In less than 10 years, China will be crisscrossed by a national highway system 53,000 miles long that will cover all the country’s cities with populations of 250,000 or more, all logistics parks, all container ports on the coast and inland rivers, 300 airports and other strategic locations.
Such an effort to connect the far-flung corners of a single country so comprehensively has not been attempted since the completion of the U.S. Interstate Highway System in 1992.
Whether those roads are supposed to bring the rural interior to the more developed coast or the economic prosperity of the coast inland is open to question. But Li & Fung says the final destination is a vastly larger consumer economy, and the sourcing, distribution and retailing giant is lining up its extensive supply chains for the ride.
Li & Fung sources approximately 50 percent of its goods from some 6,000 factories in China, but many of those makers of apparel, footwear and health care products are moving inland. And as costs rise, the Hong Kong-based industrial conglomerate is looking to countries such as Vietnam, Indonesia and Bangladesh for low-cost goods.
“Labor cost is one spur,” said Tommy Lui, senior vice president of hubbing and freight solutions at Li & Fung. “But the cost of everything is increasing in China. Wages increased by more than 10 percent in 2010 and will increase by double-digits this year. Environmental fees are up, land cost has gone up immensely, and utility costs are also increasing.”
The challenges of the manufacturing move inland are eased somewhat by the location of factories along the Pearl River Delta and the Yangtze River Delta, “and to some degree in Shandong,” Lui said.
“There are more factories in Fujian, but before long I think we shall see some factories migrating as far west as Sichuan and Chongqing,” Lui said.
Li & Fung bolstered its supply chain strength last year with the purchase of Integrated Distribution Services, a Hong Kong-based contract logistics specialist with integrated manufacturing and distribution operations. The company’s 100 distribution centers were an attraction, but Li & Fung already had scale: The company doubled its revenue from 2005 to 2008, and the nearly $16 billion in revenue last year was about 19 percent better than the year before.
And the rising wages of China’s huge population provide a growing market for the consumer goods that are at the heart of Li & Fung’s portfolio.
“Income levels will rise until the Chinese government is satisfied that there is a large enough domestic consumption market to balance imports and exports,” said Lui, a keynote speaker at The Journal of Commerce Shanghai Container Shipping conference June 21-22.
“Instead of using policy instruments to redistribute income, which is difficult, it is best that enterprises lift the incomes of the poor.”
In anticipation of the growing domestic market, Li & Fung has set up a national distribution network for fast moving consumer goods covering 880 cities across China.
For Li & Fung, that has meant rethinking the way goods move in and out of the country, and are positioned within China.
Currently, 95 percent of the domestic consumption takes place east of a line from Harbin in the North and Yunnan in the far Southwest so the network has been configured to cater to that economic landscape.
The opportunities are vast for foreign-owned entities, but also require clearing large bureaucratic hurdles. “For this type of business, you will have to get around 50 chops (approvals) from various loc al and national government bodies,” Lui said.
But the potential benefits in just about any province are enormous.
Guangdong province alone accounts for 96 million people and 7 percent of the country’s GDP. But Lui said the opportunities must be approached carefully.
“When a new network comes to China looking to set up an optimum network, I tell them they must have a presence in the first-tier cities of Shanghai, Beijing and maybe Shenzhen. This is where they will get unique brand visibility. These are the cities where everybody looks to buy new products. You can’t skip them,” he said, “but there is no money to be made.”
To supplement the loss leaders, Lui said most companies should settle for a distribution center west of Shanghai, where it is easiest to connect to inland points while maintaining stock near the largest consumer markets.
“Logically, nine out of 10 networks will headquarter in East China. Why? Because it is easier for a logistics setup near Shanghai where you can easily feed products into North China or South China through the highway network from the middle,” he said.
Manufacturing still is concentrated on the Yangtze River Delta so something west of Shanghai is ideal.
West from Shanghai are two Chinese powerhouses. With a population of 30 million, Chongqing is the world’s largest city. In the urban area alone, there are 10 million people.
“And then there is Chengdu, the capital of Sichuan; again 10 million citizens in a province of 100 million,” he said. “Add these two places together, and you have a catchment area of 130 million people and 10 percent of the national GDP.
“These are people who have money. They have industry, they have agriculture, they have good universities. Consumerism is at a high level. Stores in Chengdu such as Gucci are huge, and people queue to buy.”
Contact Mike Grinter at email@example.com.