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China integrates into global supply
chain
By Michael Mackey
As
China moves into compliance with World Trade Organization (WTO)
requirements, the freedom of international
transport and supply companies to operate in the
country has dramatically increased, catalyzing a
host of changes. The principal effect is to
bind China irreversibly into the global supply
chain for industrial products.
Infrastructure is the most visible aspect
of this change. The 10th Five Year Plan, to be
completed in 2005, will see the handling capacity
of Chinese ports increase to more than 16.5
million twenty-foot equivalent units (TEUs), with
135 new deepwater berths built and 45 rebuilt. In
spite of the blistering pace of port construction,
there are still fears that the new infrastructure
won't be enough. Those who believe this - and
there are many - have a barrage of statistics in
their favor.
Shanghai alone, with four new
deepwater container berths at Shanghai Waigaoqiao
Phase V, is expected to move between 17 million and 17.5
million TEUs in 2005. On top of this, the monthly
container throughput at Shanghai Port reached a
record high this January when the city handled
1.42 million TEUs, a 41% jump compared with
January 2004. Then, despite the Chinese New Year
holiday falling in February this year, Shanghai
moved more than 1.11 million TEUs that month, a
year-on-year increase of 17.9%. The massive queue
of users clamoring for the new facilities has led
some to question whether the new capacity will be
enough.
For
land transportation, the same question applies, only more
so. China had some 72,000 kilometers of railway
in operation by 2004, which appears impressive at
first sight, but the United States, whose transport
system is considered car-centric, had more than
double that amount of track - 159,700km. Thus China's
rail infrastructure is in fact still underdeveloped
in spite of massive, recent expansion. For
bulk shipments, Chinese railways are further
burdened by both a lack of automated equipment and
a functioning intermodal (ship to rail to
truck) system, which has led to chronic problems
with bottlenecks. However, the Ministry of Railways
has announced new plans to increase operational
rail mileage to 100,000km by 2020. In the same
time frame, it will invest in technical upgrades,
double-tracking and electrifying half the national
network by 2020 - an upgrade projected to cost
US$241.5 billion.
What remains to be seen
is whether these infrastructure upgrades, each
significant on their own, will ever be sufficient.
It may instead be that growth on the scale the
Chinese economy looks set to sustain will create a
constant need to play catch-up. Whatever the
long-term outlook, the short term will see
substantial improvements in infrastructure - the
first effect of China's integration into the
global supply chain.
On the "software"
side (ie, procedures and personnel), the story
is more mixed. Worrying some is the sheer lack of
experience and (ironically, given China's huge
population) adequately trained personnel. "In
China the modern logistics [industry] is just
starting," said an official with B&Q
Logistics. "There are not enough qualified people
who have many years of experience; also, given the
fact that the home improvement hypermarket is less
than 10 years old in China, there are no existing
models for home improvement logistics we can copy
from."
Balancing this is the enthusiasm that some
foreign players have already shown for the logistics
sector, especially as the opening-up effect of
China's WTO commitments starts to bite. WTO compliance
measures enacted last year allow for foreign
businesses to come in and operate freely in
the logistics sector, thus permitting the competition
that will ultimately create an efficient market.
According to Volvo Logistic's Viking Johansson,
this is already happening, and the increased
presence of competitive foreign players "makes
[my job] a lot easier ... Already
now, a lot of the companies that provide business
services to us have new licenses and have expanded
their business scope."
This development
has brought with it cost savings for companies as
there are fewer layers to deal with when
conducting their logistics operations, and the
layers that do exist tend to be more efficient and
transparent. Not that this change alone is
sufficient to accurately call the Chinese
logistics sector a "market". "It cuts out an
inefficient process," said P+O Nedlloyd general
manager Alex Tate.
Other problems endure.
Especially, a lack of basic infrastructure such as
a national expressway system has worked against
the creation of national trucking companies,
leaving some 2.3 million miniscule hauling
companies - the majority just "one man and a
truck" operations - to squabble over short-haul
routes. Although this, too, is starting to change.
"Larger [transport] companies, such as
Sinotrans, are building inter-provincial
[trucking] networks," said Chris Torrens, a
consultant with Access Asia. "Such operations use
modern and well-maintained trucking fleets,
enabling them to take advantage of increasingly
interconnected highway networks and to make
long-distance journeys between major cities.
Driving time between Beijing and Shanghai, for
example, is now down to about 14 hours."
There is more to a modern supply chain,
though, than just infrastructure. One key aspect -
which also doubles as a useful response to the
problems created by having to import, then move
around, large volumes of supplies - is the
creation of competitive local suppliers. The
Chinese government is keenly pushing this already,
which makes for a handy convergence of public and
private sector aims. And it is here that the
biggest implications of global integration are to
be found.
"I see a clear trend of foreign
companies reorganizing themselves and
restructuring. A lot of joint ventures are either
being converted into wholly owned foreign
enterprises (WOFEs) now, or planning to do so in
future. In general they are consolidating their
businesses here, as well as setting up supply
chain centers," said Max Henry, president and
founder of the China Supply Chain Council, who
added that there will be "more of this in the
years to come".
Not that this means the end of
the Chinese economic miracle - au contraire.
As
Henry pointed out, this development fits into
a global pattern of multinationals selling factories
(which are typically low-margin businesses anyway)
and relying on contract manufacturing whilst
they focus on sales, marketing, research
and development, and control of the supply
chain.
The significance is twofold. Not
only is China similar enough to the rest of the
world now that the political and economic risk of
investing there has waned, but the localization of
the supply chain in China is catalyzing deep
changes within the country, such as
industrialization and the creation of a
professional class.
"Localization (ie,
the replacement of expatriate managers with
qualified locals) is at the top of the agenda of
many companies," reports Henry. "It is happening."
Localization not only brings up China's
technological level and increases its
manufacturing capabilities, but it will also help
to build a truly global supply chain. However, for
foreign companies a commitment to deep
localization also cuts costs and allows the
language barrier to be overcome as well as helping
them to surmount the many operational barriers
presented by China's multifaceted, complex and
fast-evolving culture.
"You've got
to localize your management," said Jack Perkowski
of ASIMCO, the successful car-parts manufacturer. His
argument for localization has two main points.
First, it removes a layer of expensive expatriate
staff, and hands over control to people who have a
local, and therefore deeper, understanding of
costs and procedures. Perkowksi gives an example:
to him, 100 yuan is around $12, and what that
buys is therefore comparatively cheap to him, but
a local manager will be able to obtain more for
that same amount because to him or her it's a lot
more. Second, in China's business environment as
it now exists, relationships not just with other
businesses but with government at a variety of
levels are important, often vitally so, and these
are much better understood by local staff, who not
only understand the language in all its nuances
but the social and political structures behind it
as well. "There are things they do instinctively
which it would take me 50 years" to learn to do,
Perkowski said.
There is one
massive potential twist in the supply-chain integration
story: the growth of a managerial class or a
middle class is usually acknowledged to be the key
element in any process of reform, either economic
or political. It would be a huge, but very
Chinese, irony if the growth of such a class in
China failed to catalyze political reform.
Michael Mackey is a
Shanghai-based freelance writer.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.) |
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