China by the numbers

Opportunity comes at a price. If you're sourcing in China, logistics pays the price in the form of long lead times, reliability issues with carriers, as well as production, regulations and bureaucracy. Despite these pain factors, better than 94% of respondents to a recent global survey by Logistics Today and Transport Intelligence say they will maintain or increase their dependence on China in 2006.

Most supply chain strategies for China are geared to sourcing there, not managing or owning production facilities. For the 60% of respondents who source in China without owning or managing production, their dependence on Chinese manufacturers can be summed up in the comment, "Your first order is usually perfect, then things start to slip unless you have inspectors on the scene who can reject product immediately. The trend is that the Chinese are getting better at staying on specification for the duration of the order."

Quality control isn't only an issue in production — packaging, pallets and warehousing operations are all challenges of sourcing in China. Customs clearance and other bureaucratic impediments combine with carrier reliability to plague logistics managers with frequent delays, respondents say.

Frequent travel to the region is part of the solution and one of the frustrations often cited. With 60% of survey respondents saying they outsource all production, it is not surprising to find nearly 56% outsource most or all warehousing and distribution operations in China.

But China is still an export-oriented market, making outsourcing a transportation-centric matter. Third-party logistics companies (3PLs) provide logistics services for fewer than 20% of shippers, while freight forwarders handle over 60% and ocean liner companies another 15%. That may be one reason logistics providers rank pretty highly on valueadded services — they have to. The weak links are in knowledge of regulations and understanding the local market.

One signal that the export orientation will start to shift is the number of companies reporting they are likely to start using a Chinese provider for warehousing and distribution within the next five years. Nearly half (48%) say they are likely to use a Chinese provider. That figure jumps to 57% for the consumer goods segment, where the focus is clearly on the potential to develop a domestic market presence.

Though some industry segments have a stronger concentration in one region over another, the current emphasis is on areas along the Chinese coastline. The Pearl River Delta in Southern China leads the Yangtze River Delta in Southeast China by a little more than 4% until Hong Kong is included in the Pearl River Delta, then Southern China accounts for 46% of sourcing reported by survey respondents. At one third of the sourcing handled by the Pearl River Delta, the Beijing-Tianjin-Bohai Bay Triangle is China's third largest source for export goods.

Viewed separately, automotive production is concentrated more heavily in the Yangtze River Delta, while high-tech industries do more sourcing in the Pearl River Delta. Consumer goods split about evenly but also source nearly as much from Hong Kong as either of the other two regions.

It's no surprise that most goods move by ocean from China, except for hightech, which moves 61% of its goods by air.

Consistency and reliability will need to improve in production and all along the supply chain. Customs and other regulatory areas continue to constrain supply chains. And, while low cost has been one of the major benefits of sourcing in China, labor rates and other costs are inching up. This is a longer term concern for the companies sourcing in China, especially with the Chinese government dropping its currency peg to the U.S. dollar and revaluing the currency (the renminbi) by 2.1% in July. The government has reportedly said this is the first step in a move to a more flexible exchange rate system. The Chinese government is likely to resist U.S. pressure for a large appreciation of its currency.

In November 2005, Logistics Today and U.K.-based Transport Intelligence (www.transportintelligence.com) surveyed shippers and logistics service providers, asking about their issues, concerns and experience in China. Shippers responding to the survey were based in North America, Europe, China, Asia, Latin America and the Middle East. They represented each of the major vertical industry segments, with the strongest representation coming from consumer goods, retail, high-tech and industrial goods.

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