Chinese Puzzle

Chinese Puzzle

Copyright 2003, Traffic World, Inc.

In the business and manufacturing world, the latest, trendiest place to be is mainland China and specifically Shanghai. The city lies on the western coast of the Pacific Ocean with a population of about 17 million. A variety of consumer goods, including electronics, glassware, leather, plastics and textiles are produced here.

"It used to be Hong Kong was the major city. Now everything is moving to Shanghai," a movement that started in 1997, said John Flick, United Parcel Service International spokesperson.

"We''ve recently established Shanghai as our greater China headquarters. Not to take anything away from Hong Kong, but we have to move with our customers. Everything is happening out of Shanghai," said Flick.

That movement is expected to expand. Last week the World Bank issued a report projecting that China''s share of the world''s exports may grow to about seven percent by 2007, up from 4.4 percent in 2001. UPS has seen 45 percent growth in its business in China in the second quarter of 2003, said Flick. To accommodate this explosive growth, the company has representative offices "in virtually every major business center," including Beijing, Shanghai, Guangzhou, Shenzhen, Qingdao, Xiamen, Dongguan, Tianjin and five other cities in mainland China, plus an office in Singapore, he said.

UPS has been in China since 1988. The Atlanta-based $30 billion transportation and logistics services company has a joint venture with SinoTrans Ltd., which Flick describes as the transportation arm of the government, to deliver transportation and logistics services in mainland China. UPS also owns about three percent of SinoTrans stock worth about $35 million, he said. And the purchase a few years ago of Fritz Companies, a $1.6 billion freight forwarding, customs brokerage and logistics business, improved UPS''s presence in China and Asia, said Flick.

But China does present some unique distribution challenges for UPS and its customers. Today most business centers are coastal, and while the Chinese government is trying to drive investment inland and west, more work needs to be done to really open up the inside of the country to improve trade and distribution.

By comparison to the United States, China''s transport network is much less dense. According to numbers from the World Bank''s database on transport statistics for East Asia, China has 25 kilometers of paved roads per 1,000 square kilometers of land, while the United States has 612 kilometers per 1,000 square kilometers. China has 6.5 kilometers of railways per 1,000 square kilometers while the United States has 22.7 kilometers. And China has 17 kilometers of runways per 1,000 square kilometers, compared to 189 kilometers in the United States.

Said Art Mesher, executive vice president of corporate strategy for The Descartes Systems Group: "if you want to know in real time where your shipments are in China you need to know where the yaks are. The same could be said for a lot of the inter-Asia area. There aren''t trucks and satellites - there are people pulling animals." Maps of mule trails and mountain paths to optimize routing aren''t available either, he said.

Fewer railroads, paved roads and airports means higher logistics costs. In the United States the ratio of logistics costs to total gross domestic product was about 9.5 percent in the mid-1990s, said Robin Carruthers, lead transport economist at the World Bank. In the early 1990s, China''s logistics costs were about 18 percent of GDP. Costs for the inland provinces were much higher, about 25 percent, with two-thirds of that cost coming from transportation costs, said Carruthers.

UPS has developed several strategies to help shippers - both U.S. and Chinese - overcome these challenges to distribution, whether they import or export goods.

UPS''s ability to enter China''s market changed dramatically in April 2001 when the company was able to fly directly into China with its own aircraft, said Flick. By using its own aircraft, UPS had better control over time in transit and reliability, he said. The company started direct flights to China six times a week. Before then it flew into Hong Kong and chartered local aircraft to China.

"A year after that, almost to the day," UPS opened an intra-Asia hub in the Philippines. "A lot of traffic in and out of China stays in Asia," he said. "Clark (former U.S. Air Force Base in the city of Pampanga) is about four hours from every major business center in Asia. Setting up and providing an information technology network there allowed us to serve every major Asian city within that four-hour time window and overnight service points."

And today UPS is able to provide a day faster service to Beijing, Xiamen, Guangzhou, Shanghai and Qingdao through an agreement it signed in January with Yangtze River Express Co. Ltd. for domestic air cargo services, said Flick.

In addition to expanding geographically, UPS has expanded its customer base in China. UPS entered the Chinese market through large American multinational companies doing business in China. Today the company is also working with Chinese-based companies that have as few as three or four people, he said.

To accommodate that new market as well as its multinational customers, the company launched an ocean product about a year ago, Trade Direct Ocean. In China, customers can ship by container from Shanghai, Hong Kong or Yantian to Long Beach, Calif. For retailers, "all the tagging, tracking and labeling is done in China," he said. Once the containers reach the United States or other destinations, they enter into UPS''s small package stream and are broken down into individual consignments.

Trade Direct Ocean "is perfect for small and medium-sized companies that may be distributing" products to a variety of locations, for example, small retail stores, said Flick. And it eliminates the need to have a warehouse in the United States, he said.

Flick is nothing but positive about the future of trade and manufacturing in China. He sees a more open, flexible trading network coming soon, particularly with the country joining the World Trade Organization. This flexibility will come in a variety of ways, from streamlining customs to a more liberalized approach to aviation rights, to increasing usage of electronic commerce, he said. "China is definitely on target to be the worldwide manufacturing center very soon."