Course website: http://ihome.cuhk.edu.hk/~b103313/index.htm

• Offices:• Prof. Xiande Zhao, Room 906• Cheng Yu Tong Building• Email: xiande@baf.msmail.cuhk.edu.hk• Tel. 2609-7650• Mr. Bochao Zhuang, Room 941• Cheng Yu Tong Building Email:

bochao@baf.msmail.cuhk.edu.hk• Tel. 2696-1657

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Welcome to

Prof. Xiande Zhao Director, Center for Supply Chain Management & Logistics Li & Fung Institute of Supply Chain Management/ Logistics

Chinese University of Hong Kong

http://lf-scml.baf.cuhk.edu.hk/index/

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DSME6932W Supply Chain and Logistics Management

- Managing Supply Chains in China

Organization Structure

Li & Fung Institute of Supply ChainManagement & Logistics

Center for Supply ChainManagement & Logistics

Center for Logistics Technology & Supply Chain Optimization

Joint R & D Center for Supply Chain & Logistics (with Tsinghua)

Supply Chain Management Research Center

Cyber-logistics Research Center

Knowledge Transfer Office

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Course Overview and Objectives • Understand the business environment in China and

roles that China plays in global supply chains.• Comprehend Chinese culture and traditions and how

they influence supply chain operations and decisions• Make important decisions related to the choice of

supply chain strategies, design and improvements of supply chain processes

• Learn how to select supply chain partners and manage supply chain relationships in the dynamic business environment of china

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Course Assessments

• Items Weight• Case reports 50%• Final project report and presentation 30%• Attendance and class participation 20%

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Managing Chinese Supply Chains: Challenges and Opportunities

Dr. Xiande ZhaoProfessor and Director

Center for Supply Chain Management and LogisticsLi& Fung Institute of Supply Chain Management and Logistics

Chinese University of Hong KongTel. 2609-7650, Email: xiande@baf.msmail.cuhk.edu.hk

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A Brief History

• The world’s oldest surviving civilization– Evidence of communities from almost 6000 years

ago

• Dynasties dating back to 2200BC• 1908: fall of the Qing dynasty• Last Emperor Puyi

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Dr. Sun Yatsen

• Father of Modern China• First Provisional President of

Republic of China in 1912• Quickly fell out of power• Respected in both Mainland

China and Taiwan

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Kuomintang (KMT)国民党

• Nationalist Party• 1920: dominant political force in eastern China• 1925: power struggle within KMT

– Those sympathetic to communists– Those who favored a capitalist state supported by a

military dictatorship• Chiang Kaishek tried to stop growing influence of the

communists• 1928, Chiang held both military and political leadership

– Half of China ruled by local warlords

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Chinese Communist Party

• Made of Chinese Marxist groups which joined together in 1921

• Deeply concerned with social problems in China

• 1927: Mao Zedong advocated rural-based revolt

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The Long March

• Chiang Kaishek led series of extermination campaigns against CCP

• 1934: CCP suffered heavy losses, hemmed into an small area in Jiangxi

• Marched north to Shaanxi to join other CCP armies

• Took a year to complete, 8000 miles• Established Mao as paramount leader of CCP

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Japanese Invasion

• 1931: invaded and occupied Manchuria• Chiang , still obsessed with threat of communists, did

nothing to resist• Kuomintang bitterly criticized for not defending

against the Japanese• KMT forced to unite with CCP to resist Japan• 1937: rest of China invaded by Japan

– “Burn all, loot all, kill all” campaign

• KMT forced into retreat

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Post WWII

• CCP expanded enormously during WWII years, filling vacuum in local government in vast areas behind and beyond Japanese lines

• 1946: civil war– Thousands of KMT troops defected to CCP– KMT defeated– Chiang Kaishek and KMT fled to Taiwan– USA dismayed by KMT’s failure, refused further

support

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Birth of People’s Republic of China (PRC)

• 1949: Mao Zedong founded PRC and start to rule mainland China

• President Truman ordered a protective US naval blockade to prevent attack from mainland

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Early Days of PRC

• KMT legacy: unbridled inflation, economic mismanagement, shortage of materials

• Crumbling infrastructure, plummeting agricultural output

• With the help and support of the worker and the factory owners, CCP improved the economy

• By 1953, inflation halted, industrial production back to prewar levels, land redistributed to peasants

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Hundred Flowers Campaign

• 1956-57: CCP encouraged a variety of views, welcomed open criticism

• Many overseas Chinese intellectuals returned to help with reconstruction

• Many KMT intellectuals stayed, rather than flee to Taiwan

• 600,000 intellectuals incarcerated or sent to labor camps for thought reform

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The Great Leap Forward

• One of the greatest failed economic experiments in history

• CCP told everyone to build backyard blast furnaces to increase steel production– “Take steel as the key link, leap forward in all fields”

• Massive slump in grain output• 30 million Chinese starved to death

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The Cultural Revolution• Differences in opinions as to how

to develop the economy between Mao and other leaders such as Liu Shao Qi and Deng Xiao Ping

• Power struggle within the parties • Mao started to purge other

leaders and establish personal worship

• Little red book of Mao’s selected thoughts

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Red Guards

• Students issued red armbands and took to the streets• Went on rampage, shutting down schools, intellectuals

re-educated, publications ceased, temples ransacked• Physical reminders of China’s past destroyed• Neighbors and family turned each other in• Millions of people died

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Stages of economic development in China

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Stage 1: State-Planned Economy (pre-1978)

• Several measures introduced by the central government to discredit and abolish individual commerce

• Private enterprises largely replaced by state- or collectively-owned entities

• Economic activities were governed by the State Plan

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Principles of the State Plan

• Reallocation of resources to the people, following Socialist principles

• Socialist focus on providing employment for the entire population

• self-reliance and control• What’s missing?

– Efficiency– Meeting market needs

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Factories• Needed only to follow the

State Plan• Strategic and operational

issues decided centrally• Typical plant manager selected

for political savvy• Little incentive to produce new

products• Often operated at a constant

level• Huge shortages and excess

inventories common23

Quality• Operations existed in a

noncompetitive environment• No clear definition of quality or

quality consciousness• Defects inspected out• Modern quality control introduced

in the 1950s, only in selected pilot companies– Workers formed teams to discuss

problems– Several SPC tools introduced

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Distribution• Not the concern of plant managers• Resources reallocated centrally• Little or no support for marketing

activities• Ministry of Commerce developed

various corporations to handle specific categories or product lines

• Materials and goods are allocated by a bureau of material management

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Three-Tier Vertical Distribution

• Tier 1: large, mostly coastal cities– Purchased goods from all over China– Accepted imported goods

• Tier 2: Received goods from Tier 1 distributors, according to the State Plan– Located mostly in provincial capitals

• Tier 3: Wholesalers in the cities and counties– Redistributed to state- or collective-owned

retailers• Each tier added 5-17% margins

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HRM Practices

• “Iron rice bowl” employment– Young workers allocated jobs by local labor bureau– Guaranteed job until retirement– Children could inherit retired worker’s job

• Limited incentives for good performance• Little incentive to improve performance• Enterprises often hired more people than

needed

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Stage 2: Economic Reform and Rapid Development (1978-2001)

• 1978, Deng Xiaoping opened China to market competition– Reduced reliance on central planning– Moving factories closer to their markets– Stimulating competition between

organizations– Developing managers who were more

autonomous and accountable– Restructuring state-owned enterprises– Introducing contract responsibility system– Establishing privately-owned enterprises– Encouraging foreign direct investment 28

Special Economic Zones

• Established four SEZs as laboratory for economic reform policy experiments– Xiamen, Shantou, Shenzhen, Zhuhai– Preferential treatment for foreign investors– Local governments and enterprises given more

freedom to make economic decisions

• 14 economic development areas (EDAs)– Helped to attract significant FDI

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Benefits of Foreign Direct Investment

• Established modern manufacturing facilities• Brought badly needed technology and

management know-how• Brought knowledge

– How a market economy works– How a business enterprise should compete in a

market economy

• Some economic zones developed very rapidly

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Quality

• Beginning in 1978, quality concepts applied rapidly

• Modern quality control reintroduced• Exposure to knowledge, expertise and high-

quality products of foreign organizations• Laws established quality management

standards• Shanghai companies took the lead in TQC

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Reforms in Other Areas of China• Reduce reliance on central planning • Control of manufacturing and logistics gradually

shifted to provinces and municipalities• Dual distribution system – 1986

– Manufacturers expected to supply products to central government in specified amounts

– Permitted to develop supplementary plan for meeting market needs of privately owned retailers

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Logistics• Substantial improvement, with shift of

control away from central planners• Still major problems

– Unreliable and slow rail transport– Poor road conditions– Lack of bridges– Many toll roads– Numerous roadblocks and checkpoints

• Better matching of supply with demand than before

• But still substantial mismatch

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Logistics

• Strong regional and provincial loyalties– Boundaries for distributors set by old systems– Stiff tariffs, mountains of red tape

• Cargoes offloaded at regional boundaries• Severe restrictions on distribution activities of

foreign distributors

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Regional Protectionism

• Affected manufacturing and sales• Local governments encouraged to focus on

local economic growth• Many state-owned enterprises controlled by

local governments

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Major Progress

• Privately owned enterprises allowed to grow, state-owned enterprises reformed

• 1990s: opened SOEs to the markets, held responsible for their profits and losses

• Iron rice bowls gradually smashed– Labor contracts– Higher pay for those with more knowledge– Challenge of recruitment, training, development

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• What to do with workers who were no longer needed?

• How to deal with workers whose companies had gone bankrupt?

• Created need for social welfare and insurance• Income disparity between state/collectively

owned enterprises and foreign owned• Uneven economic development across regions

Social Problems

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Stage 3: WTO Membership and Continued Rapid Development (2002-present)

• December, 2001: member of WTO– Signaled presence as a player in the global

economy– Large step forward toward increased economic

exchange with international trading partners

• Growth and development have accelerated at an astonishing pace

• Vast improvements in market access

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Stage 3: WTO Membership and Continued Rapid Development (2002-present)

• Substantial increase in exports to industrialized markets

• Fierce competition in domestic markets• Attractive target for FDI• The largest exporter of many consumer

products– Electronics– Toys– Garments

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Manufacturing

• Developed competence in low-cost manufacturing• QM is becoming increasingly imperative• Incentive systems started to be changed for effective

implementation of QM • Quality Management practices are being implemented to an

increasing degree in different enterprises• Usually the state owned and collectively owned are more

behind• Wide variation for privately owned companies • Foreign owned and joint venture companies are more

advanced in QM and have more modern plants and advanced technology

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Logistics• Many problems from earlier stages continue• Sheer size presents formidable logistics barrier• Most distributors quite small, specialize in limited range of goods

and regions• Large foreign companies start enter into china• Some domestic ones also grow bigger• But the really big ones are still controlled by the state such as

COSCO, China Overseas, China Merchant• The government still controls the railway, most airport, container

terminals • Number of airlines and airport increases rapidly• Road improved dramatically but with many toll roads and bridges

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Emerging Issues

• Construction projects everywhere• Environmental issues have accompanied rapid

modernization and growth• Shortages of energy• Widening income disparity between urban and

rural areas• Vast migration to urban areas

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Emerging Issues

• Houkou system makes migration difficult– Leads to labor exploitation

• Living and working conditions of the “mobile population”– Unsafe working conditions, unmonitored work hours,

delay of wage payments, wage level– Schooling of Children

• SOEs facing increased competitione pressure to improved or be closed

• More people “off post” 44

China’s Emerging Role in the Global Economy

• Largest emerging economy in the world• GDP growth of 10%/yr. since 1978• Ranks third in the world in total world

trade•Exports growing faster than imports, $61.5 billion trade surplus•Over $600 billion in FDI, ~200 countries

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GDP (in billion of RMB) GDP growth rate

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China’s Emerging Role in the Global Economy

• Similar in size to the US, but much larger in population– US: 296 million– China: 1.3 billion

• 20% of the world’s population• Personal incomes rapidly increasing• Economic development a top priority

•Able to affect change very quickly

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Pearl River Delta• The first to develop after open-

door policy in 1978• Following the lead of Shenzhen,

other cities transformed from rural areas into modern manufacturing bases

•Light industry dominates•Among highest percent of private and foreign-owned companies in China

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The PRD

Guangdong Province

Map of Pearl River Delta

Pearl River Delta

• Shenzhen is one of China’s financial centers• Beginning to eliminate trade barriers, free

labor movement• Problems

– Worsening pollution– Labor shortage– Rising wages

•Guangdong province accounts for 36.4% of total value of China export

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Yangtze River Delta

• Gateway – Central and northern China’s industries– Vast interior markets and natural resources

• In some areas, an average of one new plant opens per day

• Shanghai: major financial, logistical and manufacturing center

• Designated as region for high technology and heavy manufacturing

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Bohai Sea Area

• Beijing: political, economic and cultural center• Tianjin: one of largest ports in northern China• Designated as a main focus for economic

development in 11th Five Year Plan• Third highest in GDP per capita

• Increasing emphasis on this area in the future

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PRD+YRD+BHSA

• Three major economic powers• Account for 3% of the total area of China• Account for 46.5% of the GDP• Higher income and cost of labour • Future emphasis in development: optimization• Help to lead and help developments in other

areas63

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Unbalanced Economic Development

• PRD, YRD, BSE: faster pace of development– Earliest beneficiary of economic reform

efforts• Vast inland region: slower pace of

development• Relatively greater focus on agriculture• Significant disparity in standard of living

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Impact of Culture on SCM

• What are some of the major cultural issues related to managing supply chains in China?

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Guanxi

• Granting of preferential treatment to business partners, in exchange for favors and obligations

• Morally binding social norm• Requires reciprocity among business associates• If obligation isn’t fulfilled within a short amount

of time, social harmony between the managers will be disturbed– Non-reciprocating manager will lose face

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Guanxi

• If a foreign purchasing manager doesn’t not reciprocate a favor within an appropriate amount of time, his company could become the target for opportunistic behavior by the supplier

• Guanxi can be transferred between social networks

• Use of China-based agents may be essential to improve trust and supplier relationships

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Collectivism

• At the heart of guanxi• Characteristics of Chinese national culture

– Preference for tightly knit social networks– Expectation that in-group members will support

each other– Strong urge to maintain social harmony and

interdependence within the in-group• Expectation of support by in-group members• Lack of obligation to those who are not

members of in-group76

Power Distance• Expectation that power is distributed evenly• Chinese people accept and expect that power is

distributed unevenly• Naturally defer to those they perceive to be

their superiors– Expect superiors to be benevolent, provide them

with stability, close supervision, explicit rules• Chinese suppliers expect to be closely

supervised and provided with very explicit rules• More difficult with deep supply chains

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Uncertainty Avoidance

• Society’s tolerance for uncertainty and ambiguity

• Comfort in unstructured situations• High: belief in absolute truth, try to avoid risks

in business • Low: more tolerant of opinions different from

what you are accustomed to, as few rules as possible

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Masculinity/Femininity

• Distribution of roles between genders• Masculine national cultures

– Assertive, competitive, driving for success

• Feminine national cultures– Modest, caring, nurturing

• Greatest gender differences are in masculine national cultures

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Long Term Orientation

• Valuing stability over change• Reflected in

– Bureaucracy– Difficulty incorporating voice of the customer– Dedication to a lasting guanxi relationship

• Long history of reliance on central planning• Passive working behavior, lack of incentives,

poor product quality, bureacractic bloating

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The effects of Ownership• Joint ventures and wholly foreign-owned

companies are much more advanced in adopting modern management principles

• Importance of being selected as a supplier to US-owned company

• Private and SOEs may be much farther behind– May make promises, honestly believe it is capable of

producing desired quality level

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Contracts

• US: belief that a good contract will ensure that customer’s specifications will be met

• China: lack of enforcement of contractual provisions

• In the absence of a facilitative government, informal relationships more important

• Historical perception of contracts as a means for foreigners to take advantage of Chinese

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Conclusions

• China is not like the rest of the world and never will be

• Manufacturing in China is heavily influenced by the past

• Think long and hard about where to locate and source in China

• Relationships may be difficult to understand or participate in satisfactorily

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Conclusions

• Chinese manufacturing dragon is raising its head and isn’t going to back off

• To truly understand it, need to understand– Where it comes from– What it has been through in its life– The culture that it lives in

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