Distribution has become perhaps the biggest constraint facing manufactures of fast-moving goods in China. But Mr Norman Sze, a partner in Arthur Andersen Business Consulting in Shanghai, says its also one of the most neglected elements.
A recent report* highlights some of the challenges facing multinationals in getting their products quickly and efficiently to the retailer. Like other aspects of distribution in China, the state of ware-housing is somewhat backward. Traditional warehouses tend to be scattered and old fashioned. Typically they comprise four-storey buildings with a short-age of even basic facilities such as elevators. .Concepts such as internal space planning are not well developed.
Taking direct control
Foreign participation in the sector is limited, although it is possible to get involved in joint ventures with local companies. "You have to get government approval from three government departments to do distribution ?Moftec, the Ministry of Communications and the Ministry of Internal Trade," says Mr Michael Law in the Hong Kong office of Trammel Crow ?the privately-owned US real estate group with big distribution plans in China.
The shortage of foreign involvement has prompted many multinationals in China to take direct control of warehousing. This can be expensive and it is against the worldwide trend of leaving the warehousing and distribution of goods to logistics specialists. The argument goes that by employing third-party logistics operators which use sophisticated technology and transportation methods, multinationals are better able to get their products delivered to retailers quickly and in good condition.
Even the most successful foreign-invested enterprises have to do things differently in China because of the infrastructural inadequacies. For example, Proctor & Gamble has a production base in Guangzhou, from where it distributes to all parts of the country. "Currently it handles all the logistics on its own, which is not as efficient as in the US," says Law. "More people worldwide are employing third-party logistics companies to handle distribution."
China is still short of this ideal. "There's a tremendous need for ware-houses and distribution centres from the multinationals," says Sze. "There are now 250,000 foreign enterprises in China and many multinational trading companies."
There are three main categories of warehouse user:
Distributing imported or locally-produced goods the largest area. This is best done near big cities, close to the major retailers. The precise warehouse location should best suit manufacturers' needs while being mindful of government regulations. "We are anticipating some restrictions in the future of trucks going into the cities during the day time, so we have to cater for those problems," says Law. "Therefore we are keeping in close communication with all potential tenants and local governments."
Export consolidation, where goods made in China are assembled and then loaded onto containers. This is known as the pick-and-pack process. The traditional way of consolidating in China is to containerise different products from different factories to an export market, where it is then shipped to another warehouse and then re-packed according to the location of retail outlets. "Many are now looking to transfer that process to China because of the lower labour costs," says Law. Warehouses in China are now being used to consolidate products made for overseas retailers such as Wal-Mart, Toys-R-Us and Ikea. "The trend is to do a lot of pre-distribution in China," says Law. When a container arrives in the US, for example, boxes are already marked up for individual retailers.
Logistics operation for relatively complicated manufacturer in China. Currently this is a small but growing business. For example motor assembly re-quires many spare parts, some made locally and some imported. Facilities are needed to be able to deliver the parts ac-cording to the 'just-in-time' principle and it is cheaper and more efficient to do this outside the manufacturing plant.
Investment by logistics companies in China is now starting to happen. A bilateral agreement between the US and China allows two American companies ?ACS and Sea-Land ?to operate as a wholly foreign-owned logistics enterprises in China. Both groups provide mainline shipping services connecting China with Europe and North America.
Under a three-year trial programme, the two companies are allowed to establish a headquarters and six branches. They can now book space with a carrier load and unload, administer cargo receipts, collect freight and maintain and repair containers.
The ultimate goal of both companies is to help clients in all aspects of supply ?physically transporting goods within China right up to the retail outlet, shipping to and from other countries, monitoring product movement, and providing safe and efficient storage and sorting via modern warehouses.
ACS, an affiliate of American President Lines, has been active in China since X1985 but its most rapid growth phase is likely to come in the near future. In coming years the company envisages investing US$245m in China. To start with, ACS has signed a three-way US$25m joint venture to build a one-storey warehouse about 20km north of Shenzhen.
In terms of warehousing, its next in-vestment is likely to be in Shanghai, al-though no date has been fixed. Mr Antonio Leung, ACS regional director for Hong Kong and China, says the core business will be exporting but local distribution will also be a major element. "We get a lot of enquiries about domes-tic warehousing," he says. "It is very important in China as there are not that many good warehouses available."
Sea-Land Service set up a China subsidiary in January this year, with its headquarters in Beijing. This subsidiary of the US freight transport company CSX intends to offer a full logistics service but it has yet to announce any specific initiatives.
In July PSA Logistics ?a joint venture between the Port of Singapore Authority, CWT Distribution and China Merchants Holdings teamed up with Shanghai Commercial Warehousing and Transportation.
The joint venture will provide logistics services to multinationals in China. Regional distribution centres will be set up in Shanghai, Tianjin, Guangzhou, Wuhan, Chengdu and Zhengzhou. Warehouses will be built and equipped with modern handling and storage facilities, and supported by computerised warehouse management systems. These i systems will help with day-to-day planning and monitoring the movement of goods between the factory, regional distribution centres and final destination.
?Trammell Crow is looking to invest US$200m in establishing modern ware-house facilities as part of a 50-50 venture with a subsidiary of Prudential. Be-cause of investment restrictions, the US companies see themselves as real estate developers, leasing the warehouses to a local logistics operator. Warehouse size would typically be in the region of 22,500 s.q metres.
The first project is in Shekou, Guangdong province, just 2km from the Shekou container and general cargo terminals. The two-storey building should be open by the year-end. The longer-term plan is to develop a network of 15-20 warehouses in China. To this end, land is being acquired in Guangzhou and Shanghai and viability studies are being under-taken in Wuhan and Beijing. Secondary coastal cities will be assessed for distribution warehouses at a later date.
Despite all these developments, an extensive and modern warehousing net-work in China is still some way off. "If we open one warehouse or even a few warehouses, it's not going to help [multi-nationals] because they are looking at the whole market," says Law.
* Managing distribution in China, by Arthur Andersen Business Consulting. For further details, contact David Ng on tel: (852) 2852 0222.