In China’s complex automotive landscape, logistics is crucial, but OEMs and 3PLs still face a steep learning curve on which they can help each other.
China’s vehicle sales and production growth has been explosive for much of the past decade, booming nearly tenfold between 2001 and 2010. When the rate of expansion slowed in 2011 and 2012 to the low single digits, officials and economists suggested it was part of a wider shift in the Chinese economy, one geared towards stability, service and consumption rather than investment and government-stimulated growth. Leading logistics companies and supply chain managers in the country echoed this, emphasising that stable growth meant China could improve on its high logistics costs by adding more value-added services and multimodal transport.
Investments in capacity show no signs of slowing down, as new plants come online across China’s major and emerging industrial centres. The Volkswagen Group is opening seven plants by 2018, including the new factories it added this autumn for FAW-VW in Foshan, south of Guangzhou and for Shanghai VW (SVW) in Ningbo near Shanghai, and in the far western city of Urumqi. In 2015, SVW will open a new factory in Changsha, in the central province of Hunan. GM will open four new plants by 2015, including a Shanghai-GM plant to build Cadillac vehicles in Shanghai. In Changshu, near Shanghai, new carmaker Qoros recently started production, while Chery Jaguar Land Rover will come online there in 2014. In Chengdu, southeast China, cars are now rolling off the line for Geely-owned Volvo Cars, while a second plant in Daqing in the northeast will go live in 2014. Changan Ford is adding a third factory to its base in Chongqing, in central China. Finally, Renault has just received approval to form a joint venture with Dongfeng, Nissan’s partner in China.
Despite all the investment, IHS sees a low risk of overcapacity, at least among most of China’s joint venture OEMs. Volkswagen aims to have production capacity for 4m vehicles in China by 2018; IHS sees the carmaker’s sales and production hitting that level by 2020. Japanese OEMs may still take several years to recover following a political spat with China, while the outlook for homegrown Chinese brands is somewhat less certain. However, most global players in China look set to ride the rising tide. Some are already warning that logistics capacity might struggle to keep up with demand.
Learning the language of reform
So is there a gap between the aims of the central government to rebalance China’s economy and the tremendous expansion of the automotive industry? Officials still talk very
much about automotive logistics in the context of ‘development’. Cai Jin, vice-president of the China Federation of Logistics and Purchasing (CFLP), speaking at a recent conference on automotive logistics in Xiamen, used language drawn from China’s current five-year plan, stressing the need for reform, stability, innovation and the balancing of supply and demand. “The speed of China’s economy should be generalised in one word: stability,” he said. “We need to press down on excess capacity to achieve stable development. Automotive logistics should enter the era of quality instead of quantity.”
Talk of reform has accelerated following the so-called ‘Third Plenum’ conference in Beijing in November. The government set out to make a raft of economic changes, from liberalising finance and credit to cleaning up state-owned enterprises. Today, the words echoing out of Beijing from party members to middle management are that the market will now play a ‘decisive’ rather than a ‘basic’ role in allocating economic resources. The reforms themselves could indeed be significant for automotive logistics, from currency appreciation to plans to open up inland borders, but only time will show how and if they are actually implemented.
When it comes to improving logistics efficiency more immediately, any visit to leading carmakers and logistics providers in the country reveals that, whether by design or competitive necessity, supply chain management in China has become much more sophisticated – and has already advanced beyond the words of officials.
The era of complexity and innovation begins
For starters, China’s automotive growth has not only been about volume. Although Chinese local brands have grown this year, most have lost market share to higher value, foreign brands. Those foreign carmakers have integrated China firmly into their global production and supply networks, if not put it at the centre. The Ford models built today in China, for example, are global products that share platforms and components across multiple continents. Volkswagen has recently introduced its MQB platform in China, which includes models like the new Golf, on which it expects to produce millions of vehicles.
"Kitting makes manufacturing changes invisible to assembly line workers...there is no need to check the parts since [logistics] has already verified them" - Mike Dickinson, Qoros
For GM, China has become the lead development market of Buick, for which some models share production with the US or may even be exported there, according to IHS’s Boni Sa, manager of China light vehicle production forecasting. “We expect that the next generation of Buick products, such as the Regal, which have been developed by SGM, could be exported to the US,” he says.
Producing global products makes the supply chain more complex, often requiring co-ordination across continents where suppliers have not localised, or to respond quickly to material constraints. Such products also allow more standard processes for material flow, packaging, in-plant logistics and assembly line processes. Both Volkswagen’s new FAW-VW plant in Foshan and its SVW plant in Ningbo have been built and designed with the group’s global processes and standards in mind. That includes more uniform containers, automated guided vehicles and IT within the plant, while for inbound logistics it includes more inbound material consolidation and standard parts handling processes in logistics centres and warehouses.
The amount of new production, plants and even new brands in China is also giving automotive logistics the opportunity to introduce innovations. SVW’s plant in Ningbo has a large supplier park at which suppliers and providers carry out a range of production and logistics activities. Qoros has implemented a supplier park close to its plant in collaboration with the local government in Changshu, which has helped suppliers perform operations like sequencing as well as to lower their investment risk.
In terms of other innovations, Qoros has also introduced a higher proportion of kitting than most other plants. According to Mike Dickinson, director of order management and logistics, such kitting will allow manufacturing to swap models and frequency on the line very quickly. It also requires fewer assembly line workers, according to Chmielarz.
Although Qoros is currently only producing one model, it plans to launch a second next year and hopes to add more as the plant moves towards its 300,000 unit annual capacity. Dickinson believes the kitting will help the plant to be highly flexible. “The kitting makes manufacturing changes invisible to assembly line workers,” says Dickinson. “Most OEMs have a manifest on the hood of a car coming down the line with 35-40 parts on it. For Qoros, we have five. The reason is that there is no need for manufacturing to check the parts since they have already been verified during the kitting.”
Supply chain design
Carmakers in China have made other advances, including more focus on logistics engineering and supply chain design. Sources at one major joint venture say the carmaker has taken over more direct responsibility for inbound deliveries (which is relatively rare in China, where tier suppliers arrange most transport to OEM assembly lines), leading it to invest further in tools and skills for better designing transport and consolidation flows, rather than relying purely on its logistics provider. As has also been seen in North America and Europe, there appears to be a trend among some OEMs in China towards centralising logistics routing and engineering.
Qoros, in launching its greenfield plant, has taken a highly integrated approach to logistics engineering and planning, manufacturing and sourcing. As a result, the shape of the carmaker’s supply chain, in which about 50% of suppliers are located within 300km of the plant, is no accident.
“We have worked closely with all suppliers in negotiating their locations and delivery parameters,” says Chmielarz. “In cases where a supplier was in Shanghai, we might determine that there won’t be a warehouse in Changshu. Some suppliers are far away or abroad, but often that was because we didn’t want to have a new manufacturing location for an off-the-shelf part.”
“Purchasing doesn’t source unless we [logistics] agree,” adds Dickinson. “We do the ‘plan for every part’ (PFEP) data together with material purchasing.”
Qoros’s logistics planning team also worked to engineer the supply chain to match the manufacturing processes in the plant. “We wanted complete engineering of the supply chain for every single delivery,” says Chmielarz. “We were then able to have much more raw data, which allowed us to then go back to the plant and re-engineer. We didn’t want to have any break in between the plant and the inbound logistics.”
This planning is particularly important for Qoros because it has chosen, similar to many other OEMs in China, to source parts on delivered terms, with suppliers arranging transport to the plant. However, the PFEP data establishes a full specification for inbound, including what truck type and mode, frequency, pallet and container should be used. Such specifications are also updated and changed regularly to respond to production and supply changes, says Chmielarz.
Dickinson says the decision to contract the supply chain this way was a matter of resources as the carmaker launched its plant. Given the proximity of the supply base, he says the company decided that taking control of inbound transport was not a main priority. “We do plan to change that, and I think that down the road we can look at adding an inbound arm for transport and containerisation, but we’re not there yet,” he says.
Are 3PLs keeping up?
One area often cited as needing development in China is its third party logistics market. Here, the prevalence of in-house logistics providers, most owned by state-owned Chinese automotive brands, has set China apart from other major automotive markets. These companies serve not only their owners’ operations, but their joint ventures too, often in JVs themselves (the largest example being SAIC’s Anji with Ceva).
Executives acknowledge these companies do have some gaps in expertise, equipment and technology. The in-house model also leads to some political sensitivity in the automotive logistics market, with some OEMs bound to in-house providers for particular plants. Transport networks are arguably not as efficiently run as they might be under independent 3PLs or in a truly open market.
However, the logistics processes among these providers have become more sophisticated, including a high level of value-added services, from parts supermarket management to line feeding. SVW outsourced its in-plant logistics and parts inventory management to Anji-Ceva a decade ago, and the provider has grown to perform these services for a number of OEMs outside the SAIC umbrella. Ford, meanwhile, has been working with Changan’s provider CMAL (a joint venture with APL Logistics), to help it to play more of a ‘lead logistics provider’ role, similar to how the carmaker works with Penske in the US or DHL in Europe.
While China’s automotive logistics market may not be entirely open, the pace of expansion has led to opportunities for private and foreign companies in China. Sources say that OEMs such as SVW, SGM, FAW-VW and Changan Ford are all expanding faster than their providers can keep up with, which has lead to an increase in the use of subcontracting. In a sign that the logistics market may genuinely be falling behind automotive growth, sources say that some OEMs are considering bringing more competencies back in-house, such as warehouse and in-plant functions. However, the in-house model at state-owned companies means that making wider changes can be difficult for carmakers.
Looking for a shared vision
Qoros provides an interesting example of how providers in China may be struggling to keep up with the industry’s changes. According to Dickinson, Qoros put out a tender last year with the intention of outsourcing its warehousing, material flow and in-plant logistics. However, for him it was important that any 3PL (the bid went out to Chinese, joint-venture and global providers) would be willing to work closely with Qoros on new processes. “We have developed an idea of how we want to run our business and we were looking for more flexibility on the exact terms and conditions,” he says.
The first challenge for the young carmaker was that it was an unknown player, with current volumes low and uncertain. Dickinson admits that, for the larger providers, Qoros would initially be a “rounding error” in their business. However, he felt the real issue was that providers had a set idea of how they would run logistics. “It was challenging for providers to accept that we wanted to do things differently, and it was hard for us to accept that this spirit of co-operation wasn’t there,” he says. “All of the big traditional players turned their back on us.”
Qoros eventually decided to keep this business in-house, which Chmielarz says has been an advantage for the carmaker in developing its own processes, including the high level of kitting.
“We didn’t want to give up on our idea of how we wanted to structure inbound logistics,” she says. “We still work with a lot of companies on the engineering, but that has been in very established frames of work. Until now, we are still searching for partners who share our vision of what the supply chain might eventually look like.”
Vehicle exports are an area in which the logistics industry has held great hope, but whose growth and development has certainly been far behind that of the domestic market. That could change as a few global OEMs use China as an export base along with more traditional exporters like Chery, Geely and Great Wall. GM has said it would increase exports to 300,000 units over the next few years. Most of these cars, such as the low-cost Buick Sail, will go to emerging markets, but some vehicles may go to the US. Volvo Cars has also recently suggested that it could export from China. Qoros has already started exporting in small volume to select markets in Europe.
The outlook is uncertain for many China-based exporters, however. While overseas vehicle and knockdown kit shipments surpassed 1m units in 2012, they fell in 2013 as some important markets faced instability (particularly in the Middle East) or erected further trade barriers, such as in Brazil and Ukraine. Aside from market conditions, exports are an area in which logistics needs further development and investment, including services for knockdown kits and spare parts logistics.
"Stacking parts correctly is very important, especially because of the very poor road conditions in some markets. In general we see better quality in markets where we use rail " - Jenny Jin, GIC
Jenny Jin, vice-president with responsibility for supply chain at Geely International Corporation (GIC) notes a strong trend towards semi-knockdown and complete knockdown kits (SKD/CKD) as countries change their import duty rules. Whereas in 2012 Geely’s export mix was nearly 70% finished vehicles, in 2013 that shifted to a 50-50 split between vehicles and kits for Geely’s 120,000 exports. GIC logistics manager Prince Chen expects that trend towards kits to continue.
Important CKD markets for Geely include Russia, Belarus and Egypt and the company has also recently invested in a CKD operation in Uruguay.
According to Jin, Geely uses a third party provider to do the packing and consolidation of CKD parts, which is managed by Geely’s plants, but connected to GIC’s systems. Jin notes that there are challenges sometimes in maintaining effective packaging, stacking and handling over the kits’ longer supply chains, especially overseas. “Stacking parts correctly is very important, especially because of the very poor road conditions in some markets,” she says. “In general we see better quality in markets where we use rail.”
Jin says that Geely tends to have the best quality in markets where it has invested in its own facilities and sales companies, such as in Belarus and Uruguay, where it can implement and oversee its own processes more strongly.
Long lead times for spare parts
The balance between investment and price is equally true for Geely and other Chinese carmakers when it comes to aftermarket logistics and spare parts networks. According to Chen, Geely uses one parts distribution centre in Shanghai to serve its global markets. About 50% of parts move by sea and 50% by air.
Like other OEMs in China, Geely faces long lead times in dispatching parts. For 2014, it has been able to reduce the time between receiving orders and the parts leaving Chinese ports, but it still takes several weeks. Including transit time overseas, spare parts delivery can stretch to nearly two months.
However, Jin and Chen agree that an overseas distribution centre is not necessarily the right move yet, although Geely continues to do feasibility studies. “If you have over-investment, then the customers will get the part sooner, but at a higher price, which our customers may not be ready to pay yet,” says Jin.
China’s automotive logistics industry is far from perfect. Aside from the infrastructure gaps and lack of services such as intermodal, experts point to low productivity, high labour turnover and a shortage of skilled management staff. There is an aggressive, perhaps damaging focus on price, which can be partly seen in the export market. Officials and executives are right to call for reform and development.
However, if redressing skills and expertise shortages is necessary for improvement, China’s potential remains high. At Geely, for example, Jenny Jin says the company has begun to work more carefully with Volvo Cars on CKD processes, as the carmaker’s new Chinese plants have a variety of knockdown operations for parts arriving from Europe. “We are trying to get closer to Volvo’s systems and to learn from them, as they are globally tested and effective. We are already communicating very closely, and we will make regular visits to share information and to check operations,” she says.
Such sharing should be part of the next phase of China’s development in automotive logistics. Besides the ownership links between Geely and Volvo, China’s automotive landscape is a web of interconnected OEMs and joint ventures. Recently, sources say that there has been more communication between the various companies and joint ventures. That would not only be an advantage, particularly as production and supply networks strengthen, but arguably it is necessary given the rising complexity of the supply chain in China. To borrow some words from the government, in the next phase logistics could be decisive for the automotive industry.