Chinese OEMs & providers in search of xiaolü
Big opportunities remain for 3PLs to lower logistics costs Christopher Ludwig and Marcus Williams report

BEIJING 20 APRIL 2012: Without a huge improvement in efficiency (xiaolü) China will struggle to deliver the benefits of its growing demand for cars and the OEMs’ huge investment in production capacity.

“We have the opportunity to double the current output of cars,” says Cai Jin, vice president of the China Federation of Logistics & Purchasing (CFLP). “But we have a low efficiency in logistics.”

He revealed that logistics across the economy in China cost a massive 17.9% of GDP in Q1 2012, around double that of developed countries. “If we can improve, we could reap RMB 3-4 trillion (about $500-600 billion) in annual benefits,” Cai said.

He was speaking in the opening session of the 9th Automotive Logistics China conference, which was held in Beijing just prior to the opening of this year’s national motor show. More than 300 delegates from carmakers, tier suppliers and LSPs gathered for two days of networking, discussions and presentations in the industry’s most important annual event for the automotive logistics sector.

There are clear opportunities for large LSPs, either domestic, joint venture or foreign, to bring the efficiencies. China has invested substantially in its infrastructure, but it lacks integration between modes and service. Logistics is also hampered by the fragmented, sub-scale and often unregulated nature of most local providers.

Slower growth, but still strong

Shen Jinjun, from the Chinese Dealers Association, is still bullish on growth

The CFLP’s optimism on car sales is based on moving China’s current ownership ratio of one car per 17 people closer to the global average, which Cai estimated at between 1:6 and 1:7.  Even at this level it would still be far below the USA’s 1: 1.3.

However, the growth of China’s car market has actually declined 1% in the first quarter of 2012 after growth moderated in 2011 at 18.5m units of passenger and commercial vehicles last year (after exploding 32% to 18m in 2010) following the end of some government incentives. Overall economic growth came in at ‘only’ 8.1% during the quarter compared to 9% and above for the past two years. The government has been taking measures to reign in inflation and avoid overheating, and indeed in the same week as the conference announced it would allow the value of the RMB to fluctuate (i.e. increase) a little more against the US dollar.

But March sales resumed the growth, and were 3% higher than the same month in 2011. Premium brands are increasing much more, and exports are up around 10% on 2011 (after bouncing back from the recessionary low by increasing 50% last year versus 2010). Conference speakers were relatively bullish on the rest of the year, pointing to government support and moderating inflation.

CFLP’s Cai Jin says logistics could save the Chinese economy trillions of RMB

Shen Jinjun, executive vice chairman of the Chinese Automobile Dealers Association, told delegates to expect sales growth of between 5-10% this year, which woul take the market to around 20m units. With Ford, GM and Volkswagen all recently announcing new assembly plants in China, the expectations for the long term are still obvious. Martin Thaysen, executive vice president for China at Ceva Logistics, pointed out that production capacity is expected to increase to 25m by 2015, and that consultancy KPMG has even suggested a figure of 40m units is possible, which could result in significant overcapacity.

Nevertheless, the CFLP’s Cai suggested to delegates that the Chinese automotive industry has entered a new phase. “The total structure of the industry is heading towards higher added value and more sophisticated building,” he said.

If logistics performance could be improved, the automotive and logistics sectors needn’t rely on the continuation of fast growth to increase profitability.  “If we can make [improvement to logistics efficiency] happen,” Cai noted, “we needn’t rely so much on the high speed of the market to grow.”

David Dudek, director of automotive for Asia Pacific for Ceva Logistics, also observed that both manufacturers and logistics providers are already putting more emphasis on lowering cost and finding efficiencies. “When we had double digit percentage growth year-on-year, we had less focus on efficiency. Now that it has come down to the single digits, there is more talk about driving cost out of the equation.”       

Infrastructure is great but not integrated

But the transformation to higher value, more efficient services is unlikely to come quickly. Issues that contribute to higher logistics costs include long distances, a large proportion of imported and exported material, and a general lack of standards for transport equipment and packaging. Thaysen from Ceva, which operates the country’s largest automotive logistics provider through the Anji-Ceva joint venture with its SAIC-owned partner, also pointed to the fact that domestic OEMs tend to own their own logistics providers. This holds back efficiency and the potential for shared networks.

“However, in some ways the market is moving away from this model,” said Thaysen, “LSPs [are] opening up their services and in some cases…being spun off into separate companies.”

Privately, delegates from LSPs also report the pressure from OEMs to their tier suppliers to separate out component cost from logistics cost, thereby exposing the inefficiencies of the latter, especially if they are also company-owned, and opening up the opportunity for 3PLs.

A large share of China’s logistics costs – about 35% – comes from relatively expensive road tolls, according to Wei Yong, chief of the transport and logistics division of the National Development and Reform Commission (NDRC). He told delegates that government has policies coming to reduce these costs. But he also pointed out that China would not have been able to finance its significant infrastructure investment in recent years without tolls.

Those investments have been spectacular; in the last five years China has spent more than RMB 10 trillion (about $1.5 trillion) on 639,000km of new roads, 33,000km of new freeways and 15,500km of new railway lines. It has created 1,700 deep water ports and 170 airports, said Wei.

GM’s Ginkel: China lacks intermodal integration for plants, ports and VDCs

However, logistics processes have not been updated to match the sparkling infrastructure, and the integration between networks and modes is still poor. “We lack the integration of these modes and activities,” said Andreas Ginkel, director of logistics for General Motors International Operations. “For example, even if there has been investment in rail, we’re missing rail links to plants, ports and VDCs.”

Thomas Blank, regional director of sales and marketing for Geodis Wilson, added:“The infrastructure is better than in parts of Germany, but the processes haven’t changed. You might have a brand new port in China, but the loading and customs processes are the same as 15 years ago, and still take a long time.”

The good news is that the NDRC, which helps to set transport policy and investment, has taken notice.“The convergence of traffic facilities and for multimodal transport is not enough, and the advantages of having logistics parks have yet to be realised,” Wei confirmed. “We have formulated specialised plans and programmes in terms of logistics parks and planning, and we are paying more attention to the unity of planning and facilities.”

Developing logistics providers

China’s higher logistics cost are also related to the development of its LSPs. Wei pointed out that they need to progress further towards added value and more sophisticated services. And there is a significant gap between the logistics performance at joint venture OEMs and that of Chinese carmakers, according to Dai Zhi, minister from FAW.  He noted the fragmented logistics industry, with more than 1,000 players and even more “unskilled providers”.

Many of them are running inefficient and imbalanced transport networks, with an empty return rate of at least 40%, according to Dai. He suggested that providers should work together more to form trans-regional alliances to help improve supply chain coordination. He called for domestic players to move from a 2PL model, providing mainly transport, to a 3PL and 4PL model that would offer more integrated services, including returnable packaging and multimodal transport.

Ceva’s Thaysen said that logistics providers could get savings “in double digit percentages” by switching to shared user networks.

Ceva’s Dudek says LSPs in China are now offering more value added services

But while there is fragmentation in the market, companies in logistics – and specifically automotive logistics – have been developing at an impressive rate. In 2010 the top 50 (general) logistics companies in China had combined revenues of around RMB 590 billion, according to NDRC’s Wei.

These companies are increasingly upgrading services and processes, including adopting more IT systems and better equipment, he said, adding that more 70% of logistics business in China have now established IT systems, including transport and warehouse management systems, procurement management systems and others.

Wei told delegates that automotive logistics providers are better than their equivalents in industrial and consumer goods sectors – although he agreed that performance was best at joint venture OEMs. He expressed optimism about the future as well as indicating support for logistics from the government. This is crucial since electronic voting among delegates carried out live at the conference – a method of interaction used several times during the event – revealed that the majority still look to the government to take the lead in developing the sector.

“In the latest 5-year plan, the logistics industry is treated as an important service sector,” Wei confirmed. “I’ve been talking with LSPs who are confident about future growth and are investing in their business, including automotive parts distribution centres.”

Ceva’s Dudek also acknowledged that LSPs are beginning to offer more advanced services, including less-than-truckload distribution, higher cube utilisation and multimodal services such as coastal deliveries and inland waterways for finished vehicles. They are also linking China to Europe by rail on the Tran-Siberian railway.

Jörg Biesemann, director of logistics for automotive Asia Pacific at tier supplier Continental, admitted the need to carry more consignment stock, resulting in turn rates in China being lower than in other parts of the world, but said he was working more with his suppliers and logistics providers to implement more advanced tools such as just-in-time logistics and vendor-managed inventory. “In Europe, the proportion of the supply base in which we use these types of tools is around 75%. It is 60% in the US,” he said. “It had only been 33% in China, but we worked with the supply base to bring the figure to around 50% last year.”

This is in the context of the challenges of supplying material across 4,000-5,000km between factories in China, of unpredictable demand curves and ever-shortening product lifecycles as OEMs scramble to establish their brands and build market share.

Chinese logistics companies, which still dominate the transport sector and own almost all of the ground assets, are also studying their global counterparts and looking for best practices. Liu De Chen, deputy general manager for Beijing Foton Logistics, owned by the commercial vehicle OEM, described how the company had developed an advanced distribution centre and warehouse to feed its production plant. Foton recently carried out a full value-chain analysis for the manufacturing process down through the supply chain, and will be gradually implementing new processes. “We are learning a lot from our foreign partners,” said Liu.

Trying to be like Apple

GM’s Ginkel challenged the industry to be more collaborative and innovative

But for the drive for efficiency to really move into another gear it is also evident that manufacturers and suppliers have to make changes to the way they do business, including adopting a more collaborative approach to sourcing logistics services and designing the supply chain. 5

Speaking most passionately about such a change in approach was GM’s Ginkel, who reported to the conference on the carmaker’s global shift to purchasing based on total cost. He revealed that GM is currently preparing three “huge” bids in the Asia Pacific region, including the largest global ocean tender for containers in the company’s history, which will be made up of around 2,000 lanes.

“We are preparing the bid now, in advance, because we don’t just want to give you [LSPs] two months to quote and then we negotiate the price down, the way it had always been done,” he said. “We want to listen, understand and indeed look into a total cost scenario in terms of what we’re bringing into the market.”

Ginkel said it is also developing a statement of requirements that will help define a standard for what GM wants to purchase. He revealed that GM is also moving towards ‘strategic supplier sourcing’, where in some cases a trusted provider can avoid a tender and have business defined directly with GM.

Likewise, Ginkel challenged the industry in China to improve. Responding to a comment by another delegate that OEMs are “not Apple” in terms of supply chain innovation, he said that such a mentality would ensure that the industry would not replicate the technology’s firm success.

“It is a mistake to think like this. We have to aim higher – don’t just complain about the same thing year after year, about lacking forecasts or standards for example. Step up and do something about it.”

JCB’s Van Osta called for a ‘gain share model’ of work with LSPs

Joannes Van Osta, general manager of logistics for the UK-based construction equipment manufacturer, JCB, recommended that OEMs adapt more of a “gain share model” with logistics providers, which would give them a share in cost savings rather that being subject to a simple ‘cost plus’ model in which revenue is tied directly to volume. “Why would a provider optimise my supply chain on a cost plus model?” he said. “If the provider gets a benefit, then it has an incentive, as long as we’re not too greedy. As a general rule,” he added, “I don’t work with people that don’t make money.”

Ginkel pointed to the importance of training and building the right relationships. A common-sized plant producing 150,000 cars a year consumes around 18,000 per minute, he said, and managing this complexity in a country like China requires highly specialised people.

Robert Choy, vice president for automotive in the Asia Pacific region for the UTi Worldwide, stressed that logistics companies need to work together with OEMs and leading universities to train the best people. 

“If you look through the financial results of a logistics provider for the line that says ‘R&D’, you probably won’t find it at most companies,” Choy said. “We need our ‘R&D’ to be an investment in people and skills.”

Exports on the rise and at a record

The CFLP led a stream of sessions on exporting vehicles from China

This year’s conference once again featured sessions dedicated to exports and finished vehicle logistics, an activity which is already having a big impact on markets like Brazil, one of China’s biggest and fastest growing export markets for vehicles. These conference sessions allowed separate one-day registration for delegates in this field and were organised together with the CFLP. They were chaired by the vice secretary of the Chinese Automotive Logistics Assocation ( CALA), Ma Zengrong.

Last year’s exports of vehicles and knockdown kits from China grew around 50% to 850,000 units, which was close to the peak reached in 2008 just before the global financial crisis. While this output is only about 5% of total Chinese production, and only accounts for 1% of China’s total exports, according to Zhang Wenjun, principal program officer from the Ministry of Commerce, but its speed of growth is 18 times faster than other export categories. It was also worth a record $10.9 billion.

Zhang, from the Ministry of Commerce, predicted Chinese exports would play a major role in the global market

While Zhang pointed out to delegates that China exports vehicles to 180 markets around the world, 95% of volume goes to developing countries. Traditionally, the top exports from China are commercial vehicles and equipment but passenger cars have grown fast as well, as saloon/sedan export models totalled 320,000 units.

Latin America is China’s fastest growing export market and top ranking destination, taking 280,000 vehicles in 2011 and pushing local Asian markets into second place. Brazil took around 100,000 vehicles, with smaller markets like  Venezuela seeing a 10-fold increase in imports from China in just one year. Africa is China’s third biggest regional market for vehicles, with Europe (mainly Russia and Ukraine) in fourth place. Traditionally strong markets in North Africa like Algeria, Egypt and Syria appear to have taken hits last year as a result of political unrest.

China’s domestic brands, including Chery, Geely and Great Wall, account for most car and SUV exports, but joint ventures have also recently boosted exports of passenger cars, including semi-and-complete knockdown kits (SKD and CKD) exports. Examples are Shanghai GM export van kits to India or vehicles to Latin America.

While Zhang acknowledged that vehicle export are still in a start-up stage, he predicted that China’s carmakers would become central to the international car trade. That is not going to be without its challenges, however. China is facing trade barriers and other protectionist measures, especially in its leading export market in Brazil, which has increased import taxes by 30% and set high localisation requirements for production.  It is also losing its comparative advantage as costs rise, in which recent wage increases have played a part. Further improvements are needed in terms of marketing and the overseas expansion of dealer networks.

“However, on the whole we see drivers for further growth and there is a competitive advantage in place because the basic inventory structure is there and we still have the surplus capacity,” said Zhang.

Zhang added that OEMs and their joint venture companies are strongly committed to indigenous brand development, while marques such as Chery and JAC are also increasing their manufacturing footprint globally in markets like Brazil and Latin America. With capacity investment strong, it is clear that China’s vehicle exports will continue to grow, he said.

Using Global providers for CKD exports

In a session dedicated to the importance of exporting SKD and CKD kits, representatives from the Chinese carmakers, including Chery, FAW, Brilliance and Lifan, stressed the importance of working with international logistics providers to improve quality throughout the distribution process, as Chinese OEMs move from a more ad hoc transactional model to one based on more coordinated services as part of a dealer network.

Chery’s Yin says Chinese OEMs have to offset currency rises

Chery Automobile’s logistics manager, Yin Shi Jun, said the company had been exporting vehicles and knockdown kits for ten years, with sales last year reaching 680,000 units and a projected 800,000 for 2012.

Yin said that Chery’s experience over the last decade and its global reach meant it had encountered a number of issues common to Chinese carmakers. These included exchange rate fluctuation and an increase in labour costs.

“The currency exchange went from 8 [RMB to the dollar] to 6.3 [RMB], which has a very big impact on us,” said Yin. “Therefore, we have to continue to innovate technologically, and in terms of product development, to offset our loss because of this fluctuation, which has hit our profit margin.”

As was pointed out by Zhang Wenjun on day one of the conference, vehicle exports from China are in a transitional period, from a model based on passive trade to one based on proactive market development, something of which Chery was very much aware, said Yin (see a recent interview with Chery in Finished Vehicle Logistics magazine here

Yin said that product design was previously based on Chinese demand but is now also being informed by overseas markets and an international vision so that vehicles need no secondary development for export.

That shift in vision has brought with it the need to work on better and more consistent quality, of which logistics plays an important role both in reaching markets and in maintaining service parts afterwards. “We are now making a systematic effort to follow pre- and post-sales services,” said Yin. “With better-regulated processes we can ensure quality and consistency.”

Delegates meet with Wei Yong of the highly influential NDRC

While having taken a more gradual approach to foreign exports and having only introduced CKD/SKD exports between 2008 and 2009, David Jang, from Brilliance Auto, said that his company had experiences in common with Chery and was now allocating more resources to post-sales services in Brazil and other markets, where it was exploring assembly plant development for knockdown exports.

Brilliance also has the majority share in a joint venture in Egypt as part of the China Africa development forum, which covers distribution to the dealer network. The strategy taken in Egypt is one Jang said could go on to influence its international vehicle development more generally.

He said that the support of international logistics providers, including information sharing, was crucial to its export business, and it welcomed the engagement of other international providers.

“I hope that by working with the logistics companies we can develop a better understanding in such things as schedule and routing and excise arrangements,” said Jang, adding that a mutual development of logistics processes for exports would better support Brilliance Auto’s business.

These were factors that were also crucial for the nascent development of FAW’s export of CKDs and vehicles. “The main issue for us in terms of exports is that we don’t currently have enough,” said Xia Shu Xian, senior business manager at the company. “In terms of export logistics, something we have said before is that cost is very important and so is quality. This year the asset committee said that we have to reach 20% [of production] by export and we have a long way to go to reach that figure.”

Brilliance Auto’s Jang wants to work with more global LSPs for export

Meanwhile, over at Lifan Group, which has been exporting for more than five years, vice president Li Wu said that annual vehicle exports were around 90,000 units, with knockdown kits accounting for 75,000 of that number. The company is also the top two-wheel motorcycle exporter in China. Together these markets have given the company a certain expertise, which it is keen to build on with international expertise. One issue that was particularly important for Lifan was the mismatch in orders and missing parts, the biggest issue for trade disputes said Li.

Li indicated that the company would be looking to global providers to help improve these operations, and revealed opportunities to such companies in an upcoming tender.

“Some of you here are the world leaders in the industry and next month we will enter our international logistics bidding and I hope you will give it your attention,” he said.

Troubles on the road and a lack of truck standards

For all the talk of growth, delegates at the conference were split on whether it was stimulating or, in fact, holding back the logistics development needed to improve the quality of service.

CFLP’s Ma Zengrong said the lack of enforced truck lengths ‘is plaguing us’

As observed by Zhang Xiaodong, professor at the Transport College of Beijing Jiaotong University, logistics providers and manufacturers have begun to work more closely to deepen the development of the supply chain. Chery’s relationship with Wuhu Changjiu logistics and Anji-Ceva Logistics’ work with Shanghai GM were just two that exemplified the sort of synergies required, he said.

Zhang said benchmarking and the monitoring of logistics processes to assess the functional requirements of information systems had been important in improving quality. However, the general consensus is that a lot more has to be done to bring China up to a globally competitive standard.

The country’s transport modes each have their own problems. The highways have a lot of waste and the use of resources is low, and the issue of how to enforce the standardisation of car carrier lengths remains acute. While the official limit is 16.5 metres (short when compared to global standards), many trucking companies run significantly longer trailers – in some cases dangerously long and overloaded – and choose to pay fines rather than sacrifice the operational benefits. The industry is now caught between the higher costs of fines, and the inefficiencies that come with a lack of standards.

The CFLP’s Ma Zengrong was harsher. “The lack of dimensions are plaguing our industry. Or, to be more precise, the lack of enforcement is plaguing us.” He said that his organisation was working with the government to try to develop new standards.

Getting rail on track

China is slowly liberalising its railway operations, giving more track to freight and allowing 3PLs to operate trains

For all the investment made, the lack of rail service is also a serious challenge. Richard Li, vehicle distribution manager at Ford, acknowledged that while plants were being built and output increasing, the expressway network was the main mode. “We know that trucking takes 90% of total volume in China, but in the US it is 75% by rail,” he said. “We need mass delivery with low cost and rail should play an important role here.”

Lack of integration between key nodes, such as port and vehicle terminals, came up again  “There has been no integrated mechanism to reduce the cost of transport between terminals,” said Zhang Xiaodong, whose college was once part of the Ministry of Railways. “There is also a problem with the proficiency between regions. And then, seasonal impacts and the longer transport time [across such a vast country] are factors you cannot ignore, ” he said.

However, as part of the government’s 12th Five Year Plan, 7,000km of track will be given over to freight use on an annual basis. Some major liberalisation reforms are also due to be announced, including allowing third party companies to operate trains, which Zhang said would help improve service and better use resources.

Zhang’s work at Beijing Jiaotong University has developed a formula that specifies – very precisely – the best use of rail or road modes in future. “What you need to remember,” he told delegates, “is that 471km will be the breakeven point, below which you lose money, above which you make it. In the future, if …transport distance is above 471km… you should resort to rail, waterways or coastal.” 

Logistics providers need to invest in assets and IT

Not all of the issues addressed were directed at government investment, however. Owen Xie, COO and vice president of NYK Automotive Logistics China, said that the big challenges for finished vehicle movements in the future would come from a lack of transport equipment. “The issue today is not the system, it is capacity,” he said, adding that, while there was plenty of talk about the speed of development in terms of manufacturing in the country, there was little insight generally into how difficult things were getting for logistics providers. “OEMs are building their plants but logistics isn’t planning in the same way to meet this volume,” he stressed.

Investment in assets including trailers, ocean vessels and compounds has been squeezed every year, according to Xie. He also pointed to the problem of a labour shortage in the logistics industry, which he attributed in part to a lack of respect for the transport sector, and even related to China’s one child policy. While such a social problem is not something that can be solved easily, Xie said that better optimisation software could ease the burden of insufficient manpower but currently there was a lack of good, tailor-made systems.

The importance of IT development was picked up by Ruud Vossebeld, director of business development at software-provider Inform, who chaired a session dedicated to looking at how IT systems were a means to achieving a better connected and collaborative supply chain. Vossebeld pointed out that if you find a way to get cars quickly through the supply chain, then you could save cost and resources. He highlighted Inform’s solution for VW’s compound management in Mexico as a successful example that had an ROI within two years. He added that 10-20% efficiency improvements for dealer deliveries were possible through such compound optimisation.

Zhai Xuehun, president of Beijing Chinaway, which provides information services to logistics companies including DB Schenker, Foton and Beijing Changjiu, said that while road transport is plagued by instability and is not punctual, IT systems have the potential to make the transport of the car as reliable as the car. He pointed out that carmakers were willing to pay more for a service that could deliver cars faster and with more accurate delivery targets as well as with less damage. Zhai said that one trucking provider in China is gaining business and has a 6% growth rate despite charging anything between 30-50% more than the average road transport provider

Green concerns sprout in China

David Zhang said that reducing supply chain emissions was vital to Delphi

In another sign of the development of the Chinese automotive logistics industry, this year’s conference featured considerable focus on green logistics and reducing carbon emissions from the supply chain. An anonymous survey at the event revealed that 67% of delegates believed implementing greener supply chains was ‘very important’. David Zhang, logistics director for APAC at the tier one Delphi Automotive Systems, told delegates that reducing emissions was now a top priority for his company, a practice he said was not only good for the bottom line in terms of reducing fuel consumption, but was also a good branding tool.

He also told Automotive Logistics that China was becoming stricter in terms of environmental regulations and emissions standards for factories as well as vehicles, and that regulation around transport may not be far off.

Delphi is now measuring its emissions with a tool developed by the Greenhouse Gas Protocol, which is part of the World Bank.

“We use the emissions measurement in our logistics engineering, and not only to determine costs. We are also working with carriers to reduce their CO2 emissions,” he said.

Zhang said that, while reducing emissions did involve some investment, the final result would almost always lead to lower costs. He gave several examples, including switching a truck route from Shanghai to ocean shipping, which saved nearly half the costs and 52% of emissions. Delphi had also worked to increase its container utilisation, improving from 58% to 75%, which brought costs benefits as well as a 15% savings in CO2.

Delphi, which works with the Smartway programme in North America to help carriers there reduce emissions, is currently communicating with the organisation to bring some of these practices to China (which include small measures such as reducing idling and maintaining tyre pressure).

Geodis also presented examples in which it is trying to bring more environmental focus to China. Jin Qian, director of automotive and industrial markets in Asia Pacific for Geodis Global Solutions, revealed that the company had been able to remove 500kg of waste out of 1,600kg produced in one factory through improving layout design, changing handling processes and coordinating the scheduling of picking and stocking. Geodis Wilson’s Thomas Blank talked about taking the processes of a Geodis project in Europe called Distripolis, which aims to take traffic out of inner cities, and adapting them to supplier parks in China.

Dominique Negre, marketing director for STVA–a finished vehicle provider and sister company to Geodis, which are both owned by SNCF, the French railways–provided some examples of projects the company has undertaken in France and Europe, which revealed that some green projects are unlikely to be implemented without public support or shared investment in China.

One site in the south of France had installed 5.7 hectares worth of photovoltaic panels at a cost of around $40m–an investment that would have been impossible without support from the government. He also said that STVA had switched to a wood energy industrial central heating system–which emits no carbon–in Lyon. At a cost of around €200,000 ($264,000) and saving about €9,000 a year in energy costs, it has a return on investment of around 20 years–likely to be considered too long by many in the automotive industry.

However, he pointed out that switching more long-distance transport to rail offered a much better return, as well as saving as much as 3.5 times as much carbon emissions as using road. One route between France and Romania saved about 300kg of carbon per car per roundtrip, reducing emissions by about 6,000 tonnes per year. China, with its over dependence on road transport, has a high potential to reduce emissions as rail services develop, he indicated.

Fast growing networks for spare parts

BMW’s Hillme: ‘expectations here are different’

A special conference session dedicated to service parts logistics revealed that this would be an area of increasing importance for China, and also one of considerable challenges. Matthias Hillme, manager of parts logistics projects for aftersales at BMW Brilliance, described a network whose requirements were growing exponentially. The company currently has four regional distribution centres in China, which are delivering parts to around 200 dealers at least once a day, and for some locations once at night as well. “But by 2020, our need for warehouse space will double or triple,” he says. “We are also adding about 60-80 new dealers per year.”

Florian Braun, general manager for sales and key accounts for North China at Schenker China, said that there is already a lack of warehouse space in coastal provinces in China, and that the demand was growing strongly for space in China’s hinterlands in the centre and west of the country. He emphasised the need for carmakers to work with providers, such as Schenker, to determine the best locations to serve their customers in these areas.

Hillme pointed out that China currently lacks any single provider that can cover the entire country, and so BMW’s providers–which includes Schenker in the north–sometimes have to rely extensively on subcontractors, which can impact negatively on quality. Stephen Tanner, managing director for FedEx Service, indicated that his company would continue to invest heavily in capital assets. “But China is a big country and it will take a long time for a provider to be able to cover the entire country effectively,” he said.

Fedex’s Tanner and Schenker’s Braun predicted higher frequency delivery to dealers would come to China

Both Tanner and Braun also predicted that the requirements for more frequent deliveries, such as the BMW service parts model elsewhere in the world that includes up to three dealer deliveries per day in some areas, was still far off in China but that such demand would come.

Hillme added that the challenges for spare parts logistics in China were not just geographical or transport based, but also reflected customer behaviour. Whilst in other countries, such as Germany, customers are accustomed to making appointments to have their cars serviced, in China customers either just showed up at the dealership or did not stick to their appointments, which makes ordering and managing parts inventory more difficult. In many cases, he said that BMW customers might also have their own drivers, and these drivers will come to the dealership in the middle of the day and wait for the car to be serviced.

“The expectations of the customers here are very different,” he said.

An e-commerce shake up?

BMW’s Hillme: ‘expectations here are different.

The conference also had its perennial issues, including a call for more collaboration as well as complaints over the lack of visibility in the supply chain. A different perspective was offered this year, however, by Jacky Wang, director of logistics for Alibaba, one of the largest e-commerce platforms in the world. Wang, who had previously been responsible for logistics in China for Ford, predicted that e-commerce would uproot the traditional supply chain completely, particularly as young people–especially in China, where the retail industry is still less open than other parts of the economy–are increasingly doing the majority of their shopping online, including some purchasing of cars and spare parts.

In terms of visibility, he revealed how a company like Alibaba is way ahead of the automotive industry. “We track single orders, not just vehicles like a truck. One truck moving between Shanghai and Beijing might have 1,000 different orders on it, and we track each of them all the way to final delivery, which in our case is often directly to the consumer’s home,” said Wang.

Depending less on the government

CFLP’s Dai wants to see less involvement from the Chinese government

Like Ginkel, Wang’s speech represented something of a challenge to the industry to look for new innovations and to be ready to adapt to significant change. Perhaps this sort of development represents one of the weaknesses in the Chinese market, where for all of its strengths, the industry is still dependent on considerable amounts of government aid and support, as described by the NDRC’s Wei Yong. “The government here obviously has a lot more power than in Western countries, and has a larger influence over the logistics industry,” he said.

In fact, the electronic voting surveyed carried out among delegates revealed that 26% of them expected that the government would bring about the changes that the automotive logistics industry needs, compared to just 19% for carmakers and only 6% for global logistics providers (0% through the change would come from Chinese providers).

However, there were also some interesting signs that the industry wants the government to let the market do more to improve its own efficiencies. A survey taken later at the event revealed that 58% of delegates wanted to see less involvement from government, including lower taxes, fewer trade restrictions and road tolls, compared to 42% who said they wanted more investment in infrastructure and more legislation.

Wang revealed that Alibaba tracks every order individually, compared to the car industry, which tracks transport moves

The CFLP’s Dai Dingyi, vice chief of the experts committee, perhaps with the regulations over truck length specifically in mind, led the call for the government to step away in certain areas. “If I could improve one thing for the industry in China it would be that the government would not always be so overactive, and leave more things to the market. The government should look after issues such as safety, but efficiency is best left to the market.”

Given China’s political structures, and the government’s economic control, such a loosening of policy may not be likely, but the industry’s desire to find its own efficiencies appears another sign of the Chinese automotive logistics industry’s ongoing maturity and its need for greater xiaolü.


The conference is part of the worldwide Automotive Logistics series, which in 2012 includes:

Conference calendar