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Logistics reaches its spring time in China

SHANGHAI 20 April 2011: More than 350 delegates gathered this week in Shanghai to hear that the high growth of the automotive industry continues to demand sophisticated supply chain management, and that the country’s new 5-year plan has been changed to put improvements in logistics high on its agenda.

Speakers and delegates at the conference focused on improving efficiency and increasing professionalism in the supply chains of the world’s largest market for automotive sales and production. With break-neck increases in volume predicted to start to slow in some regions, manufacturers and logistics providers are turning their attention to more sophisticated supply chain management. This means increased visibility, third-party logistics sourcing and multi-modal transport. For the 12th national 5-year plan, China’s central government responded to vocal comments on the gap in its initial draft by putting the improvement of logistics performance and multi-modal operations as a priority.

China’s stunning growth during the past two years – a period in which volume doubled to more than 17m vehicles a year – may finally be cooling off, or at least stabilising. In the first quarter of 2011, sales are up 12%, although the extent to which rapid growth will continue is uncertain. Much of the expansion of the past two years has been supported by tax breaks and other incentives, most of which are being withdrawn. Some regional governments, in particular in Beijing, have also put in place limits on car purchases, and at the same time are increasing parking fees, according to He Liming, president of the Chinese Federation of Logistics and Purchasing (CFLP), the association that represents manufacturers, suppliers and logistics service providers.

However, since the country’s GDP is at about $4000 per head, a point where car purchasing takes off, car sales are still expected to grow at 10% per annum into the foreseeable future.

He Liming also pointed out that the growth of recent years has helped bring about better development of automotive logistics as compared to other sectors. While Chinese logistics are typically characterised by a highly fragmented market–with as many as 700,000 tiny companies, according to Qian Jing, director for Asia-Pacific automotive at Geodis Global Solutions–the automotive market features about a dozen main players, and is seeing more investment from global providers.

While some OEMs continue with tied logistics providers, for example SAIC and Guangzhou Auto (which has two), some like Chery are moving towards increasing outsourcing to third party logistics providers (3PLs), in this case to Anji Logistics. Local logistics providers are also improving their service range. “Logistics service providers are now actively exploring new business opportunities, particularly for exports,” said He Liming, though the volume is still low at 560,000 in 2010, and still below the peak of 690,000 in 2008.

The slower or more stable growth in China might also encourage manufacturers to focus more on efficiency. While the cost of logistics relative to GDP has dropped about 0.5% to 16.7%, according to He, it is still nearly double the ratio seen in Europe or North America. At the same time, the country’s trucking industry continues to carry the great burden of moving China’s freight, particularly for the automotive industry. According to He Liming, trucking is still characterised by overloading, adding more cost and risk to the supply chain.

Networking

Logistics in the new 5-year plan

Wang Ming: government wants ‘one-stop shops’

China’s government–ever the important driver for much of the country’s industrial growth–is focusing on improving logistics connectivity and on more advanced IT systems, rather than just on the infrastructure investment which characterised the previous 5-year plan. The new plan, which spans 2011-15, mentions logistics more than 20 times, according to Wang Ming, vice director of transportation research for the National Development and Reform Commission, the country’s economic policy-making  body.

Among the key points for the government are greater standardisation, whether for trucks, pallets or IT systems. Wang also said that logistics providers need to move further in the direction of the ‘one-stop shop’, where services such as road transport, rail transport, packaging, consolidation and warehousing will be offered by one company, rather than separately as now.

He also pointed to ongoing rail investment, from high-speed lines to specialised wagons for different kinds of freight, as a means of encouraging the necessary growth of an alternative to road in China.

One of the most significant regulatory issues to emerge from the conference was a change to truck lengths. Chen Gang, general manager for Beijing Chiangjiu Logistics, noted that as of July 1 this year the maximum truck length will be shortened to 16.5 metres, while a two-part trailer will be reduced three metres to 22 metres. According to Chen, if the law is applied as planned, capacity will be reduced by 30%. “Industry would grind to a halt, and transport fees would have to rise significantly,” he warned.

But Chen, along with the CFLP’s Ma Zengrong, said that they were currently lobbying the government to modify the plans. “We are confident that the necessary changes will be made, but we need to go through a high number of ministries even to adjust one small number,” Ma said.

Professor Zhang has influenced the 5-year plan to focus more on logistics

The gap between what the Chinese government plans and what the industry may want was further illustrated by Zhang Xiadong, professor at Beijing Tiao Tong University, who is writing the detail of the latest 5-year plan as far as its logistics elements are concerned.

“We will continue to press the central government and emphasise that they must focus on logistics,” Zhang said. “We are still in the firefighting mode [on policy] in many ways.”

Zhang pointed out that despite significant investment, transport and logistics remained a major bottleneck in China and were struggling to keep up with demand.

And while he emphasised the importance of continuing investment in infrastructure–as well as high-speed rail lines to add capacity for freight, China will also build a large network of logistics centres–he said that investment alone would not be enough. The focus needs to be on the links between each mode.

“During the next 5-year plan, an integrated transport network must be achieved in China between road, rail and sea,” he said. “Currently, the modes do not link together very well and this is holding back growth for multi-modal solutions.”

The gala dinner was held at 1933, a converted abattoir

Making China’s logistics world class

Michael Filazzola: little visibility

OEMs at the conference made it clear that bringing more sophistication and visibility to the supply chain was a top priority. Michael Filazzola, director of global purchasing and supply chain for General Motors China, described how the carmaker was now focused on optimising its shipping metres, building stability into its internal processes, maximising the use of its assets and strengthening its supplier relationships. In particular, he observed how the earthquake and subsequent supply crisis from Japan had exposed a degree of complexity in the supply chain that GM hadn’t fully understood.

“We used to focus almost exclusively on our supply chain from tier ones, but now we understand that we need to look deeper, to the tier two and three level, and find ways to help them improve their logistics processes,” Filazzola said.

He added that GM was also looking increasingly to use rail freight, and that it had even experimented with short sea, a mode that still has a low penetration in China.

Global logistics providers, such as Ceva and Geodis, also outlined large scale investment in China. According to Dave Dudek, Ceva’s director for automotive in Asia Pacific, the company aims to double its size in China in the next three years, led in large part by growth in automotive.

Zhang Yuhua: learning from VW and Audi

Zhang Yuhua, from the manufacturing management department at FAW Volkswagen, also illustrated how OEMs in China have come a long way towards implementing the best practices from their global counterparts. The joint venture is now using a just-in-time, synchronised logistics system to run milk runs from its consolidation centre to its factories. The company has introduced ideas from both VW and Audi including a logistics supermarket to feed supply. Similarly to GM, the carmaker was also taking a more holistic view of its supply chain to improve total cost.

“Now we can consider that it is the springtime of the logistics industry in China,” she said.

Both local and global logistics providers expressed their ambitions to grow and improve services in China. Mo Jinkang, vice general manager of Anji Automotive Logistics, said that although his company handled as many or more vehicles per year than the largest global vehicle logistics providers, such as Germany’s BLG, he admitted that the company still had a long way to go towards improving its management capabilities.

“But we want to learn from the best companies, and so we are meeting with those companies to gain knowledge,” he said. “We also plan to set up a national network and control centre and to work to improve and increase our standards.”

Global logistics providers, such as Ceva and Geodis, also outlined large scale investment in China. According to Dave Dudek, Ceva’s director for automotive in Asia Pacific, the company aims to double its size in China in the next three years, led in large part by growth in automotive.

Presentations

Unsustainable price wars

But the Chinese industry nevertheless faces significant challenges and quality issues. Professor Zhang called the competition in the logistics industry “vicious”, and said that price wars would hurt the industry as they limited the amount that companies would collaborate.

Qian Jing from Geodis confirmed that the priorities in the Chinese automotive logistics market remained “price, price and price”.

Car Maker Panel

Porsche China’s Meng Qin, import and logistics manager, said that rising commodity prices and ongoing capacity issues (particularly related to the changing truck regulations) threatened to inflame the price wars still further. She acknowledged that manufacturers would have to accept a rise in transport fees. “As much as we don’t want to admit it, a rising fee for transport in China is inevitable,” she said. “But the positive factor is that once the price and rates stabilise, the sector will see increased investment.”

She described the challenge over the next three years as “grim” but also emphasised that the rise of multi-modal transport would play a significant role in relieving transport bottlenecks.

Price pressures are also being put firmly on the tier suppliers. Jörg Biesemann, director of logistics for automotive in Asia Pacific for Continental, said that risk and unpredictability in the supply chain meant that carmakers were increasing the amount of consignment stock asked of their tier suppliers. “We are asked to carry four weeks of consignment stock, and with lead times from some factories of up to two weeks, it means we need six weeks of inventory,” he said. “That ties up a lot of our working capital, and it also means that we must pass down these requirements to our own suppliers.”

Carrie Zhang, senior manager for Asia Pacific logistics at tier supplier Delphi, also highlighted the importance of improving quality and interconnectivity in the supply chain. She stressed the need for logistics providers to develop more integrated services that could pull together warehousing, trucking, customs clearance and inter-modal transport. “There is no company that can really do this yet,” she said, ” but perhaps it is on the way.”

Exports are in the plan

The second day of the conference saw a stream dedicated to export logistics, hosted by the CFLP and featuring a range of domestic OEMs as well as an official from the Ministry of Commerce.

The statistics are impressive. China’s exports of parts has re-bounded from the $22 billion level of 2009 to reach $31 billion last year, in line with the level reached in 2008 before the financial crisis hit. Finished vehicle exports have not recovered so well, and in 2010 had not reached the level seen in 2007. But at 560,000 last year they were significantly up on the 370,000 seen in 2009, and if the exports of 99,000 vehicles in the first two months of 2011 are any indicator, will soon be at a record level.

Mr Wang, the deputy director general of the Mechanic, Electronic and Hi-Tech department of the Ministry of Commerce, acknowledged that finished vehicle sales were “mostly low-end products for developing markets in Asia, the Middle East and Africa,” and said that sales to South America had recently started in earnest. “Our biggest market in 2011 is Brazil, which is developing very well,” he said, while Russia is also growing and taking three times the volume of the previous year.

BLG was among the companies attending from Europe or North America with interest in exports

For 2010, China’s five principal markets were Algeria, Syria, Vietnam, Russia and Chile, the conference heard, and exports were principally light trucks and commercial vehicles. But in the early months of 2011 the export of cars had overtaken these. And while Western markets and their logistics companies are anticipating the start of higher volume exports to their markets from China, some of the conference maintained that the focus, at least in the short term, would remain on emerging markets.

“Putting the emerging markets together, there is plenty of room for growth, equal to what could be made by a presence in more developed markets,” said Sun Yuanfei, MD of Cinko SCM.

The challenges for exporters were starkly laid out: an order-fulfilment rather than marketing strategy; poor product quality, and poor consistency once certification had been obtained; and poor after-sales service and networks due to low volumes.

The quantities also hamper efficient export logistics, which see small volumes to many destinations with minimal supply chain visibility.

Nevertheless, things will change. “We have production to spare,” said Wang, and added that China may both fill the gap left by Japanese production cuts following its tsunami, and benefit from Japanese OEMs shifting production to less-geologically vulnerable countries.

Li Tian of FAW said that his company now had separate targets for its exports of own brand vehicles, while Jiang Duo of Brilliance Automotive said that their previous order-driven export operation was being replaced by marketing activity and established overseas bases in Egypt, Brazil and Vietnam.

In addition, following last year’s signing of an exclusive distributor agreement with Brazilian dealer SHC, Jianghuai Automobile Company (JAC) moved 10,000 of its vehicles to South America in the first quarter with Eukor, according to Chi Ruzhao. Three of the five routes JAC uses for exports to Brazil are direct services.

While China exports the majority of its vehicles to developing countries, BYD Auto’s commercial and logistics senior manager, Xiong Tianbo, revealed that the company was targeting the US and Europe for electric vehicles, with a target of 50-60% of production destined this way. She said electric vehicles were a core product for those markets and BYD had set up a trading company to sell electric vehicles in the US, the company’s most important export market according to Xiong.

Western logistics providers are keenly aware that China is on the road to becoming the next Korea as far as vehicle exports are concerned, though it has some way to go to reach the 70% of total finished vehicle production currently exported by its neighbour; only 3% of production is currently exported from China. That said, in 2010 import/export activity saw growth of 36%, with automotive logistics sitting at the top of the list according to Dr Xiodong. Automotive exports are forecast to have an annual growth of 30-40%.

The CFLP’s Ma Zengrong said his organisation was working with ministries on issues like truck length

Building on developments in the last Five Year Plan phase, which ran from 2006 and saw significant investment in infrastructure (9% of GDP last year), the next five years will focus on building in quality to the services on offer and developing new provisions for export activity, with an emphasis on joint ventures and an increase in outsourcing logistics activity.

But speakers warned that logistics providers needed to be proactive, rather than simply wait for the volume to grow. “Logistics companies should look to contribute to this export drive and help form the market, not wait to react to it,” said Shen Jinjun, secretary general of the CFLP.

Wallenius Wilhelmsen Logistics, BLG, CN, Union Pacific and others, including the ports of Richmond, California, the port of Bristol in the UK and Belgium’s port of Zeebrugge, were all on hand at the conference to demonstrate to the Chinese OEMs that they had the infrastructure and availability to handle the exports when they come.

  • The Automotive Logistics China conference is one of a global series which brings together carmakers, tier suppliers, logistics providers and government for discussions, presentations and networking. Each lasts two days, with an introductory cocktail reception on the evening prior to the first day and a gala dinner on the middle evening. Conferences are held in North America (Detroit and California), South America (Brazil), Europe (Germany), Russia and India as well as in China. See the detail of each conference.

The conference had a dedicated session for tier suppliers