China’s export pedigree is the stuff of legend. In 2007, the country shipped US$1.22 trillion in goods overseas, according to the National Bureau of Statistics. It is expected to account for 11% of global exports by 2010, up from 7.2% in 2006. Logistics firms tasked with moving these finished goods to their destinations, see strong growth ahead. But they also face a fragmented market still fraught by inefficiency, imperfect infrastructure and local protectionism. Hong Kong-based Kerry Logistics acquired a significant footprint in China through the purchase of a 70% stake in EAS International Transportation in 2005. It now has a network of over 129 offices and 4,500 staff covering more than 1,100 cities. Gary So, executive director of Kerry EAS Logistics, spoke to CHINA ECONOMIC REVIEW about challenges involved in moving goods from A to B and beyond.
Q: How does your customer base break down between foreign multinationals (MNCs) and domestic firms?
A: About 75% of our customers are MNCs and 25% are domestic.
Q: How do you see this changing? Do you have certain targets?
A: We don’t target on this basis. It just so happened when we started operations in Hong Kong, over 90% of the customers were MNCs. These companies have requirements that are not just about cost. They talk about service quality, capabilities and total supply chain solutions. Instead of looking at a customer profile, we look at scope of services we provide. Although things are slowly changing, MNCs are a step ahead of domestic companies in seeing how this adds value to their business.
Q: As the industry evolves, what kind of value-added services are required?
A: First of all, we have capabilities along the whole supply chain from international forwarding to domestic operations – warehousing, distribution, even trading and customs broking. What we try to do is integrate different parts as much as possible and present customers with an end-to-end one-stop solution. What we are doing is not purely domestic distribution – we are able to link the domestic and international part in ways that local players cannot.
Q: Do you focus on any sectors in particular?
A: We do well in a few key segments and have anchor customers in each one. These segments include customer electronics, fashion, industrial products, automobiles, petrochemicals, FMCG (fast moving consumer goods), retail medical and pharmaceutical industries. Many leading MNCs are included in our anchor customers list, but sorry I could not disclose their names as we have confidential agreements with them. We are the biggest operator in Hong Kong for temperature-controlled products and have a new joint venture focusing on the perishables business called Kerry Fresh.
Q: China’s logistics industry is highly fragmented. Will it develop and consolidate through big companies like Kerry buying smaller ones?
A: Now the market is fully open to foreign companies, a lot of local players that once relied on the protection of the government face a lot more competition. Consolidation through M&A is definitely a major trend. Ultimately the small local companies have to be very specialized to survive as they cannot compete in the mass market. As for Kerry Logistics, we never stop looking for investment and M&A opportunities.
Q: Beijing has outlined ambitious plans to expand its transport infrastructure. Is this taking place fast enough to meet demands?
A: From an infrastructure perspective, China is growing very fast, but it is still behind more developed countries in terms of network coverage. The total length of China’s highways is only one-third of that in the US. Development is still far behind what we need from a logistics point of view but at least it is heading in the right direction. The rail and road systems have improved a lot and the airport system is also improving, although the payload is still some way off meeting the needs of the market.
Q: How do you deal with the varying local interpretations of central government rules?
A: You have to deal with things in a local way. That’s why we have to stay flexible. For example, we have trucks all over China and in some areas there are restrictions on when goods vehicles are allowed into downtown areas, thus delivery would be a big challenge. Transport law is decided at state level, but execution is based on local standard operating procedures.
Q: Say your trucks are going from Gansu to Sichuan province and get stopped at the border. What do you do?
A: If you have a province-A registered truck and are going into province B sometimes you have to pay a higher toll fee. We accept this as part of the operational cost. In certain areas we use provincial subcontractors to get around the problem.
Q: You seem resigned to things being this way.
A: Like it or not, it’s China.
Q: Is this the single biggest challenge you face?
A: It is one of the challenges but not necessarily the biggest. Regional protectionism is one issue; infrastructure is another; and then you have operating licenses. If you have the right to operate in city A it doesn’t mean you have the same right to operate in city B. That’s why we have to manage over 700 different operating licenses across the country. Getting a license can take several weeks to several months to over a year. Maintaining the existing licenses is a full-time job for some of our staff in Beijing.
Q: There is much talk of Beijing’s “Go West” policy. Are your customers responding to this?
A: It is government policy to encourage more investment in the west and there are a lot of incentives in place. We recently made a major warehousing investment in Chengdu, and we will build a network stretching down into Southeast Asia. The whole road infrastructure is going to improve between southwestern China, Thailand and Vietnam over the next few years and a lot of cargo will shift to this new network.
Q: What about a new Silk Road going through the Central Asian republics?
A: The cross-border activity in this areas is restricted and so it is not easy to get cargo moving from one country to another. However, this route is still in its early stages so there is time to make sure that customs authorities ease up.
You must log in to post a comment.
Yes, I would like to receive emails from China Economic Review. (You can unsubscribe anytime)
Copyright © 2018 SinoMedia Group Limited All rights reserved