Jerry Von Feldt is senior director of operations at Menlo Worldwide Logistics. With 25 years of experience in the supply chain and logistics industry, he supports Menlo’s management team in North Asia and manages the firm’s transportation and warehousing activities in North America. Von Feldt spoke with China Economic Review about challenges in China’s logistics market and whether domestic firms can compete with international players.
Q: What are the most significant challenges Menlo faces in the China market?
A: One of the main challenges is related to land. Commercial property prices have risen about 7-10% each year, and this has created problems for distribution centers, particularly in the past 12-18 months. I think all the logistics players in China now need to have a long-term property strategy. You see some companies partnering with international property developers for projects in key cities around China. Land around the city used to be reserved for industry – but now that’s moving further away as the population expands outward.
Q: What kind of challenges does the logistics industry face in terms of costs?
A: As any industry matures in China, prices tend towards commoditization. The logistics sector is no different. The rising cost of land and labor in China also has a large impact on this process. The result is that the overall product might not necessarily be the best quality, but it is the best price. To combat the effects of rising costs, more distribution centers are starting to use automation methods. Previously, this was seen to be too expensive compared with manual labor. But increasingly we have seen logistics providers deploy automation systems – ranging from semi to full automatic systems.
Q: To what extent is the logistics industry becoming more capital-intensive and less labor-intensive?
A: As manufacturers migrate from the eastern shore to inland and western regions, logistics providers will need to reassess their distribution networks. Specifically, you need more flexible networks and automation. In today’s business environment, it doesn’t make sense to set up a whole mechanized facility since it means you’re committing to heavy infrastructure. You need to put in flexible automation that can adapt to market swings. For example, there’s a company in the US called Kiva that uses robots, which locate warehouse goods and bring them to workers. This helps reduce rack infrastructure, creating a mechanized environment that is transportable. The situation is ideal, especially when you compare it with scenarios where you might have US$10-40 million invested in infrastructure that can’t be moved.
Q: Is there any demand for radio-frequency identification (RFID) in China yet?
A: Demand isn’t huge at the moment. But in the coming years we might have an aerospace project that requires RFID. The pieces that we’ll be handling are more expensive and therefore need tracking. But right now, at the current price level, RFID is too expensive for this market.
Q: Some logistics firms have been re-thinking lean supply chain strategies after the the Japanese earthquake in March. What’s your take?
A: There’s a difference between lean methodologies and just-in-time manufacturing. Lean logistics is about eliminating waste – such as reducing excess inventory, replenishment times and unnecessary costs – from supply chains. So, you want to keep inventories as low as possible, but not to a point in which an act of God or force majeure can bring a plant to its knees. With just-in-time supply chains, it’s like lean on steroids – when one part of production is completed, another has to be there immediately.
Q: How is China’s infrastructure from a logistics perspective?
A: It’s really grown by leaps and bounds over the past 30 years. Railways in particular have come a long way. Infrastructure is tremendously developed along the coast. But the key to China’s continued economic development is to expand infrastructure in second- and third-tier cities. Until you build that up, China’s logistics industry will face bottlenecks.
Q: How would you describe domestic logistics firms’ development? Can they compete with foreign players?
A: Yes and no. It’s like golf scores. If I hit a 72, it might be great or it might be terrible, depending on the course and who my competition is. It all depends on the market. In some cases they provide exactly what their clients need and it’s a perfect match, but in others they can’t compete with international firms.