistics providers said that they need more western-standard trailers for carrying vehicles. But at costs of more than $250,000 each, compared to a locally-made trailer at $70,000, this is not yet feasible. Carmakers could change the situation by implementing higher standards, but the question remains as to whether OEMS will agree to higher costs.

Another significant headache that needs addressing at the national level is rail transport. According to Dr. Zhang XiaoDong, professor at Beijing’s Jiaotong University as well as executive director of China’s Automobile Logistics Federation, China’s network is weighted toward passengers and lacks the capacity for growth in freight demand. “Each year we have to transport 1.8 billion passengers, and our rail network can hardly cope,” said Zhang, adding that he expects rail services to only begin pushing for vehicle logistics at the later stages of the government’s 12th five-year plan–which means serious discussion will not begin until 2015.

Challenges for export

On the export side, Chery’s Leo Yin expressed concerns that ro-ro carriers do not really listen to the needs of low-volume exporters. But Wallenius Wilhelmsen China’s Richard Ma said if the OEMs have fixed ports to deliver to, he was willing to ship as little as one vehicle. However, shipping lines often do not leave a port until their vessels are full, adding more time and cost to an already long lead time, according to Chi Ruzhao of Jianghuai Automotive.

Other exporting issues relate to poor credit availability and high duties. Geely’s Jin Guangyu said that the biggest problem his company faces is constantly changing foreign policies and rising tariffs in foreign markets on Chinese products.

The outlook for export can indeed be hit by sudden changes. Richard Ma believed that the recent Toyota recall would affect the confidence of Chinese carmakers in their plans for entering the US. He warned that it may now be more than 10 years before they enter the US.

Challenges for export

As in previous years, the conference – which was the 7th in an annual series – provided a unique platform for Chinese carmakers, local logistics providers and international logisticians, along with Chinese policy advisors, to come together. They highlighted issues affecting the automotive logistics sector, and worked on finding ways to improve. While the logistics sector continues to depend on government control and stimulus to a large degree, it is also waiting for OEMs to take a lead on quality and standards.

Reflecting a basic need shared by almost all those present, Ford’s DeMuro noted: “[It would be] very interesting to have standard KPIs–key performance indicators–across the industry.”  China’s automotive logistics development has plenty of work to do to keep up with that ‘unstoppable’ demand.

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