China’s emergence as a manufacturing hub established it as the world’s most attractive destination for global logistics providers. Its ever growing consumer classes are now raising the rewards and multinational logistics and postal services providers, including the likes of DHL, UPS and FedEx, are all expanding their business. Not to be outdone, German-based logistics provider Dachser is also joining the race as China progressively opens the sector to foreign competition. Building on the foothold established through its Hong Kong-domiciled Dachser Far East operation, the company recently set up a wholly foreign-owned enterprise (WFOE) to oversee north China operations from Shanghai. It is planning to add a second WFOE in Shenzhen. CHINA ECONOMIC REVIEW spoke to Dachser Shanghai General Manager Christophe Vincent about the company’s China outlook.
Q: How does China fit into your global expansion plans?
A: Clearly, China today is under the spotlight. It is one of the main areas worldwide and it is where we are developing the fastest. Having said that, we are also developing in other countries: this year a joint venture in Korea, and last year one in Taiwan. However, China is at the center and it fits in very well with our worldwide expansion plan because it is growing faster than anywhere else.
Q: What is happening right now in the logistics market in China?
A: If you look at market trends today, Chinese people have become more affluent and therefore have huge buying potential. They have access to and a desire for many of the luxury brands from around the world. The moment a country starts to consume there is a need for logistic services, for sophisticated warehousing and inventory management, for distribution and value added services ? Today’s market needs are forcing us to focus mainly on our import business – consumer goods, electronics, perfume, cosmetics, etc. Currently we don’t handle any fresh produce, even though in Europe it’s a field in which Dachser has a lot of expertise and is very well established.
Q: What are the major challenges?
A: The need [for logistics] is tremendous and one of the difficulties facing us today is not attracting new business but operating as efficiently as we do in Europe. China’s infrastructure is not yet fully developed so that makes it difficult to grow as fast as we would like to. One main drawback is that we can’t control how much money a provincial government invests into its own infrastructure or the infrastructure that connects it to other provinces. There is definitely a will in China to develop, and not only its coastal provinces. A lot of money has poured into the central areas and the government has set up measures and incentives to aid development and attract investors. These are positive signs but obviously the demand is huge, and therefore there’s a huge amount of work to be done by all of us international players. Of course we would like to be everywhere at the same time but we are limited – and we limit ourselves – by the number of people that can assist us in those projects, by the level of technology, and simply by the level of investment we want to make.
Q: You have just started a wholly foreign-owned subsidiary here. What restrictions still exist?
A: The WFOE license allows us to operate our air freight and sea freight business and carry out warehousing operations. We are facing some restrictions in our business because we are not able to obtain the CAAC license [Civil Aviation Administration of China first class cargo sales agent’s license] which is only available to local companies or joint ventures with a local company. This imposes restrictions on our airfreight business. However, we are working on it and we are confident that the restriction will be lifted in the future. Until the licensing laws change and we are able to have our own CAAC license, we are obliged to use local companies to receive our cargo and pass on information to our operations staff.
Q: Estimates show that logistics account for up to 40% of the total production cost and 90% of the total production time in China, much higher than in developed countries. What role are foreign companies playing in increasing efficiency?
A: Inefficiencies are mostly due to the workforce and the systems. No one is born knowing how to run a warehouse. It is a profession which requires thorough training and years of experience. In Germany and Europe, Dachser has the expertise and experience. I am confident that with the support of Dachser Germany’s workforce we will be able to grow much faster in this field. The second element for efficiency is the IT systems. You can’t have a good logistics operation if you don’t have the right software. Our IT system has been in place for several years and we have 150 people in our head office working on warehousing and trucking software. Our warehouse management and transport management systems are fully integrated and complementary. This gives us a competitive advantage over our international and, especially, our local competitors.
Q: Dachser entered China as a representative office for a Hong Kong-incorporated company rather than a mainland joint venture. Why?
A: At one time, the sentiment was that the only way to step into the market was to enter into a joint venture. However, it wasn’t possible to hold the capital majority. It probably met a need that existed at the time, but personally I have never favored this as an option. The market had to open sooner or later and it has all happened in the last few years. I have my own opinion of JVs but it would be interesting to get feedback from those still in JVs and their assessment of future plans. My experience showed me that with good partners, even as a rep office, you could do an extremely good job. That is what I did with my previous company and that is what we continued to do with Dachser when I joined the company three years ago. Today, the business modes are changing and like others we are free to enjoy these new policies.
Q: The industry is incredibly fragmented and ripe for consolidation. Do you have plans in this regard?
A: This is a very large country and, as you know, there are many companies that are performing well locally but not globally within China. So yes, the market is quite fragmented. There are many small trucking companies operating a specific service from specific points but not to any large scale on a provincial level, or even within a small portion of a region. The difficulty is identifying the good companies from the not so good. But it is always interesting for us to look at merging with or taking over local organizations that are complementary to our activities. We are certainly not rejecting the idea. It’s a way to grow and to grow faster. We have plenty of experience in this regard; we have done it in Eastern Europe, we have done it in Northern Europe. We are in Scandinavia now, in Slovakia, in the Czech Republic, in Hungary – we are in many countries where we have merged or taken over companies. China is no exception. The day we feel ready and find a reliable company that compliments our strategic needs in every respect, then we will definitely look at this option very seriously.
Q: What is next for Dachser in China?
A: Our immediate aim is to rationalize the way we are handling logistics and distribution. We already offer "pick and pack", re-labeling, repacking plus value-added services and supplementary services. The only downside is that it is not handled from one Dachser facility. Currently they are spread around in different facilities which are selected according to the project in hand. The aim for us next year is to combine all these small or medium-sized warehouses and consolidate them under one roof ? to provide contract logistics services at Dachser standards.
Q: And what is your vision for the future?
A: For a company of our size our vision would be to have the same fleet of trucks in China as we have in Europe, with the same level of service. The only thing is that it took Dachser 76 years to become what we are today. It’s a fairly large company and I think it will take us many years to reach the same level of market integration if we wanted to match China with Europe – they’re the same size. The level of service is achievable because we have the software, we will have the warehouses, and we definitely have the know-how to run a large-scale operation on both the trucking and logistics side. But I would say we have plenty of time. We are here to stay and we have many ambitious projects for China – trucking is one of them – but we will probably not try to swallow such a large cake in one bite. We will facilitate a natural growth pattern according to what the market can absorb. The aim for us in China is to move fast but in a rational and controlled manner.