Automotive Logistics China

Chinese OEMs and providers in search of xiaolü

Big opportunities remain for 3PLs to lower logistics costs  Christopher Ludwig and Marcus Williams report

BEIJING 20 APRIL 2012: Without a huge improvement in efficiency (xiaolü) China will struggle to deliver the benefits of its growing demand for cars and the OEMs’ huge investment in production capacity.

“We have the opportunity to double the current output of cars,” says Cai Jin, vice president of the China Federation of Logistics & Purchasing (CFLP). “But we have a low efficiency in logistics.”

He revealed that logistics across the economy in China cost a massive 17.9% of GDP in Q1 2012, around double that of developed countries. “If we can improve, we could reap RMB 3-4 trillion (about $500-600 billion) in annual benefits,” Cai said.

He was speaking in the opening session of the 9th Automotive Logistics China conference, which was held in Beijing just prior to the opening of this year’s national motor show. More than 300 delegates from carmakers, tier suppliers and LSPs gathered for two days of networking, discussions and presentations in the industry’s most important annual event for the automotive logistics sector.

There are clear opportunities for large LSPs, either domestic, joint venture or foreign, to bring the efficiencies. China has invested substantially in its infrastructure, but it lacks integration between modes and service. Logistics is also hampered by the fragmented, sub-scale and often unregulated nature of most local providers.

Slower growth, but still strong

The CFLP’s optimism on car sales is based on moving China’s current ownership ratio of one car per 17 people closer to the global average, which Cai estimated at between 1:6 and 1:7.  Even at this level it would still be far below the USA’s 1: 1.3.

However, the growth of China’s car market has actually declined 1% in the first quarter of 2012 after growth moderated in 2011 at 18.5m units of passenger and commercial vehicles last year (after exploding 32% to 18m in 2010) following the end of some government incentives. Overall economic growth came in at ‘only’ 8.1% during the quarter compared to 9% and above for the past two years. The government has been taking measures to reign in inflation and avoid overheating, and indeed in the same week as the conference announced it would allow the value of the RMB to fluctuate (i.e. increase) a little more against the US dollar.  

But March sales resumed the growth, and were 3% higher than the same month in 2011. Premium brands are increasing much more, and exports are up around 10% on 2011 (after bouncing back from the recessionary low by increasing 50% last year versus 2010). Conference speakers were relatively bullish on the rest of the year, pointing to government support and moderating inflation.  

Shen Jinjun, executive vice chairman of the Chinese Automobile Dealers Association, told delegates to expect sales growth of between 5-10% this year, which woul take the market to around 20m units. With Ford, GM and Volkswagen all recently announcing new assembly plants in China, the expectations for the long term are still obvious. Martin Thaysen, executive vice president for China at Ceva Logistics, pointed out that production capacity is expected to increase to 25m by 2015, and that consultancy KPMG has even suggested a figure of 40m units is possible, which could result in significant overcapacity.

Nevertheless, the CFLP’s Cai suggested to delegates that the Chinese automotive industry has entered a new phase. “The total structure of the industry is heading towards higher added value and more sophisticated building,” he said.

If logistics performance could be improved, the automotive and logistics sectors needn’t rely on the continuation of fast growth to increase profitability.  “If we can make [improvement to logistics efficiency] happen,” Cai noted, “we needn’t rely so much on the high speed of the market to grow.”

David Dudek, director of automotive for Asia Pacific for Ceva Logistics, also observed that both manufacturers and logistics providers are already putting more emphasis on lowering cost and finding efficiencies. “When we had double digit percentage growth year-on-year, we had less focus on efficiency. Now that it has come down to the single digits, there is more talk about driving cost out of the equation.”

 Infrastructure is great but not integrated

But the transformation to higher value, more efficient services is unlikely to come quickly. Issues that contribute to higher logistics costs include long distances, a large proportion of imported and exported material, and a general lack of standards for transport equipment and packaging. Thaysen from Ceva, which operates the country’s largest automotive logistics provider through the Anji-Ceva joint venture with its SAIC-owned partner, also pointed to the fact that domestic OEMs tend to own their own logistics providers. This holds back efficiency and the potential for shared networks.

“However, in some ways the market is moving away from this model,” said Thaysen, “LSPs [are] opening up their services and in some cases…being spun off into separate companies.”

Privately, delegates from LSPs also report the pressure from OEMs to their tier suppliers to separate out component cost from logistics cost, thereby exposing the inefficiencies of the latter, especially if they are also company-owned, and opening up the opportunity for 3PLs.

A large share of China’s logistics costs – about 35% – comes from relatively expensive road tolls, according to Wei Yong, chief of the transport and logistics division of the National Development and Reform Commission (NDRC). He told delegates that government has policies coming to reduce these costs. But he also pointed out that China would not have been able to finance its significant infrastructure investment in recent years without tolls.

Read the full report here