China’s growth in automotive sales has led to a related increase in volume and sales of automotive packaging. Andrew Williams looks at how local and international suppliers are responding to pressure from manufacturers to provide cost efficiency, good service and product sustainability.
China’s recent explosive automotive growth has helped to spur the expansion of local and international packaging companies in the country. But while volume is high, the demand for more sophisticated products and services, such as container pooling and to some extent reusable packaging, has lagged behind. Now, with efficiency and environmental pressures increasing, some OEMs and tier suppliers are more interested in packaging companies that can lower total supply chain costs rather than provide the cheapest piece of plastic or wood.
The consensus among many industry observers is that volume and sales of automotive packaging in China will rise throughout the remainder of 2011 and 2012. However, opinion is divided over the exact pace of growth.
Dan Roovers, vice president of automotive sales at Orbis Corporation, predicts the Chinese automotive packaging market, specifically for reusable packaging, will rise sharply throughout the period for at least three reasons. Firstly, OEMs and tier one suppliers are rapidly converting from expendable packaging to plastic reusable packaging for cost savings and environmental sustainability. Secondly, says Roovers, automotive production volumes in China will increase, hence the need for packaging to support the higher volumes. Thirdly, several of the packaging loops in China are increasing in size as new OEM assembly plants are built in the west of the country but tier one suppliers continue to ship from the east.
“These longer packaging loops increase the volumes of reusable packaging required,” says Roovers.
David Zhang, senior regional logistics manager for Asia Pacific at the tier one supplier Delphi, believes reusable packaging will enjoy high growth. “The overall demand for packaging for the automotive industry in 2012 will have an organic growth; the major increase will be driven by returnable packaging and most likely the demand for expendable packaging will remain level [throughout] 2011,” he says.
According to Duncan Deng, automotive service director at Chep China, which specialises in renting and managing packaging assets, growth has been particularly strong among tier suppliers, with revenue and customer numbers doubling in the past year. “We expect sales to grow, especially among original equipment suppliers, as more and more customers are choosing an asset-light strategy,” says Deng.
Other commentators are more measured in their predictions for the rate of market expansion, anticipating growth but at a much slower rate.
“We do expect the demand, volume and sales of automotive packaging to increase over 2011-2012 but at a much lower rate, caused by the slowing down of the Chinese automotive industry,” says Thomas Ong, deputy group chief operating officer at Goodpack.
Some pundits highlight the close relationship between the packaging sector and the wider Chinese automotive industry and anticipate more modest growth as the domestic car industry cools down following a period of rapid expansion.
“It will rise over 2011, but not as much as the past five years. New plants will consume more packaging and give new business to packaging companies. [However], with the restriction of car-buying by the Beijing Government, the ‘flashing period’ may finish in the next five years but not [over] 2011-2012,” says Li Xin, team leader of the logistics department at Beijing Benz Automotive.
“To a large extent, it will depend on the demand [for cars] in the Chinese market,” says Dr. Martin Lockström, director of the BMW-SMI Centre for Purchasing and Supply Management. “At present, the government’s automotive industry policy is not [as] loose and excitable as last year. I think the packaging demand will remain stable for the next year.”
According to Ong, the current use of returnable packaging in China is relatively more common when moving parts from distribution centres or directly from close-by the supplier to the production line. However, he foresees a major change on the horizon.
“Owing to cost-improvement initiatives and environmental protection reasons, more and more auto companies are looking into reusable and recyclable packaging,” he says.
For Roovers, it is clear that the major component of success for a packaging supplier will be logistics and reusable packaging expertise and knowledge–not simply manufacturing capacity and products. In his eyes, competing by offering only packaging products is a losing strategy–hence the lack of success to date by several local packaging suppliers.
“A successful reusable packaging company in China needs to implement packaging systems for their customers and they need the experience and know-how to pull it off. Customers are demanding a packaging supplier that will implement optimised solutions for them. Also, logistics efficiencies and reverse logistics issues still present challenges for the efficient use of reusable packaging,” he says.
Lockström agrees that more and more carmakers and suppliers are beginning to make use of returnable packaging in China–largely in response to corporate social responsibility and cost concerns.
“I think it’s a good time for packaging industry consolidation. Some local packaging companies will merge or cooperate with MNCs [multi-national companies]. Meanwhile, the industry will provide more services–not [just] packaging. For example, some companies focus on returnable packaging instead of oneway packaging and they can also provide [a] pooling service for auto OEMs,” he says.
“So far as I know, some famous OEMs [have] asked their suppliers to use returnable packaging, such as Guangzhou Toyota, Beijing Hyundai and Shanghai GM,” he adds.
Some predict that this demand will prompt companies to enter into returnable packaging manufacturing and offering returnable packaging solutions. Delphi’s Zhang explains that, because returnable packaging manufacturing factories are not labour-intensive, they will need to be close to their supply base or their customer-base; he argues that the Yangzi delta and Pearl delta will be their primary choices.
Meanwhile, Rui Zhu, China logistics director at Lear Corporation, points out that, as a customer, Lear now tends to procure more and more returnable packaging for the sake of cost-saving and environmental protection. “It is growing but will be in a low-cost operational system due to competition with ‘one-time’ packages,” he says.
Chep’s Deng says that most manufacturers in China are keen to use returnable packaging because of the long-term cost and environmental benefits, but that currently the cardboard box is still prevailing in the market. “The backhaul cost of empty packaging is a killer,” he said. “Its cost outnumbers the saving brought through replacing cardboard boxes by returnable packaging.”
However, he adds that within a certain range–around 500km–returnable packaging is being used on a fairly large scale. For these loops, depending on the level of outsourcing to Chep, the packaging is moved between the manufacturing site and its service centres.
Opinion seems to be split over whether local Chinese companies or global players in China are gaining more business with automotive manufacturers. Beijing Benz’s Xin argues that carton boxes continue to be produced by local, Chinese companies at very low prices. For Ong, however, the relative lack of domestic know-how in China represents a clear opportunity for global packaging providers to gain market share. However, although the local players may lack sophistication, he says they have the advantage of guanxi i [connections] given that all global carmakers and many tier ones are joint ventures in China–meaning that the extent of local involvement cannot be underestimated.
“We believe the global players will remain the mainstream for a while until the local players catch up,” Ong predicts.
Lockström says that foreign packaging providers dominate the market, especially in the automotive industry, largely as a result of consistent quality and good enterprise management.
“Many of them [were] already OEM suppliers and followed them to the Chinese market,” he says.
Meanwhile, Xin highlights the fact that, although local packaging companies tend to be more cost-competitive, international providers are almost invariably chosen by international customers–especially in the rental market.
“From the service, product experience and world resourcing point of view, international compan[ies] are more developed. International and local companies are sharing the market, fac[ing] different groups of customers,” Xin says.
“Honestly, both are struggling–but global suppliers are having more success than local providers. However, if price to the customer is the decision driver, competing against local Chinese suppliers is extremely difficult,” says Roovers.
Other observers agree that cost remains a vital factor, pointing out that local suppliers still win many contracts on this basis.
“Local players still dominate due to the fact that cost plays a major [part in] the final contractor selection,” says Lear’s Rui.
“So far it is still the local players who are dominating the market–the main driver is cost–but the global packaging providers will gain competitiveness by utilising advanced technologies and providing better service and lower total cost for the customers,” adds Delphi’s Zhang.
But even global providers are relying on local Chinese suppliers for their products. Chep’s Deng says the company sources all of its pallets and equipment in China from local manufacturers, primarily due to both cost and service. “Products need to be repaired and to be developed year-byyear based on the market’s response,” he says. “Local producers can make Chep adapt better to market changes and service requests”.
For many, a trade-off between cost competitiveness on the one hand and quality and service considerations on the other, remains an important facet of the Chinese automotive packaging industry–and one that continues to shape the differences between the local and international customer base. Ong argues that the main focus of priorities between price, quality and service expectation varies from company to company, depending on their organisational culture.
“Having said that, it is our impression that cost is a critical consideration–not many businesses in China [are] willing to pay a much higher price in return for quality and service,” he says.
“Chinese local customers, but not joint ventures, always focus on price first,” adds Xin.
Deng notes that international companies–especially global tier providers–use returnable packaging more commonly, as they consider more carefully the total cost and quality equation, however he feels that both domestic and joint ventures are more concerned about piece price than foreign companies. “Joint venture and domestic manufacturers are more cost-driven and use less returnable packaging,” he says.
According to Roovers, the relative importance attached to cost as opposed to quality also depends on the specific customer or OEM in question. He maintains that, while Chinese OEMs are still quite focused on price, the others are clearly focused on logistics efficiency, ergonomics and the total cost of ownership.
“These companies want packaging that minimises total cost,” he says.
This broader notion of ‘total cost’ is an important distinction– just because lower quality packaging is cheaper it doesn’t necessarily mean that it will save companies money in the long run. For Lockström, good quality is the most important factor because durable packaging can be used several times, which can ultimately reduce the costs of handling, purchasing and packaging disposal.
“Good quality packaging can also reduce your transportation risk for product damage, which in turn reduces your production line stoppage risk,” he says.
“It is a trade-off between cost and quality, [but] sustainable quality with best total cost is always the focus,” agrees Zhang.
Deng believes that the smartest companies are thinking from the point of view of the total supply chain. “These companies also consider collateral costs related to packaging, such as repacking cost, parts damage cost, packaging cleaning cost, packaging maintenance cost, packaging management cost, packaging loss cost, packaging fluctuation cost and so on, he says.
The broad consensus among many commentators in the sector is that there is also likely to be a greater focus on the standardisation of pallet and box sizes over the next few years. Lockström points out that, although China has a standards policy, companies are not yet compelled to abide by it. However, he does think that the move to increased standardisation is a growing trend.
“The benefits are obvious–therefore some carmakers already implement European and American standard packaging. I think OEMs sharing their packaging with each other will push the standardisation [agenda] for [the] entire industry,” he says.
“The topic of standardisation has been in discussion over the past years and we believe it will gain more momentum going forward,” agrees Ong.
On a practical level, Rui argues that standards for pallet and box sizes will be good for truck and container load calculation and “help companies to maximise load quantities”. Moreover, Roovers highlights the fact that the Chinese market is widely accepting the new 980mm x 1,140mm pallet size and pallet-box size as the new standard–in the same way that the 1,000mm x 1,200mm and 45 inch x 48 inch (1,140mm x 1,220mm) sizes are now the general norm in Europe and North America, respectively.
“Other sizes offering extended lengths and shorter lengths are also becoming standards,” he adds.
Deng also points out that for box sizes, there is an even wider variation of standards than for pallets, including North American, German, Japanese, French as well standards developed by local companies.
For Zhang, although pallet standardisation is on track, agreeing on box sizes will still remain a challenge, as the requirements are very different. “More importantly, there are no government bodies that drive [box] standardisation,” he says.
To date, although container and pallet pooling in China has experienced some limited success within specific OEM systems, most OEMs do not yet perceive the opportunity to make major savings by rolling similar systems across the country and several geographical and organisational obstacles remain.
“Most OEMs have chosen to operate their own fleets of packaging because they view that as the lower cost model. The distances involved in China, similar to North America, make pooled solutions challenging,” says Roovers.
Chep provides container pooling to several customers with its network of 55 service centres mainly along the east coast. Deng says that while Chep is involved with tier ones for packaging pooling for both inbound and outbound logistics, for carmakers the company is mainly pooling for the aftermarket because of the wide variety of pallets and standards used for inbound.
Deng admits that the service has not been fully developed and accepted in China. However, he believes that pooling will increase as manufacturers focus more on reducing packaging costs. “The room to cut logistics cost will be limited due to higher transit costs, so we believe the next area of savings could be packaging. And the most effective way for packaging costsaving is pooling,” he says.
“Such concepts [have] only gained attention in recent years,” adds Ong. “However, there are many obstacles to clear, such as operating arrangements involving multiple parties, organisational setup and tracking capabilit[ies], as well as [the] financial implications.”
Moreover, while Zhang anticipates a “significant growth” in pallet pooling, he predicts that container pooling will “remain a challenge” because of standardisation issues.
Despite these challenges, other observers are still confident that there could yet be a rosy future for container pooling in China. Lockström points out that, although pooling services remain a new concept in the country–mainly because of the lack of standards and service centres–some carmakers have already implemented returnable packaging systems and asked third party providers to manage and pool for different suppliers.
“Some OEMs are considering using pooling services with service providers, this is a good sign for the packaging industry,” he says.
For Rui, the more universal implementation of cross-dock and ‘milkrun’ projects among manufacturing companies may also mean that container and pallet-pooling becomes more widespread in China as firms seek to take advantage of the “volume, cost and quality” benefits of consolidation.
Most observers suspect that the anticipated lower rate of growth in the Chinese automotive industry will have little effect on the country’s auto packaging sector. The Chinese car market is still the world’s largest and is likely to remain of strong interest to packaging suppliers from across the globe, especially as it moves towards a greater degree of sophistication.
However, as the sector enters a new phase–characterised by developments such as supply chain improvements, pallet, box and container standardisation, container pooling and an increase in the use of returnable packaging–it will be very interesting to observe how the competitive dynamics between local and global suppliers evolve, particularly in terms of cost, service and quality