Monday, April 2, 2007

The Future of Chinese Logistics Industry

Interview published in on "The Future of Chinese Logistics Industry".

Question: The Chinese Government is keen to develop standards for the logistics industry. How do you see this impacting the industry in China? What does it mean for smaller companies in China who are still developing and defining their services and operations?

Nishith: In the last 2-3 years, Chinese government has shown a positive inclination towards the logistics market by introducing favorable programs. The government has displayed a continuous focus on strategic issues like globalization and building infrastructure to facilitate the formation of a nationwide transportation and distribution network in the Chinese mainland. Recently, the State Development and Reform Commission and the State Standardization Authorities have issued a plan for the development of logistics standards for 2005-2010, setting the goal of bringing the 300 standards into line with international standards. From 2005-2006, the country will formulate general benchmarks and standards urgently needed. From 2007-2008, standards for logistics technology, information, quality of service, safe operation and statistics will be worked out; and from 2009-2010, standards for innovative integrated service and related supporting standards will be charted out.

On the technological front, the Chinese government is also working towards setting up standards in RFID and plans to coordinate its efforts with those of the International Standards Organization. Setting up of Golden Card Project is seen as a major step in this direction. It is one of the government-endorsed Golden series; the general target is to develop smart cards as a method of payment for 300 million Chinese in 400 cities within 10 years.

Now coming to your question on how these initiatives will impact the logistics industry in China, I feel that it would take at least 2-3 years to streamline the direction and once that is done then Chinese Logistics Market will start benefiting from these initiatives. According to me, the biggest beneficiaries would be the companies in retail & manufacturing sector (sectors with highest growth rates in China). Adoption of Logistics Standards & Logistics Modernization will be the key components in future growth of the industry.

From macro-level, this in turn will attract more companies to come into China and use the services offered by the market owing to their comfort level with International Standards. RFID will give China the infrastructure to make industries more competitive, thereby contributing to the larger economic growth.

At the micro-level, all these developments & initiatives will push the plane of the logistics industry in China from the initial stages to one that is comparable with the ones in developed market economies. New standards in Chinese Logistics Market will also aid in improving the overall quality of services and offer a platform to match their standards with the International Standards - China will be able to invent applications & services that have value in the world market. Another major development could be an increased co-operation between government initiatives and enterprise operations to introduce self-regulation within the industry.

Bigger players will have to make changes in their business models in order to further consolidate their positions, but the larger beneficiaries would be the smaller companies, which are still developing and defining their services & operations. As they are still in their infancy, they can easily adapt to the ongoing trends and specialize accordingly. To survive in this competitive environment and comply with new standards, these smaller companies would be able to grow gradually & carve their niche by specializing in customized multi-functional value-added services as their mainstream activity. This in turn will lead the emergence of at least 4-6 new big 3PL/Logistics providers.

Question: What are the key value-added services that logistics providers in China need to address? What will be the value-added services that move the industry forward in the next 12-18 months?

Nishith: Some of the major value-added services which can be offered by these providers could be bar-coding, in-facility inventory handling, vendor management, multi-country consolidation, customs brokerage, slip sheet operation, warehousing, factory inspection, sample handling and special packing lists etc.

From an overall perspective, my pick from the lot, which can move the industry forward in the next 12-18 months could be an extension from B2B-oriented procurement, production and sales through to services focused on the needs of the end-users. RFID would certainly be a significant area for the next few years. The forthcoming times are bound to witness an era of e-business and supply chain with a greater reliance on the supply chain theory, hi-tech support and investment capital.

Question: How would you rate the quality of Supply Chain Management in China? Can global standards for SCM be developed alongside the infrastructure in China - or do you expect that innovative SCM practices are lagging behind?

Nishith: China doesn’t have the same infrastructure, which US or Europe have. Its density of land transport systems is just 22 percent of what you find in the United States and many of its roads are either unpaved or in poor condition, which slows down transit times. Companies complain of insufficient integration of transport networks, high transport costs, information technology (IT), and warehousing & distribution facilities. Outside of the main economic centers, the logistics segment tends to be of low quality and with little technological competence. I feel that the growth & development is unevenly distributed. Government is pushing companies to concentrate on interior locations, so let us wait and watch how the picture changes.

There are several other issues such as in-consistent regulations, high level of Chinese Bureaucracy, poor training at practical as well strategic level, under developed domestic industry and domestic trade barriers, which impact the entire scenario.

As far as the rating on the basis of current situation is concerned, I would give an above average rating in comparison with other developed markets but would certainly like to hold and watch how things turn-up in near future. Overall, Chinese Supply Chain Management outlook has bright prospects and gradually it would become a major enhancer for the Chinese GDP. The domain is expected to grow at a compound annual growth rate of 33% up till 2007, according to some recent estimates.

Question: What do you see as the greatest challenge (area for improvement) for the transport + logistics industry in China over the next 12-18 months?

Nishith: Regulations, culture, weak infrastructure and an undeveloped industry are just some of the problems being faced by companies. Without a basic understanding of the country, its markets, its logistics sector and potential partners, doing business in China is impossible.

I feel that in the next 12-18 months, due to initiation of government programs and focus on IT applications, companies will be faced with new challenges 1) to comply with the new standards 2) of bearing additional costs to integrate new IT applications in their business models 3) to customize & introduce new value-added services and 4) due to emergence of new players which will encourage more competition in the market.

Question: What do you see as the exciting new opportunity for the transport + logistics industry in China over the next 12-18 months?

Nishith: Chinese Logistics/Transportation Market has seen spectacular growth over the last few years and has bright prospects in the near future. All these growth opportunities are due to on-going liberalization of the market, entry of MNCs in Chinese market and acceptance of its services in the global economy.

I feel that in the next 12-18 months, most of the growth will be consolidation-driven. Although, there are more than 18,000 registered companies, which offer logistics services in China, there are very few or may be no companies, which offer nationwide distribution services. In one of the industry papers I found that no single logistics provider commands more than 2 percent of the market. This clearly proves that the overall Chinese Logistics/Transportation market is very fragmented. I feel that from this point onwards, Chinese market will be driven by consolidation or more precisely M&As. Customer demand for greater efficiencies of scale, breadth of service offerings and network coverage is growing and this in turn will prove to be a major driver for the future M&As.


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