As logistics costs continue to eat into profits for firms operating in China – currently making up 18 percent of the country’s GDP – Supply Chain Asia and CHaINA Magazine gathered top logistics executives from leading firms including Adidas, Hewlett Packard, ArcelorMittal, Flowserve Corp, Nuskin, and Tyco to get their take on what is hampering their logistics operations in China, and what the trajectory is for the future.
A 2012 survey conducted by the Global Supply Chain Council in conjunction with Ceva Logistics reveals some telling trends in logistics today. It goes without saying that costs are the biggest concern for most of our survey respondents, who shared their views on how their firms are responding to logistics challenges and what accounts for them.
Outsourcing and 3PLs
Outsourcing logistics services is nothing new in China. A vast majority of our survey respondents – primarily supply chain executives and managers from a variety of industries -outsource their direct transportation services to external partners (83 percent). Doing so can multiply your capabilities and your reach in China’s expansive market, but striking a balance between what functions you outsource and what you retain is a delicate science. Even within the same industry, there is no single, right way to outsource logistics in China.
“Our competitors are using about ten, but in our case our model is that we have three providers, all of them with different background – one is state-owned, one is a private company and one is a multinational,” explains Selina Shui, Logistics Manager for Hewlett Packard’s Logistics Operation PSG, whose providers handle all distribution operations to both distributors and customers.
“The fact that we outsource doesn’t mean that we are satisfied with our providers,” says Shui. “The reason we choose outsourcing is because we just don’t have this strategy to manage our delivery by ourselves, we need to outsource. But our choice is how to make the best combination of outsourcing to fully meet our demands,” she explains.
And with that comes the issue of subcontracting. “Of course all of them are using sub-contractors, because none of them have full coverage of all of China. We allow them to use sub-contracting, but we manage their sub-contracting,” says Shui.
ArcelorMittal, the largest steel producer in the world, similarly takes on an oversight role to logistics. “There is no intention of really building a logistics service as a full business unit, it should be more of a controlling function,” says Chief Representative Frank Ghesquiere. “We’re trying to reduce growth and move more towards a quality control concept. But we can maintain transparency and increase the quality of our service.”
Hypermarket giant, SPAR – which has created quite a foothold in China – presents a very adaptive strategy when it comes to their logistics throughout the country, though one that is still undergoing change.
“For transportation from DC to the outlet we have different strategies depending on the situation in every region,” says Haibin Tang, SPAR China’s Logistics Manager. “For example, in Dongguan we organize transportation from the DC to the outlet through a 3PL, but for example in Shanxi we have our own trucks doing transportation.”
The company’s acquisitions often necessitate adapting to existing logistics models for the large FMCG chain. “SPAR’s executive philosophy is that certain regions have their own history,” says Tang. “For example in Shandong, if [a company we acquired] was established about 20 years ago, but they joined SPAR in 2004 – they have their own history of delivering the product from the DC to the outlet on their own, and they will have a lot of trucks. But in Dongguan for example, they started with a 3PL – outsourced transportation, when they set up their company, therefore when they joined SPAR we couldn’t change their old model, they were already used to it.”
And while the SPAR strategy is to adapt to each region and partner, this doesn’t mean completely accepting the status quo. “We’ve just started this project [to analyze our costs] and now we have the first round of analysis and results are that the costs of using an outsourced provider are lower than the costs of using our own trucks,” reveals Tang. “But this is just the start and when we have developed this further, we’ll probably have different results.”
But for many multinational players, the challenges of getting involved in logistics are just not worth the trouble.
I would say road transport is still a very locally managed business. If you tried to implement rules and do it perfectly, then you lose your competitive advantage. There’s still lots of wishy-washy things going on in China transport – overload, permits and licenses. So that is one area we are not touching,” says ArcelorMittal’s Ghesquiere.
How Are 3PL’s Measuring Up?
There is no shortage of logistics service providers in China, offering every service under the sun. Direct transportation (83 percent), customs clearance (69 percent) and warehouse management (66 percent) are among the top functions most commonly outsourced, according to survey results. That’s not to say that these activities are meeting the needs of their clients. While it is no surprise that cost was the foremost complaint concerning intra-China transport, the reliability, quality and service level of transport providers weighs heavily on firms operating in China.
A whopping 62 percent of survey respondents are dissatisfied with the service level and professionalism of their providers, with a significant share describing poor IT and infrastructure (42 percent) and an inability to adapt to one’s needs (32 percent) as the primary complaints.
“Over the last few years we’ve talked to some partners and I told them, ‘your service level is so-so and you can grow your business in a very easy way’. But it takes time,” explains Lily Xie, Logistics Director of Adidas China. “So over the last ten years we’ve seen clearly that the service level has improved, in the meantime we realize all these cost savings.”
The difficult part though is not the cost cutting, but sustaining it. Xie expressed considerable sympathy for these providers, who find themselves stuck between a rock and a hard place after making cost cuts – the rock being the pressure to further improve service, and the hard place being the inability to raise prices even slightly. Without this possibility, there is little incentive to take their service to the next level.
“The reality is that it is getting harder – when the providers’ margin level is quite good, but your service level has to keep going up – it gets more difficult for them,” says Xie.
HP’s Selina Shui shared similar sentiments in accounting for the lack of innovation and incentive for improvements.
“At HP, when my service provider comes back to me saying that they have been impacted by [tax and regulatory] changes and their costs increased – usually they will be refused by us. We are not allowing them to come back with a cost increase. And then you can imagine – they don’t have enough negotiation power and also no incentive to improve. There is just no profit margin for them to think about improvement,” explains Shui.
Though not all providers are limited by resources when it comes to improving services, rather a lack of specialization and strategic business planning is what holds them back. ArcelorMittal has quite a different view from consumer goods MNCs such as HP and Adidas.
“The only thing I see for China is that you have too many general players who do everything – so the problem is that they do everything, but nothing well. There is still a lot of room for very niche logistic players,” says ArcelorMittal’s Ghesquiere, who sees a drastic difference in this respect between China and Europe.
“In Europe we can see logistic companies dealing only with steel or minerals, but I don’t see it here in China. In the warehouses they are prepared to store everything, prepared to truck everything. You have thousands and thousands of logistics forwarders and they all fight for the same businesses. They don’t look at what they are carrying and if you don’t look at what you are carrying – how can you make any innovations?” asks Ghesquiere, who concludes that it is only volumes and revenue that these providers are concerned with.
While you will never have trouble finding a local provider, what is missing from them is the willingness to step back broadly to look at the entire supply chain. Cathy Lu, Logistics Manager at Unipart, which provides sourcing and logistics of automotive components to the likes of Land Rover and Jaguar explains that “logistics providers should focus more on the integration of the supply chain, providing solutions – not just transportation. They should dedicate themselves to value-adding or cost optimization opportunities for their customers.”
Suppliers, Sub-Suppliers, and Win-Win Relationships
Carefully selecting a transportation partner with an extensive network of sub-suppliers and cultivating that relationship remains crucial in China. Nowhere is this more evident than when you look in the loading locks of a hypermarket or grocery store chain, with a queue of trucks as far as the eye can see. Ivan Liu, National Logistics Development Manager with Summergate Fine Wines & Spirits reports that it is not unusual for his trucks to queue up for an entire day, a huge drain on finances. For Summergate, there is no alternative but to outsource delivery to small, local players, each with only a handful of trucks in its fleet, explains Liu. Those small companies will likely have a driver with a connection at the loading docks, and is often the only way to get your delivery done in a reasonable time.
“Supermarkets are different – because they have a lot of suppliers and a lot of trucks coming. If you have a good relationship, then you don’t have to wait for your call, you can go to their DC directly. If you have to wait one whole day to discharge – that really lowers your efficiency. In one day, we we’d like to do 2 or 3 deliveries, we don’t want to waste time with just one delivery,” Liu explains.
Managing mutually beneficial relationships with transportation providers who have these well-connected sub-suppliers then is key to reducing your logistics headaches in China.
If we see ourselves as the owner, as the customer, in the long term, it’s not very good. Your relationship with the transportation company cannot get any better,” says Liu.
Domestic transportation companies in China are said to be eager to work closely with their customers to improve their own services and secure a lasting relationship. This is even more so the case when it comes to working with multi-national firms, says Summergate’s Liu, who believes logistics providers in China are relatively open to developing their business with their customers.
Regulations and The Local Connect
Anyone with even a year’s experience in China’s regulatory environment knows that regulations are neither static nor uniformly applied throughout the country. Keeping abreast of how regulations will affect your industry and specific products is absolutely critical. 31 percent of our survey respondents felt that changing regulations were problematic.
Working with customs here can be very difficult – each province has its own customs rules. Look at Shanghai and Suzhou – very close cities with very different mentalities,” says Rob Lewin, Flowserve Corporation’s Director of Global Logistics.
“For taxation, their standpoint is very different. For example, for wood coming in from India, Shanghai would consider a certain stamp to be okay, but Suzhou would want a different one. They’re little idiosyncrasies, but they’re enough to disrupt us.”
When it comes to high end fashion, quarantine hiccups with China Inspection and Quarantine Bureau pose a huge risk as well. LifeStyle Logistics’ Managing Director Andre Suguiura describes the potential for major disruptions from single garments that do not pass the required inspection tests for every shipment of apparel that comes into the country. When a single garment style can represent a large share of a product line, as is the case with Suguiura’s luxury European apparel brand customers, the losses are significant.
“The requirements for China are very stringent. This year is much better, our clients will do pre-tests in Europe to make sure they meet the regulations in China,” says Suguiura. But in the beginning it was very tough because nobody knew the standard levels in detail, and companies would just import and then face problems and have to return their goods.”
Tyco’s Cynthia Li faces daily struggles with officials in disputes over HS codes and the resulting duty rates. She cites the simple example of a medical appliance pump being confused with a pump for water systems. Thus, HS codes and customs clearance procures are a never-ending battle for logistics professionals in China, no matter the industry. But how can firms manage to stay on top of regulations?
“We had one of our compliance officers sit down with customs in Suzhou and say, ‘Here is our master list, help us understand this’”, says Flowserve’s Lewin. “Now we are in a situation where we come into Suzhou, and 99 percent of the time, it’s right. It took us 6 months, but we couldn’t rely on which officer is on duty that day.”
Over the course of a week, Flowserve was able to work collaboratively with Suzhou customs officers to secure a measure of predictability to their customs clearance. “Again, it was the relationship,” asserts Lewin. “Our compliance guy in Suzhou had done customs there for about 6 years previously. Without him [arranging the sit-down], I think it would have been a lot harder, or wouldn’t have happened at all.”
To be fair, it is not always an issue with the providers or regulators themselves. Despite the fact that road, rail, and air links throughout China have expanded at lightspeed, lead times are still an issue in terms of weather and distance, especially for two industries that are converging in lead times – fashion and food. “Fashion today is like perishable goods! If you miss the collection, you miss the opportunity,” says LifeStyle Logistics’Suguiura. Weather and related roadblocks can get in your way, in which case there is no provider that can make up for that. “Sometimes, we receive shipments on one day, and they need to be in the shops the next day,” he says. These constraints combined with regulations and the sheer distance between destinations make logistics in China a constant battle.
What is showing little sign of change at the moment is the dearth of logistics properties in key areas in China, such as Shanghai and Beijing. Adidas’ Lily Xie explains: “Right now we’re developing a second, large DC in northern China. In fact for this second DC the company has made a decision to purchase the site cause we really think that land is getting not only more expensive but also not so available for logistics enterprises. The government can get more money from the other type of enterprises. Overall it’s part of our global strategy.”
However, 41percent of our survey respondents expected warehousing services to increase in the near future, and the lack of warehousing property is not yet affecting a significant share of firms (only 18 percent see a shortage of stock). It is likely only in large cities such as Shanghai that are facing shortages and exorbitant rental rates. Firms like Nu Skin are focusing on second tier cities for the excess of properties and cheap labour. But for those who have taken advantage of inland cities and the abundance of space available, moving inland presents its own problems.
“There is an imbalance of services from transportation providers in western area. When we expand to western China, the local transportation provider and sub-suppliers are not good as those on the east coast, but the service requirements from our Customers are the same,” explains Unipart’s Cathy Lu.
So while cost cutting may be the main driver for moving warehousing out of core and overreached areas, (61 percent of respondents say reducing their logistics costs will be among their top three supply chain objectives this year), weighing the pros and cons of any big move carefully will be the key to planning a smart logistics strategy here. And in terms of the industry, it is likely competition and diversity that lead the logistics industry into the future.
“Everyone wants to operate with the highest standards but at the lowest costs – and those are two things that are not necessarily married together,” concludes ArcelorMittal’s Ghesquiere. “It’s a big problem with Chinese logistics, but it’s a big thing that the government is addressing. That will increase the quality and open up the market for international logistics players in road transport and they will bring international standards to the industry – there will be efficiencies going on. You’ll see an increase in volume and it will create a more competitive environment.”
Contributed by Cindy Tse & Olga Mironova
This article appeared originally in CHaINA Magazine (May-June 2012 Issue). Please refer to www.chainamag.com to read the full article and others.