China’s shift towards smarter logistics
SHANGHAI 17 April 2013 : Executives from carmakers, tier suppliers and logistics providers in the world’s largest vehicle market appear to be echoing the economic policy espoused by the country’s new political leaders, who have recently spoke out in favour of profitable over fast growth. Speakers at the 10th annual Automotive Logistics China Conference in Shanghai emphasised the quality of growth over the quantity of it, including developing ‘smarter logistics’ in multimodal transport, IT visibility and, particularly, better management.
With vehicle exports on the rise, surpassing the million-unit mark last year for the first time ever, industry leaders also called for more reliable, secure and efficient logistics for moving vehicles to China’s export markets, most of which are developing countries in Asia and Africa.
Likewise, as the number of passenger vehicles in China surpassed 100m last year, the importance of aftermarket service is increasingly relevant, both as a means of retaining customers, as well as a source of profits for manufacturers and logistics providers. OEMs are expanding the number of parts distribution centres in their networks, and exploring with providers how they might increase the frequency of deliveries to dealers.
Change from the top down and bottom upThe need to improve supply chain costs and performance in China is not just a government mandate, as most leaders in the automotive industry agree that logistics costs are too high. But the message about sustainable growth is coming from both the very top of China’s political class, as well as from the bottom of the supply chain. With annual GDP growth now targeted at around 7.5%, compared to several years of 8-10%, China’s president, Xi Jinping, recently told business leaders that the era “ultra-high speed growth” is over and no longer desirable. Instead, the government is putting emphasis on “transforming the growth model” to one that is more sustainable and in which supply and demand are more balance.
At the conference, government officials also pointed delegates towards central government policy as a guide towards reforming the automotive and logistics sectors. Dr Liu Xilong from China’s National Development and Reform Commission (NDRC), a powerful government policy department, said that the report that emerged from the 18th National Congress of Communist Party of China, held in Beijing last November, emphasised shifts towards a more service-orientated economic model.
“The service sector is going to be a major driver for the economy, [and the report] paves the way for the prosperity of the logistics sector,” he said. “The report also stresses quality this time, not just cost. Efficiency must be improved by the introduction of the latest management techniques to sustain growth.”
This message is reverberating throughout the supply chain sector in China, as speakers pointed to the need for more advanced management of cost and operations, and more emphasis on making products and services more efficient. “We need to address costs and capacity,” said Cai Jin, vice-president of the China Federation of Logistics and Purchasing (CFLP). “The solution lies in the economic model transition, in which we have to rely more on quality than the speed of growth.”
CFLP’s Cai also foresaw a move towards the service sector as well as lighter, more advanced manufacturing. This change will also lead to a change in how logistics is managed. “Our production model is a factor,” added Cai. “Because in the past our economy was in shortage, we focused on mass production. Now we need to look at a new method of production. And then we need to change the management of logistics. This will bring savings.”
Fragmentation and imbalanceFor all its headline growth, the case for changing the economic model for the automotive supply chain is strong. Although automotive production and sales looks set to expand another 5-7% in China this year to more than 20m passenger and commercial vehicles, the industry faces slower expansion at the same time that costs are rising quickly, particularly for logistics and labour, according to Cai. For example, logistics cost as a percentage of GDP surpassed 18% in 2012, and Cai expected it had risen further in the first quarter of 2013.
The Chinese automotive industry, with its hundreds of government-owned manufacturers, is also facing production overcapacity, particularly among Chinese brands. This imbalance, along with too many dealerships, has led to a growing price war and too much vehicle inventory in the outbound chain, said Shen Jinjun, secretary general of the Chinese Automobile Dealer Association. “The inventory has resulted in inventory funding costs for dealers than were as much as 100% higher than in 2011,” he said.
There are also structural issues in the Chinese industry that prevent a more efficient allocation of resources and services, including a complex web of separately managed joint ventures between foreign OEMs and state-owned companies. With most manufacturers using logistics providers owned by Chinese carmakers, it is not always easy to arrange material consolidation or backhaul flow of finished vehicles, for example. Bai Qiuli, general manager assistant at FAW Logistics, the in-house provider for state-owned FAW, one of China’s largest OEMs, said that the company was interested in carrying backhaul flows from other carmakers, but that finding ways to work with other in-house providers was taking time.
“We are looking only for win-win situations,” she said.The logistics industry in China is also highly fragmented. Dr Jörg Biesemann, director of logistics for automotive in Asia Pacific at the tier one Continental, said that across the whole Chinese economy there are more than 700,000 logistics providers, with the four largest controlling less than 5% of the market. “There are no providers that can cover the entire country,” he said.
OEMs and logistics provider also face continuing uncertainty over regulations and requirements when it comes to topics as seemingly straightforward as the legal length of a truck carrying vehicles. But the legal situation is “chaotic”, in the words of Ma Zengrong, secretary general of the Chinese Automotive Logistics Association (CALA) of the CFLP. Ma pointed out that many current trucks on the road violate the official length requirements, but the government has yet to properly enforce this length or clarify a revised one, although CALA has submitted its suggestions.
Reform on the rails
In common with other developing markets, China faces tremendous imbalances between the uses of different transport modes. Zhang Xiaodong, professor of the Transport College at Beijing JiaoTong University, and the co-author of a number of China’s transport policies, said that about 88% of automotive freight moves by road in China, with 7% moving by water and just 5% by rail. Carmakers at the event, including Ford’s manager of material planning and logistics for Asia Pacific, Aleks Kobylecki, called for more use of rail and barge transport service in China as a means to both reduce costs and environmental damage.
The good news is that the Chinese government has not neglected rail freight in infrastructure investment or, more recently, policy reform. Professor Zhang said that China plans to increase its rail network from 98,000km to 120,000km in the next few years. The expansion of more high-speed passenger rail services should also free up further capacity for freight on the network, he said.
Perhaps even more critical is the Chinese government’s steps to liberalise the country’s state-owned and controlled railway system. Zhang confirmed that the government would break up China’s powerful Ministry of Railways into several departments that will each report to the transport ministry. The government will also separate policy and operations at the railways, with planning and standards set by a National Railways Bureau, and the China Railway Corporation responsible for operations. Zhang said that this organisation would be closer to an independent company competing in the market.
“This is the foundation for a further marketisation of the railways, but many policy decisions are currently still being decided,” Zhang said.
Export growth to difficult markets
The event also featured a dedicated conference on exports, organised by the CFLP. Chinese-built vehicle exports rose 30% in 2012 to around 1.05m, with IHS Automotive forecasting 1.3m this year, and steady double-digit annual growth for the rest of the decade. But with China’s destination markets dominated by developing countries, such as those in North Africa, the Middle East, Southeast Asia and South America, the logistics chain is characterised by limited and unreliable shipping services.
While Chinese exporters still suffer from manufacturing and technology issues, Zengrong Ma pointed out that it was logistics that needed more attention. “The quality issues for many exporters today are probably found more in logistics than on the assembly line,” said Ma.
Areas of particular weakness appear to be for inland transport to ports, where vehicles often arrive with little attention paid to security or protection. Given that many manufacturers rely on importers in the receiving country to organise distribution, there also appears to be a culture of ‘out of sight, out of mind’ among many Chinese OEMs. However, larger exporters, such as Geely, which shipped more than 100,000 vehicles abroad last year, showed more interest in ‘door-to-door’ management of the export logistics chain.
From boom to less-than-boom
China’s economy has been the cause of some concern in financial markets, including slower growth and a recent credit downgrading because of high local government debt. There are also worries about a real estate bubble.
But the ‘slowdown’ of China’s economic growth would be considered a boom in almost any other market. First quarter GDP growth in 2013 was still 7.7%, below previous levels but above the government’s 7.5% target, while fixed asset investment was a strong 20.9%. “Such a level of investment has historically been enough to support GDP growth above 7.5%,” said CFLP’s Cai.
The logistics sector also appears robust, growing 9.5-9.8% in March, according to the CFLP. Total import and export volume was up 13% and 18%, respectively.
Automotive sales and production, meanwhile, were strong in the first quarter, with passenger vehicles rising 17% to 4.42m, and total vehicle sales up 13% to 5.4m units – although a large share of this growth may have been driven by incentives on high inventories, particularly among Chinese brands. Government forecasts suggest that growth for all of 2013 will finish at 20.8m vehicles, while the market could reach 26m units by 2017.
In the short term, Cai predicted that China’s economy would continue to grow at similar rates in the second quarter of the year and beyond. “The fundamentals will not change significantly. We still have strong demand, with the new order index growing by 2.2% in March,” said Cai. “There are lots of uncertainties, but the global economy is recovering steadily.”
China has also managed to tame inflation for the time being, with the consumer price index currently at 3.1% and declining. Commodity prices have also risen by only a small margin, which Cai suggested would pave the way for continued growth for the rest of the year.
Automotive cost pressure
But this relative pricing stability has apparently not been replicated across the automotive industry. Cai said that, as of this year, the biggest challenge for the sector is the rising costs for labour, logistics and management. Such costs, together with the price war and excess production capacity, could post serious threats for profitability.
For logistics, the costs come from the usual suspects, such as fuel and energy prices, particularly as China still relies heavily on coal. Salaries are also a factor, as Continental’s Biesemann said that logistics wages have risen more than 300% since 1999. And while China’s infrastructure investment has been impressive, there is also continuing congestion at roads and ports, with too little freight moving by rail or waterways.
Management and systems weaknessPlenty of money also appears to be wasted because of ineffectual management, poor IT systems and a lack of integration across the supply chain. Lucy Yang, purchasing director for Magna China, a major tier supplier, pointed to a number of supply chain weaknesses in China, including poor forecasting capabilities among Chinese OEMs. “Our plants often complain that customer forecasts are too high and as a result we have too much inventory,” she said.
Scheduling to suppliers also rarely matches the forecast, she said. Furthermore, poor ordering systems mean that there are delays in delivery scheduling, creating even more of a disconnect between manufacturing and actual demand. FAW Logistics’ Bai said that that the automotive sector currently has poor electronic information exchanges, and that systems were rarely synchronised all the way to dealers.The disjointed IT and planning links lead eventually to mismatches in estimated dealer delivery dates. Ford’s Aleks Kobylecki said that the carmaker’s target is to deliver vehicles within a week either side of the delivery date that Ford generates when a vehicle is ordered. But because of logistics delays and systems unreliability, the carmakers meets this target only around 50% of the time.
“However, because we are producing vehicles so quickly to meet demand, in many cases we miss the target because we are actually more than a week early to the dealers,” he said. However, being too early for delivery can also present inventory management problems.Meanwhile, the fragmentation in the logistics market leads to inefficiency in transport, as well as more management effort. Eddie Wright, director of logistics for Asia Pacific from Delphi, thought it was one of the biggest obstacles in the way of improving logistics services across China. “I see a lot of fragmentation in the market, which I think is the barrier that is really prohibiting us from having smarter logistics,” he said.
Zhu Rui, director of material planning and logistics at Lear China, said that more than 60% of the logistics providers the supplier uses are small companies. “I tried to consolidate more of our business to a large provider, but I failed,” he said. “There is no one company that can do this in China.”
Logistics and supply chain management also appear to be neglected by many in top management. Wenty Zhou, purchasing director at Magneti Marelli China & Far East, pointed out that this ignorance is partly why logistics and purchasing are often poorly integrated in China, with too little regard given to the logistical considerations when sourcing components or designing a supply chain.
Investing in systems and logistics control
While the above issues would be common to many automotive companies in China, the conference revealed many instances where companies are improving their logistics standards and quality, including adopting more sophisticated management, equipment and IT tools. Yang Chengyan from FAW, said that his company was going to invest in IT that would better integrate logistics operations and increase material visibility as volumes increase. The carmaker, which has major joint ventures with Volkswagen and Toyota, is expected to increase vehicle production from its base in Changchun, in northeast China, to 1.8m units per year.
“We will also invest to improve our management structure, so that logistics is better integrated into the decision-making process,” he said.
FAW Logistics’ Bai revealed it was specifically investing in an internet and mobile-based technology that would automate the management of more logistics services. The system will help eliminate more paper-based documentation by using electronic invoicing and insurance claims, for example. She added that FAW would install EDI links that would connect its factories, vehicle distribution centres and dealerships.
Tier suppliers are also working to gain more control over their logistics. Wenty Zhou at Magneti Marelli described how the Italian supplier is consolidating its inbound logistics carriers across its ten plants in China to reduce costs and improve service levels. Until recently each plant selected its providers individually, which led to a “chaotic” situation in which Magneti had a poor visibility over its inbound logistics. The company has now begun to centralise its logistics management and supply chain design, reducing its provider base from more than 20 carriers to just a handful, all of which have a global pedigree: Agility, Anji-Ceva, DHL, DSV, Geodis and UTi.
“We have set up a single contact window for specific suppliers and we have better understanding of customer planning,” said Zhou. “We have also been better able to integrate purchasing and logistics, which allows us to make network and procurement decisions from a whole supply chain view.”Magna’s Yang also recommended that China begin to make the difficult shift towards building products to order, although this would require systems upgrades.
“For build to order, you need a direct order booking system. The actual order must be communicated to each unit in your supply chain in a very short time,” she said. “The IT system must also communicate immediately to your supplier and logistic providers.”
Magneti Marelli’s Zhou also recommended that third party logistics providers had a role to play in helping manufacturers to improve how they manage and integrate logistics into their production systems. She recommended that providers come regularly to manufacturer’s plants to organise workshops and teach the management what logistics should be about.
“Top management tends not to know how to handle logistics, and so I would suggest the provider communicates more with us and offers some consulting services,” she said.
Smart from the start
Manufacturers also appear to be paying more attention to the cost and operational implications of their supply chains. Lear’s Zhu pointed out that the supplier was making more decisions around just-in-time and just-in-sequence delivery. “We’re trying to make our logistics network a competitive advantage,” he said. “For example, we recently moved a seating factory to Changshu especially to be closer to the Qoros Auto plant there.”
Qoros, a new carmaker in China owned 50:50 by Chery and Israel Corporation, is aiming to be “smart from the start” by designing logistics efficiency into its supply chain, according to Mike Dickinson, director of customer order management and logistics. Qoros, which will launch sales later this year, has based 95% of the supply chain in China, while 52% is within 150km of its plant.
Dickinson also said that the company’s management structure has fully integrated engineering, production, sales and logistics.
Already quite sophisticatedWhile China’s market is admittedly fragmented and suffers from underdeveloped services in some areas, its volume and complexity should not be underestimated. Biesemann pointed out that OEM plant capacity utilisation was as low as 60% for domestic Chinese carmakers, but for joint ventures with foreign brands, it was as high as 117%.
Automotive logistics providers are also fairly advanced when compared to providers in other sectors. Two of the largest providers, for example, Anji Automotive Logistics and FAW Logistics, control a large share of the finished vehicle logistics market between them. Both providers are also diversifying into rail and multimodal services.
The NDRC’s Liu Xilong also said that automotive logistics had already reached a high level of sophistication in China, particularly as it has been the centre of attention for a number of government agencies and policies, including privatising aspects of rail and industrial properties. “I suggest that [providers] take advantage of China’s policies allowing them to build logistics parks, for example,” he said.
Yan Jun, assistant general manager of Anji, said that his company would build 18 logistics centres over the next five years, including a number of major hubs.
“We are also working more with international logistics companies, such as Union Pacific Railroad and NYK, to benchmark and improve our services,” he said.‘Rail marketisation’
The rail reforms could in the long term also play an important role in helping to build more balance for China’s multimodal services, particularly with the introduction of more private investment and competition. NDRC’s Liu said that while the railways would not move to a completely free market model, more privatisation would follow.
“The railways has been developed a lot to facilitate finished vehicle logistics, but still have a long way to go,” he said. “We want to make the railway more free-market orientated, working together with providers like Anji or FAW Logistics. We want to create a better platform so that all parties are on the same playing field.”
According to Professor Zhang, not all of the details of the railway reorganisation and reform have been confirmed. While ‘planning’ and ‘operations’ will be split under the transport ministry, there are still debates over how exactly to define each area. The government has also not clearly defined what activities would be subsidised, although both Zhang and Liu said that rail for finished vehicle movements or automotive parts would not be among the operations to receive subsidies.
The government is also focusing on a number of other issues for the railways, including the development of an online trading platform, and releasing more cargo capacity to the private market.
“A lot of things are still being decided, but I can tell you that automotive logistics has been a key priority for developing plans for the railways,” Zhang said.
Zhang believes that the reforms will lead to further “marketisation”, or private investment. However, there has already been a number of developments in the rail sector over the past decade, according to Zuo Guangyu, vice-general manager, China Railway Special Cargo Services (CRSCS), a company established by the Ministry of Railways ten years ago.
“In the early days of the planned economy rail was mainly understood as a station-to-station service, but as the economy has shifted we are now looking at door-to-door to increase convenience,” said Zuo. “This is a breakthrough in our history.”
The CRSCS has been providing rail services for passenger and commercial vehicles for seven years and counts 21 OEMs amongst its customers. It provides capacity for 1m vehicles and has 18 container yards equipped for vehicle handling.
Zuo said CRSCS was engaged in research and design aimed at the development of multipurpose auto wagons, including bi-level units to double capacity. He also said logistics savings would come from further commercialisation of the organisation, which are expected this year as part of the railway reforms.
Zuo said that that collaboration with established rail providers from Europe and the US was important to its strategy for growth in the finished vehicle sector. “What we need to do is learn from other older entrants and we have been active in learning from Union Pacific Railroad in the US and have shared practices with them,” he said. “We have also been to [Germany’s] DB Schenker, which gave us good insight.”
Chaotic highway policyUltimately, Zhang said that the government would like to see rail for automotive increase from 5% of vehicles moved today in China, to 23% in future; water-based transport should also rise from 7% to 22%. Ma Zengrong from CFLP, however, said his association calculates that rail could move as much as 50% of finished vehicle traffic, with water taking around 20%.
But even if the rail policy changes are successful, road is likely to dominate vehicle logistics for the foreseeable future in China. Along with congestion and pollution issues, carriers in China are facing a confusing situation over trailer lengths – in fact it is an issue that has plagued China’s roads for nearly as long as the Automotive Logistics China conference has existed.
Ma Zengrong said that a high percentage of carrier equipment in China exceeds the official legal length of 15.89 metres, while trailers are regularly overloaded. In fact, trailers as long as 30 metres carrying 18 vehicles are still common. While there are fines for overloading trucks, carriers regularly pay them rather than surrendering their current loading capacity. And although the government made moves to enforce the official length several years ago, as many as 40,000 existing carriers could be described as ‘non-standard’ – and potentially illegal.
Adding even more confusion to the situation, the government has mandated that all new designs adhere to the current standards, although there is a possibility that the allowable length could be increased to 16.5 metres trailer lengths later this year. This leaves companies with the prospect of investing in equipment that could be out of date quite soon.Zhang Wei, China general manager at Lohr Automotive, said she had visited a number of manufacturers that are still producing equipment at more than 30 metres.
“China continues to produce these extra long trailers. Last year altogether 1,500 semi-piggy back vehicles were sold in China,” she said. “A lot of those vehicles have already depreciated but are still running on the road.”
Until there is a final authoritative standard, investment in new equipment remains doubtful. FAW Logistics’ Bai admitted that it was a difficult situation, as the provider itself still has around 7,000 non-standard carriers in operation. “If the government decides that it will no longer allow these carriers to operate, than as a state-owned company we would be obliged to follow the law,” she said. “However, if the government were to still allow these longer trucks to run, we would have to follow the market.”
Ma said that the CFLP has suggested a new standard of between 20 and 21 metres that would be more efficient, plus a period of depreciation to run out the previous standard.
“I hope the government can listen to us but that means it needs to recognise the fact that some of the improper trailers will still run on the road for a period of time, but no authorities have nodded their head on this issue,” Ma said.
However, China’s Ministry of Public Security has canvased the CFLP for its input on the situation. “We told them it is very complicated for the equipment to be reengineered and that this should not be the job for the logistics company because they don’t have the expertise or capability,” Ma said. “It is the equipment manufacturers that actually make the trailers.”
The shift to aftermarketAs China’s automotive market matures, the major area of profitability available to carmakers could shift to the aftermarket. With the number of passenger vehicles plying the roads in China reaching 100m in 2012, plus 100m more vehicles and motorbikes sharing those roads, the aftermarket potential is already significant.
Given the price wars, high inventory and overcapacity in the new car market, Jesse Hu, senior project manager at analyst Technomic Asia, suggested there is more potential in the aftermarket.
“We can conclude that the golden period of car sales in China has passed and we should shift our attention from car sales to the aftermarket,” she said.
Hu pointed out that in a mature automotive market, the aftermarket usually contributes to 60% of profits, but that in China it is currently only contributing 40%. She predicted, however, that the aftermarket would grow faster than the new vehicle market in the coming years. Logistics providers were already enjoying an 18% annual growth rate in the sector, she said.
Ford localises service parts in China
But as with other segments of the supply chain, logistics managers and providers for spare parts are now starting to focus more on reducing cost and improving service levels. As Ford increases its market share in China, for example, it is localising more of the service supply chain in China, and using it as a hub to move parts to other countries in the Asia Pacific region, according to Michael Little Jr, manager of purchasing strategy and material cost at Ford Motor China.
Prior to that, Little said the company was spending a lot of money for parts that were imported from other regions, including around 10% of the budget on parts from Europe. By the time the parts had been moved through warehouses in the UK and Germany, Little pointed out that the European labour rates lead to mark-ups of up to 300% for the price of a standard part. “Now that we’ve had such success with cars like the Ford Focus here, people aren’t willing to pay the price of an imported part,” he said.
Little said that Ford had taken a number of approaches to be “smarter” in logistics, and to get closer to the factory price. Ford is now trying to remove, where possible, one of the two European warehouses for Asia-bound parts, which it has been able to do for 100 parts so far, leading to savings of $2m.
Ford’s local operations in China have also established a warehouse in Shanghai so that Ford can buy directly from suppliers and re-export the parts around the Asia Pacific region. “[This] reduces the mark-ups, but also reduces the duty paid on those mark-ups,” said Little.
In total, Ford currently has 18 service parts depots in Asia Pacific, with seven of those in China. It has also set up its own consolidation centres in China. “Where we are buying large volumes, we are taking those parts through consolidation centres,” said Little. “That way we can bring large shipments in, break them down, package them for each individual market and ship them direct to Thailand, Australia and New Zealand, avoiding the high cost of ownership resulting from the mark-ups.”
Spare parts for commercial vehicles
In some ways, spare parts supply is an even more crucial area for the commercial vehicle segment, where a delay in repair does not just mean inconvenience for an individual, but can impact an entire business operation.
Truckmaker Scania, which got into the Chinese market in 2004 and began handling its own sales and distribution in 2007 from a central warehouse in Shanghai, called from support of its established logistics providers as its business grows to include customers in all regions of the country.
“In the past Scania’s main customers in China were located in the coastal regions, but recently we have picked up customers in new segments that are scattered all over China,” said Abraham Yue, spare parts manager at Scania Sales China. “So now we are looking at working with transport providers and logistics companies to analyse the whole distribution network and looking for efficiencies in moving parts from Scania’s warehouse to the dealer network and then to the end customer.”
He said it was important for the company to focus on its core business and outsource transport and warehousing to professional providers. Last year the company outsourced its warehouse activities and set up a new 1,200-square-metre facility in Shanghai.
Scania is working on a number of projects to increase parts availability and improve lead times to the dealers with its transport providers.
“Firstly, based on this warehouse, we are building up our existing stock of parts to improve availability,” said Yue. “In addition, lead time is important because, no matter how high your availability, there is still the risk that you will not be able to deliver the parts.”
Yue said that in those circumstances the lead-time in place to get the parts from the supplier or from its warehouse to the customer was important. Scania is working on a basic stock project with its dealers to make sure they always have a stock of the parts most crucial for maintenance and repair of its customers’ vehicles.
“At the same time we are looking at the opportunities of working with customs clearance agents and the customs office to show them the lead time for inbound,” he added.
Expanding the distribution network
Arthur Ji, head of Automotive at DHL Supply Chain China, highlighted the complexity of trying to establish better lead times for the commercial segment in such a huge country. He suggested that in Scania’s case, there needed to be a greater analysis of where most of its vehicles were being used to make sure parts are shipped to repair shops or dealers in the right areas.
Shipping from one warehouse to areas scattered across the country, for example, was certain to challenge lead times as a truckmaker like Scania increased its service level, he said.
“What you should think about now is a more complex network and not just storing parts in one location, but having them stored closer to the regional dealers, using something like an regional distribution network,” said Ji.
He acknowledged, however, that this would necessarily lead to the need for stock increase: “Lead time will always conflict with the inventory holding cost,” he said.
Ji also pointed out that no one carrier can handle all of the transport required to deliver across China and that transport companies working in the country were focused on smaller areas. What is needed is a network of transport capabilities. Ji said that DHL was setting up a nationwide transport network by building its own transport hubs and providing greater visibility through the use of control towers – a similar network structure that it already runs in Europe or North America.
Growth in exports
The CFLP Export day, which has been a regular event within the Automotive Logistics China conference for five years, discussed the logistics challenges for the country’s growing export volume. Although vehicle exports represented only about 5% of the market’s production, its 30% growth was significantly higher than the overall production rate. Imports to China, meanwhile, rose to 1.13m vehicles, a 9% gain from 2011.
According to the government’s official statistics, exports were highest at Chery (184,757 units), followed by Geely (100,779) Great Wall (96,465), SAIC (95,653), Lifan (87,041) and Dongfeng (84,783). Those totals include joint ventures with western companies, however. SGM for example, General Motors’ joint venture with SAIC, exported 60,000 units, while FAW-VW also grew its exports, said Wang Yinyin from the department of mechanics, electronic and high tech industry at the Ministry of Commerce.
In total, exports from foreign OEMs were 280,000 units, according to Li Li, chief of trade supervision at the division of customs control and clearance at the Shanghai Customs
China’s primary export markets remain developing countries, with last year’s top destinations Algeria, Russia, Iraq, Iran, Chile and Ukraine. But the top list is constantly changing, given the unpredictable nature of these countries’ economies and trade policies. Exports to Brazil dropped as much as 80% in 2012 compared to 2011 after the country introduced higher import tariffs. Ecuador has also recently imposed import tariffs. Meanwhile, Russia’s recycling charge on passenger cars and commercial vehicles could shrink exports by half this year, said Yinyin.
On the other hand, China has recently signed free trade agreements with Chile and Ukraine, which helped them grow significantly last year.There are a few developed countries on the list. Great Wall recently starting selling pickup trucks in the UK, while Geely has exported 20,000 pickups and trucks to Australia, said Yinyin. Overall, China exports to 196 countries. “China has a diversified portfolio of major export markets, but there is a herd effect among manufacturers,” she said. “If one OEM thinks it’s a good market, they all follow. Africa is particularly important.”
Traditionally, China has exported a higher amount of commercial vehicles than passenger, but recently this has changed, with commercial trucks 32% of the total. Light sedans grew the most and now make up 49% of exports, said Yinyin. The value of each vehicle has also gone up, but it is still 30-40% less than average export values from Japan and South Korea, she added.
The focus on vehicle export looks set to intensify in China. With production capacity likely to grow faster than the domestic market, more manufacturers will seek to export further. Weng Zeng, senior analyst at IHS Automotive, predicted exports would reach 1.3m units this year and grow steadily to 2.9m by 2022.
Tough competitionIn terms of market competitiveness, China’s OEMs are struggling. Technology is still lagging global manufacturers, and Wang pointed out that research and development investment is still only 1-6% of total revenue, far below international levels. Perceptions of poor quality are strong, and not helped by a recall last year of Chery, Geely and Great Wall vehicles in Australia following discoveries that asbestos was used in some components, said Li.
Although export volume has risen quickly in the last two years, Chinese market share even for its larger export destinations, such as Chile, does not exceed 7%, according to Weng. Although Chinese brands have grown in North Africa, Li pointed out that French brands are investing considerably in local production and service here, which will make it harder for Chinese OEMs to compete. With poor density and limited aftermarket service, Chinese OEMs could struggle to retain customers or increase their brand value.
Logistics as a competitive disadvantage
Besides the market and trading factors, export logistics themselves are putting many manufacturers at a competitive disadvantage. Ro-ro capacity is not always available to destinations in developing markets, which means either booking more than a month in advance, or relying on containers, according to Wang Yinyin.
“Chinese OEMs therefore rely more on containers, which results in more damage, and often have to pass through many ports to reach a destination,” said Yinyin. “With around three cars in a container, the costs are usually around $400 per car.”Services are particularly poor when compared to the logistics processes for most imported vehicles, according to Huang Ribo, assistant manager at the Shanghai Haitong International terminal, China’s largest terminals for vehicles. Huang revealed that Chinese exports often arrive in dirty conditions, with insufficient protection and security measures. He showed photographs in which spare tyres were strapped to vehicles with wire, vehicles were covered in dust and there was a general lack of standard information about each vehicle provided.
“When we try to contact the manufacturers to let them know about the problems we find, we hear nothing back,” said Huang.
Considering the already high cost cost of trade duties, China’s transport costs, damage rates and extended lead times appear to harm quality and profitability for exports even further. “Taken together with import duties, the overall logistics and transport cost tends to be high, and is a negative force in the competence of the Chinese automotive industry,” said Yinyin. “We call on logistics companies to try to come up with better plans to bring down the costs of logistics.”
The ‘door-to-door’ desireChina’s larger exporters, such as Geely, appear more focused on logistics service and quality. Jenny Jin, deputy general manager at Geely International, pointed to forecasting and information exchange in the order-to-delivery cycle to help avoid inventory build up at ports. Congestion at the port of Shanghai, for example, can lead to significant overtime storage costs if a vehicle is delivered too early.
“We always develop a yearly plan, along with monthly and quarterly updates,” she said. “We arrange our production according to the shipment schedule, giving the factory two weeks to arrange the production. We share the information with PDI inspectors and inland transport companies.”
Jin also called for more ‘door-to-door’ services to destinations in which logistics providers oversee the entire transport chain from factory release to dealers.
“Door-to-door service is really important for Geely. We need help from providers in controlling cost from loading to destination, including the inland logistics costs,” she said. Jin gave the example of managing overtime inventory costs at congested ports in Geely’s destination markets, which a single provider should be better able to avoid since it is handling the entire chain.
But it was clear that many smaller volume exporters in China do not control enough of their distribution chain to see the value in door-to-door services. A panel of local carmakers revealed that many rely on distributors or importers to sell their vehicles abroad, and therefore their responsibility (and concern) for logistics tends to end at the port.
Xia Shuxian, from China FAW Import/Export, which exports around 40,000 vehicles per year, revealed that in most cases the company only monitors logistics up to the port. “We are not well equipped for door-to-door services,” he said.
Jin pointed to this fragmentation of the distribution chain as a disadvantage, as carmakers lost the ability to see and control their costs. “If we just spread volume around our markets, we lose value,” said Jin. “You either need to work closely with distributors in the destination country, or setup your own sales companies, as Geely has in Russia.
“We always prefer to control the costs in our own hands, rather than leave it to our overseas partners,” she added.
New export linksWith Chinese exports having increased to Russia and Central Asia, there was also focus paid to the use of long distance railway to these locations. “We are thinking about the railway solution, which is something new for us, especially at Xinjiang province [in northeast China]” said Jin. “But the border crossing points are very busy and you always need to wait. The costs can also be higher than using other modes. But we should think about it more for other Asian markets.”
Fu Qinchao, administrative vice-general manager at China Railway Special Cargo Automobile Logistics, revealed that the company is currently investing in capacity for car exports, including an agreement with Kazakhstan to establish railway links. Along with moving vehicles from China, he said that Japanese and South Korean OEMs could use this route to tranship their vehicles to Central Asian markets.
Geely has also started to use other multimodal links to Russia and Central Asia. The carmaker is now exporting by sea from the port of Ningbo in China to the port of Novorossiysk in the Black Sea, from which point it moves onward by rail. The flow is again organised with a provider ‘door-to-door’.
“We arrange our production from the shipment date at Ningbo, while our provider books us rail slots in Russia when it leaves the port,” she said. “It works well, and last year we didn’t pay one dollar in overtime storage costs at the port.”
Logistics needs to catch upFew markets have been as quick to develop and expand as China. In the ten years since Automotive Logistics has run its conferences in China, the domestic market has grown from 3.25m vehicles in 2002 to 19.4m in 2012. Exports have grown from about 22,000 units to more than 1m.
But the changes and improvements in logistics seem to be taking longer than the sales or production growth. Even record investment in infrastructure, as China has seen for its roads, ports and railways, cannot make logistics more efficient overnight. Rather, such change appears to need further emphasis on logistics management, including stricter monitoring and end-to-end control of the supply chain.
“If I could have one wish for the industry, it would be for our logistics management to be improved,” said Yang Chengyan from FAW. “We have to minimise waste and improve our systems, but all of that has to do with management.”
Both the CFLP day, together with the rest of the conference, made it clear that while the Chinese industry may have a long way to go towards reaching the necessary levels of quality and efficiency, carmakers and providers expressed a strong desire to learn and improve. For example, after Huang Ribo from the Shanghai Haitong terminal revealed the extremely poor quality of vehicle handling he had seen for exports arriving the port, several manufacturers promised they would raise the issues with their management.
“While we follow terminal requirements, I can see that our quality is probably not up to par,” said Ge Yongjun, finished vehicle logistics vice-minister at Dongfeng Liuzhou Motor, which builds minivans. “I will bring this information back to my company.”
A turning point
The willingness of Chinese manufacturers and providers at the conference to learn from the rest of the world is one sign that their logistics management is likely to improve, and there was optimism that the industry is moving in the right direction. CFLP’s Ma said the industry is at “turning point”.
“Ten years ago the chairman of Geely described a car as a sofa on wheels. There has already been a big change on the technology side to higher quality vehicles,” Ma said. “Now we have to shift from managing simple logistics legs to managing the entire supply chain. We need to increase management intelligence and be more proactive.”
Indeed, a decade of Automotive Logistics China might not have been enough to see the sector reach its full potential for efficiency, but there is plenty to anticipate over the next ten years.