China Carries a Torch for Logistics

China's recent commitment to improve investment in infrastructure furthers the cause of logistics. And both infrastructure development and logistics got a positive bump from the Beijing Olympics.

Operating in China is complex and much of logistics continues to be subject to regulation on many levels. Foreign entities have only had full ownership rights in China logistics companies since late 2004 or early 2005, when China began allowing 100% ownership as a condition of acceptance into the World Trade Organization (WTO). Prior to that, a company operating in China needed a Chinese partner that held a majority stake in the business. Even major players like UPS didn't own their express, air and warehouse businesses fully until 2005 and others have followed in recent years.

Each different service requires a license. A logistics provider can't have a freight forwarding license and operate trucks and warehouses, it must have the appropriate trucking licenses and warehouse permits to expand its logistics functionality. In addition, it must register and obtain licenses from provincial and local authorities wherever it operates.

Although Chinese authorities are trying to streamline the process, it is unlikely there will be a single license any time soon. It is, therefore, incumbent on companies operating in China to be aware of the requirements and to comply. Adding to the complexity of the requirement that each branch and operations center needs to be registered, sometimes provincial authorities have different implementation methods or application processes.

Despite the complexity of documentation requirements, there has been better cooperation among provinces on the flow of goods. This includes better cooperation among the customs bureaus in the different provinces.

Some shift in focus is helping to drive change. When China was opening up to outside markets in the 1980s and 1990s, it was heavily export oriented. This placed emphasis on development along the coastal regions near ports. But as people become more prosperous, a stronger consumer market has developed and spread inland. In parallel, infrastructure has improved and as the coastal area becomes more expensive, factories are moving deeper into the inner parts of China. This has helped fuel a need for further expansion by logistics providers, including extending their reach beyond coastal areas that had been the center of their export-oriented business.

The standard approach to China has been to open in Shenzhen, Shanghai and Beijing, but now it is increasingly important for logistics services to cover other areas like Chengdu, Xian and Wuhan to reach new manufacturing centers and expanding consumer markets.

There, the focus is not only on export but also domestic transport. Intercity trucking is on the rise. And this is one area where the Olympics served as a catalyst.

The Olympics, though primarily held in Beijing, actually involved a number of other venues. Those sites were as far away as Shanghai and Hong Kong and included Qinhuangdao, Shenyang, Tianjin and Qingdao.

The Chinese government focused resources on infrastructure development around Beijing to facilitate logistics support for the Olympics. Upgrades were made to the airport as well as roads and facilities. Perhaps less visible but equally important were improved measures for clearances and security control. The net effect was an upgrade for the whole logistics community.

Much of the effect stuck after the games ended in terms of improved documentation and better delivery. The games also helped improve awareness of logistics. And if service and security improved as a result of the developments surrounding the Olympics, the added awareness of what is possible has also lingered.

Another side of logistics development in China is the raw talent — people to do the work and manage the supply chain function. Given that China only began to open up about 20 to 30 years ago, the people with international exposure are roughly 25 years old and older. They are the most skilled in English and international business and trade practices.

Companies have also experienced a parallel rapid growth and learning curve. UPS, for instance, started with a representative office in 1998 and became a wholly owned company in China in 2005. From 2004 to the present, the company has grown its workforce by 30 times to 5,400 people. That has meant thousands of hours of training.

The logistics market in general still has a shortage of middle and senior managers. But as logistics continues to develop as a recognized industry with growth potential, the plentiful supply of entry-level workers and graduates of logistics programs will begin to address that talent shortage.

Information technology is also a challenge on two fronts. On one side, information flows to support supply chain flows present some challenges. Synchronizing information with the supply chain will begin with making the right decisions on platforms. The tools exist and are being applied to supply chain management, driven in part by security and visibility requirements being established on the export side.

On the flip side of the issue is the consumer market in both the business to business and business to consumer segments that is very comfortable with e-commerce. That will shape the way domestic logistics evolves.

And as China's economy continues to grow and develop, the government is increasingly interested in the higher value-add industries. Incentives to invest in those industries don't exactly push out the more labor-intensive, lower value-add industries, but wage inflation, exchange rates and other economic factors actually have some Chinese businesses looking at doing some of their own near sourcing into interior regions of China itself and to nearby countries like Vietnam.

One fact is clear, the evolution of China's logistics capabilities will continue as its export markets change and its domestic markets grow and mature.

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