Outdated logistics threaten China's economic growth

China needs to bring its logistics infrastructure and supply chain management capabilities into the 21st century if it is to maintain its competitiveness in the global marketplace.

Studies show that logistics expenses in China are higher than in countries with mature logistics infrastructure, and this has pushed up the cost of its goods. Industry analysts and third-party logistics providers said these supply chain inefficiencies, left unchecked, would undermine China's long-term economic growth.

"Compared to developed countries where logistics costs are approximately 9 per cent to 10 per cent of GDP, logistics costs accounted for about 21 per cent of GDP in China," said Jerry Hsu, president, Greater China area, DHL Express Asia Pacific, citing Ren Xingzhou, director of the Market Economy Research Department at the State Council's Development Research Centre.

Mr Hsu said research showed that stock and inventory tended to lie around in warehouses for about 35 to 45 days in China, compared with less than 10 days in developed countries, and the mainland's maritime transport fleets were setting sail with cargo holds on average 37 per cent empty.

There were many reasons behind the mainland's relatively high logistics costs, Mr Hsu said, not least the sheer size of the country and its rapid economic expansion, which had left it playing catch-up with its infrastructure planning and development.

"Another aspect is the inefficiency that exists in manufacturers' logistics operations. For example, raw or semi-finished materials for production are sourced from around China and have to be brought into factories for production and final assembly. Transportation of these materials can be minimised by moving certain assembly processes to a hub, thereby reducing the logistics costs and time involved in the process," Mr Hsu said.

Owen Tang, a tutor and programme planner in the logistics department at Polytechnic University, said one of the largest obstacles to more efficient supply chain management in China was the fragmentation of the logistics market.

"It has been estimated that there are about 5million trucks in mainland China and about 2.5million registered logistics companies. That's an average of only two trucks per company," he said.

What this suggested was that few Chinese logistics companies had meaningful economies of scale. Indeed, most were run as family businesses, lacking the best practices and technological means employed by counterparts in developed markets, he said.

In terms of technology adoption, the chief area in which China's logistics industry needs to be brought up to date is in shipment tracking. Logistics operations in the mainland still rely on the Universal Product Code system, the worldwide barcode standard introduced 30 years ago, whereas their counterparts in the United States are starting to use radio frequency identification (RFID) technology to track individual shipments in real time.

Mr Hsu said the lack of transparency in shipment status on the mainland meant customers could not manage their supply chain as effectively as they should.

"There is also a lack of standardised systems throughout the supply chain. Significant manpower resources are consumed to move information from one system to another. Standardisation can save manpower and resources," Mr Hsu added.

Mr Tang said government support through policy and investment would play a key role in the industry's growth, and this had been acknowledged in Beijing's 11th five-year plan. In addition to 14 major expressway projects (including one running from Beijing to Hong Kong and Macau), transit systems for the transport of coal, imported oil and minerals to support ports, and the construction of 42 new airports and expansion of existing ones, the government had pledged to invest more in logistics hubs and professional distribution centres, and to encourage the adoption of modern supply chain management technologies and best management practices.

Ironically, these efforts may come unstuck at the level of local government. Mr Tang said operating licences were awarded on a provincial basis and local government agencies frequently abused this authority to protect local logistics operators. Protectionism was rife among local government authorities, who defended the interests of local transport companies by creating complicated licensing and inspection requirements for logistics operators from other provinces and overseas.

Market research company Accenture reported that in many places, trucks from other provinces were stopped at city borders and made to pay tolls that local trucks were not required to pay, and in some cases were asked to unload and reload onto local vehicles. In its 11th five-year plan, the government acknowledged that this issue also needed to be resolved.

Mr Hsu believed third-party logistics providers such as DHL also had a role to play in creating a more efficient supply chain in China. He said one way in which his company was playing its part was by educating the market about the importance of third-party logistics and supply chain management to doing business efficiently. To this end, DHL had invested in a management training facility in Shanghai to teach its local employees and customers to look at supply chain management strategically.

"Through the DHL Logistics Management University, DHL aims to do its part in helping to raise the standards and the level of professionalism of our employees and the logistics industry in China and the Asia-Pacific region."

The university opened in mid-September last year and is targeted at DHL's employees and corporate customers in junior, middle and senior management positions in China and across the Asia-Pacific.

Mr Tang said customers of Chinese manufacturers were another catalyst for change. Large buyers from the US, such as Wal-Mart, had implemented RFID programmes and were forcing their major suppliers to meet their technology mandate.

Chinese manufacturers dealing with US companies may also need to comply with Sarbanes-Oxley regulations, a chore made easier with RFID shipment tracking systems in place.

Mr Hsu suggested a two-step process for Chinese manufacturers looking to adopt modern supply chain management methods: "Firstly, Chinese companies can benefit tremendously from a strategic review of their current supply chain process to identify inefficiencies and then re-engineer supply chain management so that it becomes an integral part of the company's strategic processes."

Secondly, Chinese companies, especially those actively marketing their brands in international markets, should look at outsourcing supply chain management, he said.

"Increased global distribution and the need for enhanced after-sales customer service will drive the use of third-party logistics as well as outsourcing. Studies found that if an enterprise used third-party logistics, it could reduce costs by 5 per cent. Cost reductions would increase [up to] 20 per cent if the company re-engineered the supply chain and uses third-party logistics.

"There is no better time for Chinese companies to invest in supply chain technology and solutions, considering the opportunities that abound in the marketplace and the growth that Chinese companies are experiencing," Mr Hsu said.