The Many Faces of Logistics In China

The economic miracle of China goes beyond the evolution of its manufacturing capacity and extends to the development of its logistics capability. A critical challenge for China today is its emphasis on provincial economies and local control.

Each province has set up its own infrastructure and its own set of tax laws for transportation, explains Jack Gross, vice president and general manager of Schneider Logistics Inc. (Green Bay, Wis., www.schneiderlogistics.com). Schneider spent over a year in China learning about the domestic market and Gross easily admits the direction the company is taking there is not what they thought when they first came to China.

His best advice to anyone who wants to participate in the domestic Chinese market is, "You have to go there with the thought of giving back to the country. The government, as a whole, is very interested in companies that offer something, be it intellectual capital or anything else that will help them develop their own country."

The Chinese government's current Five Year Plan calls for completion of thousands of miles of highways with a goal of connecting all cities over 250,000 population. It also sets goals for developing rail infrastructure that would support intermodal transport. And, to complete the surface transport picture, there are plans for water infrastructure. China is not only investing heavily in coastal ports, it is also developing its inland ports and waterway system, again with an eye to intermodal.

The current system for long-haul or inter-provincial transport looks like a black hole, says Gross. No one knows how to get things moved. Because motor carriers are taxed and licensed at the provincial level to pick up and deliver within the province, there is little inter-provincial or national service. If a carrier delivers to another province, it can't pick up a load there unless it has the appropriate license. Myriad tax laws and regulations have spawned thousands of small, provincial transport organizations with one or two trucks, he says. At the other extreme is a giant state-run group.

Using the U.S. transport system as an analogy, picture this: China's rail and waterway systems are somewhere in the heyday of this country's 19th Century expansion. Trucking hasn't pulled out of the intrastate mode on a regulatory or tax basis, and President Eisenhower's dream of an Interstate Highway System is just a couple of years into construction. But instead of another 75 years to develop a rail network and 25 years to build a highway system and sort out the regulatory and tax structure to support it, officials want to get it all done in five to 10 years.

Some private sector companies like Schneider are working with the central government and provincial politicians to evolve an equitable system of rules governing transport operations, safety and taxation. It's like compressing the entire history of the U.S. Interstate Commerce Commission, U.S. Department of Transportation, the formation of the European Union and its DG VII transport and environment directorate, all of the battles over interstate and intrastate regulation and deregulation, access, transport tariffs, highway funds, cabotage and safety into one short process.

The Chinese government must look at the taxation and funding issues with an eye to maintaining the revenues at the provincial level while not overburdening shippers, consignees and carriers. Safety rules are beginning to roll out as well, most notably on the practice of overloading. But, as Gross points out, there is still no clear picture of what's a "standard" piece of equipment.

Ken Vieth, a partner with Americas Commercial Transportation Research Co. (Columbus, Ind.,www.actresearch.net), points to a developing commercial vehicle market in China. The initial focus for manufacturers going to China was to produce parts for export, he says. China's government had an initial attitude that to protect its local industry, foreign manufacturers had to export any product they made there. Now, growing demand in the commercial vehicle sector is following the developments in the automotive industry and manufacturers are seeing opportunities to produce parts for China's domestic assembly operations while they eye the potential for finished vehicle production.

Infrastructure development is beginning to affect the commercial vehicle market in China, creating more demand for larger vehicles, notes Vieth. ACTR has monitored the global commercial vehicle market, which was divided between the United States, Europe and the rest of the world. Now, the market is split into four parts between the United States, Europe, China and the rest of the world.

Class 8 vehicle demand has previously been strong in third-world nations but not China, Vieth explains. Export demand is filling some of the gap left as the U.S. market winds down from the massive pre-buy of vehicles ahead of the new engine requirements. But that's only taking up part of the slack, according to Vieth. If anything is holding back the more rapid growth of Chinese demand it is that there aren't logistics companies to take advantage of the larger vehicles.

No one is putting together loads, says Vieth, and they don't have the capability to do long haul. His comments support the opportunities noted by Schneider's Gross. Clearly, as the physical infrastructure expands, capacity for longer-haul, large vehicles will increase. Major global logistics players are poised to enter the market.

Joel Greenberg, v.p. of strategic accounts for APL Logistics (Oakland, Calif. www.apllogistics.com), may agree that the logistics industry in China is still developing, but he says it is possible to establish operations on a U.S. model. One APL client exporting raw materials to China now exports to bonded areas in China. Everything is sorted and segregated at a provincial-level distribution center by container load and then down to the product level. The materials are then sold to end users who can typically take overnight delivery.

There's more interest and ability to develop this sort of distribution program than there was three to five years ago, says Greenberg. He offers another example, this time of a Chinese importer of liquor. The bottled product comes to a bonded APL Logistics facility in bulk where it is picked and packed based on specific store orders. The distribution center can also do kitting, and it will put together gift baskets that include imported liquor and Chinese-made glasses.

In both instances, the regional distribution operations closest to the customer arrange for transport, so some of the issues of determining the best carrier in a region are driven down to the local level. Such basic distribution operations are not revolutionary by U.S. standards, but, says Greenberg, the prevailing thinking a couple of years ago was that you can't do logistics services in China. There's no logistics expertise to do it.

"Well, they're gaining logistics expertise very quickly, and they are extremely adept at setting up processes that let you do or provide services to end customers. So it's moving very quickly," he says.

APL Logistics provides extensive training. Still, there is a lot of turnover. Greenberg says it's like Hong Kong 10 years ago, when unemployment was about 2%. You are always going to have a few people who will jump to another company, he explains, but "you have to spend the time and make the effort to teach and train your people and get them to start thinking creatively."

If there's a benefit to the churning workforce, Greenberg offers an example of one employee who has worked for the company three times. "Each time she comes back she brings new attributes," says Greenberg. Working for an exporter, importer or a major manufacturer, re-hires bring a different skill set and understanding when they return.

Things may be getting easier when it comes to running logistics operations in China, but they're not easy yet. "Importing to China is much, much more challenging than exporting from China," says Jiwei Ye, a China-based trade specialist with JPMorgan Chase Vastera (New York www.jpmorganchase.com). And just to set the record straight, he points out that while China is a big exporter, 30% of its gross domestic product (GDP) is imports. That's three times the level in Japan and double that of the United States.

For U.S. exporters to China, the first layer of challenges is the U.S. government, says Ye. Under various export controls, many products still require special export licenses. If the customer is the Chinese military, it is even more complicated.

An often neglected area, says Ye, are the "incoterms" applied to a contract. Published by the International Chamber of Commerce, international commerce terms (www.iccwbo.org/incoterms) specify which responsibilities on an international shipment belong to the seller and which belong to the consignee or buyer.

There are at least four different government agencies that regulate trade in China, says Ye. One handles administrative details like quarantine and inspection. There's also a tax bureau that handles value added tax (VAT). The State Administration of Foreign Exchange regulates currency issues. And finally, there is a state licensing agency.

The second piece of the overall regulatory environment is, as Ye puts it, very dynamic. Unofficially, there are about 40,000 different laws, regulations and rules governing trade, which can change overnight, he says.

Ye offers an example of how complex the mesh of rules can become. If the government were to publish a regulation promoting environmental consciousness on June 30th, companies that are making products that are not environmentally friendly may not enjoy a VAT rebate. And, if the rule was published on June 30th, it will likely go into effect on July 1st.

"That's not the end of the story," says Ye. "If you don't have a VAT rebate, you can't do bonded processing, which means you cannot import raw materials, withhold VAT on those materials and process them, manufacture and export finished goods without paying VAT."

A third issue, says Ye, is that unlike the United States where a very detailed version of a law will be published in the Federal Register, in China the law may be just three pages at a high level. A detailed implementation guide will then be published by local customs authorities. China has 41 regional customs authorities, about 133 local customs authorities and over 30 different ports. A multinational company exporting to China may follow the rule for entry at Shanghai but the identically classified product may not be cleared to go through Tsing Tao.

On a final note, Ye says that foreign companies often come up against "the Chinese way of doing things." There are a lot of gray areas, he says. He's not talking about things like bribery. In this environment where rules are changing and interpretations vary by region, Chinese employees of a foreign company may not be as focused on compliance as the company itself may be. They may feel the system isn't relying on them to be compliant, as much as it's relying on the government to catch them doing something wrong. If it is less costly or more expedient to operate in this gray zone, they may do so. Perhaps that's the final layer of regulatory interpretation, the unofficial one.


The Chinese government must look at the taxation and funding issues with an eye to maintaining revenues . . . while not overburdening shippers.

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