Advancing ambitions

China has served as the workshop of the world for the past three decades, excelling at producing huge volumes of low-cost products for distant markets. But in recent years the country’s manufacturing sector has been looking to upgrade: No longer content with being the home of low-skilled, low-cost, low-margin manufacturing for toys, clothes and other goods, Chinese companies have been working to move up the value chain. 
 
The gradual evolution is impacting China’s supply chains, with slow-burn trends pushed to the surface in the fallout from the global economic downturn. Last year Pearl River Delta ports faced dismal freight volumes as demand for low-value goods in developed markets failed to materialize. With the traditional export bases struggling, the stand-out performers were regions better equipped to serve the high end.
 
"There were a few regions that saw growth, which were a bit of a surprise," said Lee Perkins, an expert on China’s logistics industry and CEO of research and consulting company China Intelligence Online. "One of them is Chengdu, a base for electronic and IT industries. Tianjin is another, where South Korean and Japanese investments in the Tianjin Economic-Technological Development Area and Binhai New Area have focused on high-tech goods.
 
"Over the past 18 months, the ports that have really fared best are the ones with diversified portfolios."
 
Higher demands 
 
As China strives to recast itself as a technological and innovation-driven economy, the logistics industry will have to undergo further change. The challenges are multi-faceted: Logistics providers will not only have to meet the needs of more sophisticated industries, but also adjust to the impact of rising labor costs and new markets as domestic consumption accelerates.
 
In addition, increased production of higher-value goods – in areas like software, computers, biotechnology, automobiles and green technology – inevitably drives demand for value-added services. That fact has not been lost on logistics firms.
 
CEVA Logistics’ goal over the next few years, for example, is to diversify its contract logistics portfolio in the consumer and technology sectors, said Axel Herzhauser, the company’s director of business development for south and west China.
 
"While customers are focusing on higher-end manufacturing, logistics companies can support them with value-added services like ‘pick and pack’ supply chain management (disassembling product loads, picking the relevant product for each destination and repackaging with a shipping label and invoice)," Herzhauser said.
 
The move towards higher-value manufacturing also means a greater need for enhanced special handling services. These range from temperature-controlled supply chains to rapid delivery for high-tech goods with increasingly short product life cycles. And any product that comes with a large price tag will require online proof of delivery feedback systems.
 
"Logistics service providers in China will need to offer their customers more sophisticated solutions in relation to security, technology and multi-modal on-time delivery," said Mark Millar, managing director of M Power Associates, a supply chain and logistics consulting firm based in Hong Kong.
 
Into the interior
 
While much of the impact resulting from China’s manufacturing shift will be seen further down the road, the wheels on the logistics industry are already turning.
 
Freight forwarders are moving inland, following the rising number of factories that are opening in China’s interior due to escalating labor costs along the country’s coastal regions, as well as a greater need to bring goods to local markets. According to a study by the Hong Kong Trade Development Council that surveyed 2,400 manufacturers, a quarter would choose to set up new factories in inland China – double that of those who would opt for cheaper alternatives in Asia.
 
Michael Drake, regional managing director for TNT (TNT.Euronext) North Asia, said the global logistics provider has been focusing on expanding westward. "This year, we have increased our dedicated flights in China and upped daily services. In addition, we have started flying between western China and Europe due to increased customer demand," Drake said.
 
China’s push to boost domestic consumption is also creating challenges in terms of inward logistics. Combined with the fact that high-value and high-tech manufacturers will require more expedited services, domestic supply chains are under pressure to reduce costs in distributing to China’s inland regions.
 
"We are seeing challenges with inland distribution into tier-three and tier-four cities, where consumption is rapidly increasing but there are challenges with secure and cost effective transportation of higher-value consumer products," Millar of M Power Associates said.
 
Over the last decade, the major battleground for the logistics industry was about expanding into China, getting established and building a reputation. Future challenges involve taking more sophisticated – and logistically demanding – products to and from places that supply chains are only just starting to reach.
 
"Over the next few years the focus of competition between logistics providers will be on lower-tier cities," said Perkins of China Intelligence Online. "That’s where the major growth will be."