Distribution remains a challenge in China. Is there hope?

Distribution remains a challenge for foreign companies in China, but recent developments offer hope.

Moving goods around China, long a bugbear of foreign companies operating in the country, is getting easier. This is thanks to rapidly improving infrastructure and a number of key regulatory changes allowing foreign freight-forwarders to set up 100%-owned ventures and foreign companies in most sectors to operate their own distribution arms.

For specialist logistics businesses, the big change came at the end of 2005, when freight-forwarders were allowed, as agreed under the terms of China’s World Trade Organisation (WTO) accession agreement, to set up wholly foreign-owned operations. For other companies, particularly manufacturers, the introduction in 2004 of a whole new category of business—the foreign-invested commercial enterprise (FICE)—gave foreign enterprises the right for the first time to establish both wholesale and retail businesses.

A subsequent relaxation of the rules that came into effect in March this year allows local rather than central commercial authorities to approve most FICE applications. This has led to a major fall in processing time, and a huge surge in approvals. In Shanghai, the country’s biggest commercial centre, the 600-plus FICEs established in the first half of 2006 outnumbered the entire total for 2005. While various restrictions remain on FICEs’ freedom to operate, particularly on the number of outlets a company can operate in any one region, there are now no geographical limits on where a company can set up such businesses.

The outcome appears to be happier foreign companies. The US-China Business Council, in its 2006 survey of its members, found that 57% reported an improvement in distribution. Moreover, whereas in the previous two years, distribution rights had topped or come second in the list of issues of concern, this time round distribution had dropped to seventh place.

Roadworks coming along

The regulations are not the only area in which there has been improvement. After a decade of heavy road-building, China’s 34,000 km of expressways form a network that more or less links most provinces to each other. Routes are often roundabout, and journey times long. But it means that companies are now beginning to be able to lay the foundations of national distribution networks.

Sims Trading, a Hong Kong-based logistics company, now reckons it can drive a truck to anywhere in China—a service it indeed provides to Wal-Mart, distributing imported products to the US retailer’s 60 stores across the country.

In the air, FedEx Express, a US courier company, similarly is positioning itself to move packages around China as well as in and out of the country. In January this year it took advantage of the change in ownership laws to offer the Chinese partner in its seven-year-old international courier joint venture USD400m for its 50% stake in the business. As part of the deal, FedEx Express is also acquiring the Chinese partner’s separate 89-branch nationwide delivery network.

Other foreign transport companies are also readying themselves to acquire domestic trucking and logistics companies. Hong Kong logistics firms are likely to be at the front of the queue, having taken advantage of the slightly earlier access they were allowed to the market because of the Closer Economic Partnership Arrangement agreed between the Hong Kong government and Beijing to open various sectors ahead of China’s WTO timetable.

Headaches remain

All the same, moving goods around China remains an unpredictable business, with many problematic areas. The railways remain a mess. Though things are set to improve over the next five years—the country’s 11th Five-Year Plan, running from 2006-10, has made investment in rail a priority—it will take at least a decade for enough new projects to have been completed to make a noticeable improvement to the seriously overburdened network.

Meanwhile, on the roads China’s many thousands of small trucking companies make competition cut-throat—and quality of service a major issue. With the price for taking a truck from Shanghai to Guangdong having dropped from around Rmb10,000 (USD1,265) to Rmb6,000 in the last few years, it is unsurprising that trucking companies seriously overload their vehicles to try to compensate for falling margins.

With vehicle-tracking systems amounting to nothing more than giving a driver a mobile phone then calling him to find out where he is, trucks and their goods occasionally disappear, especially when the load is more vaulable than usual.

Developing the soft infrastructure to manage this problem may prove harder for China than building roads. What is needed now is development of skills in everything from road management and maintenance to safety and insurance, plus the assorted back-up services that are vital to effective distribution.

China has plenty of warehouse space, points out one manager at an international logistics firm, but most of it is nothing more than empty buildings. Good, well-designed storage space, and the management to run it, remains in very short supply, even in places such as bonded zones, and expensive.

Local protectionism is another major headache. Tolls collected by local officials can amount to one-third of transport costs, says a manager at a Hong Kong-based logistics company. And even the biggest, richest cities continue to try to protect their own transport businesses rather than allow the sort of competition necessary to improve service. Shanghai, for example, still bars trucks from outside the city entering at various hours of the day.

This means that while a transport company can take goods out of its home city, it will be hard pressed to be allowed to take on loads at its destination—there, companies from that locale will be preferred for business.

While for truckers—and for service standards and costs overall—this is bad news, it also presents an opportunity for companies needing to distribute their goods. Sims Trading suggests a cost-effective way to get goods to Shanghai is to find companies from the city whose trucks would otherwise be returning empty to their home base and to negotiate lower transportation rates with them.

This also underlines the fact that for foreign companies looking to move goods around the country, it is probably still best to find experienced help—in the shape of trucking companies, freight-forwarders and warehousing providers—that can be trusted and relied upon. Going it alone may now be possible in terms of distribution in China, but doing so is not recommended for any but those with the deepest pockets and longest of long-term plans.