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Logistics Industry in China: Issues and Solutions Report

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Updated: Jun 7th, 2020

Executive Summary

The Chinese logistics industry has gained immense importance due to the increasing importance of the country as a manufacturing hub for multinational companies. However, distribution and logistics have been found to be a problem in China due to lack of development, inadequate technology adoption, bad warehousing facilities, etc. This paper looks into the logistics industry in China, and the only solution to the problem found are a heavy investment in the betterment of infrastructures such as railways and roads and advanced technology adoption to increase transparency in the supply chain.

Introduction

China has emerged as a global economic centre due to its high growth rate. The economic growth has stimulated the country’s development as the hub for world manufacturing, logistics and supply chain has gained greater importance and demand (Kam et al., 2010). In 2005, the Chinese logistics market grew by 24 per cent (Datamonitor, 2006). With the increase in trade relation of the US and Europe with China, the recurring problems of manufacturing and supply chain problems in China have become more evident. In the 1970s, China transformed itself from 500 years of a closed economy to a trade-oriented economy. This reversal in economic and political system led to an increase in Chinese trade. China experienced unprecedented economic growth and an increase in trade, which many believe, had a negative impact on the international supply chain (Kumar & Sosnoski, 2009).

The supply chain and logistics sector in China is also at its infancy and therefore cause a lot of problem to international manufacturers. Many believe due to the recent appreciation of Renminbi (RMB) and removal of tax benefits for Chinese based exporters, there evolved the need to revamp the supply chain and logistics in the country (Ganster, 2009). Transparency in the supply chain is believed to be imperative for successful operation (Ganster, 2009). Therefore, it becomes important to have a great deal of visibility and control over the operational processes.

This paper aims to understand the effect of nascent logistics and operational facilities in China and its evolution. The paper discusses the issues related to the Chinese logistics industry and the challenges and benefits they pose. Apart from this, the unique features of the Chinese logistics industry are discussed.

Chinese Trade Relations

After the progressive economic reform of China in 1978, there has been an in the spurt in the GDP growth rate of the country from 6 per cent in pre-1978 era to 9 per cent in post-1978 era (Hu & Khan, 1997). The per capita income of the economy quadrupled in-between 1980 and 1995 (Hu & Khan, 1997). From 2003-2007, the average growth rate of the economy was 11 per cent (World Bank, 2011). The Chinese economy experienced a growth rate of 10.3 per cent in 2010 (World Bank, 2011). The data demonstrates that the Chinese economy has been growing at a steady rate, and it had a positive impact on the country’s trade relations. One primary reason for this is due to the low cost of production advantage in China.

Chinese trade with the western world has increased, and the top export destinations for the country (see table 2) are the US, Japan, South Korea, Germany, India, the Netherlands, etc. the largest export destination is the US that has observed an increase in trade with China in 2010. US imports from China have increased by 23 per cent, and exports increased by 32 per cent in 2010 (see table 1). Overall, there has been an increase in trade by 24 per cent between the US and China. This demonstrates that there has been a definitive increase in trade between China and the western world, especially the US.

China became the most attractive outsourcing destination for the US, surpassing Mexico, in 2006 (Kumar et al., 2007). Due to this, the US economy has been in the trade deficit in its relationship with China. The increased pressure from foreign manufacturers in China has led to the need to develop better operations and logistical facilities in China. Further, the country has a large pool of labour force, though mostly it is unskilled labour and therefore, increases the cost of production. Further, the lack of transparency in the supply chain and other ethical issues related to production has made China a less attractive destination for foreign brands as their production hub. Therefore, an evaluation of the supply chain and logistics in China is necessary to understand the pros and cons and the uniqueness of the operational facilities in China.

Table 1: China’s Trade with the United States, 2001-10 ($ billions).

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
US exports 19.2 22.1 28.4 34.7 41.8 55.2 65.2 71.5 69.6 91.9
% change 18.3 14.7 28.9 22.2 20.5 32.0 18.1 9.5 -2.6 32.1
US imports 102.3 125.2 152.4 196.7 243.5 287.8 321.5 337.8 296.4 364.9
% change 2.2 22.4 21.7 29.1 23.8 18.2 11.7 5.1 -12.3 23.1
Total* 121.5 147.2 180.8 231.4 285.3 343.0 386.7 409.2 366.0 456.8
% change 4.5 21.2 22.8 28.0 23.3 20.2 12.8 5.8 -10.6 24.8
US balance -83.0 -103.1 -124.0 -162.0 -201.6 -232.5 -256.3 -266.3 -226.8 -273.1

Table 2: China’s Top Export Destinations, 2010 ($ billions).

Rank Country/region Volume % change over 2009
1 United States 283.3 28.3
2 Hong Kong 218.3 31.3
3 Japan 121.1 23.7
4 South Korea 68.8 28.1
5 Germany 68.0 36.3
6 The Netherlands 49.7 35.5
7 India 40.9 38.0
8 United Kingdom 38.8 24.0
9 Singapore 32.3 7.6
10 Italy 31.1 53.8

The logistics industry in China has experienced tremendous growth, especially after it entered the World Trade Organization (WTO) in 2001. The average annual growth of the industry from 1997 through 2004 has been 21.8 per cent of GDP (Kumar et al., 2007). In 2005 it grew by 24 per cent and was expected to expand quickly in future (Datamonitor, 2006). Given this background of the logistics and trade of China, the paper further discusses the unique features of the Chinese supply chain and logistics.

Unique features of Supply Chain in China

The supply chain-related logistics companies are differentiated into three categories in China in term of their ownership – state-owned, foreign logistics companies, and private companies (Kumar et al., 2007). Before liberalization, prior to mid-1980, the logistics industry was centrally controlled, wherein manufacturing was under the dictate of the State. The distribution system in China was strictly controlled by the three-tier system (Kumar et al., 2007). Therefore, the overall system was based on the socialist model based on resource allocation rather than driven by the market. However, with the opening up of the distribution rights changed the whole environment.

When China withdrew most restrictions on foreign investment in 2001 after it entered WTO, many foreign companies like DHL, FedEx, and UPS entered the Chinese logistics market (Kumar et al., 2007). Therefore, with an increase in the third-party logistics (3PL) industry, the logistics industry is expected to expand further.

With an increase in attention China received from MNCs, especially after its accession into WTO, there has been greater pressure on the domestic logistics industry to meet the increasing demand for transparency in the supply chain. Before WTO, foreign logistics companies faced numerous were unable to function comfortably in China due to numerous restrictions on freight forwarding, trucking, shipping, aviation, and customs brokering (Goh & Ling, 2003). However, after the WTO, the scenario has become easier for foreign logistics companies in China. However, there were many impediments, such as lack of infrastructural facilities and semi-regulatory environment, which leads to problems for the industry.

Best Practices in Supply Chain

The best supply chains are not just cost-effective and provide quick delivery, but they are also adaptive and agile (Lee, 2004). These supply chains are supposed to align the company’s interest with the distribution policy. Adaptability indicates that the supply chain evolves with changes in the economy, political changes, demographic shifts etc. Further, they align the interest of the supply chain with that of their participating partners. Transparency in the end-to-end transportation, as provided by DHL or FedEx, is important as this provides visibility and transparency in the supply chain. Social audit of the supply chain is required.

Challenges of Chinese Logistics Industry

There exist a large body of literature that demonstrates the problems faced by the logistics industry in China. This section discusses these challenges that impinge the Chinese logistics industry.

Costly logistics and lack of efficiency

Though there has been a high rate of growth in the Chinese economy, it has failed to bring efficiency in the logistics industry (Zhang & Figliozzi, 2010; Goh & Ling, 2003; Jiang & Prater, 2002). Research demonstrates that the costliest element in logistics in China is in the transformation that is said to be double of that in developed countries (Zhang & Figliozzi, 2010).

Infrastructure

Infrastructure in terms of roads, railroads, etc. is still insufficient (Zhang & Figliozzi, 2010; Goh & Ling, 2003). One reason for this insufficiency may be found in the unequal regional development in China, where urbanization has taken place in select areas, and others have remained unattended (Jiang & Prater, 2002; Hong & Liu, 2007; Zhang & Figliozzi, 2010). There are bottlenecks in highway construction and port areas (Goh & Ling, 2003). Transportation issues are apparent in the Chinese industry due to the lack of infrastructure.

Regulations

Government interference causes the greatest hindrance to the distribution system in China. Less than 1 per cent of the containers were transported by railways from major Chinese ports (Jiang & Prater, 2002). Even after the WTO agreement, local governments put up barriers to help local businesses or products and put up a barrier to entry of outside companies (Zhang & Figliozzi, 2010). Ninety per cent of the Chinese trade is handled through maritime transport, however, the problem these ports, though the efficient face is bureaucratic customs procedure and lack of intermodal connection (Zhang & Figliozzi, 2010).

Warehousing

The infrastructure for warehousing in China is of extremely poor quality. A common warehouse in China implies a one-storey building with “low lighting” and “low ceilings” (Zhang & Figliozzi, 2010, p.185). These have “inadequate sprinklers” and “poor temperature control” (Zhang & Figliozzi, 2010, p.185). These warehouses lack automation, and many of the works are done manually.

Lack of technology adoption

Though China is the largest mobile phone and internet user in the world after the US, still many of the interior areas of the country are not connected by any of these communication means. Power shortage and blackouts are common in such areas. IT development is considered to be a big challenge for the Chinese logistics industry (Goh & Ling, 2003). The lack of IT infrastructure prevents logistics operators in China to provide real-time information and therefore affects their international competitiveness (Zhang & Figliozzi, 2010).

Railways and Ports

The system of railways in China is inadequate to provide for the growing need for freight services within the country (Zhang & Figliozzi, 2010). Neither is the ports well developed and equipped to handle large bulk carriers (Zhang & Figliozzi, 2010). These have created a serious impediment to the logistics industry.

Trends in Logistics Industry

The latest trend in the Chinese logistics industry is “China hubbing” (Ganster, 2009). The aim of this is to bring the suppliers and products produced in China to a central “hub” from where the larger shipments would be re-routed to their final destination (Ganster, 2009). It is believed that this new trend will make logistics solutions more efficient by bypassing the distribution centre and direct to store distribution solution (Ganster, 2009). For example, Swan Logistics (China) Ltd. Intends to ship store-ready products to the different distribution centres in different countries keeping in mind the requirement of retail giants like Wal-Mart in mind (Ganster, 2009).

Transparency of the supply chain is one difficulty that is faced by most logistics companies. Therefore, most of the 3PL companies are trying to provide web-based management tools with which they can provide end-to-end visibility (Ganster, 2009).

Human resource development is believed can bring forth development in the Chinese logistics industry (Kam et al., 2010). Educating the skills to human resources is necessary.

Critique

The Chinese logistics and distribution industry though gains a lot of support from the growing economy, but fails to capitalize on it sue to impediments ingrained in the governing system of the country. Lack of infrastructural development to support growing logistics demand, wherein trucking and warehousing cost are maximum for a company, are inadequately provided. Lack of these facilities, especially inadequate warehousing infrastructure led to the food recall in 2007. Though the growth in the economy is high, investment in developing intermodal logistics solution and/or web-based visibility solution to the logistics industry. Lack of adoption of technology makes the logistics solution inadequate.

The only solution to these problems is heavy investment in infrastructure development such as railways and road. Further, there is a need to reduce the amount of bureaucracy in the system that brings in barriers for inland trade. Therefore IT development in the logistics industry is important to make it more competitive and transparent.

References

Datamonitor, 2006. Logistics in China. Industry Profile. London: Datamonitor. Web.

Ganster, S.H., 2009. China Sourcing. China Business Review, November-December. pp.67-72. Web.

Goh, M. & Ling, C., 2003. Logistics Development in China. International Journal of Physical Distribution & Logistics Management, 33(10), pp.886-917. Web.

Hong, J. & Liu, B., 2007. Logistics Development in China: A Provider Perspective. Transportation Journal, 46(2), pp.55-65. Web.

Hu, Z. & Khan, M.S., 1997. Why Is China Growing So Fast? Economic Issues No. 8. International Monetary Fund. Web.

Jiang, B. & Prater, E., 2002. Distribution and Logistics Development in China: The Revolution has Begun. International Journal of Physical Distribution & Logistics Management, 32(9), pp.783-98. Web.

Kam, B.H., Tsahuridu, E.E. & Ding, M.J., 2010. Does human resource management contribute to the development of logistics and supply chain capabilties? An empirical study of logistics service providers in China. Research and Practice in Human Resource Management, 18(2), pp.15-34. Web.

Kumar, S., DuFresne, C. & hahler, K., 2007. Managing supply chain risks in US-China trade partnership. Information Knowledge Systems Management, 6, pp.343-62. Web.

Kumar, S. & Sosnoski, M., 2009. The effect of China’s economic growth on domestic and international supply chains: Assessing the risks. Supply Chain Forum: an International Journal, 10(2), pp.10-24. Web.

Lee, H.L., 2004. The Triple – A Supply Chian. Harvard Business Review, pp.2-12. Web.

UCBC, 2011. US-China Trade Statistics and China’s World Trade Statistics. Web.

World Bank, 2011. China. Web.

Zhang, Z. & Figliozzi, M.A., 2010. A Survey of China’s Logistics Industry and the Impacts of Transport Delays on Importers and Exporters. Transport Reviews, 30(2), pp.179-94. Web.

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