China's primary transportation modes and logistics infrastructure development

China Logistics Sector

LOGISTICS SECTOR ANALYSIS in CHINA

COUNTRY PROFILE

The formal name of the country of China is the People's Republic of China. The first dynasty recognized in the country of China, the Xiz, lasted from approximately 2200 to 1750 B.C. And is stated to have "marked the transition from the late Neolithic age to the Bronze Age. China was ruled under hereditary Shang kings in the Northern area of China with the armies of the Shang battling against their neighbors and nomadic herders coming from the North quite frequently. The second dynasty in China, the Zhou gave birth to Confucianism, Legalist, Daoism, and Monism. A very distinctive writing, philosophy, art, social and political system developed in China over the past four millenniums. In 1949, the communist took over the mainland of China. China is located in "...East Asia, west of the Korean Peninsula and insular Japan, north of Southeast Asia, and east of Central and South Asia. (Country Profile China, 2006) Estimates from the year 2005 state that 14.86% of about 1.4 million square kilometers of China's land is arable. 1.3% of this land is plated in crops that are permanent in nature. There were approximately 544, 784 square kilometers of land irrigated in 2004. Environmental factors in China are: (1) air pollution from over reliance on coal resulting in acid rain and water shortages especially in northern China; (2) water pollution from untreated wastes; (3) deforestation; (4) desertification; and (5) illegal trade in endangered species. Flooding is a primary problem in China. The national carbon dioxide emission in China are "...among the highest in the world and increasing annually." (Country Profile China, 2006) China's population is over 1.3 billion not counting the population of Hong Kong, Macau, or Taiwan as of January 5, 2006. The population growth rate has been estimated at 0.50% as of 2006. Among the problems which China faces is the factor of "increasing urbanization" (Country Profile: China, 2006) in the country. (Country Profile: China, 2006) China has had the largest population for any country in the world for many centuries. Other than the majority Han Chinese, there are 55 other nationalities or ethnic groups in the country of China the official language of China is standard Chinese or Mandari. Other major dialects in the country include Yue; Wu; Minbei; Minnan, Xiang, Gan and Hakka. There are many minority languages spoken in the country as well. Education in China is lacking in that the population of China has had "on average 6.2 years" of school. (Country Profile: China, 2006) the economy of China is the second largest in the entire world following the United States "when measured on purchasing power parity (PPP) basis.

LOGISTICS SECTOR ANALYSIS in CHINA

PART II

LOGISTICS SECTOR ANALYSIS

Primary Modes of Transportation

The primary modes of transportation in the country of China includes: (1) Ports; (2) Roads; (3) Railways; (4) Inland waterways; and (5) Air. The government of China has invested heavily in the road transport system in the country and this along with the fact that the railways and inland water transport are so unreliable makes road transport the preferred method of inland travel in China. In spite of this, the trucking industry in China is experiencing great and extreme fragmentation as well as failing to be organized nationally. The logistics sector in China was for the most part neglected between 1949 and the beginning of the reforms in China during the late 1970s.

Geographical Difficulties in the Logistics Sector

There are three problems that integration of the nationwide logistics industry in China faces which include the unfriendly geography of China as China is an extremely large country and is "...criss-crossed by major mountain ranges that cover over half of its territory, and is host to a range of special problems such as extreme altitudes, permafrost, deserts of shifting sand, and seasonal flooding." (GAIN Report, 2003) the following chart illustrates the distances between major selected cities in the country of China.

Map of China (Selected Cities)

Source: GAIN Report (2003)

Deregulation of the industry has resulted in an increasing foreign direct investment, which presently accounts for approximately ten percent of the annual fixed-asset investment in China however; the logistics networks in the country of China are in a state of fragmentation. According to estimates, logistics in the Chinese economy accounts for approximately 40% of costs of production and 90% of production cycles, which are incidentally at much higher rates than in developed economy countries. Logistics costs are stated at 10% in economies that are more developed compared to in excess of 21% in the country of China. The turnover period of Chinese products is stated at 35 to 45 days compared with less than only ten days for some of the companies overseas. (the Meridian group, 2006; paraphrased)

Shipping Ports Handle Approximately 1/2 of all Import and Export in China

The largest part of the import and export in China is handled by ocean shipping with movement of the major part of China's domestic cargo in being accomplished through coastal and inland shipping lines. The number of ports in China with a throughput volume in excess of 1mn TEUs is stated to have rise "...from 8 to 10." (the Meridian Group, 2006) Namely the ports of Shanghai, Shenzhen, Qungdao, Ningbo, Tianjin, Guangzhow, Xiamone, Dalian, Zongshan and rising star Lianyungang. (the Meridian Group, 2006) the container throughput at ports in China is stated to have been experiencing a growth of 30% per year with "an enormous scramble to invest in port logistics..." (the Meridian Group, 2006) Forecasts are presently predicting a growth in foreign trade of approximately 15% annually over the next five years in China. The Ministry of Communications in the country of China anticipates the "total ocean cargo handling capacity will reach 5 billion tons by 2010 and a contain throughput of approximately 130 million TEUs." (the Meridian Group, 2006)

Ten Key Challenges

The work of LT Staff (2004) sets out ten key challenges that the Chinese logistics industry faces in what is termed a period of: "...spectacular growth helped by economic development and the increased acceptance of out-sourcing by Chinese manufacturers and retailers. " (Staff, 2004) Staff relates that there are still several challenges looming that derive from "...deep seated structural problems to the unpalatable prospect of an economic 'hard landing'" (Staff, 2006) the first of the ten challenges posited by Staff (2004) is the challenges of the 'poor infrastructure' that the logistics industry in China faces due to "...insufficient integration of transport networks, information technology (it), warehousing and distribution facilities." (Staff, 2004) the logistics sector in China is stated by Staff to be: "...of low quality, highly inefficient and with little technological competence." (Staff, 2004) Secondly, China has a challenge in the area of "regulation" and while the market in China is among the most highly regulated worldwide the regulation operates on different levels due to national, regional and local authorities with differing regulations causing a hindrance in the creation of national networks. (Staff, 2004; paraphrased) Stated as the third challenges is "bureaucracy and culture" as there are still stated to be high levels of "cronyism" making it a requirement that companies establish links with Chinese Communist Party members at various levels in the government. Repatriation of profits have proven to be a problem as well. Fourth, as stated by Staff (2004) is the challenge presented by poor training in the sector which is stated to be "...weak both at a practical level as well as at a higher strategic level" and the problem has only been exaggerated due to the government and other regulatory authorities in China to promote logistics programs." (Staff, 2004) the fifth challenge stated is in relation to "information and communications technology" in China characterized by a: "...lack of it standards and poor systems integration and equipment. At a very basic level, the consistent supply of energy is also problematic leading to interruptions to communications through power outage." (Staff, 2004) Sixth presenting in the way of a challenge is the "undeveloped domestic industry" due to fragmentation of the logistics sector in China that is: "...dominated by commoditized and low quality transport and warehousing, providing little base on which to build a modern industry." (Staff, 2004) the seventh stated challenge for the logistics sector in China is "high transport costs" which are estimated at "...up to 50% more than in developed regions such as Japan, Europe and North American. These costs are increased by high tolls on roads." (Staff, 2004) the logistics cost which are inclusive of costs such as warehousing, distribution, inventory holding, and order processing are believed to be "...two to three times the norm and in excess of 20%." (Staff, 2004) the economy in China is stated of Staff (2004) to be characterized by: "...wide variances in levels of economic activity and development." The problem is related to distribution and a significant imbalance of the flow of goods traveling toward the undeveloped west from the developed east in China. (Staff, 2004; paraphrased) Resulting has been stated to include: "...difficulties in finding backloads, leading to higher costs for Chinese haulage companies which are then passed on to their clients. Internationally these imbalances also exist between China and the rest of the world, leading to difficulties in re-positioning empty containers." (Staff, 2004) Lastly, Staff relates that a challenges in presented in the area of "domestic trade barriers" in the country of China and while the accession of the Chinese to the World Trade Organization has brought about a lowering in trade barriers (tariffs and quotas on international shipments) other difficulties exist in relation to transport of goods within the country of China due to unofficial border tolls. Staff states that: "This is particularly evidence when shipping from an inland manufacturing location to a port city or vice versa." (2004)

The industry logistics report entitled: "Logistics in China H1 2005" published by the firm China Strategic Development Partners LLC states: "According to Wang Yang of Georgia Technical Institute, the next battle for corporate competitiveness will be about supply chain management. This battle has already begun, and the Chinese logistics industry, in keeping with China's broader growth trends, has displayed and is expected to continue to display exceptional growth. According to Transport Intelligence's most recent report, China Logistics 2004, the Chinese logistics industry is expected to expand at a compound annual growth rate of 33% through 2007. Partly due to the industry's previously underdeveloped state, growth, especially coming from third party logistics firms (3PLs), is expected to be derived from the growing numbers of multinational corporations operating in China and an increasing number of domestic firms outsourcing their logistics functions." (2005) There have been steps of a significant nature taken by the Chinese toward liberalization of the transportation and logistics sector markets. Three agreements are stated as 'key agreements' and are those as follows: (1) WTO: This has opened the sectors to foreign ownership; (2) the Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA); and (3) June 2004 U.S./China Aviation Liberalization Agreement. (China Strategic Development Partners LLC, 2005)

In a recent GAIN Report entitled: "Peoples Republic of China: Market Development Reports - China Logistics Profile" it is stated that the "emerging 3PL industry in China may be categorized into four types: (1)Large SOEs (such as Sinotrans, COSCO and China Post) with extensive transport and warehousing assets, broad national networks, and strong relationships with central and provincial governments. These firms already enjoy a monopoly in several areas of trucking, shipping and postal services; (2) Medium-sized domestic logistics providers (generally privately owned), which focus on one or two key industries; (3) Logistics divisions of manufacturers and processors, primarily providing services to internal customers, but sometimes offering 3PL services to outside companies. The Shanghai Fruit Distribution Center is an example of a subsidiary company that has sought to internalize logistics needs. However, as an SOE, the division is struggling to update its facilities and compete with private counterparts; and (4) Foreign logistics providers, including multinational firms, new Wholly Foreign Owned Entities (WFOEs) and smaller firms working in niche markets. (GAIN Report, 2003)

LOGISTICS SECTOR ANALYSIS in CHINA

PART III

CAREER DYNAMICS ANALYSIS in the LOGISTICS SECTOR

Research relating to career dynamics of the logistics sector in China finds that in the country of China: "...the logistics industry wants 600,000 professionals" according to an online news service the 'China Economic Net'. (JobCyclone.com Career News, 2001) the commitment of the government in China as related to addressing the poor shape of the infrastructure in the logistics sector will result in many labor positions needing to be filled as well. The work of Thomas a. Foster entitled: "Logistics Inside China: The Next Big Supply Chain Challenge" states that among the most recent of success stories in the country of China, a country presently in the throes of a 'retail revolution' (Foster, 2005) are "...the large global retailers that have been able to tap into the needs of China's blossoming middle-class. Retailers such as Wal-Mart and Carrefour are rapidly building superstores throughout the country. Carrefour projects that it will have 61 large stores there by the end of the year." (Foster, 2005) Retailers are expanding their businesses using 3 PLs to handle their complete supply chains. This business model is one build upon 'outsourcing' enabling the businesses to: "...move quickly and limit the time and investment of holding inventory." (Foster, 2005)

Because of the overall growth in the logistics sector, the creation of career opportunities will be an inherent gain for the country of China, as well as within other related industries in the sector throughout the world. Integration of logistics and improvements that are planned hold great promise in opening up China as a worldwide marketplace for goods in the coming decade.