Valerie, it's great to have you back for this podcast series. Thus far in this series we've talked about the impact of globalism on China and we've heard from Steve Crandall who described the evolution of China business in China. Steve Ganster talked with us about the future in China and the growth implications for western companies and Michael Zakkour walked us through the history of sourcing in China and the government's initiatives that are well underway to move industries and businesses West, North, and Southwest to facilitate more equal distribution of development and wealth in the future. All of these topics point to a need for a similar change of pace in third party logistics in order to keep up with the growth. Paint a picture for us of the current Logistics Service Provider Landscape in China.
Valerie
Jim thanks for having me back. A good place to start to look at China's Logistics market is to break it down by providers, services, regions and industry sectors. China is such a large country; it's safe to say that the quality - and availability – of logistics service providers is not equal for all regions, services or industries served.
If we start with providers, we can look first at the global players. Take for example the large global players whose roots are in freight forwarding. They have been in China a long time, many through multiple acquisitions and name changes. For many years their focus was more on export freight and building density in key trade lanes between China and Europe – China and the U.S. – you get the picture. Providers built volume often setting up consolidation facilities near airports and seaports. Some managed or operated these facilities themselves while others contracted with local Chinese companies and continue to do so today. Then, beginning in the early to mid 2000s as China sourcing and manufacturing continued to grow, the market really started to heat up and there were a lot of new service providers who set up global divisions and entered China via acquisitions or a joint ventures with a China based provider. Some of these were more successful than others but the growth continued and I think it's now safe to say that service providers in China come in all sizes and types, whether they had their beginnings locally or came from Europe, the U.S. or elsewhere in the Asia Pacific region. This includes companies such as Kerry Logistics, Toll Group, TNT, Kuehne+Nagel, DHL, APL, Agility, DB Schenker and others. And from the U.S. we have Expeditors, FedEx, UPS, CH Robinson and then also companies whose roots are in ground transport and contract logistics such as Werner, Ryder, Schneider, Penske and Menlo. And there are many more. Suffice to say the market is complicated; it's still very fragmented and difficult to navigate.
Virtually all of the major players are seeking to gain a greater wallet share by offering an array of services. However, how they do that can vary greatly. I would break down the service categories into three major buckets: contract logistics, global freight forwarding including sea freight and air freight, and then domestic transportation including all modes. Although China was not immune from declining volumes brought on by the global financial crisis, the logistics service providers have rebounded and remain very focused on growth in the region.
If we take a look at services within regions of China, we all know that the coastal regions are where the focus has been, from south China in Shenzhen to Beijing and other points north. For the most part, the global providers have presence throughout the coastal regions while some of the China based providers are very strong regionally. This is particularly true in trucking where it's difficult to find a trucking company with national coverage. This has opened opportunities for transportation service providers, acting as a 3PL, to offer managed transportation. Of all the service, ground transportation is the most fragmented of all. Local competition from small firms keeps freight rates very low and the market is very competitive so no clear winners have emerged.
Moving inland, the navigation becomes even more complex as infrastructure is still challenged and the distances to travel are so significant. What we see most often in this case is service providers "following their customers" to new regions. This provides a base from which to grow vs. a "build it and they will come" strategy which brings greater risk and longer cycles for return on investment. Finally in terms of industries – the service capabilities can vary greatly and the list of qualified service providers grows shorter depending up the vertical. This is true for cold chain where food and beverage and pharmaceuticals for example, require compliance, high standards of quality performance and a closely monitored environment. It's important to match up the right needs with the right capabilities perhaps even more so in China than in other more mature markets, in order to minimize risk.
Jim
Wow, with such a fragmented market doesn't this create even more challenges for the many western companies who are moving west? How are the LSPs helping them to meet these challenges?
Valerie
It sure does create a lot of challenges, not only from a cost and performance standpoint, but when considering the risks associated with compliance to standards expected and required of publicly traded companies. These risks cannot be underestimated when doing business in China. Beware of buying the lowest price – someone lower will always come along, but the true cost may manifest itself in other ways if illegal practices are uncovered.
The best logistics operating plan as we know is one that is aligned with the overall business strategy. How that manifests itself depends greatly on the organization design, the risk profile, performance expectations, and even tax strategy, just to name a few. There isn't one right answer in terms of what strategy to deploy. In China I've seen multinationals on both ends of the spectrum in terms of how they select and manage their service providers. On the one end, is a large multinational literally bidding all its freight out on a quarterly basis, all the way to a company who has grown over many years with a single provider without ever really knowing if that's the best solution vs. other options that might be available. I would not recommend either of these strategies.
As with any initiative, selecting and managing logistics service providers in China starts with doing your homework. We've done a lot of benchmarking in this area and it's been great to see the global providers stepping up, including a greater focus on verticals and industry specific solutions, improving visibility and reporting, and providing integrated solutions to help supply chains perform better. These investments are paying off in terms of building strong relationships where strategies are shared and the parties work and plan together to enter a new market, bring up a new building or develop a new strategy for moving goods across borders to minimize taxes and take out waste. One thing that has really changed in the last three years that is awesome to see is that decision makers are now in China, active in the marketplace and helping to drive change. This is a big difference from five years ago when many multinationals were still driving decisions about China from the corporate office. Logistics Providers have responded by investing in local talent as well so shippers and service providers are working more closely together to build a vibrant logistics marketplace.
Jim
Another phenomenon that must be having a big impact on growth plans for LSPs is the emergence of the China middle class and growing consumerism. What's happening in that arena and what can we expect to see in the future?
Valerie
Jim you sure are right about that. When I was in China earlier this year every conversation I had whether I was speaking with a shipper or a service provider ultimately came around to the emergence of the China consumer and the opportunity that presented in terms of selling goods and providing services to get products to market. Consumerism in China huge, it's just the tip of the iceberg and it's going to greatly accelerate the advancement of logistics capabilities, now not just in the coastal areas but throughout the country as sellers seek to reach this emerging middle class. E-Commerce was also a big topic as the growth in B2C sales is exploding. This demands new distribution and transportation solutions as well as the technology to support them. It's really exciting.
Jim
Well Valerie it's clear to see that the LSP landscape in China will continue to evolve in the years to come. What advice would you give to western companies who will have increasing needs for 3PL services as their markets grow?
Valerie
Well Jim, one piece of advice I would give is that while there are clearly unique differences in China, if you are a shipper, your decisions about the service providers you select in China should be part of your global strategy. Large multinationals should be selecting their partners based on global capabilities. This doesn't mean that your best option in North America will be your best option in China and it won't displace the need for specialized and niche providers in specific markets. But it will greatly reduce the overall complexity of managing logistics service providers globally if companies take a view of developing a core group of providers based on criteria that should include a defined strategy for technology, performance metrics, business analytics, and other key factors. A well planned strategy for selecting and managing service providers and will provide a platform for continuous improvement with solutions that continuously evolve to eliminate waste, reduce risk and improve overall performance. This is true for China – and it's true for the rest of the world.
Jim
Valerie thanks for some great information and for helping us understand the Logistics market in China. Join me again in a couple of weeks for the sixth part of this series when I will be pleased to have Denny McKnight with us to discuss a subject that he has been very engaged with for the last three years: understanding China distribution. Speak to you again real soon. Bye now.
