Ellen Hua finds China’s logistics providers keen to pull together as growth in the country slows, putting an emphasis on building partnerships between larger and smaller providers and carmakers.
With China’s economic growth and its integration into the global supply chain, logistics service providers in the country’s automotive sector have had many challenges, including wild swings in the market, infrastructure constraints and regulatory headaches.
Although LSPs have weathered these one after another, a note of ‘huddling for warmth’ could be sensed at an important industry gathering in Chengdu, in western China, some 350km from Chongqing, which was held just as China’s 18th National Congress drew to a close.
he event was hosted by the China Federation of Logistics and Purchasing (CFLP), a partner with Automotive Logistics at its annual spring conference in China. It was attended by more than 300 delegates from major domestic OEMs, local and global providers, government officials, tier suppliers, packaging specialists, car-carrier makers and consulting firms. ‘Collaboration’ was perhaps the most repeated word at the meeting. “We collaborate through discussions and grow through collaborations,” said professor Zhang Xiaodong from Beijing Jiaotong University.
China’s explosive growth in recent years, followed by a more subdued development this year, has had tremendous consequences for logistics and the event found manufacturers and providers debating topics that ranged from a potential change to the essential structure and ownership model in the logistics market – whereby most of the major providers are owned by, or affiliated to Chinese OEMs – to questions over equipment, technology and multimodal service offerings.
Moderate growth continuing in 2012
Chinese vehicle sales in 2011 finally levelled off following the massive 32% surge to 18m passenger cars and commercial vehicles in 2010. This year, too, China’s overall car market development has been relatively slow. By October, domestic vehicles had advanced 2.7% from 2011 to 15.78m units.
Passenger car sales have been stronger than trucks and buses, up around 7.3% to 11.22m units in the first 10 months. However, a large share of that growth came during a dramatic year-on-year rise of 17.5% in the second quarter. The third quarter, meanwhile, has slumped 7.1%. Xu Changming, director of the information resource division of the State Information Centre (SIC), anticipated a slight pick-up during the remaining two months of the year.
Premium brands have grown way ahead of the rest of the market, with BMW and Audi advancing more than 30% this year. At the same time, protests in China over territorial disputes with Japan have led to Japanese car sales dropping by 38.2% in September and 58.3% in October.
Wu Ju n , general manager for Fengshen Logistics, a provider associated with the Dongfeng Group and its joint venture with Nissan, noted that the growth trend in China remains for the car industry as a whole, but not for Japanese vehicles. “The growth pattern has changed,” he admitted.
OEM efficiency drives
Despite the logistics performance for automotive generally being better than that of other sectors, high costs are still a major area of concern. In an OEM panel discussion, Ya ng Xiaoyu from First Automobile Works (FAW) argued that logistics needs to fit in with production patterns and requirements. He pointed out that as logistics itself does not generate value, it is important that the process makes the most efficient use of resources. “The best solution is being lean, addressing the issue of when, where and how throughout logistics processes,“ he said.
Dongfeng has tried to improve logistics efficiency by focusing on inventory reduction in particular, according to Xie Zhihai from the SCM improvement and supporting division of Dongfeng Motor Group. “With constant market changes, we are under pressure to deal with inventory,” said Xie. Excess inventory levels were picked up on by other observers as well. “There is risk from high inventory levels, inadequate standard practice and lack of tailored solutions,” said Zhang Yu n , general manager for Fablog Logistics Consulting. Zhang suggested that providers have been too busy with meeting the demands of rapid growth and therefore have missed opportunities to improve logistics efficiency.
Chen Chunfu, responsible for finished vehicle logistics at Geely Automobile, pointed to unbalanced capacity between Geely’s e ight manufacturing bases, which are located across the country, as well as a rise in operating costs. State regulations limiting the length of car carriers have also been holding his attention. “The increasing logistics cost is challenging as the profit margins for moving finished vehicles are already thin,” he said.
Fu Jian from the China National Heavy Duty Truck Group (Sinotruk) pointed towards innovation as the way to escape the difficulties challenging OEMs and LSPs. Geely’s Chen added that collaboration in the logistics sector would be just as necessary. Ma Deji, president of Changjiu Logistics, proposed that a better integration of resources between OEMs and providers could help to create more backload business for providers, which would lower cost and improve profit margins.
There was room for improvement also noted for international flows. Gerhard Evers, chairman of Fablog, said that in the two projects the company has handled, which involved complete-knockdown kit exports from China to Russia, parts damages were an issue. He maintained that packaging and safe transport have more room to improve in international transport to and from China. However, Duncan Deng, automotive ser v ice director at Chep, the packaging specialist, revealed that the company would soon launch a product in China to address the damage issue.
Still a fragmented sector
CFLP membership has grown in recent years from 105 to 270 companies. However, according to Cui Hongjin, chairman of Tianjin Anda, this growth is also a sign of the continuing fragmentation in the automotive logistics sector. “They [market leaders] are supposed to be no more than a dozen or so,” he said. “This again prompts our thoughts on the need for restructuring and collaboration in the sector.”
Fablog’s Zhang echoed this point in her reference to the number of German LSPs, which shrank from around 500 in the 1980 to around 10 major ones in 2010 following a wave of liquidations and mergers. It should be noted, however, that while there may be a limited number of major players, the German and European logistics industries still have hundreds of small- and medium-sized players, particularly in the vehicle logistics sector.
Noting more global logistics providers in attendance at this year’s conference, Zhang suggested that competition in automotive logistics would be tougher as manufacturers expanded their production and sales networks in China. She questioned whether the logistics sector was ready for either the opportunities or the rivalry.
Li Ze, general manager for CITIC Logistics, said industry consolidation should happen mainly in the integration of assets. Li told delegates that CITIC’s integration with major provider Anji Logistics would soon lead to such an integration, with a new joint venture combining the former’s finished vehicle logistics business with the latter’s. “With what we face now, collaboration far outweighs competition,” he said.
ViewSCM’s vice-president Li Lin, who started his company in 2008, said it had been difficult to become a recognised member of the sector and it would be even harder for new entrants to find a place now. He suggested that now was the time for logistics providers to collaborate with each other, bringing up the possibility of the CFLP serving as a platform for such collaboration.
More specifically, Anda’s Cui said that for the next five years, the strategy of non-OEM affiliated, small-to-mid size logistics providers should be to join up with larger affiliated ones. Cui said it would be better to be a small shareholder in a larger logistics group than a mere transporter for it. He and ViewSCM’s Li appeared to see eye to eye on smaller providers working more closely with the larger, OEM-owned or part-owned companies, most of which have a stronger leverage with their OEM customers than other providers. “We need to think about if it’s necessary for all LSPs to look to OEMs only,” h e suggested. “What if we look to the large LSPs developed by OEMs for cooperation opportunities, so that it costs less?”
Interestingly, if not completely in the opposite direction, OEMs expressed interest in working beyond their affiliated LSPs with more independent providers as well. Chen Sheng, responsible for logistics planning and operation management at Chongqing Changan Automobile, suggested that manufacturers should not shut the door on other providers that might offer excellent services, while reaffirming the value in Changan’s partnership with its own provider, Chongqing Changan Minsheng APLL Logistics.
While CITIC’S Li Ze agreed that integrating resources in one way or another would definitely help improve efficiency, he suggested the sector also had to look at fuel efficiency and alternative fuels for car-hauling equipment. “We can do nothing about fuel price, but why not do something about the weight of car carriers to seek a more economical use of fuel?” he asked. “Just imagine that two-thirds of fuel is being used to support the weight of a car-carrier itself.”
Growing exports and imports
China’s car exports in 2012 have been stronger than its general goods export performance, growing by 17% in the third quarter of the year. According to Wang Yinyin from the Ministry of Commerce, a total of 426,000 units of passenger cars were exported in the first three quarters of 2012, making up 55.5% of vehicle exports. Wan estimates this year’s export growth rate will be over 20%.
The top five exporters were Chery (up 21.2% to 148,000 units), SAIC (up 74.8% to 75,000 units), Great Wall (up 24.5% to 74,000 units), Geely (69,000 units), and Dongfeng (up 35.9% to 54,000 units). Algeria, Russia and Iraq are now the three largest destinations. Parts exports have also maintained a steady 3.1% growth in the first nine months, mainly to destinations in Asia, Europe and North America. Around 60-70% of parts exports were for the aftermarket.
The State Information Centre’s Xu told delegates to expect car imports to also rise rapidly, thanks to China’s growing domestic demand and consumer requirement for increasingly specific car options. A breakdown of countries showed that Germany overtook Japan in 2010 in preference for vehicles among Chinese car buyers and has since led the top five (followed by Japan, the US, the UK and South Korea) with an increasing share each year.
In exporting and importing cars and parts, foreign logistics providers are still providing the majority of services.
Much to expect from rail
The automotive industry in China is still dominated by truck transport but conference speakers expressed a bright outlook for rail’s potential to increase its share of the market. Li Xin from the transport bureau of the Ministry of
Li Xin from the transport bureau of the Ministry of Railways (MOR), said the railways would keep investing in infrastructure related to the sector and would be happy to see a better integration of modes. Among the nine logistics centres already built, Zhengzhou, Wuhan and Xian all have areas dedicated to car transport, said Li. The MOR has also introduced a number of improvements including expedited booking and the tracking of vehicle freight.
However, most OEMs and logistics hubs in China still lack rail connections. Yan Jun, assistant general manager at Anji Automot ive Logistics, said this lack of integration had caused high cost and low efficiency. He asserted that OEM facilities and China’s logistics infrastructure were highly relevant to developing rail’s role in automotive logistics. “It’s hard to make changes to an OEM’s existing plants, but new plants can be coordinated with LSP planning to get their assembly linked to rail,” said Yan. He pointed to SAIC – with whom Anji is affiliated – as having made progress in this area.
Yan also said that he wanted to see rail yards of larger size than the ongoing constructions to meet logistics capacity needs. “Cost saving needs to be considered in the planning stage. Finding remedies afterwards will hardly do,” he said.
Cars in China are mostly moved today in bi-level rail wagons. Yan, presenting together with Matthew Gloeb, assistant vice-president of Union Pacific, suggested that adjustable heights were an area to work on, so as to better accommodate SUVs. Introduction of tri-levels – which would allow for three levels of passenger cars, as in North America – could be another option to reduce cost. Yan pointed out, however, that such wagons might be subject to geographical limitations in parts of China.
Anda’s Cui also suggested an increasing driver shortage in China might constitute another reason why rail would be more important in future. “Most of the car-carrier drivers we see are the generation born in the 1950s who are to retire very soon,” he notes. “There were very few born in the 80s, so one solution to that would be rail.
Cui would also like to see trucking limited to short-distance haulage. Speakers noted that in view of increasing energy costs and overloading issues on the road, it was crucial for all transport modes to integrate rather than just compete. “Road, rail and water are not competitors but an alliance. Each is meant to offer its own merits,” added Zuo Guangyu, deputy general manager for China Railway Special Cargo Services Company.
SIC’s Xu expected to see coninued growth in Chinese car sales into 2013. But he added that the next wave of growth in both the car market and general economy might not be as fast.
In the long run, a rapid development of the car market up to 2020 is still being forecasted, with a growth rate about 1.5 times that of GDP growth. This outlook is based on previous growth patterns of the neighboring Japanese and Korean car markets, as well as the optimism on economic growth as China continues its historically rapid industrialisation and urbanisation.
Xu said that the share of smaller, tier three markets had been rising by 2-3% annually, and was expected to account for 55% of the market by 2020. Tier one markets, such as Shanghai and Beijing, are expected to lose about 15% of the market share by then. This shift will include growth for inland and western cities in China, which should also drive a more diverse and dispersed logistics demand.
Strategic OEM and logistics provider relationships are also expected to become more relevant. Chen Sheng noted that Changan started outsourcing both inbound and outbound logistics to a third party early in its development, and that further outsourcing of responsibility across its network should follow. “We see the two of us [OEM and LSP] as interdependent and as we grow to see a nationwide plant network now, we have more to expect from our partner,” said Chen.
Finally, Fablog’s Zhang maintained that even if Chinese growth is slower than it has been in the last five years, it could help the industry to make the improvements necessary in the supply chain. She pointed out, for example, that while aftermarket profit is eight times that of vehicle sales, spare parts logistics do not get enough attention in China. “We worry more about selling cars, less about aftermarket,” she said. “But in future, aftermarket will be a major powerhouse for profitability.”