Ellen Hua looks at how China’s OEMs and logistics providers are bringing more sophisiticated services to warehouses and assembly lines.
Sustained high growth in China’s automotive industry has generated increasing demand for logistics services, and more recently for outsourced services that go beyond transport for inbound logistics.
With a somewhat simpler set of transport operations to follow, vehicle logistics is estimated to be outsourced by OEMs on a scale of more 80%; for inbound logistics it is estimated to be outsourced around 50%, while for the aftermarket it is even lower, according to Ma Zengrong, vice general secretary of China Automotive Logistics Association of CFLP.
“In China, vehicle logistics started earlier and has become a developed area, and inbound logistics is developing rapidly, whereas aftermarket is just getting started,” he says.
In recent years, logistics has been more about keeping up with the market. A recent advancement is that, while quantity is still important, the quality side is gathering increased attention–particularly as the market cools. There are also signs of increased outsourcing in areas including container pooling and IT services. But many China-specific traits of the market, including the dominance of OEM-affiliated logistics providers, hold back other areas of outsourcing to a certain degree.
Although transport and warehousing still make up about 85% of revenue for automotive logistics, both the amount and the types of value-added services are growing in China. For inbound, there has been more outsourcing of sequencing, kitting and just-in-time logistics.
“We do see a trend that people no longer stop at conventional operations,” said Qian Jing, director for Asia- Pacific automotive at Geodis Global Solutions. “There are more considerations about bringing expertise to new heights.”
Her comments are illustrated by recent corporate success stories. A company like Chep, which manages container pooling, does not become a market celebrity by accident, she says, pointing to an overall climate in China in which more sophisticated capabilities are gaining importance.
Many advanced ideas have already been in China for several years. According to Ma Zengrong, they were brought in when companies like Anji-Ceva and Changan-Minsheng first set up their presence in the country around 2001.
Geodis’s Qian Jing agrees, though she says some of these processes were slower to reach the automotive industry. “In early stages, they were perhaps used more in the FMCG [fast moving consumer goods] sector by companies like Proctor & Gamble and Unilever. After all these years, they’ve found increased application in the auto sector,” she says.
“What often happens in China is once some industry players initiate a practice, their peers quickly adapt the same,” says Ma.
While inbound trucking is still the dominant service, there is more outsourcing of inbound valued-added processes. “We are seeing more scope of services and the expansion of outsourced inbound logistics. We see huge growth in the amount of milkruns, continued increase in sequencing outsourcing, and lots of just-in-time logistics services,” says David Dudek, vice president, automotive, Asia Pacific for Ceva Logistics–the largest logistics player in the market with the Anji-Ceva joint venture.
Quite a few OEMs in China are using third party logistics providers (3PLs) to do sequencing and kitting. “It started more in-house, and trended to more 3PLs,” says Dudek.
OEMs in China have already been outsourcing sequencing to tier suppliers for modules such as seats, but now the split between sequencing is evening out between what OEMs, suppliers and logistics providers do. “It depends on the OEM’s decision and the type of components,” concludes Dudek.
Some processes are still not in the spectrum of services outsourced to LSPs. Subassembly, according to Dudek, is normally done by tier one suppliers or OEMs, not LSPs as is sometimes the case in the US and Europe. “There are not yet too many examples that I have seen in China [of this kind of outsourcing,]” he says.
Dudek and Qian Jing indicate that outsourcing of planning and inventory-management is even more rare. “Particularly, planning outsourcing is a big risk for OEMs,” says Qian.
She goes on to reveal that while OEM outsourcing has grown in China, most of the outsourcing remains OEMdirected actions, with LSPs tasked more with implementation and execution. “Very often, LSPs simply execute orders given by OEMs, unlike in some mature markets where LSPs develop their own sub-orders based on an OEM’s master-order,” she says.
The communication between OEMs and LSPs still leaves much to be desired and joining the activities of the warehouse to those of the assembly line remains relatively weak, according to Qian. This is echoed by Ma. “The number of LSPs that are available to offer very mature inbound services is still limited, be it delivery to warehouse or to the line.”
Both Qian Jing and Ma Zengrong point out that the outsourcing of valued-added processes described above is mostly seen in China’s OEM joint ventures.
While the more advanced processes are not fully mature, much progress can also be noted in the more traditional transport services. A decade ago, inbound deliveries were largely made by suppliers to OEMs without ensuring full truckloads or the most optimised routes. “Most components are now picked up and managed by OEMs through 3PLs. In most instances recently, major carmakers control inbound logistics from the supplier dock, utilising their 3PL to their warehouse or plant,” says Dudek. “So milkruns are common. For larger components, there are scheduled full-truckload shipments, although there is not much less-than-truckload,” he says. According to Dudek, where there is LTL it is usually done by milkruns followed by a quick consolidation instead of a multi-user system that combines the freight of several shippers. Although Ma Zengrong dismisses milkrun/directdelivery combination as non-China-specific, he discloses that CFLP did a survey about it, showing both have been used by most carmakers.
According to Dudek, much container management work is done in-house. “But that is one area where I’m starting to see more outsourcing,” he says, adding that containers are sometimes managed by packaging-specific companies and not always 3PLs. When it comes to packaging, Chep can hardly be left out as a leading pallet and container pooling service provider. But Geodis also serves as an example of a 3PL doing container management in China. In June, it won the contract to manage containers for BMW’s new plant in northern China, a similar operation to Chep’s container pooling, except that system includes pallets as well as containers, and pallets are open for use to retailers in the FMCG sector. Chep manages a larger pool, whereas BMW’s containers are customised for its own purpose.
“In container pooling, the first challenge is the size of investment and the second is IT support,” says Qian Jiang. “BMW has no issue with either, so they do that themselves. And I think they also do this because they believe they could find an LSP in China to help manage the assets.”
The contract also outsourced waste disposal to Geodis. “In this case the 3PL is also managing the OEM’s packaging waste, production waste and scrapped parts, something not seen much in the industry, ” says Qian. “And the methods we see in Europe, such as when an OEM sells scrap steel sheet reshaped by a third party to its sheet producer, are not seen here.”
In a loose sense, the concept of supplier parks has been in China for a while, sometimes in the context of what Dudek calls “pseudo supplier parks”, where suppliers are based within close proximity to OEMs. “In places like Anting near Shanghai, there is a lot of production. Some of the suppliers may not set up a supplier park, but they are located there to be close to OEMs,” notes Dudek.
According to Dudek, “pseudo supplier parks” are more associated with established assembly plants, while most of the newer plants have built supplier park areas. An example is the recent completion of the GAC-Fiat plant in China’s Hunan province. By November, nine suppliers had entered the park to begin construction work.
In China, creating a supplier park is sometimes not exclusively for the purposes of optimising inbound logistics, but can also be a government move to support the local automotive industry through an expanded supply chain.
Another area that has seen expansion in outsourcing has been IT, where there have been more consulting services as well as service providers becoming available, according to Qian Jing. Dudek agrees, saying that dramatic increases in recent years in China have increased the need for more visibility at the part number level.
“We are seeing, in China, sophisticated IT solutions, network design and the visibility of inbound shipments. IT capabilities have come to China,” he says. “A big progress in the past 2-3 years has also been a higher prevalence of GPS and inbound shipments visibility throughout China. And the price of GPS has really come down.”
A leading software provider in China’s auto sector, who asks not to be named, tells Automotive Logistics that in today’s marketplace in China, automotive logistics cannot survive without IT support and virtually every business has an ERP/ WMS system. However, the inter-connection between one company and another is not strong compared with mature markets.
“Regardless of whether its 3PLs, vendors or clients, they all have ERP systems,” says Qian. “But one individual system is different from another, so they do not connect well. It’s a new trend here to have IT platforms for effective data sharing and processing.”
In 2010, the Automotive Logistics Association of CFLP– along with Changjiu Logistics–attempted to establish a nationwide vehicle logistics information platform for highefficiency, low-cost and low-carbon purposes. But this forward-looking step has lagged behind and not received much attention from the sector.
“We are not surprised,” says Ma. “Businesses are not always keen on what isn’t closely related to their immediate profits. Like this year, they are more concerned about road regulations on overloading. When they get these worries off their minds, we can work with others to develop resources.”
The word 3PL in China often includes OEM-affiliated LSPs. Operational complexity drove China’s early carmakers to develop in-house logistics divisions, who then began to serve parent OEMs as independent parties. But this affiliation has also developed into a kind of protectionism. “Things will remain unchanged for a while,” says Ma Zengrong. “When competition is not hot enough, and profits are still there, business naturally goes to an associated LSP. It might not be true about new OEMs though. ”
Meanwhile, he adds, affiliated 3PLs may not want to do business with another affiliated provider.
However, that’s not always the case. There have been opportunities for an affiliated 3PL of one OEM to get business off another, according to Dudek. “I’m seeing that trend continuing, although slowly. And some OEMs that do not have an affiliated provider look for any 3PL provider,” he adds.
Regarding potential conflicts of interest that may arise from branching out to non-affiliated business, as Anji-Ceva (which has affiliation to SAIC) has done, Dudek believes that rising costs are going to take the emphasis away from ownership issues. “China’s growth trend has not put a focus on the cost side of supply chain as much as it will in the new few years. More cost focus by the OEMs, or supply change, will make them look to see if their affiliated 3PLs are competitive, and look to new solutions or even shared networks to reduce cost.”
According to Ma, among an increasing number of 3PLs, there have been several companies like Anji-Ceva, whose service range has covered the entire supply chain. However, he notes that outsourcing to non-affiliated providers is currently more common for outbound than for inbound logistics.
As the role of being an integrator is becoming increasingly important, the industry is also becoming aware of more sophisticated concepts like the fourth party logistics provider (4PL). But as elsewhere in the world, local and global professionals in China are equally divided over the concept. Some identify 4PL with a lead logistics provider (LLP), while other define it based on the provider owning the contract with the 3PL and other LSPs. The 4PL in the latter sense is not seen much in China, with only a few examples from outside the automotive industry, including the example of the IBMGeodis global logistic-purchase deal, which includes China.
“It’s often better for OEMs to have someone providing both solutions and operations. So [if it’s not exactly a 4PL] people in the industry have come up with the wording of 3.5PL,” says Ma Zengrong,
As in the past, global 3PLs are still more active in import and export operations in port regions. Qian Jing attributes this fact partly to a China-specific inclination in the logistics industry.
“For one thing, global 3PLs started with import/export to get a foothold in China; for another, it’s hard for global 3PLs who are typically asset-light to get non-import/ export business in China without having their own fleets or warehousing facilities,” she says.
But now many companies are aware that investments are a must to respect the unwritten rules to win market share, and many of them have started actions. “Geodis, for instance, has entered a ten-year contract renting two prime Prologis warehouses in Chengdu before getting clients,” says Qian Jing, adding that logistics will follow as plants relocate inland.
In the transition towards ‘lean growth’, logistics efficiency is high on the agenda in China’s 12th five-year plan, and is expected to experience a quantitative-to-qualitative-focus transition, as Ma Zengrong phrases it. On the other hand, similar to mature markets, OEMs are continuing to look at lower cost, reduced inventory and improved overall visibility as well as better network design and better ideas, according to Dudek.
“In fact, carmakers are attaching an increasing importance to the role of logistics. This is seen in the enthusiasm they have demonstrated in participating in some industry events that CFLP has organised,” says Ma Zengrong (CFLP also partners with Automotive Logistics for its annual China conference each spring).
Ma also points out that inbound logistics accounts for some 60% of the total logistics cost; despite its complexity and limited profit margins, LSPs in China cannot afford to see it as unworthy, or just “nibbling a bone that is all bone and little meat” as Ma describes it. He emphasises the role inbound logistics plays in building partnerships. “It is key to establishing a real strategic partnership with an OEM.”