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MAY/JUNE 2007 www.chainamagazine.com AUS$7.50 EUR€5 HK$40 RMB40 SG$9 UK£3.50 US$6

THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS Harbin

Changchun

China gets connected River: page 18, Road: page 24, Rail: page 28

Shenyang

Dalian

Urumqi

Yellow River

Tianjin

Beijing

Hohhot

Shijiazhuang Taiyuan

Jiayuguan Yinchuan

Qingdao

Ji’ nan

Yellow River Yellow River

Xuzhou Lianyungang

Xining

Xi’an

Lanzhou

Zhengzhou

Luoyang

Nanjing Yangtze River

Golmud

Shanghai Yangtze River

Hangzhou Ningbo Wuhan

Yichang

Lhasa Chengdu

Hefei

Chongqing Yibin

Nanchang

Fuzhou Guiyang Changsha

Interchange stations Xiamen

Connections with port services Guilin

Stations are very busy during public holidays. Kunming

Guangzhou

Haikou www.chainamagazine.com

Macau

Pearl River

Nanning Shenzhen

Hong Kong

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CONTENTS MAY/JUNE 2007 www.chainamagazine.com

THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS

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Investment flows up the Yangtze The Yangtze River, China’s longest and most important river, is being transformed into a major logistics artery

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Keep on trucking

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Road transportation is the most popular form of moving goods around China but a close look at the state of trucking there reveals a highly fragmented industry with a myriad of problems

REGULARFEATURES 7

COMMENTARY ■ ERP failure factors ■ Quantifying risk and reward ■ Engines of growth ■ Domestic trucking in China

11 NEWS ROUNDUP

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33 Q&A ■ Joon Kim, a senior manager, supply chain management, Hynix ST

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44 BLOG WATCH

The inside track on China’s rail expansion

45 CAREERS

China’s ongoing rail freight expansion plans will be a boon for logistics service providers and manufacturers

48 CLASSIFIEDS 49 EVENTS CALENDAR / COMPANY INDEX 50 CHINA SUPPLY CHAIN IN NUMBERS

SPECIALFEATURES 36 Supply chain management in China auto 39 Strategies for success in high-tech logistics 28

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41 China as a driver of container shipping transformation MAY/JUNE 2007

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he cover image this month is inspired by Harry Beck’s famous London Underground map. And while a country the size of China could never hope to be as well connected as our mock intraChina subway map suggests it does provide some indication of the scale of the central government’s plans to invest hundreds of billions of US dollars over the next few decades into infrastructure projects across the country.

a red.circle publication Publisher Michael Pennington

Editorial Consultant Max Henry Art Director Colin Dizengoff Graphic Designer How Xu

This issue of Chaina magazine is the first in our annual special on intra-China logistics. We’ve divided our coverage into the ‘three Rs’: Road, River and Rail, the three most prevalent forms of freight transportation in use for moving goods around China today.

michael@theredcirclegroup.com

Trucking is far and away the most popular of these three though is not without its pitfalls which we offer some fresh perspectives on (see Keep on trucking, page 24).

Chaina magazine editorial advisory committee

Our look at river transportation focuses on the Yangtze River (see Investment flows up the Yangtze, page 18). For a river of the size and importance of the Yangtze its still relatively underutilised when it comes to transporting goods from China’s western cities to the east coast. Our article looking at rail comes at an interesting time for China’s railways. In addition to the much publicized recent introduction of China’s own version of the famous shinkansen bullet train using locally developed technology, there’s also been a lot of movement in the freight sector (see The inside track on China’s rail expansion, page 28). Currently China’s railways can only satisfy about 35 percent of cargo demand and the importance of improving is further highlighted by a recent estimate that the country’s economy would probably be growing at even a faster rate if its rail infrastructure were truly up to scratch. Michael Pennington Editor and Publisher michael@theredcirclegroup.com

Contributing Writers Chris Horton, Russel Beron, Cameron Wilson, Pilar Dieter

Mark Millar Director of Strategic Business Development UPS Supply Chain Solutions Jean-Luc Laboucheix Supply Chain Director Asia Pacific, Goodyear Eugene Lim Registered Foreign Lawyer Baker & McKenzie, Hong Kong Sean Shao Logistics Manager NuSkin China Henrik Anker Olesen Transport & Logistics Leader, Asia IBM Global Business Services

Jamie Bolton Executive Partner Supply Chain Management North Asia Accenture Amit Kumar Director Inbound Logistics North America Electrolux Group Bee-Choo Lim Materials Director Asia and Latin America Intel Jeffrey Tew General Manager and Lab Group Manager General Motors R&D Centre

ADVERTISING SALES Michael Pennington michael@theredcirclegroup.com +86 138 1897 6097 DISTRIBUTION By direct mail to subscribers in China, Hong Kong and Singapore who are involved in supply chain management, manufacturing and logistics including: supply chain directors and managers; logistics, warehousing and transportation directors and managers; sourcing, materials management, procurement and purchasing directors and managers; operations, manufacturing, import/export and trade managers; and chief executive officers, chairpersons, presidents, vice presidents, general managers, managing directors and country managers.

For subscription enquiries please contact our subscription department at: subs@chianamagazine.com or subscribe online at:

Chaina magazine’s sponsors:

www.chainamagazine.com All subscriptions will commence from the next available issue. We welcome your comments and feedback, please contact the Publisher at: michael@theredcirclegroup.com

© Copyright 2007, Red Circle Group (Hong Kong) Limited. All rights reserved. CHaINA™ (or Chaina magazine) is published by the Red Circle Group (Hong Kong) Limited, Room 813, Hollywood Plaza, 610 Nathan Road, Kowloon, Hong Kong. Telephone: +852 8192 5719. Fax: +852 3015 8719. No charge for subscriptions to qualified individuals. Annual rates for subscriptions to non-qualified individuals differ depending upon the subscribers country or territory and can be found at: www.chainamagazine.com Send address changes to: subs@chainamagazine.comThe contents of the publication may not be reproduced in whole or part without the written consent of the publisher. The publisher is not responsible for product claims and representations.

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COMMENTARY

ERP failure factors

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here are countless horror stories ranging from bankruptcy to run-away operational costs to scare any company in China facing an ERP implementation decision. In 2002, a study by a leading United States-based technologyfocused professional association indicated that only 10 percent of Chinese ERP installations were successful. Vendors are building “lite” versions of their technology packages specifically for the Chinese market knowing that complete transformation of business practices resulting from an ERP implementation is not a reality amongst Chinese companies. Yet domestic ERP vendors, such as UFSoft, Kingdee, as well as global providers such as SAP and Oracle continue to supply the ongoing local demand. What can be done in the growing ERP install landscape throughout China to mitigate the risk associated with such projects?

functional implementation conflict than stateowned enterprises.

The human factor: a case study

Pilar M. Dieter is an independent supply chain management consultant who divides her time between Shanghai and San Francisco.

Each day, Mei Zhong reports to her post in a computer manufacturing plant in Shanghai. She’s confident at her job because her daily routine rarely changes, job security has not been an issue for her in years and her family is comfortable. She works at her terminal where she updates the warehouse production log and clicks briskly between screens executing her tasks. While manoeuvring through her seemingly sophisticated home grown database tool, Mei’s senior management is contemplating an ERP investment that will change Mei Zhong’s life from the nine-to-six working hours to which she has become so accustomed.

Fair warning Plenty of articles have been written to help prevent buyers from choosing an inadequate system and weak integrator. Every ERP Vendor highlights critical success factors that include ‘client executive sponsorship’ and ‘change management across all directly and indirectly impacted divisions’. These recommended initiatives outlined by your integration team are not there simply as best practices lip service, but to help facilitate the necessary activities to ensure success. Attention to cultural, organisational and human performance factors can mean the difference between a strong return or becoming another ERP horror story.

Unique China landscape for ERP implementations A frequently-cited area overlooked in ERP implementations globally is lacking focus on the human aspect of such a change to the workforce. Now add the China factor: skill gaps, low labour costs, lack of incentives to state-owned enterprises and a corporate culture that is different from that in the West. In an effort to bridge these gaps some ERP systems have undergone reconstructive surgery to better fit the needs of the Chinese market; however simplifying the system is not a standalone solution. The institutional structure of Chinese companies (foreign invested companies versus state-owned enterprises) has direct correlation with realised financial benefits and IT implementation success. Foreign invested companies are more likely to hire experienced consultants and participate actively in the project and manage risk to mitigate cross www.chainamagazine.com

In the board room, the management team is evaluating system packages and integrators. They have weighed the financial, technical and operational impacts and believe they are well positioned to ensure a successful implementation. In the end, will they still achieve the same stellar productivity metrics Mei repeatedly boasts or will this project, as many ERP implementation projects do, overlook the necessity (and complexity) of not only training Mei on her new system, but educating the entire division on the new process by which all groups will engage? ERP implementations are not only about technology. They are about re-inventing the business. Merging cross operational systems – financials, procurement, warehousing, order management, materials management – to improve visibility across divisions, is a sound business direction. However, the daily activity that Mei performs so effectively is now going to be turned upside down and possibly even eliminated. The work force impact of an ERP system implementation is a key failure factor in ERP installs going bad. The good news is that recognising the human impact elements specific to China, and making related initiatives a priority in your implementation, will help guarantee success post go-live, thereby aiding in the return on your investment. MAY/JUNE 2007

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COMMENTARY

Quantifying risk and reward Jamie Bolton is Executive Partner, Supply Chain Management, North Asia for Accenture, based in Shanghai.

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usiness is always a numbers game: ROI, P&L, EBIT, MTB. They all speak to the corporate world’s passion for quantification. I’d like to look closely at what numbers tell us about China — enumerating the risks and rewards faced by MNCs. Our basis is two surveys conducted by Accenture: one of 238 senior European and North American executives, and a second of more than 100 China-based MNC executives. First, let’s look at some overview numbers. In a stunningly short time, China has become the world’s fourth largest economy. For 15 years, it has also been the largest recipient of foreign investment among all developing nations, according to its Ministry of Commerce. In 2006, foreign direct investment in China topped US$63 billion. According to the Accenture survey results, 80 percent of MNCs already active in China will increase their investments over the next seven years. More than 90 percent expect their China revenues to grow by more than 10 percent per year. And nearly two-thirds are looking forward to annual growth close to 50 percent. Small wonder that strong rewards are common: Nearly 70 percent of respondents stated that their China operations were, or will be, profitable within three years of their launch. Another 16 percent anticipate profitable operations within five years. Responding to a separate question, only 13 percent felt that their products have been unsuccessful in China. These numbers help explain why investment levels have been so robust. In a 200607 position paper, the European Union Chamber of Commerce in China found that 83 percent of respondents expected to be profitable and only 7 percent expected losses in 2006. Of course, no company is naïve enough to believe that foreign investment lacks risk. Here then are a handful of risk-related numbers with regards to doing business in China.

Danger along the way Major risks, not surprisingly, reside along the supply chain. According to a Transport Intelligence report in 2006, freight costs in China are up to three times higher than in developed countries. Rail transport is particularly constrained. Devoted largely to conveying bulk goods (such as coal, to meet internal energy needs), rail is unlikely to be practical for quite some time. Nor is road transport efficient. Trucks are regularly overloaded and loaded by hand. And aside from the gleaming superhighways connecting China’s east coast commercial centres, road conditions and infrastructure are generally poor. The government has acknowledged the problem, but it will be some time before China can bring logistics costs

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down to the 10 percent or 11 percent of GDP that is typical of global best practices. Access to skilled labour is another barrier. Although China produces thousands of graduates each year, foreign investors struggle to find and keep the people they need. China generally lacks a well-established talent pool of mid- and toplevel managers. Some insiders believe that up to 90 percent of China distribution initiatives fail because of workforce errors. Multinationals are also concerned about lax intellectual property protection. However, several trademark victories do show that the government is serious about making improvements. Starbucks recently was awarded US$62,000 in damages for trademark infringement against Shanghai’s Xingbake coffee shop chain. In another case, Beijing’s famed Xiu Shui Market was found liable for infringing on the IP rights of several owners of international luxury brands.

Finding the right match But according to survey respondents, the stiffest challenge is identifying good partners: Protectionfocused rules and regulations make it difficult for companies to do business in China without a domestic partner or local third party. However, a strong quality commitment on the part of local businesses and 3PLs can be hard to find. Furthermore, abundant red tape adds significant cost and complexity to the process of allying with those businesses that do revere quality. As shown in the graphic, our survey respondents cited a broad range of China-focused risks. But do the risks outweigh the rewards? Only companies that diligently assimilate China-focused strategies into a detailed global operating model — one that integrates product development, sourcing, manufacturing, transportation, storage, sales and operations planning, and provision of after-sale services — will be able to answer that question with any degree of certainty. Survey respondents identified numerous challenges facing multinational companies that do business in China Identifying good partners Credit risk Bureaucracy Intellectual property Cultural misunderstandings Unfair competition Tax and regulatory burdens Skills shortages Lack of management control Poor distribution network Inadequate infrastructure Immature financial markets Undeveloped consumer market Other 0%

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COMMENTARY

Engines of growth

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ince China has sprung onto the world economic map in the last two decades the importance of efficient distribution systems has become recognised as the backbone for the economic growth and modernisation of China into the third largest trading nation in the world. Over the last few years we have seen a growing relationship between operational efficiency, legislative clarity and physical infrastructure which will begin to transform the China logistics market from a costly, confused and uncoordinated patchwork to the smooth, effective and effortless operation it needs to be to serve the country and to promote the country’s position in the global economy. The now familiar portrait of China’s growth trajectory, coupled with the vast potential for experienced property players in this relatively inexperienced logistics market, is beginning to attract the serious attention of a wider community of international investors, developers and third party logistics operators. Although the China logistics market continues to grow, understanding its dynamics remains a challenge – still in its relative infancy, the China logistics market offers intense opportunities and challenges to real estate, as addressing the huge demand for property balances against regulatory hurdles and lack of market transparency. So in assessing the challenges, it is important to understand what factors are driving this market and its growth. These can be summarised as follows:

Engines of growth Integration with the rest of the world: Improving logistics is at the very heart of China’s place in world trade. China now accounts for 8 percent of global exports, and recently overtook Japan to become the world’s third largest in terms of foreign trade volumes. By 2010 11 percent of the world’s exports will originate in China. Stable and healthy economic growth: Economic growth has averaged more than nine percent per year over the past decade. GDP growth was in excess of 11 percent in 2006, and projections point to sustained growth of eight to ten percent per year until 2011. Export growth: Exports have more than doubled over the past five years, and are projected to double yet again by 2010. This will force a significant improvement in logistics services to ensure the smooth transit of manufactured goods overseas. Manufacturing hub of the world: Manufactured goods account for over 90 percent of exports, with manufacturers capitalising on low costs and an expanding domestic market.

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The automobile industry, which accounts for 15 percent of logistics activity, has seen massive expansion, with the sector gearing up to respond to massive growth in domestic car ownership. Retailer expansion: Retailing accounts for three-quarters of logistics activity. The retail sector tells a similar story as manufacturing with both domestic and foreign retailers planning aggressive expansion in order to secure their market position in key cities. WTO commitments: China’s acceptance of the WTO is opening up markets and is acting as a catalyst for improving logistics infrastructure. WTO rulings mandating access for foreign-owned logistics companies will increase the attraction for foreign operators and their investment. Open sky agreement: The USA-China air agreement, which is expected to see a five-fold growth in flights to the USA, is necessary to confirm trade channels and to encourage integration with the rest of the world. Moving up the value chain: China is moving up the value chain. The 11th Five-year Plan refocuses economic growth on quality rather than quantity; new higher value production will need better logistics. Inland China: Economic activity is no longer largely confined to coastal cities. Government regional policy strongly supports the development of western and north east China, which will force the creation of efficient internal supply chains and logistics services. Expanding domestic market: While the Chinese economy will continue to be largely export focused, more and more industries are gearing up for the rapidly expanding domestic economy, raising the imperative to create efficient logistics networks. Maintaining cost competitiveness: Rising prices of China’s labour, land and currency will mean that its cost advantage will gradually decline, and companies will be seeking ways to create efficiencies from logistics. It is estimated that 10 percent of China’s GDP is unrealised due to logistics inefficiencies. The above is only an indication of where the market will head. Even the most optimistic forecasts are now appearing to be conservative. The high rate of growth is coupled with a continuing rise in land values and rents, as demand is outstripping supply in the first and some second tier cities in China. We see very little indication this changing is going to change in the near future. This growth is continuing to attract overseas investment which in turn will be another factor contributing to the increasing costs of operating a business in China.

Trent Iliffe is the Regional Director, Head of Industrial for Jones Lang LaSalle, based in Shanghai.

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COMMENTARY

Domestic trucking in China Roland Chong is the Managing Director, Asia, for Meridian IQ, a Division of YRC Worldwide.

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lobal supply chain management has come a long way. With the increase in capacity and the upgrade of infrastructure and technology the haul between China and western consumer markets has become more reliable, controllable and efficient. The next significant improvements in China related supply chain management will be realised in the Chinese road transportation industry. Most global business players are already producing in or sourcing from China, turning low-cost manufacturing and sourcing from what used to be simply a competitive advantage into a question of competitive parity and imperative. Meanwhile market dynamics like labour shortages or currency evaluations are painting a picture of diminishing margins and net incomes for multinational companies. Meanwhile the Chinese domestic market continues to gain strength, demanding more consumer goods. Hence it is not surprising that companies – international and domestic – are trying to improve their China based logistics operations to drive costs out of their supply chains, to stay competitive, to protect margins and to service an increasing domestic demand. Less-Than-Truckload and Truckload transportation are the most crucial focal point of these efforts in China.

The challenge The road transport sector has struggled to keep up with the ever increasing trade volume. A fragmented structure, inconsistent service and industry standards and local differences and protectionism are being seen as primary problems of the trucking industry in China right now. As a result domestic trucking remains an unreliable factor for business planning and execution with arbitrary cost and service levels in China. The Chinese road transportation industry has yet to develop resourceful and strong national trucking providers in capable to service the market nationwide. The market share and relevance of the top 100 trucking companies in China is assumed to be small. Today the Chinese road transportation market operates on the basis of estimated millions of owner-operators and load brokers battling over shipments. The market participants often “match up” solely on the basis of rates, with limited or no visibility into the shipment routing for the shipper and shipment tracking becomes an inefficient task. The lack of declared and enforced service and industry standards enables many participants in

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the trucking market to compete on price rather than service attributes. The practice of overloading and sub-standard equipment maintenance to reduce service costs is not uncommon. The subsequent inefficiencies and fatal traffic accidents involving trucks cost lives and cost domestic and international companies valuable resources. Yet, one of the most prohibiting factors for improved national truck services seems to be significant inconsistencies in the application of national and local regulations for the logistics industry. Dealing with regional variations in the execution and enforcement of regulations in the transportation industry requires great efforts for shippers and trucking services providers alike and destroys margins quickly. Shippers and trucking services providers often have to use regional partners, adding costs and losing control further.

The solution The bottom line is that China deserves a more efficient domestic road transportation industry to service multi-national and domestic companies better. The solution for these problems will come along with the increasing demand of national and multi-national companies for reliable road transportation to control their supply chains better. Trucking service providers who recognise these market needs and are capable of offering reliable and resourceful services will be able to reap the benefits of better rates and greater market share. The change in the Chinese road transportation market could be stimulated or even accelerated by foreign trucking companies that have established their presence in China. Many of these companies have managed road transportation networks in developed markets successfully for many years and have the resources and capabilities to apply their expertise to the Chinese trucking market quickly. But it remains to be seen how well these companies can and will handle this fragmented, regulated, unreliable industry and its infrastructural challenges. Regardless, market dynamics will sooner or later introduce the necessary changes and improvements the Chinese road transportation industry requires. It is not too far stretched to assume that in less than three years the Chinese market will experience nationwide trucking networks. This will benefit the market and economy alike, maintaining the attractiveness of China as a manufacturing hub.

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NEWSROUNDUP

LEGAL

China to end tax breaks for foreign firms Chinese lawmakers approved a tax overhaul recently that would eventually end nearly three decades of preferential treatment for foreign companies. The measure is likely to pinch a variety of foreign corporations, particularly larger manufacturers, whose sales and profits have been growing robustly in China. But analysts don’t expect a significant slowdown in foreign corporate investment in China, given the country’s large market, extensive supply chain and rapid growth. Some businesses actually welcomed the long-awaited change as a step toward creating a more simplified, transparent and uniform tax system. Chinese enterprises had long pushed for a unified tax policy, complaining that overseas firms enjoyed an unfair advantage over them. Foreign companies have been paying an income tax rate of 15 percent, while domestic firms were taxed as much as 33 percent. A single corporate tax rate of 25 percent is to take effect next year. More broadly, the change in tax policy highlights a maturing Chinese economy that is becoming much more selective about foreign investments and focused on nurturing domestic companies and industries. China’s tax bureau has estimated that the measure will cut domestic corporate taxes by US$17 billion while boosting foreign tax revenues by US$5 billion.

growth of North American investment in the developing Chinese automotive supply chain, it is imperative that these companies are cognisant of local labour laws and fundamentally understand that Ford, GM and DaimlerChrysler expect 100 percent compliance.” Launched in October 2005, AIAG’s global working conditions initiative is a collaborative industry-wide project focused on promoting decent working conditions for the millions of workers around the world involved in the production of automobiles. R&D

Palm opens R&D centre Palm announced recently that it would launch its Treo 680 handheld in China, and increase its presence in the Chinese market by opening a R&D centre. Palm said it is opening its first Asia R&D centre in Shanghai for Asian language localisation, to maintain better relations with its manufacturers in the region, and to accelerate time to market for its products in Asia.

Hitachi, Nissan to boost R&D staff in China Hitachi plans to boost R&D personnel at its Beijing R&D facility by 150 percent to 200 by 2010, in order to tap the abundant pool of individuals with science-related backgrounds. Nissan Motor also is to expand its R&D division staff in Guangdong province to 320.

SOURCING

Vodafone to spend US$1.36 billion in China by 2010 Telecoms giant Vodafone will up its spend on Chinese components from US$272 million to at least US$1.36 billion over the next three years. The company is launching a China Sourcing Centre that will be responsible for negotiating deals with Chinese manufacturers. A spokesman for Vodafone said it was already sourcing in China on an “ad-hoc” basis and the move was about “formalising the processes the company already has in place in one location”. He said the centre’s purpose would be to source goods not for resale, such as laptops and other office equipment for use by the company itself. It will also include technology needed for its network, such as parts used inside the firm’s radio masts. Detlef Schultz, Vodafone’s director of global supply chain management, said the company wanted to increase annual sourcing to around US$1.36 billion within the next three years. But the spokesman said the figure could rise. Vodafone also recently signed a handset procurement agreement with ZTE Corporation which will see the Chinese company produce a range of Vodafone-only branded, ultra-low cost handsets for sale across Vodafone’s Markets. The handsets will only carry the Vodafone name. Jens Schulte-Bockum, Vodafone’s global director of terminals said,

US automakers pledge effort on auto standards in China

R&D

Ford Motor, GM and DaimlerChrysler have announced that they will provide free working conditions training for all of their current suppliers in China. Developed by the Automotive Industry Action Group (AIAG), the training is designed to educate the suppliers on prevailing Chinese labour laws and to reinforce OEM commitment to healthy and safe working conditions for all employees in their global automotive supply chains. The training, which has gained support from the China Association of Automobile Manufacturers (CAAM), will begin in mid-2007.

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Imaginechina

“The single most important resource at any of our member companies is people,” said J. Scot Sharland, AIAG’s executive director. “Given the tremendous

Ford announces research and engineering unit Ford Motor China has announced the establishment of Ford Motor Research & Engineering (Nanjing) which the company described as an integral part of Ford Motor Company’s global R&D and component sourcing network. The newly established company is consistent with the announcement of setting up R&E centres that Ford Motor China made at the Beijing Auto Show last November.

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NEWSROUNDUP news@chainamagazine.com “Vodafone’s Original Design Manufacturer strategy is intended to use Vodafone’s size and purchasing power to engage with the best white label handset makers and then use the power of the Vodafone brand to bring their products to market. We are pleased that we have signed this agreement with ZTE which will build on their experience in emerging markets to create for us an ultra-low cost handset as the first of a range of products we seek to develop with them.”

Bosch to increase China purchasing

Chinafotopress

Bosch plans to increase its China purchasing to US$1.36 billion in 2007 from just a third of that amount one year ago according to Ulrich Eichler, the company’s head of purchasing and logistics. In 2006 Bosch’s global purchases totalled EUR20 billion.

BASF chairman Juergen Hambrecht

Airbus to open China sourcing office

MANUFACTURING

EADS, the parent of Airbus SAS, will open its first China-based sourcing office in Beijing later this year as it seeks to deepen its insights into the domestic market while developing a long-term procurement strategy. The office, which will be run by EADS China, will conduct procurement support and supplier development in China for the Airbus and Eurocopter units, said Philippe Advani, vice president of EADS Global Sourcing Network. “We feel unable to source in China without fully understanding the market,” said Advani, in explaining the timing for the new office. EADS bought at least US$60 million worth of products from Chinese suppliers in 2006. Its annual procurement is expected to exceed US$120 million in China by 2010, Advani said. That figure excludes Airbus’s plan to allow China to design and manufacture five percent of its A350 model, he said.

BASF to expand manufacturing capacity

MANUFACTURING

Toyota and Hyundai to raise production With a goal to increase its market share from 3 percent currently to 10 percent by 2010, Toyota will establish a 50:50 joint venture with Chinese carmaker Guangzhou Auto Group. This new plant involves an investment of US$461 million and will produce the Camry branded car with an annual capacity of 100,000 units. When the new plant begins

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Germany-based BASF has begun construction of a polyacrylate polymer manufacturing plant next to existing manufacturing facilities in Shanghai. The new plant, one of two to be built at the site, will add a minimum annual capacity of 30,000 metric tons to the company’s polyacrylate polymer manufacturing capabilities. BASF markets manmade water-soluble polyacrylate polymers under the Sokalan brand for use in textile, laundry, paper and water-treatment applications. The second new plant under construction in Shanghai will add a minimum capacity of 12,000 metric tons to existing capacity to manufacture specialty chemicals. Construction of the two plants is expected to be completed in the first quarter of 2008. In addition, BASF is building a third new plant at Caojing, also near Shanghai, to manufacture polyisocyanate for use in automotive, industrial and wood paints. “The chemical market in Asia Pacific is the world’s largest and is expected to grow 4 to 4.5 percent annually through 2015,” said Wolfgang Hapke, president, market and business development, BASF Asia Pacific. “We are now moving even closer to our goal of achieving 20 percent of group sales in the chemicals businesses in Asia Pacific by 2010, with 70 percent coming from local production.” production, Toyota will have its total output capacity in China increase by 40 percent. Currently the Japanese car maker has more than 10 operations in China. Hyundai’s joint venture in China, Beijing Hyundai Motor, has also announced its plan to build a new plant. Scheduled to start rolling in mid-2008, this new plant will raise Hyundai’s total output in China to around 600,000 units, twice as much as last year.

Huawei, ZTE to build new bases Two leading telecom equipment providers, Huawei Technologies and ZTE Corporation, are planning to build new manufacturing and R&D bases to speed

up domestic and global expansion. Huawei will spend a reported US$517 million on a base in Dongguan in Guangdong province. The company will build the base in phases, the first of which will be ready early next year. When fully operational, the cluster of factories will account for several billion dollars worth of Huawei’s revenue. Huawei is also building a similar base in Langfang in Hebei province to be finished in July. It is also expected to generate billions in revenue. ZTE is building a national R&D and manufacturing park in Shenzhen to expand its presence in cellphones. The park will cover 440,000 square meters and employ 15,000 workers.

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NEWSROUNDUP

MANUFACTURING

Goodyear chairman outlines efforts in China

Chinafotopress

China nearing 50% of global mobile phone output Global mobile phone shipments were approximately 970 million units with a production value of about US$79 billion in 2006. Nokia ranked first in sales volume, at 347.5 million units, according to a recent report. China is the world’s largest manufacturing base, making around 46.9% of the worlds’ mobile phones in 2006. Around 103 million mobile phones were sold in China’s domestic market and 252.2 million were exported. The report cited Shenzhen, Tianjin, Beijing and Suzhou as the important bases for manufacturing.

Mobile phone output is getting higher in India, but poses no threat to China in the short term, claims the report.

Intel funds semiconductor college in China Intel plans to establish a college for the study of semiconductors, the first largescale training base sponsored by the US computer chip giant. The college which will open in August 2008 with an investment of RMB348 million will be part of the Dalian University of Technology and is expected to become China’s top training centre for professionals involved in integrated

China Mobile ranks 5th global brand China Mobile has leaped ahead of household names such as Marlboro and Wal-Mart to rank fifth in an influential annual ranking of the world’s top brands. The brand of the world’s biggest wireless operator is now valued at more than US$41 billion an increase of 5 percent from last year. At the end of the first quarter, China Mobile’s subscribers topped 316 million - more than the population of the United States. Internet search engine Google topped the list, with a brand value of US$66.4 billion.

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Imaginechina

MANUFACTURING

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Goodyear will look to expand efforts in China that helped save the company millions of dollars last year, such as buying tyres, equipment and raw materials there, the company chairman and chief executive officer said recently. In remarks at Goodyear’s annual shareholders meeting, Robert Keegan said the tyre maker saved about US$35 million last year from production sourcing in China. “This initiative will accelerate over the next two years,” he said. Goodyear spokesman Keith Price said the company’s plans in China do not include expanded tyre production. Goodyear has one plant in Dalian, China. Keegan also said the company will look for more ways to eliminate production it considers high cost. “This is an area where we will continue to take action to ensure we have capacity aligned with global demand,” Keegan said. “We continue to review opportunities to further reduce high-cost capacity.” circuitry. The new project will make Intel “one of the largest foreign investors in China” and raise its total investment in the country to nearly US$4 billion, said Paul Otellini, Intel’s president and chief executive officer. The Dalian city government estimates Intel’s new plant there will create about 1,700 jobs and the economic spin offs it creates in training, logistics and other services, will be worth RMB120 billion.

Dell to revamp manufacturing and distribution model A recent memo written by Michael Dell says major changes are underway in Dell’s supply chain. In a memo to all employees in April, Michael Dell said that under the leadership of Michael Cannon, who was named head of global supply chain operations in February, Dell will revamp its existing manufacturing, logistics and distribution strategies. Michael Dell also wrote that “The Direct Model has been a revolution, but is not a religion. We will continue to improve our business model, and go beyond it, to give our customers what they need.” This statement is being taken as an indication that Dell will eschew

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LOGISTICS

Hangzhou airport customs offers 24hour clearance service Hangzhou airport customs have started a 24-hour clearance service for express cargo, which is expected to shorten the average time needed for goods to clear customs by six hours. The service was launched to cope with the rising volume of transshipment cargo passing through the airport. sticking with its direct sales model, which accounts for nearly all of its computer sales to both businesses and consumers. In that model, orders are placed primarily through Dell’s web site, and computers are built to order. Dell, in turn, uses “demand shaping” strategies and technologies to guide buyers towards models and options for which it has the parts and capacity to deliver immediately. The model has served Dell extremely well, but the advantages it provides have dissipated in recent years, especially as the cost of components and machines has dropped, making the holding of inventory less costly. Major competitors such as IBM and Lenovo have also made substantial supply chain improvements in recent years to reduce gaps in cost and responsiveness. Additionally, in every market there is some segment of consumers which prefers to buy through retail channels. Market observers note that for Dell to re-accelerate its growth, it may need to also tap into this market segment. Hewlett Packard especially has increased its market share versus Dell in the past 12-24 months, relying largely on retail sales. Such a change would be far reaching for Dell, requiring it to manage inventories far differently than the direct model.

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LOGISTICS

CEVA Logistics wins Eaton business Diversified industrial manufacturer Eaton Corporation has awarded CEVA Logistics a contract to act as Lead Logistics Provider for all of Eaton’s businesses in the Asia Pacific Region. Under the agreement, CEVA will manage Eaton’s supply chain in the region, including warehousing in the various Asia Pacific countries, domestic road transport networks, as well as Pan-Asia Pacific distribution solutions managed from a control tower in Singapore. “We are very pleased to be selected by Eaton for this prestigious contract in the industrial market sector,” said Howard Critchley, CEVA’s managing director for China, Australia and Southeast Asia. “The Eaton contract represents an important step in our ambitious growth plans in the Asia Pacific region and demonstrates our capability to offer complete supply chain solutions to our customers. In the last months we have started the implementation of this new contract and we will have an aggressive rollout plan to coordinate warehouses and transport networks in order to provide Eaton endto-end visibility of their supply chain.” REAL ESTATE

Macquarie Goodman extends its footprint in China Macquarie Goodman announced in March that it has signed a sale and purchase agreement for a 48,000 square

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REAL ESTATE

ProLogis expanding into inland China ProLogis, a manager and developer of distribution facilities, announced recently that it is expanding its presence in China through new developments in five key inland distribution markets. The company has secured land for five industrial parks in the cities of Changsha, Chengdu, Chongqing, Nanjing and Wuhan. In aggregate, the parks can accommodate over 808,000 square metres of distribution space and represent an estimated US$246 million in total investment over time. The first distribution centres at the new parks will be delivered over the course of 2007 and 2008. “Over the past three years, ProLogis has built an industry-leading position in China by focusing on coastal markets where demand is strongly tied to import-export activity,” said Jeff Schwartz, ProLogis chief executive officer. “The expansion is a natural evolution of our overall strategy for China. While we continue to extend our presence in coastal markets, we also see opportunity in the country’s large inland cities, driven by exceptional GDP growth and increased domestic consumption.” Schwartz added that modern warehouse facilities are a crucial component of any supply chain network, and that investment in new distribution parks is delivering far-reaching benefits to the Chinese economy. “China’s distribution infrastructure must continue to evolve in order to keep pace with the country’s overall economic expansion,” he said. “We believe these new parks will play an important role in that regard by enhancing the efficiency of logistics for companies in all five of these key inland markets.”

metre distribution centre in Fengxian, Shanghai for consideration totalling RMB121 million. Macquarie Goodman’s chief executive officer, Asia Pacific, Mr David van Aanholt, said, “China presents enormous opportunities for Macquarie Goodman. This acquisition, together with the DHL-Exel development in Kangqiao, Shanghai, reinforces our commitment to the Chinese market.”

Waigaoqiao Bonded Logistics Park business takes off

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just six months,” said AMB chairman and chief executive officer Hamid Moghadam. AMB Property Corporation entered the China market in 2005 and currently has 1.4 million square feet in Shanghai.

DHL leases distribution space from AMB AMB Property Corporation, an international developer and owner of industrial real estate, has leased just over one million square feet of distribution space to DHL in Shanghai. The group’s logistics arm, DHL Exel Supply Chain, has fully-leased the distribution space of three newly redeveloped industrial buildings at the AMB Fengxian Logistics Centre in Shanghai. DHL will use the multi-client logistics campus to deliver distribution services to manufacturers of fast-moving consumer goods and retailers. “Our long-time customer DHL came to us with a critical distribution facilities requirement - more than one million square feet of highly efficient logistics space in Shanghai up and running in

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Statistics from Shanghai customs show that the city’s Waigaoqiao Bonded Logistics Park handled 138 batches of hi-tech products during the seven-day Chinese New Year holidays alone, an increase of 712 per cent compared to the same period a year ago. The goods were valued at US$40.57 million, up 2,486 per cent year-on-year. This comes as the Waigaoqiao Bonded Logistics Park has seen rapid growth in business since beginning operations in July 2004. The number of registered companies operating on the site rose to 61 by the end of last year, with a total

investment of US$95.7 million. The Waigaoqiao Bonded Logistics Park handled cargo worth a total of US$25.55 billion in 2006, most of which was exported to the Yangtze River Delta area.

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The Hubei Federation of Logistics & Purchasing recently signed a co-operation agreement with Wuhan Gaoqiao Industrial Park to establish a logistics information platform turning the industrial park into a national-status facility. China’s Ministry of Railways has also earmarked the industrial park to become a national railway container hub. The Gaoqiao Industrial Park currently has 78 tenants, most of which are logistics companies specialising in the automobile parts industry, including Wuhan Wanguo, Beijing Hyundai and Japan’s FTW. The Wuhan Bonded Logistics Centre is also located within the industrial park. RETAIL

Bear Stearns and GOME bet big on China retail US investment bank Bear Stearns and Eagle Investment Group, an investment company of the GOME group, have created a US$500 million fund to invest in growing businesses in China’s retail sector. Each partner will contribute US$250 million of capital to the fund helping them to expand both domestically and beyond China. Bear Stearns representatives told press typical investment size would be in the US$25 million-US$100 million

range and further capital raising could be considered, once the initial commitment is deployed. IT

IBM opens global service delivery centre In a bid to extend its global service delivery capabilities, IBM has a global service delivery centre in Chengdu in southwest China’s Sichuan province. The new centre will concentrate on development, operation and maintenance of application systems for clients based in Europe, Africa, the United States and the Asia Pacific region. The company also opened a similar centre in Vietnam. The delivery centre in the Chengdu High-Tech Zone is the company’s fourth such centre in China and will also run as a regional operations centre for the IBM Global Procurement Centre, supporting IBM’s globally integrated supply chain. “IBM’s delivery capabilities across countries such as China and Vietnam are a key part of our strategy to operate as a globally integrated enterprise. Such a strategy allows IBM and its clients to leverage skills wherever they exist in the world,” said Erik Bush, executive vice president, of application services at IBM’s global delivery division, in a statement. Bush continued, “Where there is a concentration of the right skills in a given country, IBM develops people and resources and brings in global best

RETAIL

IKEA to open new logistics facility Ikea has started construction of a mammoth distribution centre in Shanghai that will be its biggest in the Asia-Pacific region. The US$150 million facility, with a warehousing capacity of 300,000 cubic metres, will be Ikea’s largest in the Asia-Pacific region. It will be in Shanghai’s suburban Fengxian District, close to the deep-sea Yangshan port. The distribution centre will also be the biggest foreign-owned warehousing facility in China. This is the second distribution facility for the Swedish furniture retailer in Shanghai; it set up a centre in Songjiang District in 2005. David Hood, director of Ikea Asia-Pacific distribution services division, said Ikea plans to make Shanghai its warehousing and distribution centre for the Asia-Pacific region. He said, “The facility will not only bring advanced professional logistics expertise to China, it also signifies the importance of Shanghai being one of Asia’s major economic and shipping centres.” And it will help service the growing number of Ikea stores in China. The company plans to have 10 stores in China by 2010.

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Wuhan to gain national standard status for logistics park

practices to enable us to meet the needs of not just our domestic business in that country, but also our global business.”

Descartes opens Shanghai office Descartes announced it has opened an office in Shanghai to service growing demand for its logistics management solutions in China and the surrounding Asia Pacific region. Descartes said the Shanghai office expands its ability to offer local sales and support services to its growing base of customers and prospects in the region. “The level of interest in our products, services and solutions in China has grown significantly,” said Arthur Mesher, chief executive officer of Descartes. “Opening an office in China, combined with our development of Chinese versions of our solutions, provides increased value for our customers on a local basis. Above all, this is an indication of our longterm commitment to supporting logistics intensive organisations in China and around the world.”

“S3” Speed Sourcing Solution Order Logistics Premier Resources International have launched a global sourcing solution known as the “S3” Speed Sourcing Solution. The new product provides clients with a powerful Web-native information technology that supports tight integration and total visibility among factories, suppliers, transportation companies, and customers sourcing a variety of products in the Pacific Rim. The “S3” tool enables clients to have complete supply chain visibility in their global sourcing operations, all the way back to the factory in China, including visibility to the bill of materials, onhand inventory levels, production schedules, and available production capacity.

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REGIONALFOCUS

Investment flows up the Yangtze

Russel Beron is a freelance journalist specialising in supply chain and logistics based in Shanghai. He is a regular contributor to Chaina magazine.

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REGIONALFOCUS

Chris Horton is managing director of the Meridian Group of Hong Kong, a logisticsfocused consultancy with offices in Hong Kong and Kunming. He is a regular contributor to Chaina magazine.

The Yangtze River, China’s longest and most important river, is being transformed into a major logistics artery

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t’s well documented that in the wake of the rapid development of its coastal provinces China has arrived at a juncture: in which the competitive advantages previously enjoyed by domestic and international investors in the country’s east – namely cheap land and labour – are now really only available in the country’s interior. As China moves to promote investment and development in its interior provinces the Yangtze River, which cuts a clear line across the middle of China from Shanghai to Sichuan, has emerged as an obvious choice for opening up new investment opportunities. The development of the middle reaches of the Yangtze into a major economic corridor along similar lines to the earlier development of the Yangtze River Delta region and the Pearl River Delta region has major implications for China and for the country’s logistics infrastructure as a whole. The 2,400-kilometre stretch of the river between the municipalities of Shanghai and Chongqing runs through five provinces: Jiangsu, Anhui, Jiangxi, Hubei and Hunan. Together these five provinces account for twofifths of China’s GDP and nearly 25 percent of the country’s population. And with the exception of Jiangsu, given their relative lack of prosperity when compared to Shanghai for example, these regions have room for major economic development.

24 container ports Promoting containerisation and increasing access are at the heart of the central government’s plans for the development of the Yangtze region. Today the region has more than two dozen container ports, no small achievement considering that bulk cargo in open barges was the main mode of Imaginechina

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transport until the mid 1990s. Access has improved too: the recent completion of a project to deepen and widen the river has made the metropolis of Wuhan, capital of Hubei province, accessible to 10,000-metric ton ships. Located roughly halfway between Shanghai and Chongqing, Wuhan will be one of the major beneficiaries of the drive to increase upriver accessibility on the Yangtze. During the current Five-year Plan (2006-2010), Wuhan is being groomed to become a regional economic hub for central China (much like Tianjin is being groomed to become a regional economic hub for northeast China). In this period, Wuhan Port Group is planning to invest RMB1.4 billion in expansion projects at Wuhan Port’s Hanyang Container Terminal and Yangluo Terminal, with the goal of doubling capacity by 2010. Foreign firms looking to establish operations in Wuhan and other cities in the region need to put more time into cultivating local relationships than they would in Beijing or Shanghai, according to Zhang Runbing, managing director of investment firm Wuhan Zhisheng Group. “For second-tier cities, because of a lack of understanding, local partners are very important,” Zhang said. “Look at the GDP and population growth when considering a city for investment. Wuhan is a transport hub and is very competitive, especially at a time when top tier cities face a lot of pressure in terms of government policy and market conditions. Foreign firms need to work with policies – look at the government’s 11th Fiveyear Plan to see what the areas of focus are.” Chongqing is another city that will receive a major boost from the Yangtze’s development. In September of last year, Chongqing Port merged with nearby Wanzhou and Fuling ports

Promoting containerisation and increasing access are at the heart of the central government’s plans for the development of the Yangtze region

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REGIONALFOCUS The Yangzte River

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Wuhan and Chongqing are preparing to expand their intermodal capacity, with each city adding major containerised rail terminals by 2010

and Chongqing Municipal Production Material Corporation. The new port is presently sorting assets and assessing strategic investments for the short- and mid-term. Chongqing Port is planning a major expansion of its throughput capacity, which by 2010 is projected to reach 1.2 million TEUs – compare this to 2005, when the port handled 100,000 TEUs. Chongqing’s rapid development into the most important port city in western China is primarily due to the Three Gorges Dam located near to Yichang in Hubei province (about 4 hours by bus from Wuhan), where a bidirectional fivestage shiplock opened in 2004. Loaded barges up to 10,000 deadweight tons (DWT) can pass through the shiplock in three hours or less. By 2009 a smaller, separate shiplift will be able to lift vessels of 3,000 DWT or less within 45 minutes. At present, barges carrying up to 144 TEUs can access Chongqing – with the completion and filling of the Three Gorges reservoir Chongqing should be accessible by barges carrying loads of as much as 400 TEUs. In anticipation of the projected increase in traffic, the port at Wanzhou is constructing container facilities capable of handling upwards of 400,000 TEUs.

From river to rail, and back again Port expansion plans aside, Wuhan and Chongqing are preparing to expand their intermodal capacity, with each city adding major containerised rail terminals by 2010. The terminals are part of an 18-city containerised rail hub network that is being built by a NWS Holdings joint venture – China United International Rail Containers – also involving shareholders Israel-based Zim Integrated Shipping Services, Deutsche Bahn and Adriatic Ocean Shipping. This network will also include hubs in Chengdu in Sichuan province and Urumqi in Xinjiang, which should lead to increased international container traffic in these fast-growing landlocked provincial capitals. During the current Five-year Plan, the central government has altered its focus from a general push to stimulate construction and operation of Yangtze ports in general to a strategic development of the ports at Wuhan, Chongqing and Nanjing, capital of Jiangsu province. A major component of this new plan is the role that will be played by Shanghai’s Yangshan megaport, which will serve as the Yangtze’s deepwater transshipment hub. Underscoring its importance as a future transshipment hub, Yangshan expects nearly one-

What about the environment?

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Business issues considered, there are also environmental issues that China’s government as well as domestic and international companies operating in the region will be forced to consider. In terms of the Yangtze’s environmental situation, the outlook is rather bleak. This year the first annual report on the river’s environmental situation reached the conclusion that much of the waterway’s ecology is in critical condition. With more than 600 kilometres of the river in dire straits due to excessive pollution, damming and surface traffic. The report strongly recommended that a national management system be created for the Yangtze in order to prevent further deterioration of the river’s ecology. Even if such a system were to be put in place quickly, much damage has been done already. Yang Guishan of the Nanjing Institute of Geography and Limnology, one of the report’s chief editors, summed up the Yangtze’s current state as follows: “The impact of human activities on the Yangtze water ecology is largely irreversible.”

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REGIONALFOCUS

third of its throughput to be transported by barge before 2020. Significantly different from Wuhan and Chongqing in terms of proximity to the Yangtze Delta, Nanjing is scheduled to finish construction on the fourth stage of its current expansion project. And the city is taking advantage of its location at the eastern end of the Yangtze to become the largest comprehensive international port facility on the Yangtze. Sea-going barges, some capable of transporting as many as 300 TEUs, have already begun to be used in Nanjing and are expected to be used further up the Yangtze in time, putting ports on the river’s lower reaches in direct contact with ports in Japan and South Korea. China’s Ministry of Communications is expecting container throughput at Nanjing port to grow to more than 2.6 million TEUs in 2008 and 3 million TEUs by 2010.

More to it than just Nanjing, Wuhan and Chongqing As an economic corridor, the Yangtze is much more than just its largest cities. China’s coastal boom has solidified the leading positions of major cities such as Shanghai, Tianjin and Guangzhou, but lesser-known cities such as Ningbo and Lianyungang have also emerged as second-tier success stories. The Yangtze also boasts several cities with lower costs than hubs like Nanjing or Wuhan - plus high growth potential. Ive Van Nuffelen, the Area Head of Marketing and Sales at Panalpina China cited the cities of Wuxi and Changzhou in Jiangsu province as some of the most promising and high-potential cities for foreign investment. “Besides Nanjing that’s where we have a high concentration of customers”, he said. He also cites Zhangjiagang as a major logistics hub for that area. Zhangjiagang is located at the west end of the Yangtze River Delta and is located near the industrial boomtowns of Wuxi and Suzhou. Its port has freight business with more than 140 ports throughout the world and features international shipping lines connecting it with Japan, South www.chainamagazine.com

Korea, North America, Europe and the Middle East. Other smaller Yangtze cities, Yichang where the Three Gorges Dam is located for example, will emerge as alternatives to high-traffic port cities nearby. Yichang is becoming popular with shippers looking to save time and avoid the bottleneck caused by the Three Gorges Shiplocks. Cargo headed upstream or downstream can circumvent the final locks via road transport. Yichang is developing 10 berths at its Yunchi deepwater terminal to handle a projected increase in transit cargo from Chongqing, and from Sichuan and Yunnan provinces. A 377-kilometre rail line connecting Yichang with Wanzhou in Chongqing will also alleviate the transport bottleneck. The railway is scheduled for completion in 2009.

The Yangtze River region is still regarded as less transparent than Shanghai and the other major hubs Ive Van Nuffelen, Panalpina China

Not without a challenge Despite high levels of potential and interest by foreign companies, the Yangtze River region still has developmental logistic challenges which, according to Van Nuffelen, are primarily related to availability of information and connectivity. “There’s still today a lack of knowledge about the region at present,” he said, “In terms of logistics investment it’s still regarded as less transparent than Shanghai and the other major hubs. Everyone’s interested in going into the hinterland

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Yangtze facts ■ At 6,211 kilometres in length (3,859 miles) the Yangtze River

is the longest river in Asia and the fourth longest in the world after the Nile in Africa, the Amazon in South America and the Mississippi in North America. ■ The name Yangtze River is derived from Yangzi, the Chinese name for, beginning in the Sui dynasty, the river in its lower reaches and specifically, the stretch of the river between Yangzhou and Zhenjiang. ■ The Yangtze is known by different names over different parts of its course. At its source it is called the Dangqu, from the Tibetan for “marsh river”. Downstream it is called the Tuotuo River and then the Tongtian River. It next runs through parallel to the Mekong and the Salween before emerging onto the plains of Sichuan, where it is known as the Jinsha River. ■ The river originates in a glacier in the Dangla mountains on the eastern part of the Tibetan plateau.

and promoting 3PL development, but you can never ignore the role of Shanghai as a major cargo hub. Take Nanjing, it is rapidly developing but it still needs more consistency in terms of direct international air connections, right now it still lacks the additional cargo services to consider it as a solid cargo hub. Panalpina has already started some years ago to invest and develop specific logistics products in line with the needs offering a competitive advantage in this market. Once this is even more developed, people will look into developing business even further.” There is little doubt that increasing levels of foreign investment will begin to flow up the Yangtze in the coming years, a development

which will force local 3PL providers to upgrade their services in order to compete with foreign players and, as Van Nuffelen points out, will significantly increase visibility and decrease costs in the supply chain. In addition to transparency and visibility issues, the cities in the Yangtze region have an uphill battle ahead of them in terms of human resources. Even highly skilled local talent will require significant training to grasp the best practices brought in by foreign firms. After training such staff, firms will have to provide incentives to prevent flight to richer coastal cities and rival firms moving into the region. Bringing upper level Chinese and foreign management into the inner reaches of the Yangtze region will also prove a difficult task for firms expanding into the hinterland. Chinese management will likely require significant compensation to move away from more dynamic coastal cities. A long-term post in a city in China’s interior with little English infrastructure and a fraction of the amenities found in a city such as Shenzhen or Shanghai will be a tough sell for most any company looking to move foreign management inland. Despite the large amount of development that is still needed to catch up with China’s coast and the challenges contained therein, there is little doubt of the determination of the central government and local governments to convert the Yangtze into an economic corridor that will stimulate massive economic change in China’s interior. This difficult task will require adequate planning, international investment and cooperation and foresight to ensure comprehensive and balanced development and integration into the national economy.

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Keep on trucking Road transportation is the most popular form of moving goods around China but a close look at the state of trucking there reveals a highly fragmented industry with a myriad of problems

Cameron Wilson is a freelance journalist specialising in China business and trade issues based in Shanghai. He is a regular contributor to Chaina magazine.

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P

iracy on the high seas, and the loss of precious cargo to rogue seafarers bearing the dreaded skull and crossbones flag was once a very common phenomenon in international trade, but thankfully, moving freight across oceans is a rather safer and more straightforward matter these days - especially if you are exporting from China. But moving goods around on China’s internal road network can be a perilous affair, with a host of obstacles and hazards lying in wait, as one Canadian trading company found out recently to its cost. Silk Ventures, an export processing firm based in Shanghai, source a wide range of products but have a specialist line in automotive components. As a result of this the company decided to develop two race cars for branding purposes and last summer imported two models via Hong Kong using an agent in Guangdong province. The agent helped arrange for the cars to be transported by truck, to Shanghai, since the vehicles lacked the correct documentation to be driven. It sounded simple enough, but as chief executive officer Christian Faubert explains, the seemingly straightforward task ended up being

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anything but due to both official and unofficial hurdles they encountered. He said, “What we did was to get a trucking company to load up [the cars] and take them from Guangdong to Shanghai. I have no idea who the trucking company was, but the interesting thing was that it was introduced to us by the agent who imported the cars for us.” Faubert expected to receive the vehicles at Silk Ventures’ Shanghai workshop a couple of days later, but instead got a call from local customs authorities in Nanchang in Jiangxi province, where the cars had been impounded for reasons which were not made entirely clear to the company other than irregularities surrounding their transport documents. Silk Ventures was summoned by the authorities to the Jiangxi capital to deal with the situation face-to-face. Faubert explained, “The original quote we were given by local customs was in the form of a RMB150,000 fine to get the cars back. We refused to budge at first, as I was sure we had our papers in order, but days started to pass and the situation started to drag on.” The bureaucratic wrangling lasted two weeks; progress was only made when a local official was called in to act as arbitrator.

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TRUCKINGFEATURE who use their services. And one of the biggest problems is a lack of regulatory uniformity from province-to-province. In Silk Ventures’ case, Faubert explains that a key lesson he learned from his run in with local customs was that some routes from south to east China are less problematic than others. For example, Guangdong province, where key hubs such as Shenzhen and Guangzhou are located, has two main routes to Shanghai. One cuts directly through northern Guangdong, into Jiangxi Province and onto Zhejiang province, which is quicker but uses poor quality roads. The other is the coastal route through Fujian province, which takes about five hours longer but enjoys the advantages of more modern highways and less frequent roadside inspections. Faubert said, “Generally speaking nobody takes the quicker road because Jiangxi has very poor highways and is prone to customs difficulties.” One of the biggest problems of doing business in China in general is trying to keep in line with often contradictory rules and in this case, moving freight by road is no exception. Faubert explains, “You really have all your papers in line - though it’s pretty much impossible to get everything crystal clear.” Imaginechina

The situation was eventually resolved with some well-handled diplomacy. “How it all ended was they smashed some windows in the cars so we could claim the cars were write-offs which, for regulatory reasons, made things easier,” explained Faubert, “We then bought the cars back from a local scrap yard, and were given a Jiangxi government certificate saying the cars were cleared to be transported to Shanghai.” Silk Ventures’ cautionary tale highlights many issues which affect trucking companies and those

Local customs on some routes in China can be less problematic than others

Ever taken a drive at night in China and noticed the inordinate number of trucks on the road? One might assume its because the drivers are taking advantage of quieter roads. However, it’s more down to the fact that inspection posts are unmanned and customs officials asleep, says Faubert, who added “at night time, everyone starts moving.”

Avoiding the tolls A particular regulatory black spot, says Faubert, also exists in the shape of the tollgate on the expressway between Zhejiang and Jiangxi Provinces, where his company have also experienced previous problems. “No matter

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Protectionism also exists on a provincial basis in the shape of discriminating toll fees

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who you are, everyone gets stopped there and documents are checked. If you go via Fujian and Zhejiang there are no inspections but of course it takes longer and the tolls are higher.” Wonder Wang, senior manager in logistics, China, for Jones Lang LaSalle, says toll gates can have particularly noticeable effects on the local business environment. “A lot of goods arriving at Waigaoqiao port in Shanghai are sent to distribution centres in Kunshan, and they must pay tolls on the Shanghai-Jiangsu province border. But after items have been picked and packed maybe 20-30 percent are sent back to Shanghai so, in effect, companies end up paying a double toll for transporting the same goods.” Wang also said protectionism also exists on a provincial basis in the shape of discriminating toll fees. In Taicang, Jiangsu province, just over the border from Shanghai’s Jiading district, Shanghai registered trucks must pay full toll fees, but locally

registered trucks pay half. Companies can choose to hire local trucks in certain circumstances to get around this, but doing so creates an added bureaucratic burden. “This makes things complicated especially as companies don’t like to pay taxes to different jurisdictions,” said Wang. Faubert accepts that the trucking industry in China operates in a very complex environment and faces a lot of problems which tend to end up having to be solved by end users. As a result, he now uses a shorter supply chain to minimise the impact of any long distance trucking mishaps. He said, “Predominantly we now keep most of our suppliers within striking distance of Shanghai. Every time you ship something domestically you take a deep breath and hope that it gets there, you know the roads are poor so when you package things everything has to be packed right or it might get there badly damaged.” So it seems that using expressways, whilst it might be more expensive, can help reduce damaged goods. “The problems mainly happen more on the smaller roads because the local governments use inferior materials to build roads which deteriorate more quickly, and the trucks are all overloaded, which is one of the reasons why the roads get beaten up so much,” says Faubert.

China’s expressways: modern, but sporadic There is no doubt that anyone travelling on China’s roads ten years ago would more than likely not recognise the modern expressways which are developing between China’s major centres. And, although it may not last too long, toll gates and a relatively low level of car ownership means the country’s expressways are congestionfree compared with Europe or the United States. However, despite these significant infrastructure improvements over the last ten years, and huge investment, China’s road network is still in the slow lane compared with more developed countries. A recent report from Research and Markets,

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TRUCKINGFEATURE described China’s road system as “backward” - a situation which compounds all of the issues covered above. Its findings revealed that the expressway mileage ratio in China per 10,000 of the population in 2005 was no more than a tenth of that of the USA, one-sixth of France’s ratio and a quarter of Germany’s. The spread and coverage of the network itself is also lacking, with inter-provincial connections particularly weak, according to the report. Highways in the United States connect all cities with populations above 50,000, while Germany has comparable levels of coverage for 50,000-plus urban areas, and 90 percent of settlements with a population of less than 50,000 are connected. However, in China, expressways only connect provincial capitals and other cities with populations above 500,000. In middle-sized cities with a population of more than 200,000, just 60 percent have an expressway connection, the report’s findings showed.

So many companies are providing trucking services that many are forced to overload in order to cut costs and stay competitive Geng Bo, Anshun Transportation Company

A cut-throat industry...

...and highly fragmented Max Henry, founder and executive director of the China Supply Chain Council, said, “As long as the

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Imaginechina

A closer look at China’s trucking industry reveals a world of cut-throat competition with a myriad of small operators struggling to keep their heads above water. Geng Bo, general manager of Shenzhen-based Anxun Transportation Company, whose clients include furnishing giant Ikea, says such pressure makes overloading a serious issue in China. “There are so many companies providing trucking services many are forced to overload in order to cut costs and stay competitive.” Complex regulations again come into play here making turning a profit a tough job for China’s trucking firms. “There are many different policies in different provinces so this makes more problems and limits the level of service trucking companies can provide,” says Geng. He added, “For example, we transport commodities from Guizhou province to Guangdong province and we are often punished by the road administration officer with a RMB1,000 fine so we can buy an overload certificate but every province has a different policy. In Yunnan over 30 tons counts as overloading, in Guizhou I think its 25 tons.” Geng says his firm avoids using expressways for shorter journeys to reduce costs and that this is a common tactic in the sector putting added pressure on roads never designed to accommodate overloaded trucks. He also points out that one of the major issues affecting Chinese trucking is the extremely fragmented state of the sector, with legions of small or even single-vehicle fleets dominating the market. Such a lack of consolidation is preventing foreign companies entering the trucking industry in China.

trucking sector remains fragmented, it will always be a very local type of business. A lot of foreign companies are cautious about moving into this sector as domestic companies have good knowhow and existing connections and its going to be hard for foreign companies to penetrate this market.” However, for Geng’s firm, there are steps that can be taken to survive in this tough market, through investing in his fleet. “Recently the situation is getting better as we are starting to use bigger trucks. The trucks made in China are becoming more reliable, for example, Ji’nan Truck Company is now using technology from Austria in their manufacturing process.” Eric Laborie, vice president of corporate development with SITC Logistics, feels the problems of regional protectionism, and the complex regulatory environment, will be an indelible feature of the business landscape in China for the foreseeable future. He said, “Obviously there are barriers to some extent. The biggest problem is that the market is highly fragmented so at this stage there is no central power regulating the whole sector so you have to go individually to each province or area to deal with specific issues.” Laborie continued, “It’s impossible to suggest any real solution at this time because there is no centralised regulatory system yet. However, I know the Chinese government is working very hard to achieve this.”

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RAILFEATURE

Imaginechina

The inside track on China’s rail expansion China’s ongoing rail freight expansion plans will be a boon for logistics providers and manufacturers, providing them with access to improved infrastructure, which should increase efficiency, reduce costs and break the heavy hold trucking has on the transportation industry Russel Beron is a freelance journalist specialising in supply chain and logistics based in Shanghai. He is a regular contributor to Chaina magazine.

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ong Qiao has been with China Railway Express International Logistics Company Ltd (CREIL), a former state-owned enterprise division of China Railways, for less than six months. As the new vice general manager of CREIL, Qiao is charged with taking the company in a new direction. In a recent presentation he stressed, “We are in the process of reorganising the China Railway system. China Railway is going international.” Having previously worked for Hong Kong-based Kerry EAS Logistics prior to joining CREIL, Qiao represents the new face of a company priming itself to take on international 3PLs and win business from other major transportation providers. Rail expansion in China is designed to bridge two gaps that exist between east and west in China: the infrastructure gap that exists between coastal cities on the east coast and the western hinterland, and the prosperity gap that exists between those areas.

The case for and against rail When most companies think of rail in China, they associate it with either transportation of coal, 28

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military or passengers. Some of the reasons why rail is so underutilised include poor levels of service and the availability of relatively cheap trucking in China. While useful for longer distances, rail is less flexible than trucking and is often associated with poor handling and longer lead times. Rail is not currently effective for the short distances such as 300 kilometres – or one day’s driving – that characterise most of China’s inland trucking operations. Coupled with these factors, freight transport typically plays second fiddle to military transportation schedules. Steffen Schiottz-Christensen, head of Maersk Logistics in China commented in an article recently that, “In a country of this size, containerised rail transportation offers a cheap, efficient and even environmentally friendly way to move cargo. But a large part of China’s long-distance cargo is moved by truck, which requires a lot of fuel and is costly. The cheaper but very slow solution is river transport.” The advantage of rail for companies will become more apparent as the rail networks expand and companies like CREIL become www.chainamagazine.com


RAILFEATURE more market driven. In a newly released survey on railway logistics in China, completed by the China Supply Chain Council and CREIL, one major reason companies gave for using rail is the competitive price (52 percent), trailed by a distance by guaranteed lead-time (21 percent) and safety of cargo (16 percent). While trucking in China does offer some benefits, the trucking industry is still highly fragmented, also meaning a lack of quality service and handling standards. Overloading is commonplace and delays are common as drivers seek to avoid toll roads. For long distances, rail also offers a speed advantage over shipping and in some cases over trucking. As Qiao commented, “With our new rail network, goods can travel to India in 10 days, compared to 3 weeks by ship.”

Infrastructure improvement drive While China has made tremendous achievements in infrastructure expansion over the past 15 years, the country’s rail networks are still insufficient to supply demand, as Huang Min, chief economist with the China Ministry of Railways, recently said: “Our railroad service can only satisfy 35 percent of cargo demand.” According to government reports however, China plans to build 17,000 kilometres of new railway track over the next four years, bringing its total rail length to over 90,000 kilometres by 2010. By 2020, China plans to have 100,000 kilometres of track. The government will nearly quadruple its investment in the nation’s railroads to almost US$200 billion by 2010. The goal is to lower the country’s disproportionately high logistics costs by improving access to west China, and beyond, and raising infrastructure levels to lay a platform for increasing domestic consumption.

In January this year, CREIL signed a memorandum of understanding with Gati, a leading Indian logistics service provider. According to a press release about the agreement, “The two companies will cooperate in the development of freight forwarding, express courier and logistics services in the booming IndiaChina trade lane.” In many ways such agreements represents a reopening of a new, twenty-first century style, Silk Road.

Our railroad service can only satisfy 35 percent of cargo demand Huang Ming, China Ministry of Railways

Expansion of rail corridors and routes open opportunity Part of the government’s rail plan includes an extensive rail network expansion for the west of China. This long-term plan, extending to 2020, includes building three double decker container rail routes from Lianyungang to Urumqi, Shanghai to Wuhan and Chengdu and Shanghai to Kunming. These routes will offer greater transportation options, allowing companies to set up operations in west China where they can also take advantage of a greater supply of lower cost labour. According to the China Supply Chain Council and CREIL rail survey, Shanghai-Beijing, followed closely by Shanghai-Chengdu and ShanghaiGuangzhou are still the most popular rail routes. While these routes will continue to dominate in scale, use of alternate routes will grow and rail will increasingly become an option to consider. Clearly significant opportunity exists to expand the capacity usage of all types of rail services, especially multiple mode transportation, international service and express parcel service. The government’s rail expansion goals include a plan to build a Trans-Asian Railway, which will begin in Kunming in south China’s Yunnan province and travel through Laos, Myanmar, Thailand, Vietnam, Cambodia and Malaysia ending in Singapore.

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RAILFEATURE

Rail logistics providers need to increase their range and quality of services

The government has also introduced highspeed trains, which made their debut during the 2007 Chinese new year holiday. Initially running from Shanghai to Beijing and Shanghai to Hangzhou, these trains can run freight at up to 250 kilometres per hour, reducing delivery times. French company, Alstom signed a contract recently for almost US$500 million to supply highspeed locomotives and electrify high-speed rail networks.

Rail hubs open doors to underdeveloped regions The recent rail survey also indicated, Shanghai, Beijing and Guangzhou are still by far the predominant rail hubs in China. This picture might change though in coming years as the government has designated several other cities as rail hubs. For example, cities such as like Chengdu in Sichuan province and Kunming have received significant investment and are undergoing development as rail hubs. In late 2003, the China Ministry of Railways created a subsidiary, the China Railway Container Transport Company (CRCTC) which was charged with, among other things, developing the country’s containerised rail transport capacity. Jim Ridgwick, a Deloitte consultant in their supply chain practice, believes that “One of the CRCTC’s most important achievements will be the establishment of dedicated container-handling rail stations. This nationwide system will have about 20 major intermodal rail hubs and 40 mid-size stations strategically located at ports and inland industrial centres.” The CRCTC’s long-term rail expansion plan includes expanding container hubs in Chongqing, Kunming, Urumqi, Lanzhou and Xi’an. The setting up of rail hubs in places other than Shanghai, Beijing and Guangzhou will also help companies

expand their operations, create efficiencies and reduce costs.

An end-to-end solution: intermodal transportation The logistics industry in China is fast becoming more sophisticated, as leading North American trucking companies such as Schneider, YRC Worldwide and Werner Enterprises enter the market. To compete, rail logistics providers will need to increase their range and quality of services. One obvious solution is for all transport modes to work together towards an end-to-end supply chain solution. The automotive sector is one big driver of rail expansion towards such an end-to-end solution, particularly given that many international auto manufacturers have plants located in areas with relatively poor infrastructure. Gary So, vice president of Kerry EAS Logistics, recently commented that “The automotive sector is looking mostly for a combination of sea, air, rail and barge as a solution for transport.” While such a solution doesn’t exist just yet, changes are happening quickly. “CRCTC is carrying out several initiatives designed to improve intermodal transport throughout the country,” says Jim Ridgwick. “It has assembled its own fleet of container-ready flat cars as well as a wide range of containers, from reefers and specialised tankers to the standard 20- and 40-foot marine variety.”

Following the market With the Chinese government putting great emphasis on growing domestic consumption to ease its export imbalance, foreign and local companies are looking for ways to tap the great mass of Chinese consumers. Major East coast cities

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RAILFEATURE like Shanghai and Beijing are well penetrated, hence companies are looking for other markets. “There is a growing trend of companies shifting to second and third tier cities, which means we [logistics service providers] need to follow them and offer better services there,” says Gary So of Kerry EAS. These cities represent hundreds of millions of consumers for manufacturers and retailers and reaching them will only be made possible with an improved infrastructure that includes rail. “One of the biggest challenges to growth in China is the lack of an integrated logistics service network,” said Erxin Yao, general manager of shipping giant OOCL, at the eyefortransport transport and logistics conference held in Shanghai in March this year. According to Yao, “Growth in western China will mostly happen along the river in cities like Chongqing.” The problem with river transportation though, says Yao, is that there is limited barge capacity, since the barge industry is currently going through consolidation. Rail could provide an ideal solution for companies looking to move their operations westward by serving as an alternative to river transportation or by working together with barge and trucking towards an endto-end transportation solution.

Barriers to acceptance of rail One of the biggest hurdles for rail is to unclench the tight hold that trucking has on intra-China logistics. For 18 percent of the respondents of the recent rail survey, the main reason for not using rail is poor data tracking and visibility. Poor handling at train stations was also listed as a significant hurdle to using rail. As long as rail is seen as an inefficient poor quality means of transporting goods, resistance

Sun Yatsen’s grand vision In 1912 Doctor Sun Yatsen was appointed the director of China’s railroads. Sun considered railways to be the answer to China’s poverty at that time. Before the development of the railroads during the nineteenth-century, the United States, he insisted, had been poor. But once the country had borrowed money and built more than 300,000 kilometres of tracks, the United States had become the world’s richest nation. China being slightly bigger in area, he extrapolated, would have to build even more. Sterling Seagrave gave an illuminating account of Doctor Sun’s plan in his 1985 book, The Soong Dynasty, as follows: “Sun [was] peering at a large map of China mounted on the wall; he was wielding a writing brush. “I propose to build two-hundred thousand li [approximately one-hundred thousand kilometres] of railways in the next ten years. I’m marking them on this map. You see the thick lines from one provincial capital to another? Well, they will be the trunk lines. The others are laterals and less important connections.” ... Sun’s agents did solicit funds from financiers like JPMorgan, but without success. Only one contract was signed before the advent of World War I brought all such endeavours to an end.” Fast-forward to 2007 and the current government’s plans don’t seem altogether different from the doctor’s with Li Guoyong, transportation director of the National Development and Reform Commission, calling China’s current investment in the railroads the “biggest (infrastructure investment) in China’s history.” from manufacturers and logistics companies will hamper it as popular mode of transport. On the positive side, as rail logistics providers such as CREIL revamp their operations into more market centred businesses, service levels should improve and handling issues should be less of a concern. One of the biggest problems with rail is that it’s such an unknown. Trucking is so prevalent that companies use it by default. “We need to work with operations to provide a higher level of service,” says Song Qiao of CREIL. “For example, we need to have dedicated trains for certain companies and locations.”

Rail as a herald to a new nation Of course an expanded rail network in China holds more promise than simply efficient transport, it represents the development of a nation into a more cohesive whole which can be richer domestically and more competitive on the world stage. Professor Doctor Roger Moser, a director at the Supply Management Institute and professor at the European Business School, recently remarked that, “Hundreds of studies about industrialisation in Europe have shown that continuous investment into a reliable and far reaching railway network is essential to providing the possibility for interregional specialisation, transporting heavy goods and connecting people. Although China has gone far in some areas, further development of the railway system especially in the inner part of China will be of tremendous value in fulfilling the dreams of millions of Chinese.” www.chainamagazine.com

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Q&A

QA

Q&A

Custom-fit

Having overcome significant financial difficulties a few years ago, Korean-based Hynix Semiconductor now controls 13.2 percent of the world’s memory chip market. Hynix reported a net profit of US$2.1 billion in 2006 with many analysts attributed Hynix’s record earnings to the unprecedented fast ramp up of just two months of its Wuxi fab plant in China, a joint venture with STMicroelectronics, which officially came on line in October 2006. Hynix handles the management of the plant and owns 67 percent of the US$2 billion joint venture while STM controls 33 percent. The total complex is more than 400,000 square metres of built and planned manufacturing facilities and was the first front-end facilities in China for both companies. Chaina magazine recently got together with Joon Kim, a senior manager in Hynix ST’s supply chain management team.

Joon Kim

: What are your main job responsibilities? Joon Kim: Here at Hynix-ST (HSSL) there are three business units in the Supply Chain Management team: purchasing, logistics and customs clearance. I manage the customs clearance team with 16 people. Subdivisions in this business unit include equipment import, spare parts import, raw materials import and e-book management. We also manage the acquisition of various special licenses from each of the relevant authorities including the provincial government in Nanjing and the central government in Beijing. Also, because some of the equipment we import can be used for

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the manufacture of military weapons at times we need to obtain special licenses from the central government. All materials should be declared to customs because of our location in the export processing zone. : What products do you manufacture at the Wuxi plant? JK: Eight-inch and 12-inch wafer for DRAM, which is around 20 percent of our global output. The majority of our manufacturing facilities are still based in Korea. In the future we plan to start manufacturing flash memory products here in China. : Are many of your customers based in China?

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JK: The market share of Hynix in China is about 47 percent of the total. But we don’t sell directly to China because the final packaging line is in Korea, so everything we manufacture here is delivered to Hynix’s Korea-based headquarters. : I’m impressed by the speed that you were able to bring the plant here online, how did you do it so quickly? JK: Our relocation project required a very detailed plan because a fully functioning wafer fab production line generates revenue of millions of US dollars in one day. The fab production line was moved across from Korea in a step-by-step process and of course we can’t shut things down completely. We set up a task force team including engineers and logistics managers in both Korea and China with each side preparing a moving schedule and setting up schedule. The whole process was very well planned and we were able to relocate our production line across from Korea to Wuxi in just 3 months with no accidents. : What were the challenges you faced in doing that? JK: Well, in China we found there are very few shock preventive trucks and so when our equipment arrived in China we were concerned a lot of the equipment would be damaged in transit. Shortening the delivery time was one of the key problems we had to solve. We chose to transport using truck and ferry because there are ferries departing from Incheon port in Korea to Shandong province seven days a week. The equipment was loaded onto the ferry on Korean shock preventive trucks and then

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Q&A

Q&A

when it arrived, Chinese truck heads took the chassis to Wuxi. We needed to obtain special license to operate foreign license plate trucks in China. We found the local governments to be very helpful. For example, the Wuxi customs department worked very closely together with the customs department in Qingdao and Rizhao in Shandong province and even sent some officials up there to assist with the entire process and to provide police escort for some of the route. : So it sounds like you couldn’t have done a lot of this without the close assistance of the local governments in Wuxi and Qingdao? JK: Absolutely. They were very helpful. For example, Wuxi customs provided special customs clearance service even during the night and at weekends during our relocation period. And the China Inspection and Quarantine Bureau agreed to inspect the equipment after we’d installed it in our factory rather than the usual way which is to inspect everything before customs clearance. Also, Shanghai airport customs also provided very efficient service to help us to minimise shock during transit by allowing us to unload directly from the airplane. : Do you think that was because you were committed to investing such a large amount of money in China? JK: Well, not only that but also because they’re keen to encourage the growth of Wuxi as a centre for the semiconductor industry in China. : In addition to being able to transport your equipment from Korea to China so quickly, you were also able to get your machinery up and running in record time, what’s your secret? JK: [Laughing] Well, we just did the best we could. : How many engineers do you have working on that? JK: Now we have about 500 engineers from Korea, at that time we had around 200. : How did the spare parts logistics work during the setup phase? JK: We prepared three months worth of spare parts and brought them across with the equipment which helped to solve any short term problems. In the long term our team has worked to shorten the delivery time between our Shanghai when a great number

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of our supplier’s warehouses are located and the plant in Wuxi. Generally speaking it takes four to five days because our supplier’s warehouses are located in an area of Shanghai under the control of the Shanghai Pudong customs authorities and obviously the HSSL plant is under the Wuxi customs authorities. By working together with our logistics service providers and with the suppliers we were able to persuade the two seperate customs authorities to allow us to deliver first before customs clearance. So it now only takes six hours to deliver the parts from Shanghai to the HSSL plant. Our suppliers have also set up bonded warehousing facilities within the export processing zone here at Wuxi which has obviously helped things a great deal. We have regular monthly meetings between HSSL, each of our suppliers and our logistics service providers to talk through and solve the issues. Such close communication is very helpful and cuts down the time it takes to bring in many of the spare parts by reducing the customs clearance time. : I know that currently 100 percent of the products you manufacture here are exported to Korea. Any plan to serve your clients in China directly? JK: Yes, but no fixed plan currently. Because obviously it makes sense from a cost perspective. Currently however we don’t have any packaging facilities in China. : Are most of your engineers here at the Wuxi plant from Korea? JK: No, most of them are Chinese, we have

around 2,800 engineers altogether with 2,300 of them from China. HSSL provides plenty of training including an intensive programme in Korea to develop Chinese engineers. : And what about in your supply chain team? JK: Most of my team are local employees because their main job is dealing with customs issues so obviously they need to understand Chinese customs issues. But its very hard to get experienced semiconductor custom brokers. So after we hire our staff each person is teamed up with an engineer to help them better understand the semiconductor manufacturing process and the industry as a whole. : You’ve been in China for more than ten years, how has the logistics environment improved in that time? JK: The situation has certainly improved. As many more high-tech production lines shift to China, the authorities here are beginning to become more proactive in providing pro-enterprise flexible policy like allowing companies to deliver first before customs clearance. The authorities also recently set up bonded zones across many cities which can be very helpful to save logistics costs and time. But the hardest thing for us is that different rules are applied by each regional customs authority so we really need to work closely with the local government and with logistics service providers with local knowledge in each region.

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Chinafotopress

Supply chain management in China auto There are real money making opportunities for the many China-based auto manufacturers, but they to get their supply chain right first

James Hatcher is the managing director for Seeburger and divides his time between Australia and Shanghai.

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upply chain execution in China is addressed differently by each automotive OEM and their multinational company suppliers. Local players face their own unique hurdles as they rush to the world market. Effective supply chain management hinges on timely communication across the supply base. True JIT and/or JIS manufacturing is difficult to execute in a mature market; when you add the complexities of a developing region facing rapid growth, the challenges become exponential. Local automotive standards and other regulations ensure some degree of complexity for foreign entrants to any market. Let’s look at global supply chain communication strategies, an area that is ripe for optimisation. In this situation, we consider global tier one suppliers to face similar challenges to the OEMs they service and include them when discussing the overall OEM environment. Global consolidation and international partnerships have been occurring for several years. Consider how OEMs communicate with their suppliers in North America, Europe or Japan. EDI has existed for many years and is widely adopted. Are there global standards? A central portal where all can connect and collaborate? Most definitely not. OEMs have had to implement and support regional communication standards wherever they go. Each OEM may prefer its native standard (or to leverage its regional portal conglomerate) as its primary

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communication protocol but reality dictates that, “When in Rome, do as the Romans do.” Supply chain execution has been recognised to deliver strategic competitive advantage. Consider the fact that even in their home markets no OEM or tier one supplier wants to surrender their supply chain relationships to a third party service that is funded or actively sponsored by their direct competitors. This is a local barrier to the existing automotive portals and their attempts to reach critical mass. Furthermore, legacy environments, in-house expertise and even national pride prevent an OEM from one region choosing another region’s standard or industry portal as their primary global solution. Most OEMs do have significant EDI adoption rates with their key suppliers and have some portal strategy, but this remains difficult to scale internationally. The end result is that the global communication of any OEM or tier one supplier requires multiple standards, interfaces, manufacturing configurations, 3PL services and support of unique supply chain configurations.

The China factor Now let’s consider the China market; supply chain management wasn’t the first priority when companies entered China. Each OEM invested into China as a strategic growth market. “Get there quick” to establish brand recognition and begin capturing market share was the highest

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AUTOFEATURE

priority. China regulations require joint ventures as the automotive industry is part of their national strategic plan. As tier one suppliers quickly followed their OEMs customers and faced similar regulatory requirements. Most multinational companies now have multiple plants in different geographic regions across China. Some with different JV partners, most with different levels of IT sophistication and limited IT skills on site. Logistics is primarily outsourced as the local infrastructure was originally so immature it took dedicated businesses to ensure parts reached the plants in a timely manner. Staging buffer stock at the supplier or bonded customs warehouse, a regional 3PL warehouse or at the OEM plant is the standard not the exception. Lead times remain long if there is any deviation from plan and due to rapid market changes planning is more hope and educated guess than statistical analysis. Now let’s consider the Chinese automotive companies, the largest are state owned enterprises, others launched by entrepreneurs. Most have partnered with foreign OEMs, several of the biggest are vertically integrated owning hundreds of their own suppliers (which are legacy state owned enterprises or other JVs). Typically in a JV, the foreign partner retains IT infrastructure control or strongly recommends a solution that is designed for their specific manufacturing processes. The Chinese enterprise may have multiple JVs each with a discrete plant, one for each brand and in some cases with end products that compete with each other. The Chinese OEM faces completely unique manufacturing processes, supply chains and IT structures within each business unit. Last but not least the China government has advised that: there will be a China brand that competes at the global level, and that the existing OEMs in China will face government influenced consolidation to approximately 3 major players in the future. Each of the China OEMs is in a race to develop their brand as a dominant player across China. They all want to have the size, market share and success to claim immunity and win this unique game of survivor. None of these companies is prepared to share their supply chains with other domestic competitors. A China automotive portal is less likely to succeed here that anywhere else in the world as the stakes are even higher. For any OEM that invests and does the early adopter work getting their suppliers onto an industry generic portal will only make it easier for their local competition to plug in, catch up and compete.

Drivers of change for the China automotive industry China’s WTO membership opened the market to more multinational companies; they made significant investments following the lure of rapid ■

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growth and high profits. This was followed by the cooling of the China economy and the result is excess automotive capacity. Profits are dropping as OEMs use discounts and other traditional mechanisms to capture market share. As always, they pressure their suppliers to reduce costs to shore up margins. ■

Facilities in China now have the quality and cost efficiency to support export business. ■

Each of the China auto OEMs is in a race to develop their brand as a dominant player across China

The China auto industry will continue to grow for the foreseeable future, at what pace remains an unknown. ■

Local China OEM vehicles are quickly reaching export standards and some have lower costs than their JV competitors. ■

The current situation and direction Most China OEM plants whether JV or local have ERP (though there are some that still don’t). Most JV tier one suppliers also have ERP. Many tier one state owned enterprises and tier two suppliers do not have ERP. This will evolve in the coming years but change takes time, and it will be years till all tier one suppliers have sophisticated ERP capabilities. ■

Most OEMs have a capable logistics infrastructure in place. Whether they have outsourced this function or developed it in-house, the movement of parts and finished goods in a timely manner is not a significant issue. ■

Most OEMs / tier one companies in China manage their supply chains manually. There is poor visibility of their supply chain’s ability to execute. Customer facing has limited visibility of demand and little sharing of real time forecasting / scheduling. ■

Finished vehicle distribution is evolving and has many channels across China. ATP / CTP is more related to drawing down buffer stock than suppliers executing true JIT manufacturing. This adds significant costs and inefficiencies. ■

Qualified IT personnel in China are hard to find or can be costly to retain. ■

Export capability is a priority for many China operations. The global business unit can use a cost effective source to aid their international margin challenges. Chinese enterprises that export successfully will earn recognition and improve their “survivor” potential. To be a global player ( JV or local enterprise) all of these organisations must meet global supplier performance criteria. A deterrent is their long lead times and inflexible supply chain models. Inability to handle traditional EDI is a good example of a China supply chain

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AUTOFEATURE

Imaginechina

Now is a perfect time for automotive companies in China to evaluate their supply chain models and optimise for both short and long term effect

management barrier that isn’t an issue in most other parts of the world. Inbound data from overseas via portals or other web based solutions may suffice in the beginning, but this is not an optimal solution when supporting multiple international regions, standards, business processes and time zones.

Strategy and options for success When plants are running below optimum output, it is typically a time to look at cost cutting and efficiency improvements. The adage remains true that, “Every dollar saved in cost is equal to ten dollars of new sales.” Now is a perfect time for automotive companies in China to evaluate their supply chain models and optimise for both short and long term effect. ERP systems, production systems, logistics models and supplier communication should all be under review now. As IT staff can be a part of the challenge, review opportunities to consolidate applications into regional data centres. World class outsource data centres are now available in China if ownership of these facilities isn’t strategic to your company. Note this is not the same as outsourcing your supply chain relationships! How do you manage your supply chain? What are the requirements for your China operations to be world class exporters? Can you improve collaboration with the supply base? EDI in traditional forms or via a purpose built web solution can reduce lead times, order data errors, improve receiving goods processes, payment cycles and shorten lead times. Change management is crucial to success in China. People are resistant to change round the world, and the Chinese culture is thousands of years old and more resistant than most. User acceptance to any new business process must be included as part of any successful strategy. Evaluate your supply base, and assess their abilities to collaborate with your company for improved efficiencies. Ask yourself the following questions: Do they have ERP, production planning, WMS or

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inventory management systems? Do they have a supply chain strategy of their own? Can they support traditional EDI via VAN or internet (EDIINT versus web based) How will they support you for export business? Warranty tracking, export compliance (hazmat documentation, etc.). Are they ready? Evaluate your logistics service provider for similar abilities and their plans for improvement.

Opportunities for profit and growth The China market will remain strategic and provides long term opportunities for profit and growth for automotive companies. Supply chain execution will directly impact the profits your company sees from this market. How you collaborate with your domestic China suppliers and global supply chains is “low hanging fruit” for improvement. It can easily be addressed with existing industry standard B2B / EDI applications. Remember your China operations will need to deal both domestically and globally so they will require versatile solutions. Additionally, China OEMs will each have their own supply chain model, they may be your partner, but their priority is domestic dominance. You need to be able to support them as well as the international market. Don’t expect them to use a portal from overseas or follow a standard or process that doesn’t fit the local environment. Selecting the right solution should include consideration for the ability to: support global industry standards (multiple standards such as ANSI X12, EDIFACT, VDA, JAMA EDIFACT and so on, not just the one used at HQ); double byte and Chinese language capabilities; easy to learn and easy to use interfaces; support of your best practice JIT / JIS processes; consider vendors with: local execution capabilities; international automotive domain expertise; China market experience; and, supplier rollout and change management capabilities. The bottom line result will be cost savings and improved efficiencies that can be leveraged for significant competitive advantage. www.chainamagazine.com


Imagine China

Strategies for success in hightech logistics China’s booming high-tech sector provides a sizeable opportunity for logistics service providers to buck the global trend of shrinking profit margins

H

igh-tech companies have long sought to create value by shifting production to the Far East. China has absorbed an everlarger share of this growing business over the last decade. Today, electronics account for more than 25 percent of the total value of Chinese exports, with Chinese firms exporting more than US$150 billion worth of personal computers, consumer electronics and semi-finished products, such as LCD panels and computer chassis, every year. In many categories, China is a global leader. In flat-panel (such as those used in notebooks, PDA, PC monitors or TVs) mainland China already controls 39 percent of the market, and it is rapidly winning manufacturing market share away from Asian competitors such as Japan, Korea and Taiwan. The laptop segment is fast growing and will soon overtake the desktop as the predominant PC model. In this segment, China already controls 75 percent of the market.

The cost of the supply chain Yet the industry faces considerable challenges, not least along the high-tech supply chain where logistics remains complex and, in many cases, costly. We estimate the import/export logistics costs for China’s flat-panel industry already total US$2 billion a year, while laptop manufacturers spend roughly US$1 billion annually on logistics services. These “official” logistics costs are before we factor in a number of substantial indirect costs due to industry inefficiencies. Infrastructure bottlenecks are common in China, shipments are often damaged, lost or www.chainamagazine.com

stolen, and inaccurate paperwork can lead to customs headaches. Logistics service providers integration across scattered locations requires multiple providers, and handover between service providers can introduce delays and confusion. For flat-panel screens, we estimate hidden costs add 13 percent to the logistics bill. Laptop PC manufacturers can add a further 19 percent. Other important high-tech products from China, such as digital cameras, PDAs, mobile phones and MP3 players, also carry logistics problems and costs. These hidden costs exist because most major international logistics service providers lack the strong logistics network and competitive cost structures in China they enjoy in other parts of the world. Local providers have maintained a focus on low-end service and so are of little help to most high-tech firms.

Raimund Diederichs is a director in McKinsey & Company’s Beijing office, and Evan Guo is a partner in McKinsey & Company’s Beijing office. The authors would like to acknowledge the contribution of Martin Joerss, Robert Campbell and Arjen Kersing to this article.

A sizeable opportunity By resolving these problems and reducing the associated indirect logistics costs, logistics services providers have a sizeable opportunity to move into and corner the high-tech logistics market in China. We see two distinct opportunities. In the vertical approach, a logistics service provider will look to serve an industry’s entire supply chain from top to bottom. In the second approach, which we call a horizontal play, a service provider aims to serve many industries at the same point of the supply chain, such as warehousing or ground transportation. Logistics services providers first need to analyse the products they ship, taking into account MAY/JUNE 2007

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HI-TECHLOGISTICS

Imaginechina

Logistics service providers must adapt to the rising competitive pressures in the rapidly expanding Chinese market

variability of demand and the peculiarities of handling and other shipping characteristics, in order to carefully evaluate their current capabilities and their optimal approach. If a logistics service provider discovers it is the only one in China that understands how to properly ship flat-panel screens, for example, that carrier can and should consider taking a vertical approach and specialising in the category, delivering end-to-end solutions tailored to that industry’s needs. That includes handling everything from design and optimisation of trucking routes to warehouse management solutions, logistics management outsourcing and value-added services, such as reverse logistics management to handle damaged goods and/or replacements. A robust vertical logistics company might even allow a manufacturer to outsource its entire global supply chain. By owning the entire process, a vertical logistics service provider can also provide its customers with true supply chain visibility via a single IT solution. Given the compressed timeframes and global scale of business today, this benefit alone presents an immediate improvement. Any logistics service providers with the scale and the local knowledge to adopt a vertical approach should find it affords them higher margins and a defendable advantage versus competitors in an otherwise competitive marketplace. Integrating operations with a customer takes time and trust, and partners of this calibre are not easily displaced. Two distinct approaches for logistics service providers to create value in the China high tech supply chain Horizontal play Become specialist in segment in the supply chain

Provide door-to-door solutions

Example

Warehouse operator

High tech 3PL

Pain points relieved

Damage rate Equipment shortage Poor customs documentation

Poor logistics service provider integration Shipping mode and route optimization Lack of visibility

Root causes addressed

Lack of execution capability in specific steps Shipping Trucking Warehousing Handling Documentation

Lack of supply chain manage-ment strategy talent and tools Poor route optimization Poor hub location selection Poor vendor and LSP management Poor IT

Source: McKinsey

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Vertical play

Solution

Go horizontal Not every logistics service provider will find it has the size, the reach or the infrastructure to provide a vertical service. If a company decides that it is too small to fully serve a vertical, or that its true specialties lie in industries that show little or no growth, a horizontal strategy may be the best way to expand profit margins. This can take several forms. A logistics company could build a dedicated truck fleet with special customisation, such as anti-shock cushions, introduce best practice operations and train employees to handle cargo with special care in order to attract manufacturers of delicate products. Alternatively, a logistics service provider could establish itself as China’s premier warehousing provider, using a combination of locations, security and service quality to reduce damage rates, cut down on equipment shortages, and produce higher-quality customs documentation, thus relieving three current pain points for OEMs. The key is high execution quality, but this requires a degree of scale and large upfront investments in physical plant or assets. Because horizontal services tend already to be present in competitive markets, potential profit expansion will be related to perceived superiority of service, limiting opportunities. It may also be difficult to maintain a horizontal advantage over the longer term because local logistics service providers are quick learners. Customers are likely to press for reduced shipping rates, or perhaps switch service providers when a new competitor changes the local logistics landscape. Whichever growth strategy logistics services providers choose, they must adapt to the rising competitive pressures in the rapidly expanding Chinese market. A transition to new vertical and horizontal logistics models will be crucial for logistics companies looking to survive in the competitive Chinese market. In fact, those who fail to adapt risk being overtaken by local competitors and squeezed out of the world’s biggest import and export market. www.chainamagazine.com


Imaginechina

China as a driver of container shipping transformation Shipping lines need to modernise to remain competitive in an increasingly complex environment

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o visit the port at Shanghai is to witness massive transformation in action. The port symbolises China’s growing economic muscle and progress towards entrenching itself as one of the world’s most vibrant places. The country’s emergence as a global economic powerhouse and the consequent impact on trade flows is placing immense pressure on the container shipping industry. In turn, companies in the industry are employing a number of strategies to manage the trade flow shift on container utilisation and shortfalls in China’s trade and logistics facilities. The opening of the country’s retail sector since its accession to the WTO in 2001, combined with gradual removal of

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agricultural subsidies, is driving global container demand above GDP growth. However, despite liberalisation allowing foreign businesses to target the massive Chinese domestic market, trade flows between the country and markets such as the EU and the United States are increasingly imbalanced. China’s rise as a low-cost manufacturing centre has seen its trade surplus with the rest of the world climb 74 percent from 2005 to a record US$177.5 billion in 2006 and shows few signs of easing. Container shipping companies and their clients are consequently facing difficulties finding cargo for the return leg after transporting a consignment to the United States, Europe or elsewhere from China.

Henrik Anker Olesen is Transport & Logistics Leader, Asia Pacific for IBM Global Business Services, based in Shanghai.

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CONTAINERSHIPPING Coming back empty

Container shipping carriers are adding 50 percent to capacity between 2005 and 2009

According to industry experts, close to half of the containers transported from North America or Europe to Asia are empty, denting companies’ yields and profitability and giving headaches to managers charged with delivering efficient container utilisation. This problem is exacerbated by increased spending on capacity to meet exChina demand. Globally, container shipping carriers are adding 50 percent to capacity between 2005 and 2009, concentrated towards megaships capable of transporting very large numbers of containers. These ships complete trips more quickly than smaller vessels, reducing transit times and fuel consumption per container. However, while absorbing near-term demand, container utilisation becomes a challenge and shipping lines become more vulnerable to any softening in demand. While container shipping lines are to a certain extent hostage to trade flows, a number of measures are being undertaken to mitigate the problem. Progressive companies are using software to improve customer knowledge, match capacity to route demand and maximise yield. These companies are also employing software and advanced algorithms to identify the most efficient container utilisation plan against route demand, yield and other relevant factors.

The area has been designated by the Chinese government as a test-bed for regional economic cooperation and a leader in modernisation of transport and logistics services. This modernisation program is likely to present significant opportunities for container shipping companies to improve their operations to offset some of the costs caused by trade flow imbalances.

The challenge from the package providers As transport and logistics infrastructure is being upgraded, independent container shipping lines face a rising competitive threat from companies that can deliver door-to-door service. The shipping lines are looking to acquire assets in the hinterland such as depots, terminals, trucking companies, The companies are also trying to get access to transporting containers by rail. Rail is a segment which traditionally is given to focusing on supporting passenger traffic. The challengers

Shanghai takes peak port slot

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Imaginechina

The pace of growth has also seen China ramp up efforts to modernise its transport and logistics infrastructure and processes. Overstretched and inefficient transport and distribution businesses can impose costly delays on container ships struggling to meet global demand. Many Chinese transport and logistics companies are still employing spreadsheets and manual processes to run their businesses. On average, they are spending less than 1 percent of revenues on information technology, well below the average of about 4 percent in other countries. However, the Chinese government is currently investing heavily to ensure ports, land transport and associated infrastructure can efficiently manage forecast growth. Official estimates state China’s sea cargo handling capacity will rise from 3.8 billion tonnes in 2005 to 5 billion tons in 2010. Shanghai was already in 2006 the world’s largest cargo handling port. Container throughput is expected to rise from 74.7 million TEUs in 2005 to 130 million in 2010. It is only a matter of time before Shanghai becomes the largest container port in the world. In 2006, the port processed 21.7 million TEUs on year-onyear growth of 21 percent while one of its closest rivals, Hong Kong processed 23.2 million at only 2.8 percent growth year-on-year. Shanghai is also based on the economically powerful Yangtze River Delta region, which accounted for close to 20 percent of China’s GDP.

include package providers such as DHL, FedEx and UPS, that have succeeded by using their assets efficiently and providing a high level of service. These players have all announced massive investment programs of several hundred millions of US dollars aiming to build their capabilities in China and massive growth in staff numbers over the next few years. Their integrated systems have made the package providers famous for speed and reliability and they are increasingly investing in appropriate land-based capabilities. These providers currently lack capabilities in line operations, but they could partner with or acquire shipping lines, primarily port-to-port operators. Economic growth in China will substantially drive world trade over the next decade, creating further imbalance in east-west trade flows. To remain competitive in a challenging environment for container utilisation in particular, shipping lines must modernise to boost efficiencies improve customer relationships. If they do not they face losing business to rivals who can take advantage of new technologies to improve service.

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BLOGWATCH H All blog entries are reprinted with permission. Written something interested that you’d like share with us? editor@chainamagazine.com

Imaginechina

supply centres that ensure very quick turnaround times on repairs, whereas Volvo still must send parts from their Shanghai station (with mechanic in tow) to the site, resulting in slower turnaround, and as their sales in the medium- and low-end penetrate, this will be one of the most critical issues for many.

China transportation service provider selection: say no to overloading

Volvo rolls on in China www.allroadsleadtochina.com With the logistics market expanding on nearly every level, and many firms looking to build their networks, it should be no surprise that Volvo would view the China market as one filled with potential. And so it should come as no surprise that Volvo has announced that they will expand their presence in China, and that expansion will start with a 25 city road tour to drum up sales. With sales of 1,173 units last year (a 28 percent increase on 2005), Volvo is still only taking a fraction of the market away from heavy hitters FAW and Dongfeng. Of course, at twice the price of either of their competitors that should be expected. Through the same announcement, Volvo also announced that they will get into the medium and lower end of the markets with new products that will leverage the brand awareness, but offer a lower cost option. Given the vast number of individual truckers, this could play very well for them depending on the pricing/quality comparison with Dongfeng and FAW. One hurdle though is that to be successful in China it would be imperative to have in place the service network to support their buyers. After price, the second consideration for many is quality of service and availability of repair centres, because downtime money lost. Dongfeng and FAW have in place vast networks of mechanics and part

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supplychain.establishinc.com When evaluating, selecting, and managing third party logistics providers to handle domestic transportation in China, Best in Class companies carry out a detailed analysis of the cost structures of their prospective 3PLs. Such an analysis will uncover whether your 3PL is following legal and ethical business practices. In particular, many 3PLs in China subcontract the transportation to smaller local trucking firms. These firms then subcontract further, resulting in a subcontracting trail spanning several layers. By probing into who actually handles your freight and how it is handled usually uncovers serious ethical and legal problems. One problem which significantly affects the service levels of transporting in China is directly related to the overloading of trucks. Overloaded trucks are illegal and present unnecessary risk to your cargo. Many of the small mom & pop truck drivers operate without insurance. In order to make a profit to survive these operators also do not pay for truck maintenance fees, they utilise one driver for the entire haul, and avoid paying endowment insurance and welfare. The drivers and their trucks are operating illegally and will flee the scene upon a facing a traffic accident, leaving your cargo at site. Reasons for overloading: Low transportation prices; fierce competition; road maintenance fees; and, excessive number of toll gates (some of which are illegal). China 3PL selection and management best practices: conduct a cost structure analysis of your potential 3PLs; use your own trucks, or; forbid transferring and subcontracting, or; limit the subcontracting to a maximum of two levels and implement standard SOPs to monitor performance, including audits, and, say no to over-loading.

The next wave of sourcing in China www.frogdesign.com/frogblog There was an interesting article written recently by Jim Hemerling of Boston Consulting Group’s Shanghai office about China’s migration to the next wave of sourcing, in which China emerges “as a global R&D and innovation hub in its own right.” He breaks the history of Chinese sourcing into three waves. The first focused on low-cost procurement. The second wave saw the very same suppliers who participated in the first wave mature to the extent that they could participate in product innovation and design. The numerous announcements of new R&D centres being set up in China are evidence of this wave. These R&D centres not only localise for the Chinese market, but have evolved to develop products for global markets as well. Hemerling’s interest is in the third wave, of which he cites IBM’s recent relocation of their global procurement organisation from New York to Shenzhen and GM’s relocation of its power-train electronics procurement organisation to China as examples. He argues that the third wave — China becoming a global centre of procurement — may make sense for some companies, but that there are numerous performance issues to consider for most. I find the third wave to be more an issue of cost savings that result from scale and from being a multinational organisation that can truly function in an integrated way across regions — no small feat and a positive reflection on the company’s (for example, IBM’s) structure and operations. That said, I find the second wave’s transition of Chinese R&D centres from product development for the local market to global markets more interesting. The development side is straightforward, but how does the research side do this? That’s the difference between China becoming a global R&D hub and becoming an innovation hub. The latter emphasises understanding users and markets and the design of products — this capability is much harder to centralise (and doesn’t need to be anyway).

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CAREERS Changed jobs in the past month? Hired someone new recently? careers@chainamagazine.com

Imaginechina

Best Buy builds leadership team in Asia Best Buy has announced the appointment of Redmond Yeung as president and chief operating officer of Best Buy Asia. In this newly created position, Yeung will be responsible for overseeing all of Best Buy’s operations in Asia, including Best Buy China, Jiangsu Five Star Appliance (Five Star) and the company’s global sourcing office in China. Yeung will report to Robert Willett, chief executive of Best Buy International, the business unit of Best Buy dedicated to developing growth and innovation opportunities outside of the United States. “Redmond Yeung is an exceptional leader with the vision, global experience and deep retail knowledge to help us create great experiences and relationships with our customers in China,” said Willett. “He has achieved an extraordinary track record of success in growing and delivering superior operating results in highly competitive markets while always focused on serving the needs of customers. I am confident that Redmond, in partnership with the talented leadership team already in place in China, will help us achieve our goals in perhaps the most exciting retail market in the world today.“ Jianguo Wang will continue in his current role of chairman of Five Star, the Nanjing-based chain of appliances and consumer electronics stores. Weimin Lu, senior vice president and chairman of Best Buy China, will now focus his time on the identification and development of potential new business opportunities while also cultivating and nurturing strategic relationships with government

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and community leaders as well as vendors in China.

Meridian IQ names Roland Chong managing director for Asia

Nortel names new Chinabased procurement officer

Meridian IQ, a wholly owned subsidiary of YRC Worldwide, recently announced that Roland Chong has been named managing director, Asia. In his new role, he will be responsible for all Meridian IQ activities throughout Asian and will oversee the China forwarding venture between JHJ International Transportation and Meridian IQ, China.

Nortel recently named a new procurement officer, Jeff Townley, who will report to Joel Hackney, senior vice president, Global Operations and Quality. Townley will relocate to China and manage all of Nortel’s supplier relationships as well as all of Nortel’s annual purchases. “Nortel continues to strengthen the Company’s leadership team, ensuring that we have world-class individuals with global business experience to drive our business forward,” said Hackney. “Jeff Townley brings decades of solid Nortel experience and performance to this role. He is the right person to drive our success in this critical position. Unwavering focus on supply chain excellence supports our larger objective of building Global Operations into a competitive advantage for Nortel.” Townley assumes the Chief Procurement Officer role from John Haydon, who recently was named vice president and general manager, Network Partner Solutions, Global Services. A proven innovator and well respected within Nortel’s supplier community, Townley brings 24 years of experience at Nortel to his new position. He has served in various capacities of increasing responsibility at Nortel including senior management positions across the Operations function. Most recently, he was leader of the Business Transformation Strategic Procurement team.

TNT names new head for expanded road network in Asia TNT has appointed David Stenberg as the general manager of TNT’s planned integrated road network expansion from Singapore, Malaysia and Thailand to Indochina and China. TNT’s Asia road network service offers customers a door-to-door, day definite express solution that is said to be two to three times faster than transporting freight by traditional sea modes, and will cut costs by up to 30 percent compared to air freight, according to TNT.

Roland Chong

Chong will report directly to Jim Ritchie, president and chief executive officer, Meridian IQ. “Roland is a seasoned executive who has proven his skills in strategic leadership and business building,” said Ritchie. “We look to Roland and his management team to build solid growth and to increase revenues and profits in Asia.”

Agility names new president, chief executive officer Agility has named Essa Al-Saleh as president and chief executive officer of its Global Integrated Logistics unit, the company’s private sector and core global logistics businesses. He reports directly to Agility’s chairman and managing director, Tarek Sultan. US-born Al-Saleh has been with Agility since 1998, and has played a vital role in the company’s transformation from a regional player to a global logistics leader through acquisitions and organic growth.

Texas Instruments appoints new China president Bing Xie has been appointed as president of Texas Instruments’ (TI)

MAY/JUNE 2007

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CAREERS Changed jobs in the past month? Hired someone new recently? careers@chainamagazine.com operations in China. Based in Shanghai, he will be responsible for managing the day-to-day operations of the company in China as well as overseeing sales and marketing efforts for the country.

HP appoints new China president Hewlett-Packard has hired Fu Biaobang as new China president. This move came about due to the departure of Fu’s predecessor Sun Zhenyao. Fu Biaobang was the former China president of Dell. Fu had joined Dell in 2001 to take up a senior post as managing director for the China market and was promoted to Dell’s China president in 2003.

Fu Biaobang

Imaginechina

“As the first local executive appointed as president of TI’s operations in China, the new appointment strengthens our presence in the China market.” said Terry Cheng, TI Asia president, “Bing Xie is a proven leader with experience that crosses both local and multinational markets. I am confident that he has a deep understanding of the market in

China as well as a passion for meeting customer needs.”

What’s it like to work for... Best Buy? Weiwah Le, Senior Supply Chain Manager, Best Buy Asia Pacific

Who’s the boss? Redmond Yeung is president and chief operating officer of Best Buy Asia and Weimin Lu is chairman of Best Buy China.

How many staff? Currently in the global sourcing department there are 80 people. In addition there are 100 people involved in retail support for the China markets. We employ 350 people in our one Shanghai store. And finally there are 100 people in the corporate function, which includes supply chain.

Supply chain responsibilities? I am here to enable my team to be able to do their job and deliver excellent supply chain management for our company. We are the link between our customers and our OEM manufacturing partners, the majority of which are in China. We source a lot of consumer electronics. We always evaluate how capable our suppliers are by looking at their production lines and who they are doing business with. But the supply chain team is not just involved in bringing new suppliers on board but also involved in a lot of operational issues including troubleshooting and problem solving.

Who are your customers? We’re committed to helping people take full advantage of the promise of technology to help them in their lives. We know that full enjoyment of most 46

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products require more than just what comes in the box. And, we all know it’s a hassle to go back to the store because we forgot one thing that we wanted. This will stop in our interactions with our customers and listen to customers’ needs, wants and desires. Energised employees who create great customer experiences are the reason Best Buy continues to be a successful company.

makes a lot of difference. We are a very young and energetic team and there are plenty of opportunities to grow here. When the Best Buy store in Shanghai first opened all the staff in the corporate function put on the blue shirts that our in-store employees wear and supported them for one week. That was a great experience, really very exciting and that energised the whole team here.

How to get a job in Best Buy?

Pay or perks?

There’s an area at www.bestbuy.com.cn which advertises all available positions. We also advertise positions through 51job.com and through newspapers. We do work with head-hunters and we rely a lot on employee referrals which we find very effective. Our employees know our company’s culture and know what type of person we are looking for, so that often brings in good talent.

The pay is competitive when compared to the market average. But the most important thing is the company culture here. We are very people orientated. If our staff believe in what they do they can drive the company and not just their team. Senior staff are very supportive. We encourage our staff to have fun while being the best which is a very important value for us. Currently we are still working on an in-store discount scheme for our employees.

Any training offered? For new staff we have new employee orientation which lasts one week. On the job training for the supply chain department includes a very systematic training process which lasts about one month and includes a lot of processes and systems. It also teaches new staff how to interact with different functions. We also job rotations or cross-function rotation and rotation to our corporate office in the United States or to our office in Canada. Likewise we have people from the United States who come to China so we can all put a face to the voice. This

Long hours? We don’t encourage long hours. We want people effectively managing their time. I have a lot of conference calls with the United States either early in the morning or in the evenings.

Business travel? My team spend a lot of team travelling regionally visiting factories. I have some international travel to our headquarters in the United States. www.chainamagazine.com


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MAY/JUNE 2007

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CLASSIFIEDS

TRADE UP TO GREATER INNOVATION Global Trade Management can … • Drive Cost Savings • Mitigate Risk • Improve Supply Chain Efficiencies • Deliver import/export compliance …simplify and streamline international trade operations. Utilizing the company’s global trade management solutions, clients realize trade cost savings and supply chain efficiencies while improving compliance with ever-changing government regulations. With operations in every major trading region in the world, JPMorgan Chase Vastera global trade solutions incorporate: • shipment documentation • import/export compliance • duty management • classification & valuation • strategic sourcing • trade agreement programs • restricted party screening & resolution • logistics & transportation management JPMorgan Chase Vastera International Trade Consulting (Shanghai) Co., Ltd. Tel: (86 21) 6101 0241 jpmorganchase.com/vastera

Go Kunming

Whether you're going to Kunming on business or for leisure you'll need to know how to get around, where to stay and the top places for food, drinks and fun. GoKunming is the only English-language website serving the needs of visitors to and residents of Kunming, China's 'Spring City'. Filled with useful listings, an insightful blog that is updated daily plus forums and classifieds, GoKunming makes it easy to get the most out of one of China's top second-tier cities.

www.GoKunming.com

mghk = china logistics The Meridian Group of Hong Kong (MGHK) is an integrated business consultancy and research house based in Hong Kong with operations in mainland China. Our knowledge of China's logistics infrastructure and connections with key players inside and outside of China make us the premier source for high-value China logistics information. Need answers? Contact us today: Mainland Director: Christopher Horton E: chris.horton@meridiangrouphk.com Logistics Consultant: Lee Perkins E: lee.perkins@meridiangrouphk.com T: +86 871 551 9116 www.meridiangrouphk.com

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COMPANYINDEX

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Accenture .............................................................2, 8 Adriatic Ocean Shipping .......................................20 Agility .....................................................................45 Airbus .....................................................................13 Alstom ....................................................................29 AMB Property ........................................................15 Anxun Transportation ...........................................27 Bear Stearns ...........................................................15 Best Buy ...........................................................45, 46 Bosch .....................................................................13 Boston Consulting Group .....................................44 CB Richard Ellis .....................................................11 CEVA Logistics .......................................................15 China Mobile .........................................................14 China Railway Container Transport ......................30 China Railway Express International Logistics .....28 China Supply Chain Council .....................27, 32, 35 China United Intl Rail Containers .........................20 Chongqing Port......................................................19 DaimlerChrysler .....................................................12 Dell ...................................................................14, 46 Deloitte...................................................................30 Descartes ................................................................16 Deutsche Bahn ......................................................20 DHL ........................................................................42 DHL-Exel ..........................................................14, 15 Dongfeng ...............................................................44 EADS ......................................................................13 Eaton Corporation .................................................15 FAW ........................................................................44 FedE .....................................................................x42 Ford Motor .............................................................12 FTW ........................................................................15 Gati .........................................................................29 Gazeley ....................................................................3 GM..........................................................................12 GOME ....................................................................15 Goodyear ...............................................................14 Google ...................................................................14 Guangzhou Auto Group .......................................13 HMG Logistics........................................................14 HP.....................................................................15, 46 Huawei Technologies ............................................13 Hynix-ST ................................................................33 Hyundai ...........................................................13, 15 IBM .......................................................15, 16, 40, 44 Ikea...................................................................16, 27 Intel ........................................................................14 Jiangsu Five Star Appliance ..................................45 Ji’nan Truck............................................................27 Jones Lang LaSalle .............................................9, 26 Kerry EAS ...........................................................4, 28 Kingdee ....................................................................7 Lenovo....................................................................15 Macquarie Goodman .............................................15 Maersk Logistics.....................................................28 Marlboro.................................................................14 McKinsey & Company...........................................39 Meridian IQ-JHJ ...............................................10, 45 Michael Page ..........................................................47 New City Corporation ...........................................11 Nissan Motor ..........................................................12 Nokia ......................................................................14 Nortel .....................................................................45 NWS Holdings .......................................................20 OOCL .....................................................................31 Oracle.......................................................................7 Order Logistics Premier Resources Intl ................16 Palm .......................................................................12 Panalpina ...............................................................21 ProLogis .................................................................15 Research and Markets ...........................................26 SAP ...........................................................................7 Schneider ...............................................................30 Seeburger ...............................................................36 Silk Ventures ..........................................................24 SITC Logistics .........................................................27 Starbucks ..................................................................8 STMicroelectronics.................................................33 Supply Management Institute ...............................31 Texas Instruments ..................................................45 TNT ........................................................................45 Toyota ....................................................................13 Transport Intelligence .............................................8 UBS.........................................................................50 UFSoft.......................................................................7 UPS .........................................................................42 Vodafone ................................................................12 Volvo ......................................................................44 Wal-Mart .................................................................14 Werner Enterprises ................................................30 Wuhan Wanguo .....................................................15 Wuhan Zhisheng Group .......................................19 YRC Worldwide ...............................................10, 30 Zim Integrated Shipping Services .........................20 ZTE Corporation ..............................................12, 13 MAY/JUNE 2007

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CHINA SUPPLY CHAIN IN NUMBERS

Top 11 Asia airports January-November 2006 World Rank

2. 4. 5. 6. 9. 13. 19. 21. 23. 24. 25.

Airport Hong Kong (HKG) Seoul (ICN) Tokyo (NRT) Shanghai (PVG) Singapore (SIN) Taipei (TPE) Bangkok (BKK) Beijing (PEK) Osaka (KIX) Guangzhou (CAN) Tokyo (HND)

Tonnage

% Change

3,286,750 2,130,416 2,080,691 1,951,205 1,764,055 1,554,642 1,076,637 940,161 766,172 754,370 739,830

5.3 8.4 -0.4 16.3 4.6 0.0 3.9 32.9 -3.1 10.5 5.0

Source: Airports Council International

China wages rising

Both rising wages and turnover are affecting how companies operate in China. Many manufacturers are seeing their margins shrink to 5 percent – half what they were only a few years ago. General Motors, Honda, Motorola, and Intel have all shifted some manufacturing or research to inland locations, where wages can be half what they are on the coast. Others are looking even farther to lower-cost countries such as Vietnam or Indonesia.

China manufacturing PMI watch The CFLP China Manufacturing Purchasing Managers’ Index (PMI) provides a monthly indication of economic activity in the manufacturing sector, compiled each month from data about their purchasing activities and supply situations from more than 700 manufacturing companies.

% 60

Imaginechina

Labour shortages in China are forcing companies to boost wages as the supply of surplus labour from the countryside tapers off. Salaries in China jumped by an average of 8.4 percent last year – with some factory salaries surging as much as 40 percent. And employee turnover is skyrocketing. An average of one out of seven Chinese workers switched jobs last year, and turnover in some low-tech industries is approaching 50 percent.

China’s biggest ports see TEU volume surge China’s leading sea and river ports handled 7.63 million TEU in February 2007, representing an increase of 41.2 per cent over the same month a year ago. The upsurge in container volumes coincided with the Chinese New Year holiday that are traditionally marked by a slowdown. A breakdown of the statistics produced by China’s Ministry of Communications shows that cargo volumes grew by 21.4 percent year-on-year to 379 million tons in February. In the first two months of the year, China’s larger ports collectively saw a 30.2 per cent increase in container volumes amounting to 16.05 million TEU, while aggregate cargo volumes stood at 800 million tons, up 21 percent over the same period last year.

Logistics expenditure expected to rise 11 percent China’s spending on logistics will rise by 11 per cent during 2007 to more than RMB4.23 trillion according to government forecasts. Chinese government 2006 statistics show the national expenditure on logistics grew by 13.5 per cent yearon-year to RMB3.8 trillion. Expenditure on transportation went up 12.8 percent to RMB2.1 trillion and money spent on warehousing rose 16 percent to RMB1.2 trillion.

China’s economy grew by 11% in Q1 58 56 54 52.3

52 50 JAN 07

FEB 06

Source: China Federation of Logistics and Purchasing

50

MAY/JUNE 2007

China’s economy continues to accelerate at a blistering pace, growing 11.1 percent in the first quarter of this year from the first quarter of 2006, according to data from the National Bureau of Statistics released recently. The surge in growth is almost certain to force Beijing to step up efforts to cool the economy. Fuelled by soaring exports and huge investments in infrastructure, factories

and energy supplies, China could soon overtake Germany to become the world’s third-largest economy, behind those of the United States and Japan. While most economists called the quarterly growth figures surprisingly strong, they said they were distorted somewhat by a huge injection of government money into the economy, which encouraged lending, as well as by exporters’ seeking to avoid foreign tariffs that may be imposed later in the year. “This is the first-quarter blow-out,” says Jonathan Anderson, chief Asia economist at UBS. “But we don’t expect this to continue. There were a lot of wacky things happening in the first quarter.” China’s main trade partners, 2006 Partners United States EU Hong Kong Japan ASEAN South Korea Taiwan Russia

Export ($ billion)

Growth ($y-o-y)

Import ($ billion)

Growth ($y-o-y)

203.5 182.0 155.4 91.6 71.3 44.5 20.7 15.8

24.9 26.6 24.8 9.1 28.8 26.8 25.3 19.8

59.2 90.3 10.8 115.7 89.5 89.8 87.1 17.3

21.8 22.7 -11.8 15.2 19.4 16.9 16.6 10.5

Source: NSB

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The products and services featured above MAY/JUNE 2007are offered by JPMorgan Chase Vastera International Trade Consulting (Shanghai) Co., Ltd., a wholly-owned 52 indirect subsidiary of JPMorgan Chase & Co. JPMorgan Chase is a marketing name for the treasury services businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. ©2006 JPMorgan Chase & Co. All rights reserved.

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2007 May-Jun Issue