Rising to the challenge

Rising to the challenge

When it comes to ocean container logistics in China, it must be observed overall that despite challenges on many levels, the system works. China is on the cusp of becoming the world's largest merchandise exporter, and despite its low-cost labor and the world-class work ethic of its people, that status never would have been achieved without ports and roads built well ahead of demand.

Unlike countries such as Vietnam and Brazil where infrastructure development is playing catch-up with demand, China is busy greasing the wheels for years of future growth.

But shippers in China face numerous challenges that can't be overlooked. Conversations with many shippers over the past several weeks have revealed a number of themes that come up repeatedly. They range from ensuring product quality to convincing manufacturers to load less-than-containerload quantities or even to allow the shipper to take delivery of goods at the factory rather than at a port or consolidation center. They involve customs enforcement, especially on imports, the efficiency of secondary and inland container ports, and monetizing the potential to shift value-added logistics from North America and Europe to China.

One theme that comes out is the effect on shippers from China's national economic policies. It's long been known that China is shifting development from richer coastal regions that have been the biggest beneficiary of its economic emergence, to poorer regions in the interior. This has had practical effects; many shippers have found that their traditional coastal-area suppliers are being pressured to relocate manufacturing to the interior, especially when it comes to low-value product.

Infrastructure development, however, hasn't always followed suit. In interior regions, access to seaports and logistics services is much more limited than in the areas surrounding deep-water seaports, forcing shippers to restructure their supply chains in such a way that incurs higher costs and longer transit times. China also is shifting to higher value manufacturing, forcing some shippers to source outside of the country.

When the location of manufacturing shifts, shippers encounter the reality of high costs and lack of competition in interior transportation. The domestic logistics industry in China remains highly fragmented, and even though the industry has thousands of operators, competition in the domestic trucking and 3PL sector has not evolved to the point where it creates price pressure as it has with more developed services such as contract logistics and ocean transportation.

In addition to cost, efficiency is a big issue. Interior ports have not benefited nearly as much from the world-class technology and operating experience implemented at major ports such as Yangshan off Shanghai or at the Shenzhen terminals. And intermodal rail, a natural fit in China given the long distances between interior points and the coast, is still in the early stages of development.

Internal borders are another challenge related to the interior shift of manufacturing. Regulatory barriers to moving goods within China tend to undermine the tremendous potential for managing outbound consolidation in China rather than in North America or Europe. A growing number of shippers have found value in using warehouses and labor in China to undertake value-added logistics at a significantly lower cost than in developed markets. In order for goods to be delivered to the consolidation center, however, they must move internally in China. If that involves transits between provinces or other districts, regulatory barriers must be overcome.

Many shippers believe the customs system has not modernized to the global standard of China's ports or the expectations of its users. Customs authorities worldwide face the delicate challenge of upholding laws while allowing legitimate trade to flow and thereby benefit the countries' economy. Uniformity and consistency of enforcement at its dozens of international customs districts - an issue that even developed countries such as the U.S. continue to struggle with - remains a daily challenge for shippers moving goods through Chinese ports.

Shippers report that regulations are subject to changes in interpretation by local authorities, requiring daily hands-on management of customs relations to maintain a relatively smooth flow of product. Also, the problems for shippers seem to grow when goods are imported into China.

One thing can be said with relative certainty. Given China's track record, no one can say these issues won't get solved. It's just a question of when.