July 2004 | Commentary | 3PL Line

The Logistics of Doing Business in China

Tags: 3PL

Earlier this year, one of the United States' most famous apparel manufacturers closed its last U.S. manufacturing facility. Like many companies, it now relies on plants in countries across the world for manufacturing. At least one is likely to be in China.

China already accounts for a vast amount of the world's production, including 75 percent of its toys, 20 percent of its steel, and 18 percent of its apparel and textiles. Given its huge supply of labor at some of the world's most competitive wages, these numbers are probably just the tip of the iceberg.

If you're not already manufacturing in China, you probably will be at some point in the near future. But be forewarned that when you do, a few aspects of your business will become considerably more complicated.

As a global logistics executive who spent several years working in Asia, I've had a chance to observe many companies' Chinese logistics initiatives up close. As a result, I know that most companies find it difficult to complement their Chinese manufacturing with seamless and efficient logistics service.

Here are just a few reasons why.

1. The transportation. Let's start with the transportation part of the equation. China's logistics scenario is still a work in progress—so much so that it can cost substantially more to transport goods within China than it does in North America or Europe. In fact, these costs may be as much as 50 percent higher, or more, in some provinces or regions.

One reason is that China doesn't have the same kind of infrastructure. Its density of land transport systems is just 22 percent of what you find in the United States and five percent of what you find in a country such as Japan. And many of its roads are either unpaved or in poor condition, which slows down transit times.

China's roadways also carry high toll charges—sometimes accounting for as much as 20 percent of the total cost of a haul. By contrast, tolls in Europe might account for two to three percent of a haul's total cost.

To make matters even more complicated, there is no such thing as cross-country truck service. The average size of a Chinese trucker's fleet is two vehicles, and various regulations between the country's many provinces require changing trucks nearly every time a truck crosses provincial borders. This makes it difficult to achieve economies of scale.

Rail Slightly Off Track

While you might imagine that this would simply make rail transportation a more viable alternative, it's important to note that China's rail system also faces challenges. The country has 1.3 billion residents and many of them rely on trains, so that passenger traffic often clogs rail capacity.

Additionally, some rail routes require that companies book space as much as six weeks in advance. Even for customers who are lucky enough to find a slot, many say the rail system's terminals don't enable them to accurately track and trace their freight.

2. The logistics facilities. Inventory at rest in China also has its shortcomings. Cargo storage space is in short supply, and a considerable amount of China's capacity is older, which leads to more cargo damage and higher inventory costs.

Compounding this challenge, most of the country's warehousing facilities do not have computerized stock supervision systems. Thus, it may be difficult to execute the inventory management practices you're accustomed to in the United States.

It also doesn't help that only a handful of companies manage most of China's warehousing space, because where there is limited competition, there is usually less willingness to go above and beyond for clients.

3. The contingencies. Last is the issue of contingency. The past few years have proven that it is often prudent to build some geographic flexibility into your supply chain, because concentrating all your operations and vendors in one place could temporarily cripple your supply chain if a problem crops up in that area.

SARS provided a small taste of this. Even though it didn't affect most inventory, it did affect China, and there were legitimate concerns that its impact would be both serious and sustained.

No country or city is immune from situations that could affect your ability to move and manage goods—not even the country that is fast becoming known as the world's factory floor.

Thus, it's wise to consider basing your sourcing in more than one country, even if you only base a little bit somewhere else. For example, while China is clearly a primary sourcing and production location for major U.S. apparel retailers, many of these retailers continue to maintain sourcing and use factories in Latin America or in other Asian markets such as Vietnam.

A Brighter Future Ahead The good news is that many of these issues won't be issues forever, because China is in the process of tackling many of its logistics shortcomings. The Chinese government is currently executing some impressive portions of a five-year plan that includes substantial infrastructure improvements, regulatory changes, and a policy that is more friendly toward foreign investment.

This plan includes:

  • 200,000 kilometers of new roads by 2005, including major new highways between Shanghai and Chengdu, and Beijing and Zhuhai.
  • The end of restrictions on foreign ownership, which should open up the trucking transport sector to more growth and higher quality.
  • $42.7 billion in railroad network infrastructure improvements over the next few years.
  • The complete opening of China's railroad network to foreign investment by 2006.

Additionally, the wave of U.S.-based businesses is already raising the bar on China's logistics practices and introducing new efficiencies into its supply chain structures.

Should the prospect of navigating the challenges of Chinese logistics alone still daunt you, bear in mind that several leading U.S. third-party logistics providers have a presence there and many of them are in the process of expanding further into China.

Despite the fact that I have been so candid about some of the logistics challenges you will face in China, it is important to stress that I still see a huge benefit to doing business there.

Although you will have to factor a bit more time and money into the portion of your supply chain that includes China, the investment is well worth it. The economic benefits still substantially outweigh the current logistical and infrastructure challenges. Just ask the numerous companies who are already there.