As China prepares to host the world in 2008, the country is un-dergoing a massive building program just in time for the Olympics. More than just new hotels and sports facilities, this booming nation is installing new logistics infrastructure to handle the growth.
Antiquated logistics and manual processes continue to hamper distribution systems. Logistics costs account for about 21.3% of China’s gross domestic product compared to 8.6% for the United States. Palletization is just beginning to take off.
Way Behind but Catching Up
According to a report by the U.S. government, China faces three major challenges in developing an integrated, nationwide logistical industry, namely its unfriendly geography, a heavily fragmented transportation network with local regulatory barriers, and inferior equipment operated by poorly trained workers.
The majority of China’s population lives in cities on its east coast. Logistical flows are extremely uneven to western China which makes it hard to supply goods. New railways are being built more efficiently to move people and bulk commodities to the mountainous western region of the country, but demand for rail capacity is much greater than the supply. According to a report by ARC Advisory Group, more than 160,000 carloads are needed per day, but presently the system can only handle 90,000 carloads.
Adrian Gonzalez, a consultant with ARC Advisory Group, said, “China resembles the United States from 130 years ago although China’s rate of progress is much faster than the United States at the turn of the century. What it took us decades to do, they are doing in years.”
Zhang Wenjie, who has led the research group tasked with logistics planning for the Beijing Olympics, claimed that the upcoming Olympics will cost about $5 billion in logistics services.
Despite advances in its logistical infrastructure, areas outside of the main economic centers remain fairly unequipped and inefficient. China Economic Review reported that “The logistics problems facing the automotive industry in China are the same as in the rest of China’s logistics industry – an infrastructure shortage, a skills gap, problems with joint ventures, high transport costs, IT problems, and below-world-standard levels of service.”
Pallet Practices in China
Paul Masica of Viking Inc., the largest supplier of pallet nailing machines in North America, traveled to China late last year for a trade show and to tour some plants. He said that people at the show estimated that China produces 400 million pallets each year. They also forecasted that number would be five times that figure within 10 years. China has approximately 700 million pallets in circulation right now.
Masica said that most pallets in China are made by hand using nail guns or even hammers. Chinese companies are slowly looking at automation. A large Chinese pallet company would probably make several thousand pallets per day.
China appears to be evaluating all of its options as far as raw materials, pallet management, sizes, etc. Leaders in the country developed a standards committee in 2005 to look at all the alternatives. Masica said, “Although China appears open to alternatives to wood, I believe that wood will still dominate.”
With limited forestland, China gets most of its lumber from foreign sources, including North and South America.
A 2005 report by a Norwegian research group wrote, “In China, forklifts are not popular. Most pallets used are for exporting or imported goods. Most managers think manpower is cheap, but they don’t know that the efficiency ratio of forklift vs. manpower is 10 to 1. For manpower as handling, there is no need for pallets. However, without pallets, packing increases the frequency of manual handling many times, and these multi-handlings also increase the risk of goods damage many times. Researchers said this is one of the reasons for the 20% high logistics cost to GDP.”
This same report claimed that most warehouses do not have racks and are not designed for forklift movement. Many of these facilities are old and out of function. They were originally designed as part of China’s central planned economy not for world class logistics.
What Pallet Modules Will Catch On?
One looming question seems to be what pallet system the Chinese will embrace. There are a number of models out there from exchange, to private pools, to even rental systems. Given the fragmentation in the country, a number of competing models could develop.
Loscam and CHEP are two large rental companies that are eyeing the Chinese market. Neither one has made significant inroads so far. But they both are developing contacts and researching the region. Loscam has operated in Hong Kong for a number of years and has a strong presence in the Asian market.
David Mezzanotte, CHEP’s CEO, said, “China is attractive as one of the fastest growing consumer goods markets, with increasing palletization in the supply chains. Also, retail is shifting from traditional markets to modern trade like supermarkets, hypermarkets and convenience stores. We see a situation with market growth and pallet standards starting to take shape.”
The amount of palletization in China increases every day as major multinational corporations begin to implement best materials handling practices from around the world. Currently, many major corporations in China own their own pallets. Most of these are one-way, wooden pallets. Pallet exchange exists on a limited basis according to Mezzanotte.
CHEP hopes its relationship with consumer-good manufacturers will help it develop its presence in the country, a strategy similar to what the rental giant followed when it entered the United States.
China’s government may have other plans. It might develop a cooperative pool similar to what companies developed in Canada with the CPC, or it could develop a government owned pool.
Mezzanotte believes rental has a bright future in China. He said, “State-owned industry in China centers on heavy manufacturing, which is not a target for pallet pooling. Food processing, distribution and retail is mostly run by private companies, many of whom are multinationals and CHEP customers in their home countries.”
Could Chinese Palletization
Impact the U.S.?
As one of the largest suppliers to the United States, Chinese export practices could impact the U.S. pallet pool. Most products shipped from China today are floor loaded into cargo containers. But if that changed, Chinese-made pallets could increase, especially in west coast markets.
U.S. demand for pallets could drop if more products coming from China are palletized. Some believe that the savings in shipping costs associated with greater space utilization will keep these items floor loaded for the foreseeable future. This is likely to be true as long as labor costs in China remain low and the costs to palletize in the import market do not become cost prohibitive.
These trends could change over time and should be watched by those servicing clients that palletize products from China in North America.
More Multinational
Companies Means Change
From product manufacturers to logistics experts to mass retailers, multinational corporations are rushing into China. While the retail and distribution landscape is still dominated by small, local companies, multinationals are expanding. Many times these companies are making alliances with regional players.
Multinational companies bring expertise, financial resources, brands and technology that China needs to grow. But it is far from easy even for the largest of corporations. Despite working toward freer markets, Chinese authorities still rule with an iron hand in many situations.
Companies have to figure out how to take advantage of major initiatives, such as China’s “Go West” policy aimed at bringing industry and prosperity to western and central China. The government has set aside billions to drive expansion in areas such as Chongqing, which is already a manufacturing hub located in central China. Technically, Chongqing is the largest metropolitan area in the world with more than 30 million people. This expansion will make Shanghai even more important as a port city in the future, and it may become the world’s largest port city some time this year.
Once you move into the interior of the country, you have a shortage of infrastructure and resources. For example, many Chinese ports lack adequate feeder systems to accommodate intermodal transportation.
American or European executives might see just the glitter of the big cities on the east coast and come away with a limited understanding of the real logistical difficulties.
While industrious, Chinese culture may not always jive with how most multinational companies function. For example, Chinese concepts of saving face and avoiding confrontation may make it hard to identify problems or correct mistakes. Foreign companies have to develop an understanding of Chinese culture and how it differs from Western thinking.
As more multinational companies gain traction in China, look for consolidation and efficiencies to increase.
Barriers & Logistical Problems
Many outsiders think of China as one unified country with a strong central government that dictates everything. But that is far from the truth.
China is divided by provincial governments with various businesses, cultures, taxes, paperwork requirements, etc. Shippers must be aware of the bureaucratic mess that occurs especially when shipping within the country across multiple provinces. Transportation networks are fragmented with regulatory barriers that prevent consolidation. Local governments frequently protect local companies through license requirements, fees, inspections, tolls, etc.
For the few logistics companies given licenses to work across multiple provinces, tolls can still be very high. Logistics Management reported that toll charges for a 40 foot container shipped from Beijing to Shanghai over the
road can run as high as $400. That sum makes U.S. tolls look like a bargain by comparison.
Beyond government impediments, poor facilities and management practices cause high levels of loss, damage and unsaleables, especially for perishable products. One report estimated that 30% of China’s fruit and vegetable harvest is damaged each year due to poor logistics practices. Some of the problem results from outdated infrastructure or the lack of adequate equipment. Another major cause is the lack of trained workers who understand how to reduce handling and shipping damage.
China is the third largest country in the world in terms of total land mass. Supply lines tend to be much longer than what many Western companies first imagine. It can take weeks to move things within country compared to a week in the United States. China’s vast size also makes it almost impossible to enter all markets at once.
According to a report by the U.S. government, goods shipped by Chinese rail are much more likely to be damaged than those shipped by truck. Damage usually occurs during handling as goods are moved between rail cars and trucks. Poorly trained and equipped movers damage products. The same report indicated that theft is still a problem especially for rail shipments. Bureaucracy, poor scheduling and low speed rail lines also cause unpredictable delays, which make forecasting difficult.
Overloading of goods, poor truck maintenance and evolving roads make truck transport more difficult than in North America or Europe. New road construction is helping to alleviate traffic and transport problems. But China still has a long way to go, especially in areas outside of the major cities. Shipping by barge tends to be cheaper than rail or truck. China has three major rivers that allow access to inland regions. Water transport does have its disadvantages including port bottlenecks, outdated equipment and inadequate IT systems.
The general message seems to be that China is far from ideal when it comes to its logistics infrastructure, but things are getting better every day.
Constant Change
The one thing that seems constant is change. As large companies move in and push industrial expansion to the central and western sectors of the country, the logistical dynamic remains in constant flux. This is the ground floor of the materials handling revolution in China. Now is the time for anyone who wants a say in what happens to get involved.
Even China’s major advantage, cheap labor, is starting to change, especially in some ports. Labor costs are rising as economic activity increases. As people get more skills and training, the labor costs may rise while other costs decrease, such as product damage. A better-trained workforce will make better decisions and likely be more efficient.
More equipment and training could also decrease the amount of labor needed, which may lead to new problems. What happens when a country with a seemingly endless supply of labor wrestles against businesses that try to reduce labor to become more efficient?
China’s transformation cannot be ignored because it will impact more than just Asia. It will affect the West, especially if it begins shipping more goods across the globe on pallets. Although it increasingly has become a small world where decisions around the globe impact local markets, this truth can get lost in the hectic race of meeting deadlines and keeping customers happy.
