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THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS

The who, what and why of China supply chain, page 20

Global leverage points, page 6 n The city at the centre of the world, page 32


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CONTENTS THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS

18 20

NOVEMBER/DECEMBER 2007 www.chainamagazine.com

COVER STORY

China supply chain 20 Our annual look at the companies, people, technologies, ideas and regions in China supply chain that you need to know about

32

REGIONAL FOCUS: DUBAI

22

The city at the centre of the world The emergence of Dubai as a global logistics hub has implications for China too

REGULARFEATURES 6 COMMENTARY ■ Global leverage points ■ Considering the downstream supply chain ■ Yangtze River Delta: steaming ahead 12 NEWSROUNDUP

32 38

FASHION SUPPLY CHAIN FEATURE

Suits you To achieve optimisation in their supply chains, fashion brands need to take a good look at their end-to-end supply chains

28 Q&A James Gagne, managing director, Schenker China 30 Q&A Philip Pearce, managing director China, Goodman Group 30 Q&A Mohammed Sharaf, commercial director and managing director, Port of Dubai 40 BLOGWATCH 42 CAREERS 45 EVENTSCALENDAR / COMPANYINDEX 46 CHINA SUPPLY CHAIN IN NUMBERS

38 www.chainamagazine.com

SEPTEMBER/OCTOBER 2007




Publisher Michael Pennington michael@mk-media.net

Contributing Writers Chris Horton, Cameron Wilson, Pilar Dieter, Bradley A. Feuling, Russel Beron

Editorial Consultant Max Henry Art Director Emily Zhang Graphic Designer Veronica Zhu

Chaina magazine editorial advisory committee 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 Thomas McKinley, Business Development Director, China thomas@mk-media.net +86 137 6164 5140 Yuki Lam, Business Development Director, Hong Kong yuki@mk-media.net +852 2521 5294 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.

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© Copyright 2007, Middle Kingdom Media Ltd. All rights reserved. Chaina magazine (ISSN 1992-9668) is published by the Middle Kingdom Media Ltd, 11/F Golden Star Building, 20-24 Lockhart Road, Wanchai, Hong Kong. Tel: +852 3421 2086 Fax: +852 2529 8771. 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.com The 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. CHaINA™ is a registered trademark of the China Supply Chain Council.


COMMENTARY

Global leverage points is executive partner, supply chain management, North Asia for Accenture, based in Shanghai. Jamie Bolton

C

hinese companies — like the country itself — are becoming world powers. However, most of these organisations are not yet 'global high performers'. Take revenues: at many of China’s leading companies, revenues are higher than ever. But the ability of those companies to create value (by returning profit greater than their cost of capital) is only half that of their global peers. Or consider average total return to shareholders (TRS): according to Accenture’s recent report, High Performance Business in China 2007: In Pursuit of Profitable Growth (accenture.com/countries/china/hpbchina2007_ en.htm) that figure was roughly seven percent from 2001 to 2005 at leading companies in China. However, top global players achieved 22 percent during the same time period. Even the average global company, with a TRS of nine percent, outpaced China’s best performers. Even though Chinese profitability and TRS have improved since the 2001 to 2005 measurements were made, it is highly unlikely that Chinese companies’ fundamentals have picked up at the same pace as the growth of the market suggests. Business leaders concede that much of this growth has been driven by market reforms and excess liquidity. The upshot: although Chinese companies are rapidly learning, growing and improving, they are still underdogs on the global playing field. Several years ago, this might not have been so important, but China’s progress is blurring business boundaries. More and more competitors are coming to play on the country’s home turf, so local advantages are fading. At the same time, shareholders have set the bar extremely high. Current price levels reflect the assumption of continued high performance. Anything less could be catastrophic. So what are the worldwide levels or platforms upon which Chinese companies will have to compete? Along what lines, in other words, will the most pitched battles with global competitors be fought?

Talent China’s labour force, while massive, does not include an endless supply of highly skilled workers. However, competition for such employees is intensifying as more global businesses look to shift knowledge-intensive activities such as product design to China. At a tactical level, Chinese companies must match or improve on-the-job offers made by the competition. At a strategic level, they need innovative talent management programs that view the workforce as an asset to be cultivated and optimised.

Multidirectional capital flows As the movement of labour between companies and nations increases, so too does the flow of 

NOVEMBER/DECEMBER 2007

capital. Under the terms of its WTO membership, China has been liberalising rules on foreign direct investment and easing some restrictions that prevented foreign companies from operating independently. At the same time, Chinese outward investment is booming, with more and more companies recognising the need to expand beyond the fiercely competitive domestic market. This two-way flow of capital is what global high performers do. But it also calls into play a more universal set of ground rules: global results — in line with those of established players — will become a permanent expectation.

Consumers The battle for China’s new consumers is fiercer than ever. Average urban disposable income is rising at more than 10 percent a year and a new home-owning middle class is demanding products such as cars and household appliances that, until recently, were beyond reach. Given such growth in spending power, it is not surprising that Chinese consumers are becoming more discriminating about product features, quality and service. International companies generally set the standard in these areas. In most sectors, Chinese companies must play catch-up.

Sourcing acumen China’s burgeoning consumer markets are a primary reason for the nation’s unparalleled appetite for energy and raw materials. Chinese oil companies are among the most active on the African continent. China’s imports of materials are so enormous that even the slightest shift in demand patterns triggers big changes in world prices. For many Chinese companies, global sourcing is now a reality. They face a future of increasing dependence on worldwide supply sources, which means more vulnerability to external supply chain shocks.

New ideas The developed world is losing its monopoly on innovation. The Chinese government, for example, aims to increase research and development (R&D) spending as a percentage of GDP from 1.3 percent in 2005 to two percent by 2010. Many local companies lag their international counterparts in R&D investment, but China’s best companies are catching up rapidly. They are setting up their own R&D centres; encouraging and expanding knowledge transfer and collaboration with multinational partners; tapping into exciting new product ideas generated by customer feedback; and implementing innovative ideas into their management processes. Chinese companies aspiring to be the best will need to act similarly. www.chainamagazine.com


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SEPTEMBER/OCTOBER 2007




COMMENTARY

Considering the downstream supply chain is currently the chief executive officer of Kong and Allan, LLC, based in Shanghai. Kong and Allan is a consulting firm specialising in supply chain operations and corporate expansion. Bradley A. Feuling

T

he growth of sourcing from and manufacturing in China is no secret. With a FDI increase of 12.8 percent from January to August of 2007, according to the Ministry of Commerce, it seems more and more companies are entering the game. This means new supply chains are created daily and existing supply chains are reorganised just as frequently. As a result, the competitive landscape is changing and low cost sourcing from China, merely based on price, is losing its competitive advantage. Hence, the entrance of Vietnam and other low-cost countries. As many note though, today’s global competition is based on supply chain versus supply chain. This perspective considers the process of value creation including material and information movement. It doesn’t however discuss geographic location, and herein lies the key question: how will supply chains in China remain competitive? The answer is in the continued development of the downstream supply chain. To move in this direction, companies must ask themselves: what factors should be considered when identifying new suppliers? What is the impact these downstream effects have on upstream operations? How can a company effectively coordinate with suppliers to improve downstream processes?

Hidden realities downstream Downstream supply chains extend deep into China. With existing and new supplier bases, sub-contracting networks, and increasing logistics infrastructure, the reality in China is a supply chain may change without one even knowing it. This leads to a fundamental lack of control and greater potential for a loss in competitiveness. In talking with executives, many will state visibility is critical to developing a competitive supply chain. Due to a number of factors, downstream coordination currently extends beyond the realm of software and RFID. What then lies below the surface? To build visibility a company must first peal back the layers of the downstream supply chain. Beyond the first layer exists a complexity of operations that few are willing to examine. It seems a lot like the independent operator model, and that is because it is. In China, questions concerning inventory management, capacity and planning, demand scheduling, raw material ordering and logistics management are commonly 

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left to the supplier. This action or rather inaction, contributes to a number of hidden realities in the downstream supply chain. In many cases, the same control and monitoring policies utilised overseas will not be consistent in China. This creates a primary challenge for local suppliers and foreign customers, a misalignment in the coordination of operating processes. For many Chinese manufacturers limited demand scheduling processes are effectively employed therefore capacity constraints are likely, and are occurring. With overwhelming local and foreign demand, capacity is now increasingly maximised, further reducing resource availability. We must remember that ERP and MRP systems are still fairly new in this environment. Supplier scheduling is based more frequently on an as needed basis, instead of future forecasting models. The effects are a reduction in flexibility, which means materials may not be on hand to account for new orders. Inventory is not managed to account for accurate buffer stock, further preventing the supplier from meeting required quantity and delivery windows. Logistics routing is identified by selecting the lowest immediate cost provider. These decisions can affect the delivery time and landed product quality. In some cases, companies face a loss of product entirely. These considerations only address the direct supply chain the company is working with. When considering Chinese manufacturing, companies must understand service level maximisation is the number one priority, not profit maximisation. The two are fundamentally different. With capacity constraints, suppliers may sub-contract a portion of the demand quantity to ensure an order is fulfilled. Here enters a new supply chain the customer may be unaware of. New material and logistics inputs, as well as operational procedures are now a part of the process that dictate when and how a company receives product. Costs will remain low to generate increased revenue through sales, but not necessarily profit. This limits the ability to expand. The problem has been compounded even further, indirect influences effect the supply chain, and a different system of thinking dictates material flows. With ineffective and limited focus on downstream supply chain operations, the customer generally only sees the direct product cost, and this may not change. But this is the www.chainamagazine.com


COMMENTARY

core reason downstream operations are gaining emphasis, as companies consider the operating procedures they don’t see. How will the costs attributed to product from these processes effect future pricing and viability?

Effects upstream What few companies actively consider are the direct effects these downstream considerations have on the upstream supply chain. Although delays, product quality issues, increasing costs and redundant processes are felt, little if any changes are pursued to correct these issues. Herein lies the problem. When a foreign customer experiences longer lead times due to product shipment delays, the costs are related to the reduction in service level. Simply put, the end-customer demand is not being met in-full and on-time. This means cash flow velocity is reduced and profit is not maximised. Quality variability is another effect rippling through the entire supply chain where costs multiply as problems remain unaddressed. In this case, orders must be replaced to meet quality expectations. This takes time, further lengthening the delivery speed and increasing the challenges faced by the upstream supply chain. Production schedules are affected, as is the service level. As a result, the reduced effectiveness of material flows leads to higher actual costs. In some extreme cases, insufficient knowledge of the downstream supply chain can lead to supplier inputs that do not meet local regulations. This can have devastating effects on the brand and industry as a whole. Large product recalls mean significant losses in potential revenue and earnings. This forces a redevelopment of the whole downstream supply chain, a very costly process. Lastly, redundant processes are common between Chinese operations and their foreign customers. Language barriers can certainly increase the potential risks of repeat processing, www.chainamagazine.com

but are not the primary factor. Without an understanding of downstream procedures, coordinating material and information flows is nearly impossible. When a company is unaware of these operating policies, the customer will frequently find samples have to be shipped multiple times, product resent, or documentation reprocessed. All these factors increase the delay time and hinder payment transactions.

Developing the downstream supply chain As supply chain’s become more competitive, companies must actively coordinate downstream operations, looking at product flow as one seamless process. This means moving beyond the independent operator model. Each stakeholder should be involved under one design, identify roles and responsibilities to grow and develop a sustainable advantage. Training and especially education is one key component. Currently, the demand for supply chain professionals in both local and foreign entities far outweighs the supply in China. To offset this growing trend, companies should actively invest in their supplier’s processes. With a hands-off approach, you can be assured your supplier will do the same. By taking a more active role, a company can stress the importance of downstream procedures and collaborate on building new working models for continued expansion. Another area of focus is increased interorganisational coordination. This means working more closely with a supplier to identify underlying challenges in inventory management, demand planning and logistics operations. By approaching the issue as a relationship, local partners will see an opportunity for further advancement through knowledge exchange. This is an ongoing process, and one that must be approached from the standpoint of continuous improvement and ongoing collaboration. To effectively grow, the supply chain must grow as one living organism. NOVEMBER/DECEMBER 2007




COMMENTARY

Yangtze River Delta: steaming ahead is Senior Associate Director of Industrial for Colliers based in Shanghai Ying Shin Lee

T

he Yangtze River Delta is undeniably the economic powerhouse of China. Amongst this dynamic growth, Shanghai can take significant credit for leading the region in its endeavour for greater progress. With a natural geographic advantage, and a strong commercial history, Shanghai has developed further to now boast first class infrastructure, a vast pool of talent, a transparent commercial environment and strong government support. The city has also been the forerunner in providing incentives for emerging business models, with a myriad of special economic zones and special policies. As such, it has successfully attracted foreign investment to the city as well as to cities within her proximity. The ambitious development of Shanghai’s port facilities and inter-modal transport networks is reinforcing the city’s significance as the main gateway linking China’s aspiration as a first-rate manufacturing base to the rest of the world. This can be achieved more effectively if China can improve efficiency in logistics - the backbone of industrial activities. Currently, it is estimated that as much as 20 percent of China's GDP is attributed to logistics cost, twice as much of that of developed markets. A one percent reduction in the cost ratio in China will lead to cost savings of RMB209.4 billion. As such, moving goods crosscities or -regions is now a key area for attention. The government is aggressively and rapidly developing major infrastructure nationwide in a bid to integrate markets and expand her manufacturing faculty.

Too costly The natural consequence of Shanghai’s rise is higher costs. With a total land area of 6,340.50 square kilometres, with the city proper spanning 2,642.60 square kilometres and industrial area covering only 1,000 square kilometres, but at site Los Angeles versus Shanghai industrial space 2006 indices

Los Angeles

Shanghai

GDP growth (%)

3.3**

12.0****

Built warehouse area (sqm)

112 million*** 50 million*

TEU throughput

16 million***

21.71 million

Total no. of container berths

36***

35 (Yangshan Port: 54 berths by 2020)

* Assuming 10% of all industrial land used for logistics. ** US Department of Commerce *** Colliers International Research **** National Statistics Bureau

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coverage of only 50 percent, leaves us with 500 square kilometres of industrial footprint. If we were to use 10 percent of all industrial land for logistics use, we would have 50 million square metres of built warehouse space. To put things in perspective with this assumption, Shanghai will be needing a lot more warehouses than it can accommodate. Furthermore, demand for public premium grade warehouses is likely to grow faster as both the industry deregulates and there is an increase in outsourcing to specialised 3PLs as more companies move away from reliance on inhouse logistics providers. In China, it is estimated that the 3PL share of the market is around 20 percent, compared with 57 percent in the United States, 80 percent in Japan and 35 percent in the European Union. The conclusion is simple, Shanghai is running out of space, requirements are getting bigger and faster - warehouses will become more expensive.

Shedding light It is logical, then, to look to the smaller cities within close proximity to Shanghai, such as Suzhou, Jiaxing and Kunshan. These are cities where Shanghai's economic sphere of influence extends well beyond its geographical boundaries and offer functional cost-efficient opportunities such as: opportunity to consolidate older operations established when no good quality warehouses existed; expansion now that China's logistics industry has deregulated since China’s ascension to WTO; allow growth of centralised regional or national distribution centres for more efficient operations and as result of the development and integration of inter-model transport networks; take advantage of lower costs and more aggressive courtship from local governments. What does locating outside Shanghai mean to foreign investors? If located strategically, it means new and bigger premium grade logistics facilities for better functional efficiency, expansion possibilities, more eager government courtship, more cost-efficient rents, direct access to the fast growing domestic market in the Yangtze River Delta and still being within radial influence of Shanghai. Areas within an hour’s drive of Shanghai and located at the internodes of major transport networks are now the new rising starlets. www.chainamagazine.com


NEWSROUNDUP

LEGAL

China 3rd in patent applications

R&D

China has climbed to number three in the world for numbers of patent applications behind Japan and the United States, according to China's State Intellectual Property Office (SIPO). In 2006, intellectual property offices across the country received 122,318 domestic patent applications and 88,172 applications from foreigners, with the number of domestic and foreign applications rising 30.8 percent and 10.4 percent, respectively, over 2005. China's patent law regulates that patents fall into three categories: invention, new design and innovative utility model.

GM plans US$250m research centre

EU lifts textile quotas The European Union (EU) will lift the quotas on ten categories of textile imported from China starting 1 January 2008, the Ministry of Commerce has said. Both sides reached an agreement in June 2005 on resuming quotas on China's textile exports to the EU; the agreement expires at the end of this year. Meanwhile, China and the EU will implement an export license administration system and an automatic import license system, respectively, without quantity restrictions.

General Motors (GM) has announced plans for a research facility to explore alternative fuels and improve the fuel efficiency of its vehicles sold in China. The Centre for Advanced Science and Research will be on a new US$250million corporate campus in Shanghai that also will serve as home to the automaker's Asia-Pacific headquarters. The first phase is to be completed late next year. “[We’re] going beyond mere words by making investments in new technology, in new institutions and research and science development here in China, that will help take some of these promising technologies that you’ve seen and heard about from the blackboard to the blacktop,” said Kevin Wale, president and general manager of General Motors China. The automaker joins a growing number of multinational corporations attracted to China not merely as a cheap source of factory labour but also because of the nation’s growing pool of engineers and scientists. “For GM, an obvious advantage of doing this is that it will be able to enjoy low-cost R&D while getting better access to the local market and probably winning more government support for future projects,” said Mei Xinyu, research analyst at the Ministry of Commerce in Beijing.

The city of Suzhou has started cooperation with Shanghai's Pudong Airport customs and Wuxi's airport customs to offer onestop clearance for international express cargo, which need to be trans-shipped via these two airports. A customs clearance facility for express cargo has been built in Suzhou and recently started operations. Local shippers and freight forwarders now only need to go through clearance procedures at the new facility instead of clearing the airport customs in Shanghai or Wuxi again. R&D

R&D growth the highest in China, India The growth rate of R&D spending by companies in China and India led all geographic regions last year though they lagged behind in actual spending, a study by management consultancy Booz Allen Hamilton found. 12

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Chinafotopress

Suzhou-Wuxi airport, Shanghai airport customs cooperate

The company’s third annual study of the world's 1,000 largest corporate R&D spenders, titled “Global Innovation 1000”, found that these corporations increased their research and development spending last year by twice the amount of spending 2005. The study found that Chinese companies are racing to catch up with R&D spending in developed markets, showing they have taken the cue from the government to ratchet up their efforts to make China a knowledge-based economy. According to a previous report by Booz Allen Hamilton, China’s R&D expenditure in terms of GDP rose from 0.69 percent in 1998 to 1.42 percent last year. The government aims to lift the figure by 2010 to 2 percent, closer to the levels of 2.5-3 percent in developed countries. PetroChina and China Petroleum & Chemical were the top R&D spenders

among Chinese companies. The top 10 global R&D spenders were Toyota, Pfizer, Ford, Johnson & Johnson, DaimlerChrysler, General Motors, Microsoft, GlaxoSmithKline, Siemens and IBM. China, India and the rest of the developing world represented just 5 percent of overall corporate spending on R&D in 2006, but their five-year average growth rate shows their drive to catch up with the big players. Their R&D spending last year grew by 25.7 percent over the previous year, in keeping with a five-year average rate of growth of 25 percent, whereas the rest of the developing world increased spending by 14.4 percent. While the total R&D spending in China amounted to $1.96 billion, that in India stood at $208 million last year. www.chainamagazine.com


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SOURCING

AstraZeneca to outsource manufacturing to China AstraZeneca will move some of its pharmaceutical production to China with the possible loss of 700 jobs in the UK, to cut costs in the face of price pressure from generics manufacturers.

AstraZeneca will outsource the production of Lactam, an ingredient in its bestselling schizophrenia drug Seroquel, to contract manufacturers in China as part of a drive to save US$900 million. A company spokesperson said the outsourcing is in its 'start-up phase’, with submissions to regulatory agencies still to come.

SOURCING

VW to strengthen supplier control

Imaginechina

Volkswagen has announced it will launch a restructuring program to strengthen its control on its auto parts suppliers in China. The move is expected to help the German car maker to keep both tight control on product quality and to cut costs during its enlarged sourcing operations from China. Volkswagen plans to team up with a third party to offer training and supervision on its domestic auto parts suppliers in the program dubbed as “Qualification Supplier China Program”. It will prompt domestic suppliers in work out future planning and to target inefficiencies in production, technology, management and workflow. “The program will also help to enroll Chinese suppliers in our global sourcing system,” the car maker said. Volkswagen’s sourcing from China totalled US$1 billion last year, serving both its Chinese venture with Shanghai Automotive Industry Corp and First Automotive Works Group. The restructure program announcement came after the car maker raised its sales target by 26 percent to 900,000 in China this year, after a similar costcutting program.

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Imaginechina

General Electric to set up more JVs General Electric (GE) will set up more joint ventures in China as the company tries to localise production here and seek sourcing partners to offset rising costs of steel and copper. The move will help GE sustain growth in China - especially its infrastructure division that makes aircraft engines, locomotives, power generators and water treatment equipment - at a doubledigit rate over the next few years.The company's goal is to reach US$10 billion in sales in China by 2010. “We are looking to localise more products and capacities, seek more creative partners here and prepare for more technology transfers at the right time,” said John Rice, vice chairman of GE and chief executive officer of GE Infrastructure, its largest business segment. The solution to rising costs also included optimised designs to achieve a “best cost” and GE has started to establish strategic sourcing partner relations on a long-term basis.

Currently GE has more than 50 companies in China and 23 of those are joint ventures. MANUFACTURING

Continental to invest US$216m in China plant Germany's Continental AG said it plans to invest about US$216 million to build its first tyre manufacturing plant in China to boost sales in the world's secondlargest auto market. Production at the plant in Hefei, in Anhui province, is due to start at the beginning of 2010. Continental started exporting to China ten years ago, but is a relative latecomer when compared with Goodyear Tire & Rubber and Michelin, which both began production in China in the mid-1990s.

Ford-Mazda-Chang'an open manufacturing plant Ford Motor, Ford subsidiary Mazda Motor and Chang'an Motor have opened a 160,000-unit car plant in Nanjing.

GE to continue heavy R&D investment in China Wal-Mart imports from China reach US$27 bln McDonald’s looks to China to trim costs Intel announces US$2 plant in China IBM moves global procurement HQ to China Metro uses RFID to speed up China-Europe supply chain Airbus establishes China sourcing centre Dell sourcing in China reaches US$22 in 2006

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MANUFACTURING

Imaginechina

Chrysler looks to expand market share in China

The facility has already begun production of the Mazda 2 subcompact and will start making a small-sized Ford model next year. The move comes five months after the three companies opened a 350,000-unit engine plant in Nanjing for domestic car production.

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US automaker Chrysler is looking to expand its sales in China's growing car market, Chrysler's China boss Simon Elliot has said. The company is seeking to sell around 20,000 cars in China in 2007, more than doubling the 8,000 sold in 2006, and to increase compact-car production in order to gain footing in the world’s secondlargest automobile market, said Elliot. Chrysler is expected to ramp up efforts in marketing, model development and sales networks in China.

Alan Mulally, Ford's president and chief executive officer, said annual production capacity at the new plant could be increased to 300,000 units to meet increasing demand in China. Total investment in the plant is expected to reach US$510 million.

LOGISTICS

Menlo Worldwide acquires Chic Holdings Menlo Worldwide has acquired Shanghai-based domestic 3PL Chic Holdings and its subsidiaries Shanghai Chic Logistics and Shanghai Chic Supply Chain Management. Menlo initially announced in September that it would acquire Chic Holdings for US$60 million along with an undisclosed future earn-out performance-based incentive. At the time, Menlo indicated this deal was made to increase its service footprint in China in what has been a hectic year of company acquisitions geared to augment its international service lineup. As a domestic provider of 3PL and transportation management services, Chic has a network of 130 operating sites in 78 cities in China’s industrialised sectors and western provinces. “We are very pleased to welcome Chic Logistics to Menlo and are excited about

NOVEMBER/DECEMBER 2007

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the tremendous foundation for growth and market expansion this platform brings to us in China,” said Menlo Worldwide president Robert L. Bianco, Jr.

Schneider acquires BaoYun Logistics Schneider Logistics has purchased the operating assets of China-based BaoYun Logistics. The US 3PL said that the investment allows it to offer more services on the domestic Chinese market including transportation, warehousing, cross-docking, 3PL and consulting services. Martin Winchell, managing director of Schneider Logistics China, said, “We’re taking very deliberate, strategic steps in China.”

facilities in the Yangtze River Delta region,” said Jack Yang, country director of Gazeley China. “Due to the high cost of land in Shanghai, Kunshan, the nearest city to the northwest of Shanghai, will be attractive to occupiers seeking better value in outlying areas." Gazeley is also currently developing a 42,000 square metre distribution centre in Tianjin and a 40,000 square metre warehouse in Jiaxing, Zhejiang province. These two projects are expected to be completed in September 2007 and July 2008 respectively.

China-Vietnam land container transport route opens for traffic The land container transport route connecting south China to north Vietnam has opened for traffic, with transport times between Hanoi and south China cut from one week to two days. The route offers weekly service and is operated by Sumitomo Corporation, a leading trader and distributor of commodities. The Japan-based company has plans to extend the route from Vietnam to Thailand.

REAL ESTATE

China has approved plans for the country’s fourth free-trade port area at Yangpu Port in Haikou, Hainan province. There are already free-trade port areas at Yangshan Port in Shanghai, Dongjiang Port in Tianjin and Dayaowan Port in Dalian. The move marks a major step towards a free trade zone with the Association of Southeast Asian Nations (ASEAN). Li Lanxue, chief of Haikou Customs, said the Yangpu Bonded Harbour Area would offer tax breaks on imports, and rebates on China-made commodities, while trade between companies inside the harbour area would be exempt from value added and consumption taxes, in addition to the preferential policies already granted to the Yangpu Economic Development Zone. China and ASEAN are seeking to establish a free trade area by 2010.

Gazeley to open Kunshan logistics centre Industrial real estate developer Gazeley, a wholly owned subsidiary of Wal-Mart, plans to build a 53,100 square metre logistics centre in Kunshan. The first phase of the project is scheduled to start construction in October 2007 and to be finished in June 2008. “We have seen clear market demand for world class high quality warehouse

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Imaginechina

Free-trade port approved in Hainan

REAL ESTATE

Kerry EAS to set up Chengdu logistics centre Freight forwarder Kerry EAS Logistics plans to invest RMB50 million in a regional distribution centre inside Chengdu's airfreight logistics park. The facility will cover 3.3 hectares and have 24,000 square metres of warehouse space. It is the third major project in the Chengdu Airfreight Logistics Park after DHL's express operations centre and the Singapore-based RichLand Group's cold chain logistics centre. Kerry EAS Logistics is the logistics platform for the Hong Kong-based Kerry Logistics in China. It currently has 125 subsidiaries, branches and representative offices across China with a network covering more than 1,100 Chinese cities.

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Best Buy to open second Shanghai store Robert Willett, president of Best Buy International, said the group will open a second Best Buy store in Shanghai in the coming year if it can find a suitable site. “We are seeking the right location for the new outlet in the city to expand our business,” said Willett. He said the company's first store in Shanghai's downtown Xujiahui area, which opened earlier this year, had been successful enough to warrant a second outlet in the city. Best Buy hasn’t expanded as quickly as industry watchers expected in China. But Brad Anderson, vice-chairman and chief executive officer of Best Buy Corporate Campus, said the chain is not falling behind its competitors. “We are studying the Chinese market to find out what Chinese consumers expect and want,” said Anderson. “Best Buy needs experience in the China market, but it takes time.” Willett said Best Buy will focus on building infrastructure and establishing an international sourcing team."We don't want to make mistakes - our investment in China is a long-term plan," he said. Best Buy's rivals - Chinese retailers Suning Appliance and Gome Electrical Appliance - are also planning to expand nationwide. Suning has 413 outlets in China and plans to add up to 180 new stores in the next five years, while Gome has close to 1,000 shops.

Nokia opens first major retail store in China Nokia has opened its first flagship store in China, which is also the largest and only standalone Nokia store in the world. Nokia claims the store, located in Shanghai, brings a new perspective to the mobile retail industry through a personalised shopping experience. "The China market has become the leading global market in terms of scale and maturity, and we believe that the Nokia Shanghai flagship store will become popular among Chinese consumers," said Colin Giles, president of Nokia China.

Store visitors can interact and become familiar with Nokia's products and service before purchasing them. The store is equipped with a state-of-theart audio and video system, including

display screens that help visitors identify different areas of the store. Product descriptions appear on a nearby digital display when a visitor picks up a product to view.

VIETNAM’S LEADING INDUSTRIAL REAL ESTATE CONSULTANT Our Industrial and Business space division is fully abreast of Vietnam’s emergence as a key provider of industrial land and accommodation in the Asia Pacific region. Our unparalleled market knowledge, places Savills as the premium consultant to advise occupiers from all sectors, when considering Vietnam as a country in which to invest. Our market leading research and consultancy covers all aspects of the market, from detailed analysis of the availability and costs associated with land leasing and warehouse renting, through to commentary on the legal framework and the procedures for site acquisition. We are able to provide advice on labour, infrastructure and location choice, whilst also being in a position to compare Vietnam on a regional and global level.

Our full range of industrial services extends, but is not limited, to: • Sales and Leasing • Development Recommendations, Feasibility & Project Marketing • Sale & Leaseback / Investment Restructuring • Comprehensive Research • Tenant & Purchaser Representation • Site Identification & Sourcing • Pre-Commitment Advisory • Asset Management • Valuation Services

CONTACT INFORMATION Robert MacDonald Head of Industrial +84 8 823 9205 rmacdonald@savills.com.vn www.savills.com.vn

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The flagship stores reflect Nokia’s business-to-consumer sales model, which helps Nokia better understand consumer needs, the company said.

Dell in Gome retail deal

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Dell has entered into a new partnership to sell the company’s products through Gome Electrical Appliance, one of China’s largest consumer electronics retailers. The PC manufacturer Dell began rolling out its systems in about 50 major Gome stores in early October and

Dell employees are available in Gome stores to help customers with purchases and their overall experience. Mu Guixian, vice president of Gome, said that Dell’s selection of Gome as its first retail partner in China shows that the large-scale consumer electronics retailer is becoming an increasingly important venue for customers purchasing IT products. “Chinese consumers are increasingly sophisticated in how they buy and use technology, so it is only natural that a global brand like Dell partner with Gome to provide a preferred shopping experience,” said Michael Tatelman, vice president of marketing and sales for Dell’s global consumer business. “For Dell, this is a great opportunity to extend connections with Chinese customers we may not have reached in the past. We look forward to a long and mutually rewarding relationship with Gome.” The partnership with Gome is Dell’s latest retail distribution agreement aimed at reaching more customers worldwide. The company recently announced relationships with Bic Camera in Japan, Carphone Warehouse in the UK and Wal-Mart in the United States.

Staples and UPS open JV stores in China Staples and UPS have opened two joint venture stores in Beijing. The new store format, co-branded Staples UPS Express, combines Staples’ office supplies and document processing services with UPS’s packaging and international shipping services. “The Staples UPS Express concept in China stems from a long-term www.chainamagazine.com


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alliance between the two companies,” said Richard Loi, senior vice president of UPS, Asia Pacific & China District. Two additional locations are planned in Shanghai by the end of 2007.

Haier plans huge retail expansion Haier Group, headquartered in Qingdao, has decided to move the marketing, planning and sales departments of Haier Computer to Beijing to help increase the

company’s expansion of retail outlets. Haier currently has set up 800 boutique retail stores for its computers, but it expects to increase the number of stores to 4,000 by the end of this year. Fang Chunsong, general manager of Haier's business department for mobile computing, says that Haier’s new operational headquarters will be located in Beijing’s Zhongguancun district and will begin operations in November.

IT

Metro to penalise suppliers who don't use RFID

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Suppliers to Metro Group will pay a financial penalty if they decide not to ship pallets that are tagged with RFID technology. The decision indicates the seriousness of the German retailer in making its supply chain more efficient, and the pressure on processors to implement the technology. Metro already runs an RFID-enabled supply chain system between suppliers in China and Germany. Martin Bruening, a Metro spokesman said as the retailer asks more suppliers to become part of the company's RFID roll-out, it expects to achieve more supply chain efficiency. “We will extend the accruing benefits to compliant suppliers by giving them preferred treatment at our facilities,” he said. Metro had sales of EUR55.7 billion in 2005, making it the world's fourth largest retailer.

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COVERSTORY

China supply chain 20 Our annual look at the companies, people, technologies, ideas and regions in China supply chain and logistics that you need to know about in 2007

Lenovo Very much a leading light in China and one of the country’s only true multinationals, Lenovo has really come of age in 2007. The company is making its presence felt in a sector where Japanese and Western brands have ruled the roost since the commercialisation of computer technology. Gerry Smith, senior vice president global supply chain for Lenovo, said the company's supply chain was severely tested in 2007 by LCD panel shortages for notebook PCs – which led to the creation of a “War Room” by the procurement team which “drove down part shortages significantly.” Smith said, “Any time you encounter an industry-wide parts constraint like the LCD shortage in notebooks, that’s a disappointment however, I am very proud of Guan Wei, Lenovo's vice president Greater China supply chain and his team for their excellent performance and achievements in exceeding our targets in Greater China despite the shortage of LCD panels.” A new worldwide IT infrastructure, which will eliminate its legacy systems, is in the pipeline for Lenovo. This new system will link Lenovo’s sales and services representatives to its manufacturing plants and distribution centres around the world, and enable them to provide more accurate product availability and scheduling information to customers. www.chainamagazine.com

Gerry Smith is clearly optimistic about Lenovo’s plans for the future: “Lenovo’s Global Supply Chain is designed to deliver – moving forward, our goal is to become the number one supply chain in the PC industry.” Lenovo is currently in the midst of a expansion strategy to consolidate its growing global reputation, concentrating on cutting costs and delivery times. Smith said: “We also gain synergy by integrating key distribution services, customerrelated activities and reverse logistics capabilities into these facilities – Lenovo expects to improve delivery by further reducing operational cycle times and increasing our visibility and control of our end-to-end supply chain.”

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There’s no denying that the emergence of Vietnam as an alternative manufacturing destination to China has been beneficial for both.

Vietnam This south-east asian nation shares a great deal in common with China – and not just a border. Vietnam is following in the footsteps of its giant neighbour and is opening up for business, with careful market reforms presenting many new opportunities in sourcing and manufacturing. And one of the questions on everyone's lips in China throughout 2007 has been: is Vietnam a better bet than China? There are mixed opinions regarding the attractiveness of Vietnam as a manufacturing destination, with many (including Richard Brubaker on page 40) arguing that Vietnam's infrastructure is a long way from where it needs to be if its going to emerge as a serious challenger to China. There’s no denying however that the emergence of Vietnam as an alternative manufacturing destination to China has been beneficial for both. China has moved on from the days when it simply bettered other manufacturing destinations by offering a combination of sheer volume and low price, to focus on the production of higher value technology goods which raise more taxes and are better for the economy as a whole. Vietnam at the same time is taking care to learn from China's mistakes as it increasingly opens up to foreign investment. Talk of Vietnam usurping China’s factory of the world status is somewhat premature – the huge domestic market that exists within China’s borders is very much the country’s trump card. But with wages approaching 30 percent cheaper in Vietnam, it’s not hard to see why China is no longer automatically the first place in East Asia to go for manufacturing.

CHEP and pallet pooling CHEP, the global leader in pallet and container pooling services, officially launched their pallet pooling service in China in March last year. For those of you not familiar with the advantages of pallet pooling, its has been found that in China there can be up to a 30 percent increase in transport efficiency and loading/unloading labour cost reductions when companies move to palletised deliveries, which means quicker-turning loading docks. Frank Tonna, national key account manager with CHEP based in Shanghai, said, “when one looks at statistics like the supply chain and logistics cost as a percentage of GDP, one can clearly see that China has a great opportunity to reduce supply chain costs. The momentum for pallet pooling continues to grow at a rapid pace. The greater the number of pallet pool users, the greater the aggregate supply chain savings, which will contribute to a lowering of China's overall percentage supply chain and logistics cost to GDP”. The company has also introduced a new pallet, specifically designed for 22

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the China market: a 1.2 x 1.0, steel reinforced, RFID enabled plastic pallet, more durable and environmentally friendly than the wooden pallet which is more commonly used in China today. But CHEP’s solution is not just about pallets, it’s about the whole system solution: the control systems to manage the flow of pallets, the national network of service centres, the numerous training programmes to ensure companies can adopt the pallet pool quickly and easily, the pallet pool management expertise and future state technologies like RFID, all help to make CHEP a solely unique provider of such services in China today.

Bill O'Brien, Havi Food Services As president of the company responsible for food storage, logistics, and distribution services for McDonald’s in China (with the fast-food giant recently describing him as a “consummate expert in China cold chain logistics”), Bill O’Brien has plenty to say about food safety issues – and there's certainly been much to discuss on this front in 2007. He feels that one of the most important steps required to make food supply chains in China safer is to strengthen the regulatory environment in China – “our fear, however, is that it will take years for this to be translated into real action, with universally applied regulations.” O’Brien has had a long and deep relationship with China and has seen many trends come and go. But with the “made in China” label tarnished by numerous product safety scandals, and growing concerns over cold chain standards, food is coming under unprecedented scrutiny in China. O’Brien recommends concentrating on maintaining the strength of your brand strength to protect against fallout from food problems. More proactive approaches he advocates include building your own cold supply chain – or outsourcing to an external handler. Across the supply chain, O’Brien feels hundreds of thousands of one-man-and-a-truck companies operating. As O’Brien says, “China must move away from the requirements that people use their own trucks and warehouses to do logistics and recognise the value of systems and management.”

Green supply chains Somewhat surprisingly, the central Chinese government has been a key driver behind much of the move towards more green policies in China in 2007. Consolidation policies in the steel sector to remove the hundreds of small but heavily polluting steel mills, an attempt to shift in the economy away from high-energy consuming industry and towards light industry and high-tech (with Vietnam amongst the places picking up China's slack here), and efforts to “green” major cities like Shanghai demonstrate an awareness that the environment is under serious pressure. Allroadsleadtochina.com’s Richard Brubaker thinks 2007 was a very significant year for www.chainamagazine.com


COVERSTORY environmental issues in China. “Overall, I believe the trend is clear - clean up or clear out,” he says, adding, “this summer was a turning point in my mind as the Wuxi algae blooms [in Tai Hu] and other environmental issues became front page news.” Blanket coverage of this particular issue on domestic media was a tacit admission on the part of the Chinese government that more had to be done to improve the situation. Coverage of the issue extended to the country's supply chains as well with many companies for the first time starting to pay close attention to their own contributions – both good and bad – to the environment. Looking ahead to 2008, Brubaker said, “I would expect to see more stories of factory shutdowns and regional reorganisations as China looks to balance the needs of industry and consumers”. Another major implication for the supply chain may be the development of China as a centre for the design and manufacturing of green products such as solar panels, and their subsequent commercialisation.

The modernisation of China-based industrial and logistics real estate facilities The long-awaited emergence of world-class logistics real estate facilities in China has gathered pace in 2007. For Andrew W. Slevin, executive director with real estate company Knight Frank in Shanghai, the recent emergence of an increasing amount of outside investment in the industrial property sector has been a contributing factor, as the sector attracts more and more money from the big overseas players in industrial and logistics real estate. As Slevin said, “industrial property as an investment is a relatively new concept in China and really only expanded when the central government took an active role in constraining the development of unauthorised district level zones. We foresee continued investment in industrial real estate by both local and overseas purchasers and this should mean we also see improved construction quality since many investors focus on building high quality properties that are suitable for multiple industries.”

Mark Millar, director of strategic business development, UPS Supply Chain Solutions Mark Millar consolidated his position as one of the region's supply chain leaders in 2007, speaking at a large number of important supply chain and logistics conferences in China, Hong Kong and Singapore, and even in other markets further a field. An ever-energetic and entertaining speaker Millar is a true personality. Throughout his career he has chaired and presented at more than 50 international conferences on the supply chain, logistics, and strategic marketing. Having spent a number of years in Shanghai but now based in Hong Kong, Mark’s current role

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Mark Millar

sees him focusing on developing innovative supply chain solutions for UPS’ consumer-retail customers seeking to optimise their international supply chains from Asia into the United States domestic market. This involves leveraging UPS’ China facilities, including developing Origin DC operations (ODC) in Shenzhen that can offer a range of value-added services, combined with a comprehensive range of multi-modal trans-pacific transportation options (transit times ranging from three days to three weeks, depending on desired balance of speed versus cost). In turn, this is complemented by UPS Customs Brokerage and domestic United States transportation networks, including direct-to-store and direct-to-consumer, thus providing what he describes as “a unique end-to-end global supply chain solution from one single source provider.”

The long-awaited emergence of world-class logistics real estate facilities in China has gathered pace in 2007.

Ethical supply chains Well-documented product safety problems this year have questioned the ethical integrity of many companies’ supply chains. Does each end of the chain know, or even care, exactly what the other end is doing? The upshot of this issue is that a move towards ethical supply Chains is slowly, but surely, gathering pace. “Ethical sourcing in China has still a long way to go to reach western standards – but you can see a growing trend to more commitment to ethical sourcing especially at foreign companies in China, says Nis-Peter Iwersen, vice president of Danfoss International Procurement Offices China. Iwersen’s company has signed up to a United Nations environmental charter called Global Compact – a corporate social responsibility initiative. “But [at the same time] I also see a major difference on the level of ethical sourcing if the area is focusing mostly on exports.” And because China is such a high risk country when it comes to putting out potentially harmful products and in terms of the integrity of its supply chains, 2007 saw more and more companies setting up supplier’s codes of conduct and NOVEMBER/DECEMBER 2007

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RFID will become more prevalent as the savings offered by offering pinpoint inventory control become clearer.

carrying out their own stringent tests thorough dedicated audits.

RFID On the face of it China looks like an ideal candidate for RFID projects – lack of existing old infrastructure to replace, and plenty of incentive in terms of quality and safety issues which could be hugely reduced with the successful introduction of the new technology. However, the Chinese government is stalling over the adoption of an RFID standard, fearful of having to pay licence fees to foreign companies. Despite this, research firm Analysys has said that the market for RFID grew 23.4 percent in the second quarter of 2007, hitting RMB 1.076 billion, or roughly US$143 million. Three companies - Invengo, Sense Technology and Intermec – account for 48.94 percent of the total market. As the technology gets more economical, RFID will become more prevalent as the savings offered by offering pinpoint inventory control become clearer. And in China, for most companies it’s a case of when and not if for RFID. Just look at Metro, they recently announced that they will seek to penalise suppliers that don't adopt the technology.

Tesco Since increasing its stake in Chinese supermarket chain Hymall from 50 percent to 90 percent in 2007, the UK's Tesco been going head-to-head with Wal-mart and Carrefour in the hypermarket battle in China, though has for the most part (and as far as your average shopper is concerned) slipped

under the radar until relatively recently because the company until branded all its stores in China under the Hymall and Happy Shopper names. The company’s no-nonsense marketing campaigns in China, similar to those on show in the UK, focus on customer savings as opposed to glamorous foreign brands, a move that might pay off given a recent survey which showed that Chinese consumers trust local brands more than imported brands. But now more eyes are on Tesco in China than ever before, because the company has finally taken the bold step of replacing the Hymall brand name in its stores and on its carrier bags with the more familiar (to any British in China) red and blue Tesco colours and Tesco logo. The supermarket plans to open 500 Tesco branded products. Watch this space.

IBM 2007 was a busy year for IBM in China with the company setting up a IBM Global Procurement Centre in Shenzhen and opening a fourth global delivery centre in Chengdu.

Dalian Dalian has come of age this year. Not only did it attract US$2 billion of Intel’s money, but as China's offshoring capital it has also garnered the attention of the IT press worldwide throughout 2007, including a Computer World magazine article titled “Why Dalian is so hot right now”. The north-eastern city has given companies such as the UK's BT, who invested US$70 million in

Richard Brubaker, Allroadsleadtochina.com Over the course of the past 12 months, one website has emerged as probably the single most observant and insightful source of China-related supply chain orientated stories and analysis. That is all thanks to the website’s sole-founder (and writer of nearly all the website’s posts) Richard Brubaker, who also serves as founder and managing director of China Strategic Development Partners. “2007 has been a great year for Allroadsleadtochina.com. I only began little more than a year ago, and it is a constantly evolving organism, but I will continue to focus on second-tier development, logistics, manufacturing, and deals in 2008,” said Brubaker. Brubaker feels that this year has been a good one for logistics as regulatory hurdles have been taken down on the back of more WTO membership obligations. He added, “investments (foreign and domestic) have increased, and M&A activity created stronger networks and firms,” whilst saying 2007 was disappointing because of the “polarisation” of the product safety scandals and the continued lack of understanding of the role foreign brands played in that matter. For Brubaker, “the future of China is not a story of being the world’s factory floor, it is about how the world’s factory floor is working to develop 20 percent of humanity. It is a story that goes beyond the Beijing [Olympic] games and World Expo [in Shanghai in 2010]. It is a work in progress. It will take time. And Allroadsleadtochina.com will continue to be there.”

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COVERSTORY

Part of Intel’s success has been based on tremendous progress in leveraging the advantages the local China supply base can provide.

a software development R&D centre there this year, a much-needed second destination in Asia for IT offshoring services.

Tianjin There’s more to Tianjin than just being the closest port to China’s capital city. It’s well established Tianjin Economic-Technological Development Area (TEDA) has long been a welcoming home to foreign businesses, and continues to grow. So far, over 4,200 companies have invested between them more than US$37 billion in the area. The flow of foreign firms entering shows no signs of slowing just this month, technical services company Imtech announced it won a contract with Airbus to fit out a high-tech painting plant with high-tech infrastructure that the aircraft manufacturer is building in the Binhai industrial zone, with Chinese partner Tianjin Zhongtian Aviation Industry Investment, for its Airbus 320 series. Interestingly, Ni Xiangyu, vice chairman of TEDA, believes the city is being used as a mould for the rest of China to follow: “We face the responsibility of creating a model that won't cost too much, whether in monetary terms or in environmental sacrifice. It's a new model for northern Chinas heavy industrial areas, and for western China.”

Intel Intel’s March announcement that they would be investing around two billion US dollars in a new chip plant in Dalian (where the company also plans to invest in the first semiconductor college in China) was one of biggest ever foreign investment deals in China. Further reflecting the importance of China for Intel, the company's operations in China became its own regional division, with equal standing to the other regional divisions in the Americas, Europe, Middle East-Africa and Asia-Pacific, now reporting directly to corporate headquarters. It was a move that translates into a great advantage for this country that continues to grow at an amazing rate, said Jim Zhou, Intel China A/T factory materials manager at Intel Materials China. Historically, one of the problems which has held back high tech companies in China is the lack of depth in the talent pool, leading to a reliance on high salaried expats. But Zhou himself is among the first in a new generation of Chinese talent who are helping companies buck this trend. Intel Materials has put tremendous efforts into local leadership development, he said, "just look at myself, I started managing our Shanghai factory materials procurement group [just] three years ago, then last year I was relocated to Intel Chengdu's new site as factory materials manager, replacing an expat from the United States.” In a sign of the times, Zhou has since been promoted and his former post filled by another local hire. Jim Zhou added that part of Intel’s success has been based on tremendous progress in leveraging the advantages the local China supply 26

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base can provide: “We help very local suppliers extend their business outside of China and become regional and global suppliers to support other Intel facilities outside China.”

China Supply Chain Council If there's one name that has come to really dominate the scene of China supply chain management, it is surely the China Supply Chain Council. And the Council has continued its domination of the industry's conferences, events, and training scene in 2007 with at least one event having taken place nearly every week somewhere around China throughout the year. No Council event is complete with the tireless and energetic enthusiasm of its founder and executive director Max Henry, he probably deserves more credit than anyone else for improving the general standard of supply chains in China by providing that much-needed platform for the discussion of new ideas, innovations, and technologies.

Pilar Dieter, Alaris Consulting A relative newcomer to the China supply chain scene, Pilar Dieter has already established herself as one of the industry's most sought after speakers at the many supply chain and logisticsfocused conferences that take place in China throughout the year. This year she played host to one of World Trade magazine's much-publicised (and much listened to) inaugural webinars on China logistics that took place in the summer, and chaired the annual Port Logistics & Shipping Conference that took place in Shanghai where senior officials from ports around the world convened to discuss opportunities in China’s port and logistics environment. Pilar Dieter currently serves as a director for Alaris Consulting’s China organisation with a focus on logistics, global trade management, and technology for foreign companies in China. She has more than 10 years of industry expertise serving companies’ supply chain divisions through software implementations and business process re-engineering efforts, having previously spent time working for Accenture, TradeBeam, and Embarcadero Systems Corporation, where she worked with ocean ports and rail terminals

Pilar Dieter www.chainamagazine.com


COVERSTORY in innovating next generation technical solutions to streamline global logistics processes active in major ports around the world today. Pilar is on the cutting edge of solving supply chain logistics and distribution problems in Asia. When asked if there had been any developments in China supply chain this year that had been of disappointment to her, Pilar answered that the “semantics related to trade disputes with China” had been a lowpoint. “There is a gaping hole in adequate supplier quality assurance that exists among the growing number of suppliers worldwide. Product safety and quality is undoubtedly of utmost importance in the success and reliability of global trade on all levels, however the responsibility of faulty product does not rest solely on the manufacturer.”

The VAT rebate In July this year the central Chinese government cut export rebates for about 37 percent of export categories and the effects are still being felt. As Pilar Dieter of Alaris Consulting says, “The trickle down effect of the VAT adjustment as well as the other cost inflation events of 2007 naturally left suppliers feeling pressure of margin erosion of their manufactured goods, and buyers feeling the squeeze of price hikes due to suppliers losing these rebates. As China continues to push higher skilled manufacturing, the incentives for

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low cost country sourcing in China for low end commodities will not vanish completely, but the way in which low-cost country sourcing is viewed will take a turn.”

R&D Early estimates at the beginning of 2007 that China was poised to overtake Japan as the world's second R&D spender globally turned out to be overcooked. What is certain however is that more and more companies are investing in R&D in China than ever before as things for the first time slowly start to move from ‘Made in China’ to ‘Made by China’.

Rail freight There have been some interesting developments this year in the development of rail freight as serious low-cost alternative for moving goods across China. It's all part of the central Chinese government's plan to invest a staggering US$200 billion in the country's railroads over the next three years. This year also saw the opening of the first privately invested rail line in China, linking Quzhou and Changshan in east China, a move which Pilar Dieter says, “signified the first step towards China’s reform in financing railway construction.” Hopefully the trend will continue going forward.

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Q&A

People power

QA

James Gagne is managing director of Schenker China and before the recent merger of BAX Global and Schenker, was managing director of BAX Global China for six years.

&

James started his career with Maersk (China) Shipping in 1995 in a sales and marketing role, based in Shanghai and was responsible for establishing the marketing department which would eventually become responsible for the regional marketing activities in Central China including Shanghai, Ningbo, Nanjing and Chongqing. As the previous managing director of BAX Global, James was responsible for running all aspects of the China business, including overseeing the incorporation of BAX as an International Freight Forwarding and Warehousing WFOE with its head office in Shanghai. day in this industry the difference is not going to be in the systems we have in place and in the network we have in place, but in having the people to execute and innovate. So people development is certainly one area we're very different and that will continue to be an area that we're going to invest money and time in. : Okay, but given the talent shortage that exists in China, with all the big 3PLs chasing the same people, what advantage does Schenker have in attracting the best talent?

: How are Schenker different from the other multinational 3PLs operating in China? James Gagne: Your question is a good one because I agree there are a number of international logistics companies in China who are growing their footprint in terms of the number of warehouses they have here and so on. But I think the way we continue to differentiate on a China-wide basis is the way in which we invest in people. I really mean that, we are putting a lot of effort into fostering a learning environment for our people and we have programmes that are already in place related to developing our managers. Specifically I'm referring to a leadership management development programme that is actually put together and managed by the most senior managers in the company. The management of the company is very hands-on and involved in the training process. Because at the end of the

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JG: That is still a major issue and if we look at the threats that the industry faces in China, one of the biggest has to be intellectual capital theft, the loss of key talent and the transfer of good people. We are an organisation that of course in a market like this needs to be competitive about the way we pay. More importantly I have mentioned the multiple layer approach we take to the development of our staff from a grass roots level up to the very senior management which helps to attract talent. And in addition if I look at the pedigree we are establishing in sports events logistics globally, regionally and in China, especially the Olympics, that is attractive to a lot of younger university graduates in China. And that is something our competitors cannot offer. : To what extent does Schenker own its own facilities and vehicles in China? JG: Our strategy is more on the asset light side, however we do own some trucks and road haulage vehicles. Our focus is on working with companies

and partners in China and entering a meaningful lease relationship. Our approach is not to own 1,000 vehicles, the emphasis is more on managing vendor relationships and investing in systems. : Is that a long-term strategy in China? JG: The only way that could change is if we were to find a complimentary fit with a Chinese-owned organisation that we might purchase for strategic reasons. We are always looking for acquisition opportunities but the company has to be complimentary with our business and there has to be a corporate fit with the management, with a focus on quality. : How has the merger with BAX gone? Has it been a smooth process? JG: Overall I think that if we look at the merger in relation to customer retention as a KPI, we've done very well. One of the priorities we had as a company was to balance the external and internal factors of the merger. We didn't want to exclude our long-term customers from the process and were overly paranoid about spending a lot of time with our customers. In June of this year Hong Kong and Macau completed the integration process. Because of the number of operating entities we have in China we've put back the legal integration until 2008, however the merger of senior management was completed earlier this year. : Just getting back to the sports events logistics that Schenker handles. How long has Schenker been acting as the freight forwarder for the Olympics? www.chainamagazine.com


Q&A

JG: We've had an arrangement with the International Olympic Committee since 2000 which has allowed Schenker the privilege of undertaking the freight forwarding and customs clearance business wherever the Olympics might be held. We are involved in handling team equipment, supplies, anything that is coming in from outside for the event. And for the Beijing Olympics, that's not just in Beijing but also in Hong Kong for the equestrian but in Qingdao for the sailing events. We are responsible for making sure the documentation is right, that goods are cleared and delivered on time to the venues. We're also involved in some of the venue logistics and in the replenishment of hospitality suites. We have built up a real pedigree in this area over the years not only with the Olympics but also for events such as the recent Asian Games in Doha. : It sounds like a large undertaking? JG: It's a massive undertaking. And we are still in preparation in Beijing both in hiring people locally as well as bringing in a team of people. We have a group of experts globally that are part of our global sporting events team, or GSE. Prior to a massive event like this we have people who come out early on to build relationships and work with the local organising committees. Just because we are the exclusive provider, we still have to work hard to ensure that the experience is going to be a solid one. : Schenker is also involved in the World Expo in 2010 in Shanghai, is that a similar set up?

right across the country. That to me is important as it tells a story in itself. It shows that even at a time when people perceived that something was not right, our customers, the ocean carriers and so on have come to Schenker's support and expressed that because of the global relationship we have, they have no concern about the way we are operating. : What are Schenker's future growth plans in China? JG: When you look at the combined [BAX-Schenker] entity we have already a solid footprint in the fashion retail area, in high-tech and electronics, including semi-con, in healthcare and in automotive, these particular verticals are the ones that we will continue to grow. We are not trying to be everything to everybody. So we want to put a lot more emphasis on these verticals. We see the chemical and industrial vertical as an area where

together with our parent company DB we can provide unique solutions to our customers. And also as aerospace de-regulates in China, if we look at the some of skill sets we have in place and the models we have in place with other customers, we feel we can replicate our expertise in this area. : Does the company have any plans to make any local acquisitions? JG: The major focus is still on completing the legal integration of Schenker and BAX in China and we don't want to become distracted from that. Regarding local acquisitions, we will seriously consider that road if we find a company that is very complimentary and that fits us overall, including a fit with our key verticals. But saying that and finding the right company are two very different things. Deutsche Bank is very willing to invest on a global basis and China is a very important market for us and them.

JG: It's different. The World Expo Bureau is in talks with a number of players. Unlike the Olympics there's no exclusive provider for the Expo. We already have the opportunity to be one of the recommended logistics service providers. : There was a great deal of publicity recently surrounding the MOC's [Ministry of Commerce] announcement that several Schenker entities in China were operating without a valid NVOCC license, has this problem now been fully resolved as per your announcement in the middle of September that business in China was not affected? JG: The issue is 100 percent resolved and there's a very good understanding between the MOC regarding our activity in China. We have not suffered any service interruption in China,

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NOVEMBER/DECEMBER 2007

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Q&A

Industrial strength

QA &

Philip Pearce is managing director China for the recently re-branded Goodman Group (previously known as Macquarie Goodman). Based in Shanghai, he is responsible for the strategic development and continued expansion of the group’s industrial investment business throughout China. This work encompasses property acquisition, development, asset management and joint ventures with the objective of pursuing opportunities to establish a China-focused industrial trust. Philip Pearce is managing director China for the recently re-branded Goodman Group (previously known as Macquarie Goodman), one of the world’s leading industrial property groups. Based in Shanghai, he is responsible for the strategic development and continued expansion of the group’s industrial investment business throughout China. This work encompasses property acquisition, development, asset management and joint ventures with the objective of pursuing opportunities to establish a China-focused industrial trust. Philip has more than twelve years experience in real estate investment trusts in the Asia-Pacific region. Before moving to China, Philip was worked for four years with Ascendas MGM Funds Management Ltd, a JV between Goodman and Ascendas for the establishment and management of Ascendas Real Estate Investment Trust, the first industrial REIT in Singapore. He was responsible for the full spectrum of property operations, including capital transactions, development and asset management. PP: We don’t have a specific timeline in place however our medium term goal is to have a China-based fund established. We currently have several initiatives underway in Asia the exact timing will depend on the outcome of those initiatives. : What properties is Goodman currently involved with in China?

: There are a few different sides to the Goodman website with fund management being one side and property management another side, are you only involved in property management in China? Philip Pearce: We are a long term owner of industrial property, our own-developmanage customer service offering is the foundation of our business. Apart of that platform to enable us to continue to grow and re-cycle capital we do have a funds management capability attached to the group. Here in China we are looking to establish a China-based logistics fund, but at the moment everything is on the group’s balance sheet. : Is there a timeline in terms of putting in place that China-based logistics fund?

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PP: Our first project in China is Shanghai Business Park, designed and managed by Arlington, a UK-based business park developer which Goodman acquired in late 2004. Following an agreement signed with DHL for a built-to-suit distribution centre in Kangqiao, we established our first office in Shanghai. The Kangqiao Distribution Centre reached its physical completion in mid September this year, it is a 56,000 square metre single-storey warehouse with DHL as committed end-user. Aligned with our China strategy which is to expand both through strategic acquisition and development, we have also acquired a number of existing properties in Shanghai, namely the Fengxian Distribution Centre which has been entirely leased to Lotus Group and the Putuo Distribution Centre with NYK, Sinotrans and Nippon Express as the anchor tenants. We are also working

on securing a number of land parcels in Shanghai and Beijing as well as a facility for Amazon in Beijing. : And what about other opportunities outside of Shanghai? PP: Over the last six months we’ve been looking at opportunities outside Shanghai, our first priority is the Bohai Bay area, such as Beijing and Tianjin, which present us a lot of opportunities. We are also exploring the southern part of China including Guangzhou and Shenzhen. The demand for warehousing space in those areas has been and will continue to be strong. : So there's clearly a great number of opportunities for Goodman Group in China? PP: One of the big challenges when a new player comes into the market is that there are so many opportunities in China, you run the risk of trying to chase too many opportunities but not focusing on any particular one. This can result in a lack of focus which may lead to not achieve desired results. We believe there are a lot of opportunities in the major seaport cities. Of the top 20 ports in the world seven are in China, besides the largest ports like Shanghai and Shenzhen, cities such as Dalian, Qingdao, Ningbo and Xiamen also offer a great number of

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Q&A

opportunities. The government is also encouraging manufacturing facilities to move inland. But if we try to cover China in one fell swoop, it may limit our growth. : Do regulatory issues pose a problem in China? PP: One of the challenges that confronts the industry is constant change of regulations. You might enter into an agreement today where everything is fine, but in a month’s time the regulations may have changed, this increases the uncertainty associated with transaction. : And what are some of the other challenges you face? PP: One of the biggest challenges at the moment is sourcing the land, without the land you can’t develop! The government is increasing its controls over the conversion of rural land into industrial land. Another big challenge is quality: it is definitely possible to build good quality property however the amount of supervision that is required by the developer is much more than what is required in other more developed markets. : How do you supervise construction process?

the

PP: At this stage we take a twopronged approach: we have an inhouse project management team, and also outsource the construction management and detailed project management to reputable international project management companies who have their people onsite full time to supervise the contractors : One of the commonly talked about perceptions of the industrial real estate market in China is that it's a very locally-run business, is it harder being a foreign company in this market? PP: To a certain extent it is harder in terms of getting the contacts, you need to be in the market for a while before the local authorities become aware of you. However once this recognition is achieved, the local development zones are very accommodating to the multinational developers, because it helps raise the standard of the zone, and the multinational companies also bring with them expertise and customer base. Historically the industrial real

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estate market in China has been locally run but that is changing. There are more and more international players entering the market and it serves to lift the benchmark. This goes hand-in-hand with the increasing opening up of the logistics market to international 3PLs. : Is the standard of the real estate contractors in China far below what we might see in Australia? PP: Contractors in China are not well supervised and the end result sometimes reflects this. However it is possible to build to an international standard. Take our recent completed warehouse at Kangqiao as an example, we are very proud of the facility, it takes the standard of warehousing in China to a new level. That was built by a local contractor and we are very pleased by the end product. : What is the selection process that Goodman uses in order to select a contractor for a particular project? PP: Track record and cost are the two most important factors when we select the contractor. We will invite a selection of multinational and local companies to bid. Our operations in other markets all have a list of preferred contractors and we will have our own list in China over time. And in certain cases we may not go through the tendering process,but negotiate the contract sum with one of our preferred contractors.

: And in terms of letting out the finished properties, how do you select the agencies you work with on a particular project? PP: Yes, we do use agents and track record is important. To certain extent it's a question of ‘you scratch my back and I’ll scratch yours’. If an agent has introduced us the land, it would be very difficult for us to build something and go through one of their competitors for leasing. : What do you think of the general standard of logistics and industrial real estate facilities that are currently on offer in China? PP: Obviously there’s mixed products in terms of quality. There is no doubt that the supply of high-grade warehouse facilities has increased over the last three years. Prior to that there was very little international grade stock available. The challenge for the new entrants into this market who are looking to buy and establish a portfolio of warehousing space is finding good quality warehousing. And that’s why groups like ours are fortunate because we have strong development capabilities and the best way for us to build a strong portfolio is to do it ourselves. But at the same time if we see good acquisition targets where the quality of the warehouse meets our criteria we will take the opportunity.

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REGIONALFOCUS

The city at the centre of the world The emergence of Dubai as a global logistics hub has implications for China too

is managing director of the Meridian Group of Hong Kong, a research firm with offices in Hong Kong and Kunming. He is also the editor of GoKunming.com and is a regular contributor to Chaina magazine. Chris Horton

C

hina, and its boomtowns of Shanghai and Shenzhen, may be generating a global buzz, but there's an altogether different sounding buzz coming from another boomtown at the opposite end of the Asian continent, Dubai. Capital of the emirate of Dubai in the United Arab Emirates, the city has rapidly emerged as the fastest-growing city in the world via its combination of an ideal location for regional and global trade, abundant capital, competitive government initiatives and massive logistics infrastructure investment. Unlike fast-developing economies closer to China such as Vietnam or India, Dubai is poised to complement rather than compete with China’s role in global supply chain. China may be the ‘Middle Kingdom’, but Dubai is astutely leveraging its strategic location at the centre of global trade with impressive results and development goals that rival China’s in terms of ambition.

Dubai’s open skies attracting the world As an integral component of the Dubai government’s long-term strategy and vision, free economic policies have been adopted as a tool for encouraging investments beneficial to travel, commerce and industry. A prime example 32

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is the ‘open skies’ policy, which has served as an important catalyst for Dubai’s emergence as the global air hub of the future. Under the open skies model, all airlines are able to fly to Dubai and compete without restriction or handicap. Not surprisingly, carriers from around the globe have flocked to the emirate – today over 200 destinations are linked to Dubai International Airport by more than 110 airlines. The Middle East’s busiest airport – it handled more than 25 million passengers in 2006 – Dubai International Airport is expanding aggressively with the addition of new terminals and concourses expected to bring passenger capacity to 70 million passengers per year. In terms of transport of goods, the airport’s Cargo Village handled nearly 1.5 million tons of cargo in 2006, making it the busiest cargo logistics hub in the region. Despite its bold development goals, the airport and the adjoining Cargo Village will soon engage in fierce competition with an even larger airport that aims to become the world’s busiest airport and most important logistics hub. Nothing short of massive, the Dubai World Central project is being built around Dubai World Central International Airport, which upon completion will be ten times larger than

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REGIONALFOCUS Dubai International Airport and Dubai Cargo Village combined. The new airport will have an annual cargo capacity of 12 million tons and will be capable of handling more than 120 million passengers per year – that’s 50 percent more passenger capacity than Atlanta international airport, currently the world's busiest airport. The airport is designed to handle A380 superjumbo jets and as many as four aircraft will be able to land simultaneously, round-the-clock. Flagship carrier Emirates is positioned to continue its strong growth as it will enjoy a homefield advantage at the new airport – Emirates Group will have exclusive access to one of the airport’s three terminals. Emirates air freight subsidiary Emirates SkyCargo has gone on a bit of a shopping spree in recent years to prepare for the move into its Cargo Mega Terminal at the airport, which is designed to handle up to 1.2 million tons of cargo per year. With plans to double the size of its fleet in the next few years, Emirates SkyCargo has more than US$30 billion in aircraft on order. “Dubai enjoys a geocentric location that is a key advantage in facilitating and optimising global supply chain flow,” said Michael Qu Jingfeng, Emirates China Cargo manager. “The city is situated at the centre of the world, between the major population centres of east and west, north and south. Africa, China, Europe, and the Indian subcontinent are all within easy reach of non-stop flights from Dubai using current commercial aircraft. In fact, Dubai and Emirates are in a position to serve 5.8 billion people within a radius of an eight-hour flight. Dubai is also perfectly positioned to carry the east-west, ultra

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long-haul traffic from the Americas, the Far East and Australasia with its new-generation aircraft.”

Emphasis on integrated logistics Recent wealth generation in the region and the focus of the Dubai government on developing connectivity should ensure the city’s continued rise as a regional and global supply chain hub, Emirates’ Qu said. “Middle Eastern markets - Dubai in particular - are undergoing a phase of strong economic growth and massive infrastructural development. The Dubai government is investing heavily to develop its ports and airports and the transportation industry as well as other industries which may facilitate both tourism and trade through the movement of cargo,” he said. “Both the Dubai World Central International Airport and Dubai Logistics City will turbo-charge the city’s expansion and growth.” Located on the apron of Dubai World Central International Airport, Dubai Logistics City (DLC) is being billed as the world’s first fully integrated logistics platform. The 25 square kilometre facility is designed to serve all modes of transport, logistics requirements and valueadding operations in the supply chain – including manufacturing and assembly – all of which will be available within a single-bond free zone environment. DLC is scheduled to be operational by the end of this year. Dubai’s hefty investment in upgrading and expanding infrastructure is buttressed by the government’s open and progressive policies and regulatory regimes. “In light of Dubai

Dubai enjoys a geocentric location that is a key advantage in facilitating and optimising global supply chain flow

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REGIONALFOCUS

Dubai’s ‘open skies’ policy, for example, has played a major role in the city’s success as an important air transport hub

government’s long term strategy and vision, free economic policies are being adopted to encourage investments which boost commerce, industry and the hospitality industry,” he said. “Dubai’s ‘open skies’ policy, for example, has played a major role in the city’s success as an important air transport hub.” “With millions of US dollars worth of investments in infrastructure including ports, airports and duty free, Dubai and the Middle East, to some extent, will be an integral node in supply chain with emphasis on world class services which are cost-effective to boot.”

Jebel Ali: Dubai’s global gateway DLC is not only being built adjacent to what will be one of the world’s largest and busiest airports, but it will also adjoin Jebel Ali Port and Free Zone, one of the world’s top ten container terminals and a major manufacturing base. Jebel Ali has benefited from the global vision espoused by port operator DP World, which emphasizes comprehensive and integrated facility development combined with a streamlined regulatory environment. DP World chief executive officer Mohammed Sharaf (see Bringing Dubai's success to the world, page 38) has been the global port operator’s head since it was created through the combination of Dubai Port’s domestic and international operations. Sharaf told Chaina magazine that Dubai’s rise was influencing the direction in which global trade was developing. “As economies develop, gateway hubs must evolve too,” Sharaf said. “Connectivity needs to be enhanced as do value added services like logistics parks. Dubai's rise and global expansion is transforming the way in which global trade matures. With 90 percent of traffic moving by sea, our role is critical.”

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Jebel Ali’s capacity will be expanded to stay apace with the cargo capacity increase that the Dubai World Central facilities will bring to the city. Jebel Ali is scheduled to be expanded in as many as 14 stages up to 2030 and will eventually accommodate an annual cargo throughput of 56 million TEU in containerized freight and 150 million tons of general cargo, automobiles and bulk freight. Jebel Ali’s upgrades will solidify its status as one of the world’s largest ports and will help the port challenge Singapore and Hong Kong for global market share. DP World’s role in Dubai goes beyond port operations and development projects – it is driving the Emirate’s emergence as a regional and, perhaps, eventually global finance centre. In October DP World Chairman Sultan bin Sulayem announced that the company plans to raise a minimum of US$3.5 billion in an initial share offering in November as the emirate attempts to attract international investment via sales of assets. The company will sell approximately 20 percent of its equity in order to repay US$3.5 billion in bonds and to supply the government with cash. It will be the biggest IPO to date in the Middle East and is expected to provide Dubai’s bourse with a major boost as regional competition heats up between Dubai, Qatar and Bahrain – all of whom are vying to become the region’s financial centre. The move is seen as a prelude to more listings by Dubai’s multiple government-owned corporations, including Nakheel, which may list by 2009.

Dubai and China synergies Rather than directly competing with China, however, Dubai is poised to serve as China’s gateway into much of Eurasia and Africa. Given its location and logistics infrastructure advantages, Dubai is quickly developing into a

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REGIONALFOCUS

China will obviously play a significant role in [Dubai’s] future growth

distribution hub for Chinese exports to markets that used to be difficult for Chinese goods to reach. Dubai’s Dragon Mart is a prime example of the potential trade and supply chain synergies that exist between China and Dubai. A joint project between China and Dubai developed by Nakheel Property – creators of the Palm trilogy, the World and numerous other high-profile projects in Dubai – Dragon Mart is the largest trading hub for Chinese goods outside of China. At a length of 1.2 kilometres and featuring eight

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fully equipped warehouses, Dragon Mart is intended to serve as the gateway for Chinese products into Middle Eastern and African markets. Since opening in late 2004, Dragon Mart has attracted large numbers of visitors seeking to take advantage of the Middle East’s largest market of Chinese products and its wide selection of wholesale and retail goods. Qu noted that Dragon Mart’s influence extended beyond the immediate region. “As a ‘strategic cooperation’ between the Chinese and Dubai governments, Dragon Mart helps increase Chinese exports, not only to the Middle East, but also to Africa, Eastern Europe and Central and South Asia. China is now one of the world’s highest growth areas and a major economic power which is creating a soaring demand in cargo market. The fast transit times at Emirates’ Dubai hub give China freight forwarders swift and easy access not just to Gulf markets, but also to points throughout the Middle East and Africa.” China will also help drive DP World’s expansion as it plans on doubling its global throughput capacity in the coming ten years. “China will obviously play a significant role in our future growth,” DP World’s Sharaf said. “We continually look at projects and evaluate each of them on their individual merits and demand by our customers. The growth in China is exciting and one we wish to participate in long term. We have already committed to double our capacity within the next ten years and China will be a component of that growth.” NOVEMBER/DECEMBER 2007

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Q&A

Bringing Dubai's success to the world

QA &

Mohammed Sharaf has been chief executive officer of DP World since its formation in 2005 and has been involved in the development of Dubai into a world-class port since joining the Dubai Ports Authority in 1992. As commercial director and managing director of the Port of Dubai, Sharaf played a central role in the rapid development of Dubai’s container terminals at Jebel Ali and Port Rashid, which combined have become a top-ten global terminal facility. Sharaf has overseen DP World’s rise as a top global terminal operator, including the acquisition of the P&O Group in 2006. Lloyd’s List named DP World ‘Port Operator of the Year’ in 2006. Chaina magazine spoke with Mohammed Sharaf about DP World’s strategic vision for the coming years for itself and the global market – plus where China fits into its plans. The two other key issues that we continually focus on are security of the supply chain and safety. We are well on our way to becoming the industry leader in supply chain security as we are the only terminal operator with ISO 28000 certification and also the only operator with CT-PAT membership. Finally safety of our workforce is of paramount importance. We want to ensure that our staff remains safe and secure every single day and each of our managers is expected to focus on that as part of their daily activity. : With the end of 2007 upon us, what developments of the past year do you consider most important in terms of DP World's long-term goals? Mohammed Sharaf: At the beginning of 2007 we updated the long-term strategic plan developed by our most senior managers in our head office and in our eight regions. Moving towards that vision consistently has been our most important task and we are on target with the process. We have also continued to grow our global footprint in alignment with our strategic plan and our customer's growth so that we can be where our customers need us in the future. We have strengthened our HR policy and set up a global management development plan to ensure that we remain a compelling place to work for our people. At the end of the day our job is to make global trade easy and efficient, and to do that we have to continue to grow and to have the right people in place to facilitate commerce. 36

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: How has the rise of Dubai as a world city and logistics hub transformed global supply chain? MS: Dubai has used a global and strategic vision to create a unique hub for world trade. The model that has been developed is one that we are expanding globally and that will have significant advantages for developing and developed economies. Wherever possible we intend to link our Dubai World group parent which has over 80 entities in 100 locations and is one of the world's largest holding companies. We bring multiple local investments once we engage at the port level. For example in Djibouti we have invested in the port, airport, free zone and the country's first five-star hotel. In Vietnam we began with a port development and are now looking at real estate development around the port. : What unique competitive advantages do the Jebel Ali Port and Free Zone offer? MS: As chief executive officer of DP

World I can say that what we have created in Dubai by linking our company with our sister organisation EZ World has become a role model for economic growth globally. Our ability to ease the development of establishing companies, recruiting talented workforces, and streamlining paper processes is something that we will be expanding to other locations. We have created a very robust venture in Djibouti that mirrors our success in Dubai. We are also going to take the same approach in Dakar, Senegal where we have just been awarded port and free zone licenses. The rise in throughput in Dubai mirrors the growth in companies established in the free zone. We now have over 6,000 companies from over 120 countries based in the free zone and the throughput in Dubai has made Jebel Ali the eighth largest terminal in the world. : Looking ahead to 2008, what are the biggest challenges facing port managers and developers? MS: Our studies indicate that global growth will continue for the foreseeable future. We believe that creating enough terminal capacity to keep serving our global customer base is the single most critical challenge. The recent explosion in very large containerships over 10,000 TEUs and rapid growth in containerised traffic is outpacing the growth of terminal capacity in most parts of the world. To enable continued expansion of trade new terminals have to be built and effectively managed.

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New trends in fashion supply chains To achieve optimisation in their supply chains, fashion brands need to take a good look at their end-to-end supply chain capabilities

T

Manzanedo is global chief executive officer of Logisfashion, based in Spain. Juan

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he fashion industry evolves at high speed, modifying the supply chains to adjust to new market conditions. We have recently witnessed how very successful brands experience sudden growth, whereas others decline sharply, in a general environment of favourable development where market conditions change constantly. Among the most relevant changing conditions in the industry we have outlined the following: Unpredictable and unstable demand: This refers to the low predictability of future sales at the SKU (stock keeping unit) level, and not to aggregate sales, which can be anticipated relatively well. The difficulty to predict sales at this level is due to several causes, such as the increasing number of SKUs within brands and the fast change in market trends. Offshoring and globalisation of the supply chain: Nowadays, textile companies of almost every size search for the most convenient

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production locations worldwide and aim to become global brands with sales reaching all possible markets. More flexibility in the industry: Globally, the textile industry is increasing its procurement flexibility, by outsourcing, and in logistics, by reaching out to 3PLs for all or for specific parts of the supply chain, which enables greater flexibility if a change is required by market conditions. Increasing product obsolescence: The same reasons pointed out for the demand unpredictability, bigger number of SKUs and faster changes in fashion trends, also result in manufactured garments becoming outdated in a faster way. High costs in sales outlets: The rise in competition, the limited space available in the appropriate commercial areas, the increase in real estate prices, together with the decreasing manufacturing costs result in an increase in www.chainamagazine.com


FASHIONFEATURE

the proportion of outlet costs compared to production costs. Studies made by big European fashion brands show that each unsold garment in stock in the store represents a cost of 50 euro cents per piece per day.

From manufacturing to customer Fashion brands that are able to control the whole supply chain have the biggest growth rates. This idea is in line with the belief of Zara’s owner, Mr. Ortega, “with one hand reaching the customer, with the other reaching the manufacturing process�. Companies adopting this philosophy are the ones growing and developing, especially if they have their own stores. If a company has a direct contact with its customers and at the same time manages the supply chain upstream from designing to manufacturing, even if through outsourcing, then it will probably find itself in a better position than companies that can only control part of the supply chain, for instance multi-brand boutique-shops or their suppliers. What kind of new supply chain models do these driving forces lead us to?

Upstream Short production periods and tight delivery times. This is mainly the result of the low predictability of sales at the SKU level and the relation this has with the high obsolescence of products. Hence, some fashion brands such as Inditex (distributor of the Zara brand) and H&M, have chosen double supply chain systems, where a supply chain driven by cost and efficiency provides the most basic products, and a second supply chain focused on speed, short production times and flexibility is used for those products that need to adapt to a specific demand at a given time, such as fashion garments. Basically, instead of designing and manufacturing during six months to sell during the following six months, as was the case for the traditional system of the supply chain for multibrand-boutiques stores, the new system enables an important part of the production to be manufactured and even designed adjusting to the changing demand and with lead-times of 15 days to two months. On the other hand, the outsourcing and globalisation of the manufacturing process places an increasing importance on brand quality control (QC) over production. This QC, whether carried out internally or externally by some company specialised in textile QC, becomes critical to ensure that the products reaching the final buyer are in line with the brand requirements. This is certainly a feature of strategic importance as quality is one of the most important values fashion brands want to convey to consumers. Globalisation, especially in sales, creates a clear tendency for QC at origin as opposed to QC at destination. This type of control has www.chainamagazine.com

the advantage of anticipating possible existing problems, detecting them at a time when it is still possible to be dealt with, and helping to homogenise the QC criteria in those cases in which sales are diversified by areas. For similar reasons sales in different areas place an increasing importance on logistics operations at origin. For example, there is a higher activity in logistics operations in China for global European and American brands, which traditionally sent all their products to their distribution centres in order to be delivered to each market. These operations, carried out now in China and in other big manufacturing hubs, are mainly: order preparation for direct distribution to third countries, multi-country consolidation (MCC) in one hub, quality control operations at logistics platforms and occasionally value added services such as labelling, tagging, ironing and co-packing.

Fashion brands that are able to control the whole supply chain have the biggest growth rates

Downstream Also at destination the new conditioning factors are having a direct influence on supply chains. The difficulties to predict the sales at stock keeping unit level are even more severe when predicting sales at store level, so the option of having a distribution centre, centralised at a regional level and with frequent replenishments (usually twice per week) is now more important than ever. This type of set up is important as well in order to maximise store capacity. As mentioned, the cost of having a garment in a store is very high, so outlets must only have high rotation products in small quantities. All products classified as purely stock that can be stored in a distribution centre, products with a low selling performance, outdated garments, and so on, should be removed from the store. This store optimisation process acquires an increasing importance when it comes to reverse logistics, as it is critical to remove as quickly as possible from stores all low rotation products in order to place them at other locations to turn them into best sellers. Thus, reverse logistics is now performed during the season and not only at the end, as was traditionally the case. This type of logistics does not imply selling all these products at discount, since often to complete the size curve or to re-distribute the garments geographically can improve the product rotation and selling performance without reducing its price. In summary, optimisation of the supply chain in the fashion industry is improved through the control of the process from the manufacturing stage to the final sale to the consumer. To obtain the correct control we need the proper tools to visualise the supply chain in real or almost real time: from the actual sales at the store to the inventory in each phase of the chain, including what is being manufactured or transported. NOVEMBER/DECEMBER 2007

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CIOs must pay more attention to the supply chain Mark Samuels, editor, Computing Business, Incisive Media Publications, 2007 Organisations now have a range of business and IT processes to call upon as they attempt to create seamless supply chain integration. Rather than holding stock in expensive warehouse space, firms are looking to make the most of innovative technology to speed up logistics processes, source products direct from suppliers and push final goods quickly to customers. Successful supply chain management is all about overseeing multiples: multiple shopping channels; multiple technologies, including radio frequency identification (RFID); and multiple sourcing locations, such as the Far East. Maintaining consistency across multiple channels, technologies and locations is a considerable task. Take retailer [UK] Argos, who has seen its product line increase from 7,700 to more than 18,000 during the past seven years. As highlighted in this month’s Computing Business cover story, Argos’ supply chain director Steve Melton says providing the goods for a broad range of lines requires a firm hand. “We have been working with key suppliers, particularly those in the Far East, to reduce order quantities and reduce lead times,” he says. RFID technology can help IT leaders track and trace deliveries when errors occur, but it remains a pipe dream for most. Too expensive to tag all but the big-ticket objects, RFID remains associated with the bulk movement of goods, rather than individual items. With more external sourcing now taking place, anything that can improve item tracing might be sensible. The EUwide number of dangerous products reported on a week-by-week basis this year is up 43 percent, with 48 percent of them involving Chinese products. However, strong supply chain management is not just about controlling external suppliers. You will also need to take charge of internal systems and ensure that staff are not scared by innovative IT. Supply chain processes traditionally over-rely on acquired knowledge, a process that can leave a firm exposed when key individuals 40

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leave an organisation. Serviceoriented architecture (SOA) is allowing organisations to re-use resources ondemand in a modularised fashion. Some firms are already taking a lead here, illustrating how enterprise resource planning and electronic point of sales systems can form part of a holistic logistics system. The innovative use of IT should mean the days when the supply chain was the most intractable leg of the product delivery journey will be increasingly distant memories.

Why Vietnam is not the next China www.allroadsleadtochina.com There has been a lot of talk lately about where people will go should the China bubble burst, where to go when suppliers in China cannot be trusted, and more importantly where to go when congress slaps punitive tariffs on China… Well... it isn’t Vietnam. And here is why. When this conversation occurs, it is typically started with “what if” and usually will involve India and Vietnam in some manner. There are articles about Vietnam’s progress, blog posts about its future, and more talk. The problem is, like in India, that it is missing the infrastructure…. specifically its logistics infrastructure. When speaking about China’s economic miracle, it is clear that without modern ports that could cycle millions of TEUs, the trucks that were capable of handling the containers, the roads for the trucks to drive on, etc… China’s economic position in today’s world would have been much different… and with a background in logistics, one of the first things I do when looking at the

potential suitability of a city is look at its logistics infrastructure. However, as you can see in [a recent presentation by Port Klang in Malaysia], Vietnam has a looong way to go. What struck me after reading through this presentation is not just the fact that textiles, shoes, and oil are the top three exported items... it is that 75 percent of all exports leaving Vietnam on a plane are garments (39 percent), footwear (25 percent), and handicrafts (10 percent). In my mind there is only one reason why you would export any of these on a plane) because the throughput (ie. capacity) of Vietnam’s seaports is far less than it needs to be… 3.137 million TEUs were exported from Vietnam’s ports in 2006 (Shanghai port alone was over 20 million TEU). For manufacturers, what this means is that in order to get your goods out of China, you will need to pay a significant premium. Perhaps the short jump to HK or Singapore is all that is required, but the costs are not just monetary... they are also in time. Right now, this is probably an acceptable short-term solution as the goods being sent have quotas in China, but not in Vietnam. So there are savings there that may offset the cost of the transport, however, Vietnam still has a long way to go in many areas... and logistics is probably going to be one of the biggest pieces of the puzzle to come. Fortunately, a couple of weeks ago the government announced that it would pump US$4.5 billion into their ports over the next five years to allow for the additional capacity needed to meet demand. … let’s just hope that is 4.5 billion now.

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

Phil Murtaugh leaves SAIC for Chrysler

Chrysler has named Philip Murtaugh as chief executive officer of its Asian operations. Murtaugh leaves Shanghai Auto (SAIC) where he headed up the firm's burgeoning international strategy and operations.

experience operating in China, where the suburban Kansas City company already has a jointly owned air freight importer and logistics operation. It also is in the process of acquiring Shanghai Jiayu Logistics Ltd., one of the country's largest less-than-truckload carriers. Byrnes is a senior adviser with Yuan Associates, a consulting firm based in Beijing. He also served as president of Tyco International China and oversaw Chinese operations for Rockwell Automation. Schulz recently retired after 32 years at Ford Motor, overseeing the company's efforts to expand the brand internationally. “This is an exciting time in YRC Worldwide's transformation and as we continue our strategy of growth, particularly in China, we are confident that our position as an industry leader will be strengthened by the guidance and perspective from Michael and Mark,” Bill Zollars, the company’s chairman and chief executive said.

Phil Murtaugh

In his new role at Chrysler, Murtaugh will be responsible for all of Chrysler’s Asian operations, including China and India. “I can’t think of anyone more qualified to lead our business activities in this critical growth region,” said Michael Manley, Chrysler’s executive vice president - international sales. “Phil has a proven track record and we are excited he has joined our team.” Before joining SAIC in June 2006 Murtaugh served as chairman and chief executive officer of the General Motors China Group from June 2000 until April 2005. Based in Shanghai, he was responsible for the overall coordination of GM’s extensive operations in mainland China and Taiwan. He also was a member of GM's Asia Pacific Strategy Board.

DHL appoints new AP COO DHL has named Kelvin Leung as its new chief operating officer for its global forwarding business in Asia Pacific. Leung was previously vice president of DHL Global Forwarding for Hong Kong, south China and Macau, where he was responsible for the long-term strategic planning, sales and operations as well as business development of the regional DHL global forwarding logistics markets, a company statement said.

DHL Express names new AP CEO DHL Express has appointed Dan McHugh as chief executive officer of DHL Express, Asia Pacific, after having been acting chief executive officer since July when predecessor Scott Price was named head of DHL Express, Europe. McHugh joined DHL Express Asia Pacific in April 2005 as senior vice president, commercial, and was responsible for sales, marketing, pricing, market research, product development and customer service for the Express unit in Asia Pacific. “Dan has a proven track record, both in DHL and in the logistics industry, as well as an excellent knowledge of Asia,” said global chief executive officer John Mullen. “I am confident that Dan will write important chapter in the DHL Asia Pacific success story.” Before joining DHL, McHugh was the executive vice president of sales at APL, having previously served as president, Asia/Middle East for APL.

Rotterdam rep in Guangzhou The Port of Rotterdam Authority has appointed Jeffrey Gao as Rotterdam representative in Southern China, based in a new office in Guangzhou. In 2000, Gao switched careers from recruitment to the logistics industry, and became senior co-ordinator for supply chain management at Maersk Logistics, and then manager of P&O Nedlloyd’s shipment management department. He returned to Maersk in 2006 as manager of the export shipping department.

YRC Worldwide appoints new directors YRC Worldwide has appointed two new members to its board of directors to help the trucking and logistics company as it pushes into Asia. Michael T. Byrnes and Mark A. Schulz each have extensive

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CLASSIFIEDS

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COMPANYINDEX

EVENTSCALENDAR November

S

29

5

12

19

26

30

6

13

20

27 Marintec China 2007 November 27 - November 30 Shanghai, China www.marintecchina.com

M

31

7

14

CHaINA Summit & Expo 2007 November 7 - November 9 Shanghai, China www.supplychain.cn

T

1

8

21

28

PROCURETECH LIVE 2007 November 21 www.procuretechlive.net

15

22 23

29

16 17

23

30

W

2

Spare Parts Logistics Summit 2007 November 23 New Delhi, India www.supplychains.in

T

3

10

17

24

1

4

11

18

25

2

3

10

17

24

31

4

SITL Asia 2007 December 10 - December 12 Shanghai, China www.sitl-asia.com

18

25

1

5

11

19

26

2

6

13

20

27 23

3

7

14

21 17

28 24

4

8

15

22

29 25

5

9

16

23

30

6

31

7

14

21

28

1

8

15

22

29

2

9

16

23

30

F

S

December

S

M

T

Auto Logistics & SCM Summit 2007 December 5 - December 6 Shanghai, China terrapinn.com/2007/autochina

W

T

F

S

January

S

M

Supply Chain CSR Summit January 23 Shanghai, China www.supplychain.cn

T

3

10

17

24

31

4

11

18 17

25 24

1

5

12

19

26 25

2

6

13

20

27

3

W

T

Accenture ............................................................................ 6, 26 AGS Logistics...................................................................... 13, 19 Alaris Consulting...................................................................... 26 Allroadsleadtochina.com.................................................... 22, 25 AMB Property............................................................................. 5 APL............................................................................................ 42 Argos......................................................................................... 40 Arlington................................................................................... 30 AstraZeneca.............................................................................. 13 Automotive Resources Asia...................................................... 46 BaoYun Logistics...................................................................... 16 BAX Globa................................................................................ 28 Best Buy.................................................................................... 17 Bic Camera................................................................................ 18 BLOGIS..................................................................................... 11 Booz Allen Hamilton................................................................ 12 BT.............................................................................................. 24 Carphone Warehouse ............................................................. 18 Carrefour................................................................................... 24 CB Richard Ellis........................................................................ 15 Chang’an Motor........................................................................ 14 CHEP......................................................................................... 22 Chic Holdings........................................................................... 15 China Petroleum & Chemical................................................... 12 China Strategic Dvlpt Partners................................................. 24 China Supply Chain Council........................................ 26, 37, 47 Chrysler......................................................................... 15, 42, 46 Colliers................................................................................ 10, 11 Computing Business................................................................. 40 Continental................................................................................ 14 DaimlerChrysler........................................................................ 12 Danfoss Intl Procurement Offices............................................ 23 Dell............................................................................................ 18 DHL............................................................................... 16, 31, 42 DP World............................................................................ 34, 36 Dragon Mart.............................................................................. 35 Embarcadero Systems Corp..................................................... 26 Emirates.................................................................................... 33 EZ World................................................................................... 36 FAW........................................................................................... 13 Finnair Cargo.............................................................................. 2 Ford Motor.............................................................. 12, 14, 42, 46 Gazeley..................................................................................... 16 General Electric........................................................................ 14 General Motors................................................................... 12, 42 GlaxoSmithKline....................................................................... 12 GoKunming........................................................................ 32, 43 Gome Electrical Appliance................................................ 17, 18 Goodman Group...................................................................... 30 Goodyear.................................................................................. 14 H&M.......................................................................................... 39 Haier.......................................................................................... 19 Havi Food Services................................................................... 22 Hymall....................................................................................... 24 IBM............................................................................................ 12 Inditex....................................................................................... 39 Intel........................................................................................... 26 IU Kelley School of Business................................................... 27 Jebel Ali Port............................................................................. 34 Johnson & Johnson.................................................................. 12 Kerry EAS.................................................................................. 16 Knight Frank................................................................. 23, 25, 43 Kong & Allan.............................................................................. 8 Lenovo...................................................................................... 21 Logisfahion............................................................................... 38 Lotus Group.............................................................................. 30 Maersk....................................................................................... 42 Mapletree.................................................................................... 7 Mazda Motor............................................................................. 14 McDonald’s............................................................................... 22 Menlo Worldwide..................................................................... 15 Meridien Group Hong Kong.................................................... 32 Metro................................................................................... 19, 24 Michael Page............................................................................. 43 Michelin.................................................................................... 14 Microsoft................................................................................... 12 ModusLink................................................................................ 18 New City Corporation.............................................................. 15 Nokia......................................................................................... 17 P&O Nedlloyd.......................................................................... 42 PetroChina................................................................................ 12 Pfizer......................................................................................... 12 Port of Dubai............................................................................ 36 Port of Rotterdam..................................................................... 42 PricewaterhouseCoopers.......................................................... 22 Richland Group........................................................................ 16 Rockwell Automation............................................................... 42 SAIC..................................................................................... 13, 42 Savills........................................................................................ 17 Schenker................................................................................... 28 Schneider Logistics................................................................... 16 Shanghai Jiayu Logistics........................................................... 42 Siemens..................................................................................... 12 Staples....................................................................................... 17 Suning Appliance..................................................................... 17 TEDA......................................................................................... 26 Tesco......................................................................................... 24 Tianjin Zhongtian Aviation Ind Invt........................................ 26 Toyota....................................................................................... 12 TradeBeam................................................................................ 26 Tyco International.................................................................... 42 UPS............................................................................................ 18 UPS SCS.................................................................................... 23 Volkswagen............................................................................... 13 Wal-Mart.............................................................................. 18, 24 YRC Worldwide........................................................................ 42 Yuan Associates........................................................................ 42 Zara........................................................................................... 39

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CHINA SUPPLY CHAIN IN NUMBERS year. In September alone, retail sales expanded 17 percent year-on-year. Retail sales in urban areas climbed 16.3 percent to RMB4.33 trillion while in rural areas it increased 14.9 percent to reach RMB886 billion.

China FDI slowed in 2006

Ford, Chrysler sales up in China Ford Motor's sales of vehicles in China rose 30 percent in the first three quarters of 2007 over the same period last year to 149,455 units. Sales of the hot-selling mid-sized Focus sedan, popular among young professionals, rose 69 percent to 90,249 units, while sales of premium brands such as Volvo, Jaguar and Land Rover were up 72 percent to 14,063 units. Meanwhile, Simon Elliott, president and chief executive officer of Chrysler Group China Sales, forecast Chrysler's sales in China will more than double to around 20,000 vehicles this year from fewer than 8,000 units last year, boosted by sales of a few popular new models. Elliott said, "We are looking at new opportunities in the segments we don't cover today ... The small car and compact car segments, two of the biggest segments in China, will be very much under our spotlight. Chrysler doesn't have a small car with a small engine. We have to find somebody that does, (and) make sure the quality and pricing are right." Small cars are increasingly popular in China. According to data from Automotive Resources Asia, sales of subcompact cars in China jumped 46 percent from the previous year to 118 million units during the January-toAugust period, accounting for a 35.3 percent market share of the entire local auto industry.

A RMB350bn National Day holiday The retail sales of consumer goods in China rose 16 percent year-on-year to almost RMB350 billion during the week-long 'Golden Week' National Day holiday. The Chinese government launched Golden Week holidays in 1999, in the hope of encouraging people to spend more money for the benefit of economic growth.

record, meaning there are now ten 100 million-ton ports in China. The other nine 100 million-ton ports are in Shanghai, Ningbo, Guangzhou, Tianjin, Qingdao, Shenzhen, Qinhuangdao, Dalian, and Rizhao. This is still some way behind the United States, which is estimated to have between 40 and 50 100 million-ton ports.

China vehicle sales up 24.46%

Retail sales rise 15.9%

Total auto sales in the first nine months of 2007 rose 24.46 percent year-on-year to 6.46 million units, with output up 22.78 percent at 6.51 million units.

China's retail sales rose 15.9 percent year-on-year to RMB6.38 trillion in the first nine months of 2007 despite a soaring consumer price index. The growth rate of retail sales, a major gauge of consumer spending and an indicator of market movement, was 2.4 percentage points higher than the growth rate of the same period last

China has ten 100 million-ton ports The handling capacity of the second largest port in northeast China, Yingkou Port has broken the 100 million-ton 46

NOVEMBER/DECEMBER 2007

A UN report has found that China was the third-largest recipient of foreign direct investment in the world in 2006, after the United States and the UK, state media reported. The report said that the FDI figure of US$69 billion represented a decline of 4% from 2005, the first time that the number has declined year-onyear in the last seven years. A possible reason for the decline is China's recent push for investment in high-tech and service industries rather than labourintensive manufacturing industries, though the latter remain the most attractive to foreign investors.

China logistics turnover up 15.3% The aggregated turnover of China's logistics industry totalled RMB26.8 trillion in the first half of this year, up 15.3 percent on the same period in 2006, a growth rate one percentage point slower than 2006 over 2005. In a breakdown by sector, turnover of industrial commodities came to RMB23.4 trillion, up 15.6 percent year-on-year. Turnover of imported goods climbed 14.2 percent year-on-year to RMB2.95 trillion. Turnover involving farm produce stood at RMB461.5 billion, representing a rise of 5.1 percent year-on-year. Rising global energy prices are forcing companies operating in China to pay more for logistics.

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 750 manufacturing companies.

% 60 58 56.1

56 54 52 50

OCT 06

SEP 07

Source: China Federation of Logistics and Purchasing

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2007 Nov-Dec Issue