Chengdu, a city of 14 million people more than 1,000 miles from the ports of Shanghai or Shenzhen, is at the heart of China’s plan to shift manufacturing from the higher-cost east coast to its interior. The city, designated a logistics hub by the Chinese government, boasts an industrial base of domestic and international companies ranging from biomedical and electronics firms to automotive suppliers.
Sweden’s Volvo Car, owned by Chinese automaker Geely since 2010, will open an assembly plant in Chengdu next year to produce luxury cars for the Chinese market. Foxconn, Apple’s Chinese supplier, makes iPhones and iPads in Chengdu.
Whatever their cargo, the city’s factories depend on a constant stream of trucks to haul freight between Chengdu and ports and other Chinese cities. Those trucks travel a rapidly emerging highway system — China recently approved plans to build more than 1,250 additional miles of roads, including highways in Zhejiang province on the nation’s southeastern coast and Xinjiang province in the far northwest.
But multinational shippers looking to expand in China face a potential speed bump: China’s highly fragmented, competitive and chaotic trucking industry. Observers fear China’s inefficient trucking system could hamper efforts to expand domestic distribution as the country tries to stimulate economic growth that has slowed during the past year.
“The real problem today is that there are 9 million individual trucking companies in China, of which 6 million have only one truck,” said Jeffrey H. Schwartz, co-founder and deputy chairman of Global Logistic Properties, a Singapore-based developer with logistics centers in 26 cities across China.
“It’s an emerging market, an evolving market,” said Steve Matheys, executive vice president and chief administrative officer of Schneider National, a Green Bay, Wis.-based trucking and logistics company with operations in China since 2005. “There are very few large players.” Trucking in China “has similarities to the U.S. in that it’s a highly fragmented market.”
In some ways, trucking in China resembles U.S. trucking at the dawn of the interstate era, or even before economic regulation in the 1930s, when the first big motor carriers battled “wildcat” truck operators who charged shippers considerably less.
“It’s very difficult (for a larger company) to compete on price with a company that operates only one truck and has no overhead,” Schwartz said. “It’s easy for them to be the most competitive bidder for any load going in one direction. The question is, how do they get a backhaul? They park the truck on the side of the street, sleep in the truck and try to hustle to find a load to take back home.”
There are trucking and logistics companies in China large enough to offer contract services, including Schneider National, Matheys said. Those companies are often used by large, multinational shippers. “We’ll talk about managing freight on a lane or regional basis, rather than load by load and day by day,” he said. But many Chinese shippers rely on owner-operators.
The enormous pressure to find backhauls means competitive pricing for shippers, profits for intermediaries and low margins for independent truck drivers.
Drivers often overload their trucks, said David Hartman, China practice director at Blue Canyon Partners, a Chicago-based consulting firm. “That creates uncertainty as they regularly get stopped in the countryside. Some local official can stop a truck and negotiate for a fine. Negotiations have been known to go a day or two, and then you are a day or two late getting your load to the port.”
Such fines are a cost of doing business for many truckers as they cross China.
Global Logistic Properties, a $566 million company managing a $14 billion property portfolio in Asia, is working on a solution it hopes will make Chinese trucking more efficient and less uncertain. The company partnered last year with China’s Transfar Road-Port to build a network of logistics centers and “road ports” throughout China under a joint venture company, Zhejiang Transfar Logistics.
Those road ports are hubs where owner-operators can park trucks, eat, sleep and find freight using a digitized exchange.
“It’s basically a trading floor where people put jobs up for bid and the truckers bid on them,” Schwartz said. “It’s a way to get the trucks off the street and for shippers to get their goods moved.”
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Transfar currently operates road ports in Chengdu, Hangzhou and Suzhou, providing parking for more than 3,000 trucks, Schwartz said. GLP and Transfar plan to build road ports next to logistics centers in 15 cities across China, he said, creating in effect a network of distribution points or hubs providing access to trucking, warehousing and logistics services.
“What we’re trying to do is make trucking more efficient for shippers that rely on small trucking companies,” Schwartz said.
The Transfar road port in Chengdu is the model for that network.
“The most striking thing at first is its size,” said Rachel Katz, a consultant who spent 10 months as a Fulbright scholar studying trucking in China in 2010 and 2011. The Transfar exchange in Chengdu “is a big, white cavernous room” that resembles a large train station, she said. “There are high ceilings, and rows of seats with drivers looking up at a digital board.” That board lists loads posted by freight brokers who work with the factories, or shippers, and negotiate prices with the truckers.
The Transfar facility “feels very much like a step into modernity,” Katz said, compared with the Chuanshan freight market a few miles away, where truckers walk up and down a dusty road, searching for loads posted on chalkboards outside broker offices. That’s a scene much more reminiscent of raucous markets in the Old West — whether in China or the U.S. — than the airport-like road port operated by Transfar.
The challenge may be attracting truck drivers who are attached to traditional ways of doing business in the old markets to the new road ports, Katz said. China’s truck drivers depend on relationships with intermediaries to secure loads at high enough a margin to ensure their survival, and may be reluctant to switch. They’re also as reluctant as people anywhere to embrace change — especially when it comes rapidly.
“They’re struggling to break even on a lot of routes,” said Katz, who spent six months last year traveling 8,000 miles with truck drivers in China. “The drivers are totally squeezed. They don’t have any cushion at all.” For drivers accustomed to a chalkboard world, the high-tech hubs may be overwhelming at first, she said. But pressure from the Chinese government to improve the inland distribution system eventually will have results.
“Trucking is a core issue and will be a core issue” in coming years, said Katz, who now works for consulting and research firm McKinsey in San Francisco.
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It’s an issue China will address and solve in its own way. If China were as successful in transforming trucking as it has been expanding its infrastructure, “it would make a profound difference to the economics of the country, especially as manufacturing moves more and more to the interior,” Katz said. By deploying more technology, “they could leapfrog into the next decade.”