In recent months, a number of major U.S. transportation and logistics companies have launched new services in China as a way to move up the supply chain and take control of freight at the manufacturing facility, rather than at the foreign port or U.S. gateway. The opportunities are lucrative, but the road isn’t always easy going, warn the experts. China’s transportation and logistics sectors, particularly the ground transportation segment, are highly fragmented and rules and regulations are constantly changing. The payoff is sweet, however, for both U.S. shipping companies and their customers.

Market openings pave the way

Prior to 2005, U.S. firms were required to establish a joint venture with a Chinese company to operate in the country’s transportation and logistics market. The country’s membership in the WTO in 2002, combined with market opening reforms and increasing manufacturing and sourcing activity has fueled the expansion of U.S. firms in China these past few years.

Schneider National (www.schneider.com), one of North America’s largest trucking and logistics companies, opened its first office in Shanghai in 2005. Earlier this year, it became the first U.S. trucking firm to receive operating authority in China, where it now does business as Schneider Logistics (Tianjin) Co. Ltd., providing domestic transportation, warehousing, cross-docking, third-party logistics and other services. Schneider intends to expand its presence in China, say company executives, and is prepared to spend “tens of millions” of dollars on acquisitions and organic growth.

“We see this as a great opportunity for customers in China, whether they be foreign-invested companies or Chinese-based businesses,” remarked Martin Winchell, managing director of Schneider Logistics China. “We will now be able to help customers build out their intra-China network and grow their business in the various provinces.”

 It’s estimated that China has close to 2 million trucking companies with an average of 1.2 trucks each. The market is also dominated by LTL, but the truckload market is growing rapidly as the country continues to develop its highway infrastructure as part of its 11th Five-Year Plan (see sidebar). Schneider hopes to unveil its truckload service in China before year’s end. 

YRC Worldwide (www.yrcw.com) planted its stake in China in 2005 too, with the formation of a transportation joint venture with JHJ International Transportation Co., the second largest air freight forwarder in China.

In June, YRC Worldwide announced that it has entered into a preliminary agreement to acquire Shanghai Jiayu Logistics Limited, one of the largest providers of LTL ground transportation services in China, with over 30,000 customers, 1,600 employees, 300 tractors and a network of over 3,000 vehicles.

As it turns out, the China market could really help U.S. transportation and logistics firms with a presence there as both China-U.S. and intra-China trade keep on heating up. And, spending on logistics and transportation now accounts for 18 to 20 percent of China’s gross domestic product, compared to 8 to 10 percent in the U.S. That means trillions of dollars are up for grabs.

Partnerships fuel new products

One of the more unique approaches to gaining a foothold in the China market is a combination of less-than-containerload (LCL) and LTL services like that offered by Con-way Freight (www.con-way.com) and APL Logistics (www.apllogistics.com). The OceanGuaranteed service-a time-definite surface transportation service in partnership with APL Logistics and APL servicing ports in Hong Kong, Shanghai, and Shenzhen-is an example. It’s been working so well that it has been expanded to include four other Asian ports-Yokohama, Busan, Singapore, and Kaohsiung.

According to Con-way, “Importers are realizing significant cost reductions and reliable product delivery from the hybrid LCL-LTL service. One customer in the homebuilding industry, which formerly relied on air freight, has achieved significant cost savings and improved supply chain reliability since it started using the service last fall, seeing its freight charges fall nearly 80 percent per shipment, with an overall savings of more than $157,000.”

Ned Moritz, vice president of branding for Con-way Freight, said recently that, “Many factors influence transit time for freight coming to the United States from Asia-especially China-and maintaining acceptable service levels becomes a bigger challenge for American retailers every day.”

Since air freight is prohibitively expensive for all but a few importers who ship very high-value goods (LCL shipments by air are about 10 times more expensive than ocean), many are finding day-definite LCL shipping the best available option, added Moritz. When combined with an LTL service, the results are even more impressive.

The service fills a niche, reports MergeGlobal, the logistics consultancy the two companies hired to research the market before launching OceanGuaranteed. Most LCL shippers are seeking reliability, not speed, said an executive with the firm. Furthermore, the LCL services previously available on the market had transit times to the East Coast of 30 days, give or take 10 days. This makes for higher inventory and pipeline costs for importers.

The service has achieved 99.8 percent reliability since it was rolled out a year ago, and on-time delivery is guaranteed or the shippers will be given a discount. In addition to the Asian expansion, the two companies are considering expanding the service to Latin America and Europe and may even add a full containerload (FCL) express service in the future.

In fact, Matson Navigation (www.matson.com) and J.B. Hunt (www.jbhunt.com) have already teamed up to focus on FCL shipments. Their new service, which started last March, offers guaranteed, expedited freight transport from Ningbo and Shanghai to Long Beach, California and various U.S. inland destinations under a single invoice. Under the new program, customers will have a choice between to products. The first will be offered by Matson and Matson Integrated Logistics (MIL) and will guarantee the transit time and delivery of shipments to the West Coast and selected inland destinations.  The second product involves partnering with J.B. Hunt to provide a guaranteed expedited transload and inland point delivery option. By utilizing the J.B. Hunt 53-foot containers, customers will be able to consolidate cargo from ocean containers into a lesser number of domestic containers synchronized for carriage via expedited intermodal or over-the-road service.  wt

Sidebar: China's Road and Rail Infrastructure Projects 2006-2010

The following are key projects for China’s road- and railways that will be built during the 2006-2010 period, as part of the country’s 11th Five-Year Plan:



Railway

The country will develop 40 intermodal terminals, 18 logistics parks, and 100 container handling terminals. Government spending of $190 billion in then rail sector will add 11,000 miles of track by the end of the decade. This will comprise the “biggest (infrastructure investment) in China’s history,” noted Li Guoyong, transportation director of the National Development and Reform Commission. The government is also improving its rail freight capacity by upgrading the current 60-ton trains used widely throughout the country with 70-ton trains. The new 70-ton trains can carry more weight and run at a speed of 120 kilometers per our, compared to the 80 kilometers per hour for the 60-ton trains.

Rail investment is critical for China, as there exists a shortage of freight trains and lines to carry raw materials from the western provinces to manufacturing hubs along the more developed coastal regions. “Our railroad service can only satisfy 35 percent of cargo demand,” acknowledged Huang Min, chief economist with China’s Railways Ministry, during a recent interview.

Meanwhile, the Chinese Embassy in the UK reports that in order to meet the increasing demand for railway transportation, railway planners have called for the building of high-speed dedicated passenger railway lines and the shifting of all freight transportation to the existing tracks. Within the next five years, China will build 9,800 kilometers of dedicated passenger railway lines, or 50 percent of the new lines to be built in the country. Of the 9,800-kilometer dedicated passenger railway lines, 5,457 kilometers will accommodate trains running at a speed above 300 km/hr.

The Ministry of Railways has also begun construction of a 1,318 kilometer dedicated railway line linking Beijing to Shanghai, which allows trains to run at 350 km/hr. The service, which is planned to begin in 2010, will cut train trips between Beijing and Shanghai from the current 14 hours to only five hours. “The Beijing-Shanghai dedicated passenger line can relieve the existing tracks of the heavy pressure from passenger transportation, thus increasing the freight transport capacity of the existing tracks by 50 million tons a year,” said a professor with Beijing Transportation University.



Highway

Fourteen expressways are being built, including one from Beijing to Hong Kong and Macao. The total expressway mileage in China amounts to over 41,000 kilometers, ranking the country second in the world. By 2020, the country is likely to overtake the U.S. as the country with the biggest highway system. This bodes well for the country’s automotive sector, of course, as well as fast –food chains like McDonald’s, which plans to add outlets near highway stops.

According to the government, by 2010 a fairly complete expressway network will be finished in the developed regions of eastern China, while high grade highways will connect major cities in less-developed central and western regions of the country.

Earlier this year, the government pledged to invest 24.8 billion yuan ($3.1 billion), collected through motor vehicle purchase taxes, in rural road construction this year, which is nearly 10 per cent more than last year. In 2006, a total investment of 151.3 billion yuan was put into the building and reconstruction of 325,000 kilometers of rural roads, a record high.

The China Daily reported recently that the government is making a concerted effort to get more financial organizations involved in rural road construction, such as the China Development Bank. This method of financing was unheard of in the past, as loans could be secured only on toll roads. A government official explained, however, that the loans would be repaid quickly as local economies tend to rise rapidly after the development of a good road system. Every township in the country as well as most administrative villages in eastern and central China will be accessible by paved roads by 2010.

In the meantime, the 2008 Summer Olympics, which will open next August in Beijing, while helping to spur road construction, is also adding pressure on the government to address the notoriously bad air pollution. A recent study of 15 large Asian cities by the Asian Development Bank found Beijing suffered the dirtiest air, with 142 micrograms of pollution particles per cubic meter. The amount is five times New York City’s average and more than seven times above the World Health Organization’s target for large cities. To improve air quality during the Games, Beijing will forbid vehicles with substandard emissions from the city’s roads, restrict production at factories in Beijing and surrounding areas, and increase parkland. And, to better accommodate the 1.5 million tourists expected to visit Beijing during the Olympics, the city is building a $3.6 billion airport addition that will more than double its size. Olympic officials are said to be “very comfortable with where things stand in venue construction and other infrastructure and logistics.”