Category Archives: China

Will High Priced Logistics Mean the End of the China Surge?

Last year, David Jacoby wrote in The Economist Guide to Supply Chain Management: How getting it right boosts corporate performance that China’s high supply chain costs are limiting its growth. Noting that, as per a recent study by the US Chamber of Commerce, China’s logistics costs are the second highest in the world at 22% (compared to the global average of 13%), China is choked by the high cost of inbound logistics.

With the rising cost of production in China (as more and more middle class workers demand higher salaries in their quest to maintain a middle class life style on par with their peers in other parts of the world), repeated calls to allow the yuan (which is rising against the US Dollar [WSJ]) to float with the market, and rising raw material and oil costs, it appears that China’s days of being a LCCS destination might be coming to an end if it doesn’t get its logistics costs under control.

Now, you can argue, as Jacoby points out, that China’s government is investing massively in infrastructure, having recently laid out a broad-scale and ambitious programme to improve supply chain performance by creating third-party logistics (3PL) enterprises and deregulating certain transportation areas; promoting the establishment of logistics networks throughout the country; and building 30 modern logistics parks that will serve as distribution centers throughout the country in their 11th five-year plan, but you could also counter-argue the facts that the Shenzhen Dongdao Logistics Co. became insolvent and collapsed on January 25 and Guangdong-based Nan Yue Logistics posted an RMB 190 Million loss in 2009. In other words, it would appear on the surface that logistics are becoming too costly for even the logistics providers in China, yet alone the foreign buyers who need to use them.

So is this going to mean the end of the China surge, and an eventual shift to new LCCS locales when the market returns? Or will China find a way to get its logistics under control? Not Necessarily. For what it actually means, we turn to Dick Locke, SI‘s resident expert in international trade.

Well frankly I don’t believe the US Chamber of Commerce. I don’t think it’s because of their anti-Health Care, anti-regulatory reform, anti-environmental policies but that doesn’t help their credibility.It’s because there is such a trade imbalance from China to the rest of the world that logistics costs into China have been dirt cheap for years. Freight companies were moving 40 foot containers from Europe to China for around $400 back in the boom days.

 

Here’s an excerpt from an academic paper on trade imbalance in container movements in and out of China. TEU means “Twenty Foot Equivalent Units.”

 

On the transpacific trade the imbalance in 2006 was 1:2.6 in favour of eastbound traffic, with demand for 14.3 million TEU eastbound, and 5.5 million TEU westbound. Meanwhile, on the Asian-Europe trade the imbalance was 1:1.8, in favour of westbound with carryings of 7.5 million TEU and 4.1 million TEU eastbound (Robinson, 2007).

 

And the WSJ says the yuan is strengthening? Excuse me? Where do they get that? On the first of the year the dollar was worth 6.8291 yuan. Today it’s worth 6.8360. (oanda.com) Maybe the WSJ is careless about verb tenses and means it will strengthen soon. It might. It might not.

 

When will the China surge be over? That’s a product by product question but the general answer is when you can find better suppliers elsewhere. No one’s buying a third of the way around the world unless the suppliers there are the best. But you need to test other countries periodically. Global Sourcing is like painting the Golden Gate Bridge. You never finish.

In other words, the cost of logistics is all relative and it’s the total cost that matters in the end. While China, and its suppliers, remain highly competitive, it will be the location of choice.

The reality is that while logistics costs in China might be “high” relative to its GDP, they’re still “low” in absolute cost compared to costs for moving the same volume in the developed world. The yuan may be “rising”, but it really hasn’t risen much against the American dollar, so it’s still not an issue. And wages may be rising, but they’re still rising by pennies, not dollars, and the wage costs are still relatively insignificant. In other words, all the noise you hear is just much ado about nothing … and it’s time to go and buy another can of vibrant orange paint.

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Is China Proving that International Trade is a Zero-Sum Game?

Recently, state-controlled Sinopec spent $4.65 billion (US) to become the first Chinese multinational to buy a direct stake in a major producing oil-sands project in Alberta (Canada) and buy out ConocoPhillips‘ 9% stake in Syncrude Canada Ltd (which is the trophy of Canada’s oil sands projects, producing 350K barrels a day). According to the Globe and Mail, the deal represents the next stage in Chinese investment in the oil sands, as Beijing-controlled companies scour the globe for energy resources and look to diversify the country’s growing imports away from the Middle East.

Sinopec is a subsidiary of China Petroleum & Chemical Corp., which started buying into Canadian Energy projects in 2008 with an initial purchase of a 40% interest in the proposed Northern Lights project in northern Alberta. (It is now a 50-50 partner with France’s Total SA.) China Petroleum & Chemical Corp. is also active in Canada, and will acquire a 60% stake in Athabasca Oil Sands Corp.’s Mackay and Dover projects, a 20% stake in Vancounver-based Teck Resources Ltd, and, in turn, a 20% share in Suncor Energy Inc.’s Fort Hills oil sands project. This is in addition to other holdings in Canada, Venezuela, Brazil, Argentina, and the Middle East.

Wondering what it all meant, I asked Dick Locke, SI’s resident expert in international trade. This is what he said:

Well, it means that sometimes international trade is a zero-sum game. That’s when multiple countries chase a disappearing resource.

 

The US is ill-equipped to deal with this one. Our government and opinion-makers are captured by the duology (if you’ll allow this as a word) of oil producers and car manufacturers who are very conservative about energy strategy. Our population patterns have way too many people living on large lots beyond the reach of effective public transport. China is doing a great job in both solar and wind power development. You probably saw that Applied Materials moved their solar cell manufacturing site and technical expertise to China (Technology Review).

 

While the Chinese government has real problems with human rights, it does think long term and is doing what’s best for its people in this aspect.

In other words, China knows that it needs more energy than it’s currently producing if it’s going to continue to support and modernize its population, and that, just as the world is looking to China as a producer of consumer goods, China needs to look to the world as a producer of energy … and will have to spend much of what it is making to acquire that energy. At some point, the outflows will have to equal the inflows and international trade will China will become a zero-sum game.

Dick Locke, Global Supply Training.

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Rio Mino … Rio Bribo … Rio Gono!

If you’ve been following the news, four executives of Rio Tinto, a mining and exploration company, recently admitted to a court in the Chinese city of Shanghai that they took bribes totalling over 10 Million Yuan (BBC). Not long after, they each received prison sentences of between 7 and 14 years in addition to large fines and confiscation of their personal assets. Liu Caikui received seven years, Ge Minqiang received eight years, Stern Hu received ten years, and Wang Yong, accused of receiving the largest bribe, of almost 9M, received 14 years (CNN).

This should send a very strong message to foreign companies wanting to do business in the new China. Play by the rules (and definitely respect “face” [HBR]), or do the time.

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Is China the Home of the New Cyber Criminal?

A year ago we had GhostNet, a massive cyber espionage network rooted in China that went well beyond simple allegations of spying on Tibetan Institutions. After a 10-month investigation, a network of over 1,295 infected hosts in 103 countries was discovered that included computers at ministries of foreign affairs, international organizations, news media, and NGOs.

Then we had massive cyber attacks that originated in China, including one against Google last December, and now even Google is pulling out of the country (as it must do no evil).

And now, we find out that GhostNet was but a shadow of a much larger Shadow Network (The Globe and Mail) which has compromised sensitive data from at least 16 countries from compromised computers in at least 31 countries (including computers used at Honeywell and NYU), which have been used to gleam Indian missile defence secrets and Canadian Visa applications from its citizens travelling abroad (including applications from the UK). The full findings will be revealed today in Toronto, as the network was cracked by researchers at the University of Toronto’s Munk Centre for International Studies, the Ottawa-based security firm SecDev Group, and a U.S. cyber sleuthing organization known as the ShadowServer Foundation, the real-world Internet Lone Gunmen.

The Full Report is available on line on Scribd and documents how much of India’s defence network has compromised as the computers and systems of the National Security Council Secretariat, Military Engineer Services, Military Personnel (including the Artillery Brigade and the Air Force), Military Educational Institutions (including Army Institute of Technology, the Military College of Electronics, and the Mechanical Engineering College), India Strategic Defence and Force magazines, a number of corporations (including YKK India Private Limited, DLF Limited, and TATA), and Maritime India (including the National Maritime Foundation and the Gujarat Chemical Port Terminal Company Limited) were all breached.

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What’s the Real ‘China Price’

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

the doctor asked me to look at an article over on Supply Chain Brain titled “What’s the Real ‘China Price’“. I, somewhat grudgingly, decided to look at it. I say grudgingly because I thought it was going to just be another article listing all the additional and surprise costs that people incur when the buy from another country. I used to get them all the time when I was at HP. My role then was to set up overseas sourcing offices to make it easier to work with low cost suppliers. Believe it or not, HP was insular in the late 80s and subscribed to the American Honda philosophy of keeping your suppliers nearby. Obviously, they have moved away from that philosophy. So has Honda.

This article wasn’t too bad. The more primitive versions say things like “cost of letters of credit” and “six week shipping time.” It didn’t do that. But it was very vague and general. It mentioned some overseas sourcing projects that didn’t go well. It didn’t mention domestic projects that didn’t go well. The big message was here:

Having jumped on the China bandwagon, a manufacturer finds its risk factors soaring. Suddenly, it’s a lot more difficult to cover up for glitches in the supply chain. Safety stock levels begin to rise, canceling out the savings that were realized through just-in-time supply strategies. High-priced airfreight becomes a frequent fall-back position. And managers “spend countless hours in business-contingency exercises that are about as valuable as the binders they sit in,” said Jim Miller (a VP at Sanmina-SCI).

And the conclusion was:

“Offshoring is not simple — and quite frankly, it’s not always the right answer“.

Well, of course it’s not simple and it’s not always the right answer. A long distance flexible supply chain using ocean freight isn’t possible. However, when it is the right answer, those who can handle the complexities successfully will have a big advantage over those who can’t. “It’s too hard” isn’t a formula for success. To be self-serving here, could I suggest some training?

To leave generalities for a minute, how did we handle this reluctance at HP? Here’s what we did in the sourcing stages when looking for suppliers.

1. Eliminate potential suppliers who we didn’t think would meet our quality and on time delivery requirements (and other standards such as labor practices and environmental stewardship). Every purchasing company has a level of late deliveries and supplier quality failures that they know how to handle. The good ones tighten their standards continuously. Bringing in a substandard supplier is a non-starter. But don’t tell me that there are no suppliers in low cost countries who produce good quality.

2. The best looking surviving suppliers were given a rigorous landed cost analysis. It had about twenty line items in it.

3. The top suppliers on landed cost were given a risk analysis. That would compare the lowest landed cost supplier to the landed cost of a not-quite-so-low cost supplier and see how much had to go wrong before the choice of the low cost supplier would turn out to be the wrong decision. Exactly how much would have to go by premium freight? How much would a currency have to appreciate? How much extra procurement overhead would be required? And, never forget, something could go wrong with the second best supplier too. The main purpose was to bring risks out into the open and look to see if it was realistic for them to happen.

So, bottom line, it’s an OK article. It really doesn’t get as specific as it should but it doesn’t perpetuate a bunch of nonsensical myths either. Worth a read.

Dick Locke, Global Procurement Group and Global Supply Training.

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