Global Logistics—November 2009

Wagons West Chinas New Reckoning

Sometimes adversity yields opportunity. When a major earthquake struck China’s Sichuan Province in May 2008, its magnitude was incomprehensible: 70,000 people killed, many more displaced, and widespread annihilation of infrastructure and socio-economic wellbeing.

But a landscape literally wasted by nature is now quaking and awakening with the tremors of a man-made boom as infrastructure projects and economic development opportunities arise anew.

The Chinese government is hitching its wagon and securing its bullion to westward expansion, opening up new manufacturing pockets in the country’s sparsely populated hinterland. The seismic shift in production capacity to the interior has been ongoing as coastal development in the east approaches critical mass and labor costs rise. Areas such as Chengdu, the capital of Sichuan Province, are reaping the unexpected benefits of media exposure and relief efforts, as well as government and foreign stimulus.

Contractual foreign investment in the region has surged 207.5 percent year on year to $4.2 billion, according to official figures released by Sichuan’s Bureau of Commerce. Chengdu, in particular, has staked its claim in China’s Wild West, accounting for 80 percent of the province’s total take, with a growth rate of 218.9 percent.

Both domestic and foreign investors are lining up projects and digging into China’s relatively poor and underdeveloped southwestern province. At the 10th annual Western China International Economy and Trade Fair held recently in Chengdu, public and private shareholders from China and elsewhere around the world announced 551 signed projects, worth US $43.3 billion.

Chinese investors contributed to 539 of the projects, which largely focus on the equipment manufacturing, service, and technology sectors. The remaining 12 projects include foreign contractors, with U.S. companies ponying up $1 billion.

German industrial conglomerate Siemens intends to set up a Global IT Operation Center in the city to provide better tech support for its customers. Taiwan’s Foxconn Group, the world’s top maker of outsourced electronics, is looking to invest $1 billion to build an industrial base in Chengdu, setting up production lines for products such as LED TVs and LCD modules.

With manufacturing stimulus and infrastructure development building, transportation is following close behind. A.P. Moller-Maersk recently announced that it is locating a global service center at the Tianfu Software Park in Chengdu.

The ocean carrier is also drafting plans for a logistics processing branch and document processing center in the software park that will integrate service operations from Maersk’s other branches, covering orders, document processing, and personnel training.

Chengdu has gradually formed a cluster of shared service centers. Numerous world-class companies, including Accenture, DHL, JPMorgan, Volkswagen, Lafarge, Amazon, and domestic players such as Alibaba and Tencent, have set up operations in the city. Maersk is considering further investments in Chengdu as part of its efforts to expand business in the western market.

Opening Western China to more industrial development will likely have a marked impact on how global businesses source and ship product to and from Asia. German-based rail carrier DB Schenker is already experimenting with a Eurasian intermodal land bridge connecting China to Europe following the Trans-Siberian Railway route. U.S. shippers, too, will need to reevaluate sourcing strategies, transportation routings, and domestic distribution networks as they explore Asia-East Coast sailings through the Suez Canal.

Steering Toward A Deep Green Sea

In the interest of saving the environment and greening the supply chain, the Rotterdam Port Authority is teaming up with Friends of the Earth Netherlands, a non-governmental environmental organization, to push for more waterborne commerce. The two parties are challenging the maritime shipping industry to drastically reduce CO2 emissions 30 percent by 2020 and 80 percent by 2050, compared to 1990 levels.

The port and Friends of the Earth Netherlands are calling on the Dutch government to shoulder its responsibilities in the run-up to the climate summit to be held in Copenhagen later in 2009. They are petitioning the government to make every effort to cooperate with other countries and port authorities to introduce international agreements on CO2 reduction, including making CO2 reduction part of the Environmental Ship Index (ESI).

The ESI is a voluntary project piloted by the ports of Rotterdam, Amsterdam, Antwerp, Bremen, Bremerhaven, Hamburg, and Le Havre to measure a ship’s emissions based on the amount of nitrogen oxide, sulphur oxide, particulate matter, and greenhouse gas it releases. The index would provide a benchmark for the environmental performance of vessels or ships.

The ESI is currently being developed in an international context to encourage the use of clean ships. This can be done, for example, by introducing price incentives to dues that ships pay when visiting ports. The Rotterdam Port Authority plans to use this ESI to encourage ship owners to make their fleets more sustainable and to use cleaner fuels.

German Cataloger Mails It In

Traditional department stores and mail-order retailers that can’t keep up with the Joneses or Müllers—and their shifting buying habits—may find themselves in a similar position as German cataloger Quelle and its holding company Arcandor Group.

The 82-year-old company, and its 128-year-old patriarch, recently announced they were liquidating assets after failing to make the transition to e-commerce.

It’s a sign of the times, especially for retailers that span time. Changing consumer habits and the repercussions of a lingering worldwide recession have taken their toll on well-entrenched brands. Global retailers, particularly those that have not adapted their supply chains to online sales and distribution channels, face the same challenges and consequences.

By contrast, in early 2009, U.S. department store chain Macy’s discontinued its Bloomingdale’s By Mail catalog to shift focus to the brand’s direct-to-consumer business. As a complement to the exposure of brick-and-mortar stores, the Internet has become the primary vehicle for marketing and channeling goods to consumers. And in the eyes of the evergreen consumer, eliminating paper catalogs and unnecessary waste has become an accepted expectation.

Quelle simply did not have the infrastructure in place to facilitate the transition to e-commerce—even as it began restructuring its activities and go-to-market strategy in 2007. When the company began losing sales, consumers lost confidence and banks withheld credit.

Not by coincidence, in 2005 the Arcandor Group sold a considerable number of its logistics operations to DHL, the express and logistics subsidiary of Deutsche Post World Net—including its goods distribution center in Unna/Holzwickede.

In Quelle’s wake, the Otto Group will likely capture the majority of market share for Germany’s retail catalog segment.

Perhaps the Hamburg-based retail conglomerate’s pedigree accounts for its enduring success. What began as a shoe mail order firm in 1949 has evolved into a diversified holding company with 23 companies and 50,000 employees in 20 countries. Otto sells shoes and countless other goods; it owns housewares retailer Crate & Barrel; and it has conquered home delivery and fulfillment.

In 1972, the cataloger started its own courier company, HERMES Delivery Service. Today, HERMES Logistics Group is Germany’s largest player in the B2C and C2C segment, apart from the German Postal Service.

The moral of the story? Talk to the Müllers and Joneses—then invest in transportation and logistics.