Changing Supply Chains in China

Russ WhittleSeptember 16, 2008

Vanderbilt China Business Forum

And

Owen Graduate School of Business

Migration of Export Shipments from Hong Kong to South

China

HK Share in S China Direct Ocean Cargo

0

10

20

30

40

50

60

70

80

90

100

Percentage

93.3 84.5 76.1 61.6 58.2 53.2

1997 1999 2001 2003 2005 2007

South China Direct Ocean Cargo: Hong Kong vs. Shenzhen

0

5,000

10,000

15,000

20,000

25,000

30,000

'000 TEUs

HK Direct Ocean Cargo 9,662 10,071 10,478 11,149 22,602 23,998

Shenzhen Direct OceanCargo

698 1,846 3,298 6,936 16,192 21,099

1997 1999 2001 2003 2005 2007

Comparative Advantage

All major carriers All major carriersService by Steamship lines

Development cost are substantially lower and government is aggressive

Limited due to costs and government inaction

Expansion

More land available to support container terminal productivity and little environmental regulation

Land & environmental constraints limit productivity improvements

Productivity

Regulatory environment is improving fast and should drive convergence

Simple and transparentRegulatory Environment

High quality, state of the art technology for container loading

High quality, state of the art technology for container loading

Port Service Quality

Lower THC at Shenzhen portsTHC are significantly higher, push is on to lower THC to bring convergence

Terminal Handling Charges

Lower shipping costHigh cross-border costInland Transport Linkages

ShenzhenHong Kong

From “Study on Hong Kong Port - Master Plan 2020” by GHK (Hong Kong) Ltd.

Cost Advantages

$1430$1417$1713Total

$296Differential: HK Relative to Shenzhen

$269$269$366Terminal Handling Charge

$167$154$333Truck to Port Terminal

$994$994$1014Fees (Documentation)

Via Shekou / Chiwan

Via Yantian

Via Hong Kong

Industry data based upon a 40 Foot ISO container

Future Plan

• Shenzhen investing US$3.3 billion in port development

• Plan to double capacity in Shenzhen• Develop additional deep water ports

– 60 berths in 5 port areas

• Nansha development & expansion• Two new port clusters

– Hainan– Fujian

Hong Kong

Tianjin

Dalian

Fuzhou

Guangzhou Shenzhen*

Qingdao

Xiamen

Ningbo

ShanghaiNanjing

Wenzhou

* includes: Yantian, Shekou & Chiwan Ports

CHINA

China’s Major Container Ports

Inland China Transportation & Shipping

River Traffic

• 133,000 kms of inland river routes open to navigation• 3 major river basins

– Yangtze

– Pearl

– Yellow

• Yangtze & Pearl Rivers account for 80% of transportation capacity

• River ports: Chongqing, Wuhan, Yichang• Small vessel: 50,000 - 70,000 tonnage, up to 150,000

• Transfer points: Rail and Road

Railways

• Not enough capacity, can service only 35 - 50% of needs

• Central gov’t investing US$150 billion over 5 years

• Developing 10,000 km of track to accommodate double deck containers

• Capable of handling 10 million TEUs• Switching to higher speed electric engines

Road Network

• Invested US$241bn in road construction from 1990 - 2003

• Added 5000 km of expressway in 2007• Currently 50,000 km of expressway

• Plan by 2020 is 85,000 km of expressway• Local provinces also investing in road

infrastructure and opening to private sector

Role of Third Party Logistics (3PL) Providers in China

What is a 3PL?

A third-party logistics provider (abbreviated 3PL) is a firm that provides outsourced or "third party” logistics services to companies for part, or sometimes all of their supply chain management function. Third party logistics providers typically specialize in integrated warehousing and transportation services that can be scaled and customized to customer’s needs based on market conditions and the demands and delivery service requirements for their products and materials.

Source: Wikipedia

3PLs in China Licenses

• Full business license• Custom Brokerage• Trucking & Cartage

• Warehouse & Distribution• Ocean Freight Agent• Break-bulk Agent

• International Air Transport Association (IATA)• CT-PAT (certification)

Value Added Services

• QA / Quality control• Barcode labeling• Kitting & assembly

(bundling)• Packaging• Price marking

• Security tagging• Product display units

rbainc

Propeller, Inc.

Value Proposition

• Reduce end-to-end supply chain costs:– Value added services cost displacement

(PRC labor rates vs. US)– Reduction / elimination in redundant

processes– Lower freight cost (FCL vs LCL)– Eliminate costly surprises (wrong product /

defective product / shortages)

Bonded Logistic Park, Free Trade Zones and CFS

Bonded Logistics Park

Free Trade Zone Warehouse

Bonded WarehouseGeneral Warehouse

Not allowedMediumMediumLowCost for returning goods from warehouse to supplier

UnlimitedUnlimited6 months (extendable for another 6 months)

UnlimitedStorage Period

Immediate refund after delivery into

warehouse

Refund after goods are physically

exported out of PRC

Immediate refund after delivery into warehouse; may

change to FTZ policy later

Refund after goods are physically exported out of PRC

VAT Refund Policy

YesYesYes

(Customs approval)

NoMulti-country consolidation

YesYesYes

(Customs approval)

NoCo-packing or Kitting or Assembly

YesYesYes

(Customs approval)

NoItem level consolidation

YesYesYesYes

(N. China only)

Carton level / LCL consolidation

Shipper (FOB)

Consignee (FCA)

Shipper (FOB)

Consignee (FCA)

Shipper (FOB)

Consignee (FCA)

ShipperOwnership

Warehousing & Distribution Strategies out of China

Distribution

• Consolidate multiple vendors products into one box and ship directly to store or manufacturing site

• Direct to DC. Bar code labeled for distribution• Direct to customer

– Technology– High value

• Rework prior to shipment (product display units)

Warehousing

• Staging for product launch

• Just-in-time

• Hold components and finished goods at origin (delay shipping cost / duty)

Value Proposition

• Elimination of supply chain transfer points (DC bypass)

• Lower freight cost (FCL vs LCL)• Less inventory in supply chain

– Safety stocks – Increased turns– Reduced working capital costs

Changing Nature of Supply-chain and Logistics

in China

Green Initiatives

• Reducing carbon footprint– EU lead

• Efficiencies– IT & Automation

• CNG Trucks• Packaging • Container Utilization• Reverse logistics• Recycling

Security & Tracking

• CTPAT– Locks

• RFID– Container

– Pallet– Case

China

• New labor laws• Greater focus on environment• Reduction in export rebates

• Higher cost • Shift to higher end manufacturing• Supplying components for assembly in other

SE Asia countries• Increased domestic consumption

Thank you