With some 40,000 car carriers in China thought to be operating outside of legal limits on truck length, Ellen Hua finds out why, despite new regulations, companies are still flouting the law and what the likelihood is for future change.

As the Chinese car industry has nearly doubled in size in just a few short years, so too has the capacity of some of the country’s car hauling trailers, albeit outside the country’s legal limits.

Chinese car carrier sizes used to be similar to European norms–mostly around 18 metres in length with the capacity to move 8-10 cars each. But even that length is above the legal maximum length for trucks in China, which stands at 16.5 metres. It is also now more common to see trucks with a length of 22-25 metres carrying 12 units or more. In some notable cases, there are even trailers with extended length– often pulled as double trailers–that carry in excess of 20 cars. Such trucks are known playfully in China as ‘transformers’.

issue-1Current estimates are that up to 40,000 car carriers in operation in the country–the great majority–are in violation of the law.

While such overloading was limited initially to a few truck operators, it has evolved into an overwhelmingly common practice, implicitly accepted by most players with the penalties for violations factored into rates.

This ‘pay-as-you-go’ cycle looked like it would continue unabated until last year when the government published The Regulation on Road Safety and Protection, which introduced more severe penalties for non-compliance. The law stipulates that three violations in a year result in a loss of licence, while a transport business can be banned from operating if onetenth of the trucks in its fleet violate the limits. The legislation applies to all industries but the automotive sector is among those most affected by the change.

The entire sector held its breath last year as July 1st–the date set for the rules to come into force–approached, with the deadline hovering as a day of reckoning for some providers. On the other hand, others in the sector said they were calling the government’s bluff, as past regulatory attempts had failed.

issue-2Predictions that the status quo would be maintained have been partly fulfilled. “Things are going on the way they were,” says Ma Zengrong, vice general secretary of the China Automotive Logistics Association of CFLP. This view is confirmed by Christophe Poitrineau, president of the Gefco Group Asia, and Renato Andrade, country manager of Volvo Logistics China.

Lead-time and delivery capacity have barely changed since the new law was adopted, they say. “We have noticed a limited impact in some areas within our distribution network,” Andrade reports. “Inspections by road authorities have increased but are still at low levels. The impact into our operations has yet to be noticed and our customers have not experienced any disturbances.”

Ma says the carriers are not ignoring the law, but the current dimensions of their fleets already violate the regulation. Andrade agrees, saying that some of the carriers that Volvo Logistics contracts with expressed considerable concern after the official communication of the legislation. But it wasn’t feasible for them to make the necessary changes in a short period of time.

But while the impact on operations has so far been limited, expectations are that, slowly, the industry will come into compliance. “Associations, businesses and government all are aware it’s a matter of time before getting the issue resolved,” says Ma.

Gefco’s Poitrineau says that there has been an increase in state police control on trucking, while Andrade says feedback from its carriers shows penalties are increasing compared to previous years.

Kidnapped legislation

But with such a high proportion of the Chinese car carrying fleet in violation of the 16.5-metre limit, there is simply not enough legal capacity. “There is not enough compliant capacity [trailers] in the Chinese market to meet the total demand of car deliveries,” says Andrade.

In this sense, Ma says that the long-term trucking violations have effectively kidnapped the legislation, as there were concerns that enforcing the rules too harshly could paralyse the automotive and logistics industries. After all, trucks move more than 80% of passenger cars in the country.

Ma believes that making transitional arrangements will be necessary. “Offering a transition time would avoid a colossal waste of resources,” says Ma, pointing out that overnight investment to update fleets would be very expensive and infeasible for most players.

Simply put, the use of smaller trucks would decrease the load factor among logistics providers in China and lead to higher costs, something the government and the industry would have to address. “Overloading has resulted in very low delivery costs,” says Ma. “The use of compliant car carriers will increase delivery costs, pushing up car prices, which have otherwise been going downward for years.

“[This rise] would be at odds with China’s macro-policy on the CPI [consumer price index], which is already at a high level.”

Some experts say that the industry’s growth has been too fast for legal standards of special-purpose logistics to keep up. Andrade agrees that this is a valid point. International standards are often longer than China’s–16.5 metres might be inadequate for the world’s largest car production and sales market.

Nevertheless, a law is a law. An academic source from Beijing contends that no government is held accountable for the profitability of each business. “If you run a restaurant, you certainly don’t give your customers unsafe food that upsets their stomachs because you do not profit,” he reasons.

Behind the overloading

The proliferation of overloaded trucks is the result of a cutthroat price war, a fragmented truck market and other inefficiencies, compounded by lagging standards. As costs are pushed lower, the need to resort to overloading increases.

issue-3According to one source, trucking prices for vehicle logistics in recent years have been dropping by 10% annually. Unable to pass cost pressure to a third party, truck operators stretch loading capacity to the limit. “Low margins drive some transport companies to find any possible solution to increase profitability,” notes Andrade.

Part of the problem is the market’s fragmentation, with thousands of small owner-operators comprising the sector. “The market is extremely segmented and competition is fierce,” says Andrade.

“It is easy to play price when you have a very fragmented market,” adds Gefco’s Poitrineau.

High toll and fuel costs also increase the pressures on truck operators. Toll charges account for about 20% of total transport cost, compared with 10% in Europe, according to Ma. But toll cost is an area in which the government has taken notice. “State attention is coming here, and the trend we are seeing is toll costs coming down,” says Ma.

Another factor in the abuse of trucks is that responsibility ends with the carriers, not the shippers. In Europe, if a transport company overloads on behalf of its customer, responsibility (and punishment) would be shared with the contracting company. That is not the case in China.

The overloading issue itself also perpetuates the market’s inefficiencies. For example, imbalanced flows–deliveries that are not matched with backload trips–are both a cause and an effect of overloading, Ma points out. “If sanctions effectively prevent overloading, truck operators are sure to actively look for backload business, maximising use of their resources. They don’t do this today because overloading makes up for losses from empty return trips,” he says.

The overloading has also been sustained by the ‘payas- you-go’ approach to fines, with violations treated as a regular part of cost, next to fuel and tolls. However, such costs are not represented during tenders, so there is no clause or compensation mechanism for recovering the fines. Consequentially, the sector gets caught up in the cycle of more overloading to make up for increasing fines, and vice versa.

“It goes on and on because profits outweigh penalties,” says Ma. “When violators gain a more competitive edge even after the cost of punishment, compliant players are forced to break the rules to survive.”

Revising official standards

In China, most car carriers are semi-trailers–articulated vehicles comprising a tractor unit and a trailer. A compliant 16.5-metre semi-trailer would carry only six cars. This limited capacity has prompted CFLP to work with authorities to introduce the application of car carrier types that are common in other countries, such as centre-axle trailers.

The centre-axle type would carry at least two more units than the current articulated trailers, while maintaining safety with a small turning radius. “Having higher capacity car carriers in place of the old compliant, yet low-capacity ones would make it easier to address the current dilemma,” says Ma.

Andrade agrees that this type of trailer design would benefit the industry, although it will also take time to implement a new regulation. “From a capacity and cost efficiency standpoint, the centre-axle trailer is better than semi-trailer, however, the former is illegal in China,” he says.

According to Ma, the CFLP has made progress with the authorities. This past February, for example, the Ministry of Industry and Information met with the Public Security Bureau, Ministry of Transport and National Standards Commission to discuss accelerating the revision of new official standards for car carriers.

In the past, there were some businesses that tried to develop centre-axle trailers in China, but production was discontinued because such vehicles had no local application. Now that such trailers may come back, Ma predicts that many international businesses will be drawn to opportunities in this area.

The return of price

Since official enforcement of the loading regulations has brought with it little actual change, there does not appear to have been a significant impact on the price of truck transport. But a price rise would follow more earnest law enforcement.

“If more government control were to accelerate a change of fleet in China, a price increase will happen, but it would be offset in part by the fragmented market,” says Poitrineau.

issue-4Poitrineau expects carmakers to put further downward pressure on prices. “I think they will ask us to find new solutions, and work with them to do so. There is a need for much more proactive solutions and professional experience to cope with the new regulation,” he says.

Volvo Logistics has experienced a general price increase, according to Andrade, but more as a result of rising fuel and labour costs rather than because of legislation. “We target long-term relationships, which gives our business stability not only in operations but also in the cost base,” he explains.

Andrade admits, however, that Volvo Logistics does face pressure from its transport suppliers. “We have been successful in achieving good price negotiations with our customers and they also understand the situation will affect everybody in the industry,” he says. He adds that being part of Volvo Group does not reduce cost pressure. “The internal pressure is just as great as the external, sometimes even greater, due to our internal high quality demand.”

Ma believes that a price mechanism for the sector is necessary so that competitors don’t continue to undercut one another. “About ten big businesses take up some 70-80% of the market in China, and so we all have reasons to sit down and discuss the pricing,” he says. “There should be a reasonable margin for the logistics sector. Trading mere cost with service does not work. Truck drivers are poorly rewarded, and logistics companies struggle to go forward with moves such as IT investment. ”

Innovating a way out

Like many logistics providers in China, both Gefco and Volvo Logistics outsource trucking services. In response to the regulation, both companies have begun to invest in their own fleets that will meet official standards.

Poitrineau admits compliant fleets will make Gefco’s cost base less competitive, but he believes that having more control over assets will eventually pay off. “We don’t invest for one or two years. We consider China a key market over a long-term period,” he says.

There also seems to be a divide between the local providers–some of them owned by carmakers and thus staterun– and the international providers that tend to have more focus on quality, safety and compliance. “For companies such as ours that prioritise safety, environment and quality, it is a tough market to compete in and it is only through innovation that we have been successful,” says Andrade.

As an example, he reveals the use of new truck technology in the Volvo Group that the company hopes will increase its competitiveness. “We are innovating though alternative and compliant equipment for the transportation of cars, and aim to be a reference,” Andrade says.

The company has also implemented its Dealer Management System IT solution, which increases visibility of the distribution chain with the capacity to interact with production. “This is a powerful tool for the car manufacturers’ sales and marketing companies based in China, ” says Andrade.

Gefco is introducing a new distribution scheme in China, with more multi-user compounds that will allow different brands to share cost and help to increase delivery frequency. “For carmakers to improve lead time to market and cost efficiency, the massification [standardisation] of logistics flow is a solution for the future,” Poitrineau says.

Gefco also has further plans to use more multi-modal transport, while Poitrineau expects new tools will be introduced to improve capacity use and and backloads.

Poitrineau believes that the expectations of Chinese consumers are changing, and so too will the expectations for vehicle logistics. He anticipates consumers will want more options in their cars and more specific requirements, including more post-production work at vehicle compounds.

“In this case, you need very good integration in the supply chain to accelerate flows,” he says. “The time will come [when carmakers] produce mainly to customer orders. It will involve a much more lean logistics system to reduce lead time and secure quality products to end customers.”

Foreseeing changes

Poitrineau says that road transport is a strategic issue that’s going to change the market. “It will change who’s going to be considered good providers. It’ll give some opportunities for new entries, new competitors.”

He describes today’s road sector as jungle market without rules, with focus still on price rather than on quality. As an example, he points to how carriers in China will often exchange loads with each other to suit their best route, but without notifying their customers, leading OEMs or 3PLs to lose track of their vehicles.

issue-5Andrade advises that improving road transport in China will require action from all sides, including customers, logistics providers and authorities.

And Poitrineau believes that there is already a positive trend in this direction. “I think carmakers are much more sensitive to the delivery quality of contractors.”

According to Andrade, Volvo Logistics and the Volvo Group are already following this path as carriers that do not meet its standards will not be contracted.

Although its impact remains to be seen, Gefco, Volvo Logistics and the CFLP all welcome the regulation on truck lengths as a step toward harmonisation, safety and respect for compliance in China. Clearly, the next step must be that the regulation is brought up to date for today’s industry, and that it is meaningfully enforced.