China’s increasing export volume, particularly to low-cost markets, has resulted in a challenging, fragmented logistics sector. Anthony Coia reports.
China’s phenomenal rise to becoming the world’s largest vehicle sales and production market was largely a domestic affair. As sales for commercial and passenger vehicles roared ahead in the heady days of 2009 and 2010, exports – including semi- and complete-knockdown kits (SKD and CKD) – fell from a high of 681,000 units in 2008 to just 370,000 in 2009, and did not surpass the previous high again for several years.
However, since 2011 exports have rocketed, rising 50% in that year and another 30% last year to surpass the million mark for the first time. The leading brands were Chery, which shipped around 200,000 units of finished vehicle and knockdown kits, ollowed by Geely and Great Wall, which each exported around 100,000 units. With growth in China’s domestic market now somewhat more subdued, especially for many of China’s domestic manufacturers, exports are anticipated to steadily increase as a proportion of production.
With this rise in exports has come an increase in the demand for logistics services, including inland transport, port handling operations, shipping and even rail towards Russia and Central Asia. Carmakers are starting to see more options for ports of exit, as well as the entry of specialist logistics providers, such as Germany’s BLG Automobile Logistics, which offers services like vehicle tracking and adding accessories.
However, there are important differences in the nature of the current growth and logistics operations for China when compared to other nations that have recently experienced a strong rise in vehicle exports, including Mexico and the UK, let alone compared to the export stalwarts like Germany, Japan and South Korea.
The most obvious difference is the mix of market destinations and the product mix. China exports fewer passenger cars, at 45%, than it does commercial vehicles. The great majority of these vehicles are destined to low-cost and developing markets such as Iraq, Algeria, Chile and the Ukraine, although Chinese brands have started to gain a stronger footing in major markets like Russia and Brazil, as well as Iran. Furthermore, according to Mark Morley, director of industry marketing for manufacturing at supply chain consulting firm GXS, some observers expect that Chinese companies will increase exports significantly in the coming years to markets such as India, Thailand and Vietnam.
While all of these developing markets have wildly different characteristics, they share some common difficulties. Smaller markets often lack frequent and regular ro-ro services, as well as adequate terminal and inland infrastructure to handle vehicles, which can make shipping cars in containers a more practical option. Likewise, whether in larger markets like Brazil or Russia, or smaller ones in Latin America, many emerging markets – like China itself – have industrial policies and import duties that encourage, if not mandate, setting up knockdown kit assembly plants or working with local manufacturers.
"In actuality, some of our markets may change from CBU to KD and vice-versa. For example, Ukraine was an SKD market a few years ago. It depends on the import duties" - Jenny Jin, Geely
The result is that logistics services for Chinese exports are in some ways more fragmented than those of other markets. OEMs require a mix of ro-ro shipping, containers and CKD operations, often split between many trade routes. And with some carmakers expecting to increase the proportion of CKD manufacturing in their international networks, demand looks likely to remain splintered.
Geely’s export mix
An important example of how logistics services for exports are developing in China can be found at Geely, which was China’s second largest exporter last year with 100,279 units. The carmaker’s top five markets in 2012 were Russia, Iraq, Saudi Arabia, Ukraine, and Iran. Geely’s exports were 68% finished vehicles, 29% CKDs and 3% SKDs, according to Jenny Jin, vice-president of Geely’s international division. Markets to which Geely sends finished vehicles currently include Iraq, Australia and the Ukraine, while knockdown kits go to markets like Brazil, India, Iran, Mexico, Russia, and Malaysia.
Jin predicts that the composition of Geely’s exports will shift further in 2013 as it targets a 60% rise in exports, to more than 160,000 units. She expects the proportion of CKD to rise to 40-45% as new assembly locations open in Egypt, Belarus and Uruguay, where Geely plans to ship 3,000 units each. “In actuality, some of our markets may change from CBU [completely built units] to KD [knockdown] and vice-versa. For example, Ukraine was an SKD market a few years ago. It depends on the import duties,” says Jin.
According to Jin, Geely’s current export logistics demands are significant for both finished vehicles and for kit handling She says that the carmaker is seeking more options for loading ports in China based on the location of its plants and points to further need for logistics service providers and ro-ro service. “When choosing ocean carriers, for example, we need ones that are reliable and offer competitive lead-times and guaranteed space,” she says.
But Geely also needs freight forwarders to provide competitive destination services for its CKD shipments. Jin says the company is aiming for more door-to-door services for CKD shipments, over which it wants to gain greater control.
Great Wall wants more ro-ro frequency
China’s other major exporters have a similar export mix to Geely, with CKD representing around 30-40% of vehicles exported. Although Chery was not available for interview in this article, last year it told Finished Vehicle Logistics that CKDs made up around 40% of its exports in 2011.
The Tianjin Port Ro-Ro Terminal is aiming to develop an intergrated logistics service platform to boost its export offering.
Expanding ro-ro services
Although China’s exports move through a variety of transport modes to a fragmented list of markets, the country’s export-related logistics services are undoubtedly growing. And while ro-ro services have been among the areas that manufacturers say are in need of further development, shipping lines have been adding new routes and ports of call.
One of the leading ro-ro carriers serving China is Höegh Autoliners. Bob Tang, the line’s head of commercial, says that its primary export ports in the country are Shanghai and Tianjin (near Beijing). However Xiamen, located on the southeast coast, about 700km northeast of Guangzhou, is the fastest growing export hub for Höegh.
The shipping line’s trade lanes from China include routes to Europe, Africa and South America. Somewhat surprisingly, given the current climate, Tang says that the fastest growing route is to Europe, where Chinese-made vehicles move or tranship to the Mediterranean region, Eastern Europe, Russia and North Africa in some cases. The biggest difficulties for Höegh include the volatility of these volumes, as well as port congestion, particularly in markets with inadequate infrastructure. “Our main challenges involve port congestion and infrastructure deficiencies,” says Ta ng. “On the destination side, this is something that we experience quite often in North Africa, such as at the port of Djen Djen, Algeria.”
"In recent years, we have set up a new logistics department in order to provide one-stop service, including inspection and distribution" - Tang Zhe, Tianjin Port Ro-Ro Terminal
However, with the current growth, Tang reveals the company is expanding its fleet and service, and predicts improved port connections. “We want to further develop regular trade lanes out of China and increase our vessel sizes. With the increase in export volumes, we will also see positive developments in port infrastructure, which will enable quicker turnarounds for the vessels,” he says.
More export terminal options develop
China’s terminals for handling vehicles have also been developing with the growth in exports. While the Shanghai Haitong International Terminal has been the country’s dominant port for vehicles, a number of other terminals have also been expanding. The Tianjin Port Ro-Ro Terminal, for example, consists of two terminals with an annual handling capacity of 600,000 imports and exports. In 2012, the terminal handled about 120,000 exports from mainly Great Wall, Foton, FAW, and Hafei, according to Tang Zhe, the terminal’s marketing department deputy manager.
Ta ng adds that the terminal is aiming to develop an integrated logistics service platform. “We have constructed a carport in the terminal, a one-floor covered building that should be open in April,” he says. “We are also building a new yard, which should be ready in May or June. Tianjin is also developing a multi-level car park, which will take about two years to complete.”
Other terminals are developing besides Shanghai, Tianjin and Xiamen. Important nodes that Geely uses, for example, include the ports of Ningbo, 225km south of Shanghai, and Yantai, which is 600km southeast of Tianjin. In southern China, Guangzhou Port Nansha Automotive Terminal expects to begin operations in the second quarter of this year. Paulus Lee, marketing manager, expects to export 15,000 vehicles from Guangzhou to Pakistan in 2013.
3PLs get in the mix
As exports and port terminals develop, third party logistics providers have been expanding export services. An example is a joint venture between BLG Automobile Logistics and China’s Cinko SCM, which opened its first terminal in Tianjin last year and now operates in Beijing and Shanghai.
Last year BLG handled about 60,000 exports at the terminal in Tianjin. Around 40% of the vehicles were shipped to the Mediterranean Sea region and 35% to the South America west coast, while smaller volumes were sent to the Persian Gulf (10%), Sub-Saharan Africa (10%), Southeast Asia and Australia (5%). South America and Southeast Asia were the fastest growing markets.
According to Thomas Leiber, general manager for China, BLG’s export services range from repairs and accessories to building entire special edition cars; it also includes software flashing, as well as tracking and tracing vehicles. The fastest growing export service for the company is labelling vehicles with barcodes and entering them into a BLG system called ‘C@rin’. “This system provides tracking throughout the entire journey from our compound to final destination at the dealership,” says Leiber.
Leiber says that although almost all of its exports are finished vehicles, he is expecting growth in the number of CKD and SKD shipments as BLG prepares to offer services that supply its clients’ domestic and foreign assembly lines.
Cars in containers
Another area of potential growth is the containerised movement of vehicles from China using specially fitted racks, particularly for China’s less developed export destinations. “We ship to countries that ro-ro vessels do not serve, including destinations in Asia, South America, the Middle East and Africa,” says APL Logistics’ Rinaldy Sudyatmiko, senior director, automotive, Asia and Europe.
In November, APL began exporting General Motors’ Chevrolet Sail model from China to Laos. The process begins with General Motors in Yantai delivering to APL’s local yard. The cars are loaded at the yard using Trans-Rak International’s ‘R-Rak’ solution, which is removable equipment that allows the secure loading and bracing of four vehicles in one container. Once the containers are loaded, ocean carrier APL ships them from Yantai to Dalian by barge, and from Dalian to Bangkok by ocean. At Bangkok, the containers move by truck a distance of 640km to Vientiane, the capital and largest city in Laos.
The entire process, from vehicle receipt in Yantai to delivery at Vientiane dealerships, takes 30 days – within GM’s lead time expectations, says Sudyatmiko. In Bangkok, APL Logistics collects the R-Raks and returns them to Yantai by loading 55 units in one container.
Lack of rail and added value
While the Chinese export and logistics service market is growing across numerous modes, it is still suffering from deficiencies in infrastructure and, arguably, in quality control.
There is a general lack of rail links between plants and the major exit ports, which slows down lead times and increases cost. According to GXS’s Morley, Chinese OEMs need toensure they have the appropriate logistics infrastructure in place to support exports, particularly as higher wages on the east coast, together with government policy, have led companies to build plants further inland. “The problem is that the road and rail infrastructure that is used to support the transportation of vehicles to the east coast for export is only just starting to become established,” says Morley.
BLG, for example, moves vehicles to Tianjin port solely by truck. According to Leiber, the average distance from vehicle plants to Tianjin port in the northeast is around 400km.
Another characteristic of the Chinese export market has been the slow uptake of value-added services. Leiber says that whereas foreign OEMs view BLG’s quality and technical services as a matter of course, Chinese carmakers often do not want to pay higher prices for such service. “Even damage rate competitiveness ranks second after service costs [for Chinese OEMs]. The consequences of costs and savings are not evaluated sufficiently,” s ays Leiber.
Ta ng adds that one of Tianjin Port Ro-Ro Terminal’s main difficulties is that the Chinese authorities have not entirely supported the expansion of its terminal logistics services beyond cargo handling. “In recent years, we have set up a new logistics department for customers in order to provide one-stop service, such as inspection and distribution,” he says. “This logistics department receives limited policy assistance as the authorities believe that we should only handle ro-ro vessel loading and unloading, not logistics. This is unlike the Shanghai Haitong Ro-Ro Terminal, which is a five-storey facility that offers a variety of storage vehicle and services.”
Chinese OEMs must get sophisticated
With generally low-cost vehicles and a popularity in developing markets, China’s OEMs depend on a logistics system that has global reach but can keep costs down. In many ways, this system is remarkable for its extensive range despite relatively small volumes on many trade lanes.
For example, although rail is lacking for domestic movements, it has begun to develop across the ‘Eurasian land bridge’, with manufacturers making use of Russia’s Trans-Siberian railway to connect China with the West. GXS’s Morley points out that a number of European OEMs have used this route to transport knockdown car kits to plants in China. Likewise, some Chinese carmakers, such as Great Wall and Chery, are using the rail network to export kits to Russia.
But as exports grow, the need for more frequent and reliable services is evident. Chinese OEMs are currently at a disadvantage to competitors as they face long shipping times to market. Also, given the fractured nature of their export flows, these OEMs cannot make full use of economies of scale for shipping when it comes to cost and service frequency.
Furthermore, if Chinese OEMs aspire to break into more established markets, such as Europe or the US, the competition will be fierce, especially at the low end of the market where the likes of Renault’s Dacia brand or Volkswagen will be hard to match, says Morley. In such areas, speed to market, the need for more sophisticated services and a focus on quality, including damage prevention, will be essential for any Chinese export.