2007 Mar-Apr Issue by Chain Media

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THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS

Mind the talent gap: solving China’s skills shortage

CONTENTS MARCH/APRIL 2007 www.chaina-online.com

THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS

COVER STORY

Mind the talent gap Some fresh perspectives on how to solve the massive skills shortage that is slowing down your China supply chain

Q&A

Danger: Proceed with caution

Improvements are needed in the transportation, handling and storage of dangerous goods in China

REGULARFEATURES 7

COMMENTARY ■ A look at China’s industrial land auction process ■ After-sales blues ■ The impact of rising energy prices ■ Developing a China operations strategy

11 NEWS ROUNDUP 29 REGIONAL FOCUS ■ Tianjin: China’s third engine

37 CAREERS 27

Q&A

Setting the standard Susanne Lehmann, logistics planning manager, Shanghai Volkswagen

40 CLASSIFIEDS 41 EVENTS CALENDAR 41 COMPANY INDEX 42 CHINA SUPPLY CHAIN IN NUMBERS

SUPPLY CHAIN FEATURE

Navigating the logistics real estate maze China’s complex real estate environment remains a major obstacle to improving overall supply chain efficiency

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MARCH/APRIL 2007

any in China have recently returned to work after the week-long Chinese New Year holiday, a Golden Week holiday that turned out to be especially golden for China’s retailers, with the government reporting a 15 percent year-on-year growth in retail sales over the period (see Growth in China’s retail market, page 42). But not all workers in China will be returning to work, or at least not to the same company. The results of a recent survey with 700 white-collar workers (most of them in Shanghai) working across 15 different industries in China showed that a whopping 40 percent of them were planning to change jobs in the month immediately after the holiday. With the large-scale job-searching peak in 2007 expected to come in mid-March this is a particularly fitting time for Chaina magazine to take a look at one of the biggest problems currently afflicting most company’s China supply chain operations: the talent shortage (see Mind the talent gap, page 18). This is not a problem restricted to the supply chain area and most sectors in China are reporting similar skills deficiencies at all levels, with the problem most acutely felt at a mid- to senior-management level. The bad news is that the problem is not likely to go away in the extreme short term: it will take at least five years, though probably closer to ten years, before the current crop of junior-level executives (who are already benefiting from the millions of dollars that many companies are now spending on training programmes in China) come of age. The confusing industrial real estate environment in China (and subsequent lack of quality warehousing space) is another oft-cited obstacle to the continued smooth development of China supply chains. Towards the end of 2006 the government announced new regulations intended to increase efficiency in the buying and selling of industrial land. But the move has left many analysts wondering whether the new regulations have just made matters worse (see A look at China’s industrial land auction process, page 7; and, Navigating the logistics real estate maze, page 34).

It’s not all doom and gloom however: 2007 is the year of the golden pig, which only comes around every 600 years, and is supposed to be notably auspicious. Let’s hope this year is a golden year for your company’s China-based operations too. Michael Pennington Editor and Publisher michael@chaina-online.com

CHaINA MAGAZINE Publisher Michael Pennington michael@chaina-online.com Editorial Consultant Max Henry

Contributing Writers Chris Horton, Russel Beron, Yang Ning, Shirley Liu Art Director Colin Dizengoff Graphic Designer How Xu

CHaINA MAGAZINE EDITORIAL ADVISORY COMMITTEE Jamie Bolton Executive Partner Supply Chain Management North Asia Accenture

Amit Kumar Logistics Manager Asia Intercontinental Freight and Logistics Services Electrolux Group

Mark Millar Director of Strategic Business Development UPS Supply Chain Solutions

Jean-Luc Laboucheix Supply Chain Director Asia Pacific, Goodyear

Eugene Lim Registered Foreign Lawyer Baker & McKenzie, Hong Kong Henrik Anker Olesen Transport & Logistics Leader, Asia IBM Global Business Services Bee-Choo Lim Materials Director Asia and Latin America Intel

Sean Shao Logistics Manager NuSkin China Jeffrey Tew General Manager and Lab Group Manager General Motors R&D Centre Ash Lim Market Development Director Supply Chain Management APAC Oracle

ADVERTISING SALES Michael Pennington michael@chaina-online.com +86 138 1897 6097 DISTRIBUTION By direct mail to subscribers in China, Hong Kong and Singapore who are involved in supply chain management, manufacturing and logistics including: supply chain directors and managers; logistics, warehousing and transportation directors and managers; sourcing, materials management, procurement and purchasing directors and managers; operations, manufacturing, import/export and trade managers; and chief executive officers, chairpersons, presidents, vice presidents, general managers, managing directors and country managers.

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© Copyright 2007, Red Circle Group (Hong Kong) Limited. All rights reserved. CHaINA™ (or Chaina magazine) is published by the Red Circle Group (Hong Kong) Limited, Room 813, Hollywood Plaza, 610 Nathan Road, Kowloon, Hong Kong. Telephone: +852 8192 5719. Fax: +852 3015 8719. No charge for subscriptions to qualified individuals. Annual rates for subscriptions to non-qualified individuals differ depending upon the subscribers country or territory and can be found at: www.chaina-online.com Send address changes to: subs@chaina-online.com The contents of the publication may not be reproduced in whole or part without the written consent of the publisher. The publisher is not responsible for product claims and representations.

MARCH/APRIL 2007

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COMMENTARY

A look at China’s industrial land auction process

n what appears to be a confusing time for industrial companies looking to buy real estate in China, it’s worth taking a look at the impact of the new regulations governing the purchase of industrial land usage rights in China, and to analyse some of the implications and constraints placed upon industrial companies growth and expansion plans as a result. Before the end of 2006, the transfer of land usage rights for industrial land, had been predominately handled through a private treaty process. Due to the perceived absence of an open and fair competition for the purchase of industrial land, the central government felt that this process had led to an apparent undervaluation of industrial land prices. In order to enhance efficiency and increase transparency, the government therefore announced a new policy to tighten the control of land administration in August last year.

The benchmark for such ‘6th level industrial land’ has been set at RMB 336 per square metre meaning very simply then that throughout 2007 any industrial land in the Jiading district of Shanghai for example must be sold through a bidding, auction and listing process at a base price of RMB 336 per square metre.

Trent Illife is the Regional Director, Head of Industrial for Jones Lang LaSalle, based in Shanghai.

New benchmarks According to the new policy, the government has set the new benchmark of industrial land use rights as of December 28, 2006 and all industrial land can only be granted by bidding, auction and/or listing. And from now going forward, prices for land usage rights, should not be lower than the benchmark set by the central government. Local governments have also studied and finalised the respective base prices in their areas of control. Juncho Logistics Park located in the municipal-level Shanghai Northwest Logistics Park was the first to announce their base price at RMB 700,000 per mu or approximately RMB1,050 per square metre. (Editor’s note: a mu is a traditional Chinese unit for measuring area and is approximately 667 square metres) According to the central government’s edict, China’s industrial land has been divided into different levels. Many areas of tier 1 cities for are in the 6th level (see chart, below).

An increase in land value... As a result of this new policy, second hand industrial land transactions will become more attractive to buyers and thus force a considerable knock on increase in land values. Anticipating the price increase, some local developers have land banked large amounts of land prior to this implementation, hoping for the excepted, and all but certain, increase in land values. And despite the the increase in the asking prices, most investors and developers are now preferring to deal with private land owners. A recent transaction involving an industrial land parcel adjacent to Pudong Airport was completed between two private developers with a transaction price of RMB 1,200,000 per mu. Whilst this may seem like a high price, the purchaser is expecting to see a further increase ahead of any additional transactions there.

...and in rents 6th level industrial land City

Districts

Beijing Tianjin Shanghai Guangzhou

Daxing, Changping, Shunyi Jinnan, Xiqing Jiading, Baoshan, Minhang Panyu, Nansha

Source: Jones Lang LaSalle

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The obvious consequence of increasing land prices is that the rental rates for logistics and warehouse facilities will most certainly continue to grow. Even though new benchmarks have been set and there’s no way to avoid the industrial land auction process in 2007, there is still no land quota release, as this widely expected policy has not been customised for local governments as yet. And the longer this policy takes to implement, the further it will drive land values and rents. MARCH/APRIL 2007

COMMENTARY

After-sales blues Eugene Lim is a Registered Foreign Lawyer with Baker & McKenzie, based in Hong Kong.

ecember 2004 marked the “big bang” for foreign investment in the distribution sector. Foreign investors applied to establish their foreign-invested commercial enterprises (FICEs) in droves. One area often neglected in this process is after-sales services. Having worked with numerous companies and industries, some of my thoughts on planning an efficient after-sales program in China are as follows.

Appropriate spare inventory levels Speed and service satisfaction are often synonymous in after-sales programmes. To minimise the time taken to repair and replace goods, companies often maintain spare inventories in China. But there is a trade off. Increasing inventory levels reduce delivery times but tie up cashflow in inventory, customs duty and import VAT costs. Duty deferral schemes, such as the use of bonded warehouses, may ameliorate these costs. However, optimising inventory levels is often an essential criterion.

Defective returns The disposal of defective goods that are returned (or defective returns) can be problematic. If the defective returns were initially imported into China pursuant to a customs duty exemption and are subject to Customs supervision, consent from Customs is required before they can be returned by the customer. If the defective returns are exported overseas, special programmes (such as temporary export for repair and replacement without cost) may be used to reduce the customs duty and import VAT costs on imported replacements or repaired parts. These programmes may however increase complexity to after-sales operations (for example, tracking serial numbers of exported defective goods, having the defective goods undergo commodity inspection, and so on).

Pricing issues Traditionally, foreign investors faced immense difficulties providing after-sales services in China. They had to use third party service providers or provide such services through consulting arrangements. These arrangements were often unsatisfactory and cumbersome. FICEs are allowed to perform after-sales services relating to goods set out in their business license. Repair and replacement services, unlike other types of services, are subject to VAT and not business tax. This has two consequences: •Investors which previously provided such services through consulting arrangements are now required to levy VAT. This increases turnover tax cost for such services (from 5 percent business tax to 17 percent VAT); and •Transitioning to a VAT model also means that input VAT costs of importing or procuring spare parts or replacement products may be offset against the output VAT levied on the repair and replacement costs. Hence, the entire turnover tax burden may be transferred to the consumer. These consequences need to be taken into consideration when pricing after-sales programs in China. 8

MARCH/APRIL 2007

Need for updated regulations The ability to provide efficient after-sales services is crucial to protecting Chinese consumer rights. The problems foreign investors and FICEs currently face are often due to rules that were not designed to account for modern demands of the Chinese consumer. As China becomes more developed, consumers will demand more sophisticated after-sales programs. Many existing rules and regulations will need to be updated to cope with these developments. www.chaina-online.com

COMMENTARY

The impact of rising energy prices

he impact of oil prices on your China supply chain is a strategic issue both for companies selling in China as well as those sourcing for export. Oil price increases may affect the cost-toserve customers, thus negatively influencing the performance of your supply chain. The rise in oil prices may also ignite higher energy input costs for manufacturing and fuel costs for transportation. Indeed, according to recent reports domestic logistics expenses in China in 2006 increased by 13.7 percent when compared to 2005. It is critical for companies with supply chains in China to remain aware of changes taking place in their markets in response to oil price hikes. In order to avoid, or at least delay a rise in your cost-to-serve, companies are advised to closely watch for changes in the buying behaviour of their customers and the selling behaviour of their supplier segments, adjusting their supply chains accordingly. And as a result of the rise in energy prices, some questions worth asking include: Will consolidation of orders and shipments become more of a necessity? Will warehouse receiving practices of customers need to be adapted towards larger, less frequent deliveries? Will companies operating JustIn-Time manufacturing and distribution models be required to add more distribution centres to their network, improve inventory management, and carry more inventory? And, will higher transportation costs offset the gains achieved by sourcing in China?

US versus China In the United States, changes and fluctuations in oil and energy prices, and their impact on total logistics costs, are muted by the relatively small percentage that energy costs represent of total logistics costs, where a 20 percent rise in fuel costs results in only a 4.8 percent rise in transportation costs. Even a doubling of fuel costs â&#x20AC;&#x201C; an extreme example even by todayâ&#x20AC;&#x2122;s rapidly changing oil price scenarios â&#x20AC;&#x201C; represents only a 24 percent rise in transportation costs.

China vs US trucking cost factors (percentage of sales)

Fuel Toll Charges Driver Wages Source: Establish

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China

14-40 20-40 3-5

20-25 20-25 25-35

There is another less significant but present impact of energy on logistics costs: the component of warehousing that is energy related. In the US utilities bills, including water, electricity and gas, make up approximately 5 percent of the cost of warehouse operating costs. Energy costs in China however make up a larger component of total logistics costs due in part to the lower wage rates and the relatively high total fuel costs as a percentage of sales. Therefore, any fluctuation of energy costs in China would drive a much larger change in overall costs and a correspondingly larger impact on logistics strategy.

Dustin Mattison is a management consultant with Established, based in Shanghai.

Avoiding irrational strategy changes A case study which shows that increases in fuel prices in China may have an irrational impact on the decisions made by executives involves a multinational manufacturer of consumer goods sold in the local market. The company was rationally pursuing a sound strategy involving reducing domestic logistics costs in China by cutting the number of warehouses, encouraging direct flows from factories to customers, reducing handling, consolidating product in fewer locations and reducing the number of 3PLs they dealt with. However, due to the recent increases in global energy prices many international 3PLs in China were forced to raise their prices. In response, this multinational cut the relationship with their strategic 3PLs and instead began to work on a more ad-hoc basis with a much larger number of local Chinese warehousing and trucking companies that offered cheaper rates. Clearly this decision was not consistent with their original long term strategy which had been to become more lean and agile. More rational strategy changes might have included keeping temporary warehouses which could be easily shut-down, creation of cross-docking platforms and having distributors handle logistics on their behalf. MARCH/APRIL 2007

COMMENTARY

Developing a China operations strategy Jamie Bolton is Executive Partner, Supply Chain Management, North Asia for Accenture, based in Shanghai.

hina is not always an easy country in which to do business. Despite its entry into the WTO in 2001, complex distribution, licensing, health, technical and packaging restrictions that don’t necessarily infringe WTO tenets but put foreign competitors at a disadvantage still exist. These restrictions can inhibit newcomers from using existing distribution channels and rapidly gaining economic access to markets, thus giving domestic companies advantages in preparing for direct competition. Regulatory fragmentation is another challenge for new entrants. Logistics in China has been micro-regulated for years, with different service components treated as distinct subsectors by various government departments. Although efforts are being made to improve coordination, shared jurisdiction for the logistics sector remains a challenge. Companies still must acquire separate licenses through multiple governing bodies, and often must obtain separate licenses for each province in which they operate.

One step at a time Although there are hundreds of steps companies can take to address the above challenges from a supply chain perspective, a few are critical to a company’s ability to thrive in China. The most important of these is to think “end-to-end” and develop a ‘China operations strategy’. China is one of the world’s most dynamic markets. This makes planning for an integrated supply chain much more critical and underscores the importance of fully coordinating demand, production, supply, distribution, information technology and human capital. Endto-end integration is particularly important when developing a China operations strategy because it helps align supply with demand: Companies with superior supply/demand-matching capabilities will have a significant advantage in this market because they are more responsive to changing market conditions. Investing wisely in capabilities is critical. For many companies, high costs and lengthy timetables make the development of proprietary sales and distribution channels or networks unfeasible. As a result, investing in the capabilities of domestic distributors has particularly high payback potential. Such investments could take the form of incentives and performance audits to improve distribution efficiency. Well-focused investments also will align with regional/local particularities and relationships, since every city or investment zone has different policies designed to attract certain types of investment. 10

MARCH/APRIL 2007

Managing third party relationships For most companies, a China operations strategy will involve collaboration with numerous entities — not just distributors. Relying on qualified third parties is therefore critical. In addition to minimizing risk, the right third-party relationships make it easier to quickly identify and enter new markets, and to rapidly achieve scale. The ability to fully quantify risk and plan for its mitigation can separate success from failure. Companies that understand their baseline cost structure, know the drivers of supply chain excellence, and have the ability to calculate total net landed costs will dramatically increase their chances of success in China. A final “must have” is clear expertise in supply chain technology. Maximising information visibility and correctly managing supply chain movements, leveraging the contributions of supply chain partners, and flexing the supply chain to meet changing objectives are just some of the reasons. Yet expertise in supply chain technology cannot be separated from expertise as it applies to people. On balance, the concept of functional or service excellence needs to be improved in China. Some believe that up to 90 percent of China distribution initiatives fail because of workforce capability. To surmount this obstacle, make training a priority, develop leadership capabilities at all levels, and set clear criteria for advancement within the organization.

Some baseline questions The best way to understand and prioritize the supply chain capabilities needed to thrive in China and develop a China Operations Strategy is to create a detailed understanding for your company’s entry and operations. Start by addressing the following baseline questions: How can we best leverage China as a supplier and consumer market? What does our company have to offer? What do we want to bring to China? Does our company have sufficient knowledge of the China market? Have we considered all the supply chain complexities associated with sourcing, manufacturing, selling and distributing products in China? Do our service model, technology know-how, existing international network and/or management skills provide us with a competitive advantage? Do we know how to continually reduce operating costs to support attractive pricing? Asking the right questions, and subsequently developing the right supply chain capabilities, could provide the China operations strategy that many China-focused companies desire, but far fewer achieve. www.chaina-online.com

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LEGAL

Calls for China to restrict foreign access to local logistics market There have been recent calls in China for the central government to restrict foreign access to the domestic logistics market. The calls come after a report compiled by 20 domestic logistics industry and related associations urged moves be taken to prevent foreign firms from monopolising the domestic logistics industry at the expense of local smalland medium-sized enterprises. According to the findings of the report, leading overseas firms are dominating the international express and shipping industries, as well as logistics services catering to foreign manufacturers based in China. DHL, FedEx, UPS and TNT together control an 80 percent share of China’s international express market. The report said that 98 percent of clients of international logistics companies based in China are foreign invested companies whereas the clients of local logistics businesses tend to be domestic firms, indicating that the customer service networks of both sides are separate and not yet overlapping. FedEx Express recently completed a buyout of Tianjin Datian’s 50 percent stake in their JV and Tianjin Datian’s domestic delivery network as part of a US$400 miion deal, giving FedEx Express 89 locations across China.

China, US reach pact on advance pricing Tax authorities in China announced in January that they had reached the first ever bilateral advance pricing agreement (APA) by signing an agreement with the United States. The APA, which involves Wal-Mart Stores, makes it possible for tax departments and the retail giant to resolve transfer pricing issues before they arise during an audit. It also gives the company greater confidence that its transfer-pricing methods will be upheld during an audit. The APA program also enables taxpayers and the Chinese tax authorities to work together to resolve potential double taxation disputes. “We’re working more closely with the US Internal Revenue Service with the development of economic cooperation between the two countries,” said a commissioner from the Chinese State Administration of Taxation. www.chaina-online.com

R&D

MSN setting up Shanghai R&D centre Microsoft is setting up a US$20 million R&D centre in Shanghai for its online MSN service, its first such centre outside of the United States. The move comes after the software giant saw setbacks in its online services in China, including the resignation of a top executive responsible for the company’s Windows Live unit in China late last year. The R&D centre will be based in Shanghai’s Zizhu Science Park close to where Intel already has a research facility. The centre will also host a technical support team for Microsoft’s online communication tool MSN Messenger, which has over 20 million users in China. Luo Chuan, former head of Microsoft’s Windows Live unit in China and also responsible for the China site of the company’s MSN portal, resigned from Microsoft at the end of 2006. Luo is tipped to become the first chief executive for MySpace China, an online networking website.

R&D

China is world’s top spot for R&D China is the most popular country in the world for setting up new R&D facilities, according to the UN. 61 percent of foreign companies establishing new R&D centres globally are choosing to set up in China, compared to 41 percent in the United States and 29 percent in India. By 2005, multinational corporations had established 700 R&D centres in China, the UN report states.

Shanghai Automotive also plans to take a 50 percent in SAIC Iveco Commercial Vehicle Investment for around US$25 million with the acquisition coming as part of the company’s program to develop commercial vehicles. The company will also establish a US$9.82 million subsidiary in the UK, SAIC Motor UK Holding, which will become its main platform for European operations.

Shanghai Automotive ups R&D spend Shanghai Automotive is planning to invest more than RMB3 billion in R&D and business expansion. The auto manufacturer is set to inject RMB868 million into its joint venture with General Motors, Shanghai General Motors, and also plans to invest RMB142.25 million into Shanghai GM Dongyue Power, a producer of thirdgeneration engines. MARCH/APRIL 2007

NEWSROUNDUP

SOURCING

Tommy Hilfiger to sell global sourcing division

Visteon to lift China sourcing

MARCH/APRIL 2007

Xu (Ian) Yang general manager, Intel China

MANUFACTURING

Intel plans new China plant Chipmaker Intel plans to invest in a major new plant in China to manufacture leading-edge chips. One source said the investment in the new plant would total a “couple billion of [US] dollars”, making it Intel’s biggest investment in the country to date. The plant will manufacture 65nanometre multi-core processors and will be Intel’s first such manufacturing facility in Asia. Intel, which has invested about US$1 billion in China to date, already has major test and assembly plants in Shanghai and Chengdu.

Sources declined to give further details of the project, such as the location and timing. Intel also said last month it would make China an independent sales and marketing region from the beginning of 2007.

Mizuno plans US$4.2 million warehouse Mizuno will invest US$4.2 million on the construction of a 30,000 square metre warehouse in Shanghai. The sportswear manufacturer also plans to decrease production costs and open more franchise retail stores in China. There are currently around 700 Mizuno retail outlets in China and the company aims to raise that number to 1,200 by 2008. Mizuno has set a sales target of US$135 million for this year.

Imagine China

Global automotive supplier Visteon expects to buy substantially more Chinese parts and components as its strives to lower its cost base. About 20 percent of Visteon’s global purchasing is in China today and about half of the company’s Asian supplier base is located in there. “China is critical to our success. This is why we have located our global electronics and our regional purchasing at our China technical centre in Shanghai,” said Sylvain Gaillet, global purchasing director of Visteon’s Asia-Pacific electronics divisions, noting that the company is looking to lift its Chinese auto electronics buying by about 30 percent at the same time as it develops its network of Chinese suppliers. “Our long-term goal is to improve the capability of key suppliers in China to play an increasingly important role in Visteon’s development both locally and globally,” said Gaillet. Visteon recently announced plans to close a parts plant in the United States, the start of a turnaround program that will see no fewer than 30 facilities in North America either restructured, sold or closed. The company has complained that high production costs in North America are making it uncompetitive.

Imagine China

Fashion brand Tommy Hilfiger Group is reportedly planning to sell its global sourcing group to Li & Fung, a provider of outsourced procurement and import/ export services. Under the agreement, Tommy Hilfiger will sell its global sourcing operations, with offices in Hong Kong, Taiwan, India, Bangladesh and Sri Lanka, to Li & Fung for close to US$250 million. Hilfiger will then use Li & Fung’s global sourcing operations on an outsourced basis. Tommy Hilfiger procured a little over US$700 million in goods in 2006. Fred Gehring, the chief executive officer of Tommy Hilfiger Group, said, “Our own operated buying offices have contributed tremendously to the development of our business to date, but we believe that to take things forward we can benefit tremendously from the integration of these offices within the greater network of Li & Fung, with over 70 offices in over 40 countries and territories, including as many as 19 offices in China alone.”

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Hershey and Lotte announce JV

Semiconductor giants plan Suzhou JV

orthodontics and microbiology categories according to Brad Sauer, executive vice president of 3M Health Care. 3M has already invested US$35 million in the first phase of the factory, slated to start operation in January 2008.

Nestle open new petcare factory in Tianjin Swiss food giant Nestle has opened a petcare factory in the Tianjin Economic Development Area (TEDA). It is Nestle’s first pet food factory in mainland China.

3M to establish health care products factory

MANUFACTURING

Diversified technology manufacturer 3M is establishing a new health care products factory in Shanghai and expects the facility will help the company maintain 20 percent sales growth in greater China, including Hong Kong and Taiwan, over the next few years. 3M currently has six factories in China, but this new facility will be its first devoted to health care products in the medical, dental,

Nokia to merge China JVs

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Sim Joo Hua, business unit head of Nestle Purina Petcare China, said “when considering the site for a factory, and weighing up all the different factors such as the proximity of resources, the quality of infrastructure and the nearby port facilities, in case in future we wish to export from this plant to other countries, Tianjin clearly came out on top.” Annual sales of pet food and supplies in China are projected to reach some US$750 million by 2008. And, in five years time the total value of the country’s pet-related economy could be around US$2 billion.

Imagine China

NXP Semiconductors, formerly Philips Semiconductors, and Advanced Semiconductor Engineering (ASE) have signed an agreement to form a JV in Suzhou focused on semiconductor testing and packaging. The entity will focus on the testing and packaging of a wide range of semiconductors in areas such as mobile communications, consumer electronics and automotive products. “We’re pleased to be able to strengthen our relationship with ASE through the formation of this JV and appreciate the willingness of governments to help in this regard,” said Ajit Manocha, chief manufacturing officer with NXP. “The JV combines the expertise of both companies to provide high-quality, competitive products to address the needs of electronics manufacturers around the world.”

Imagine China

United States-based confectionary manufacturer Hershey and South Korea-based Lotte Confectionery have announced plans to set up a manufacturing JV in the Jinshan district of Shanghai. “The manufacturing facility in Jinshan gives us the flexibility to make products closer to our consumers, bringing locally relevant and innovative new products to markets faster and fresher,” said Hershey senior vice president J.P. Bilbrey. The Jinshan manufacturing facility is expected to begin operations in June 2007, with products available in retail locations in China by August. Lotte added that it will use the strategic partnership to sell its Xylitol chewing gum in North America via the distribution network owned by Hershey.

Nokia has received government approval to merge its four manufacturing JVs in China. The restructuring involves a JV between Nokia and handset manufacturer Capitel, a JV between Nokia and a telecoms gear manufacturing company in Beijing, a Nokia JV plant in Dongguan, and a Nokia JV in Suzhou. Nokia filed the necessary applications for the merger in January 2006, and obtained approval from all relevant local governments in June that year. The central government issued its preliminary approval in August 2006. The new entity, which will produce mobile phones and network equipment, will be based in Beijing, and Nokia will hold approximately a 60 percent share with the four Chinese partners holding the remaining stake.

MARCH/APRIL 2007

NEWSROUNDUP

Dell may add new factory in China

general manager, Dell China’s client service centre

China Foto Press

Li Yuanjun

Imagine China

The general manager of Dell China’s client service centre, Li Yuanjun, has said that Dell’s sales in China will increase by 30 percent in 2007 and with this fast growth, the company may need to build a new computer factory in the next three to four years. Dell opened its second computer factory in China in May 2006. The factory covers 55,000 square metres and is designed to produce 7 million computers each year, doubling the annual production capacity of Dell’s old factory in Xiamen, which mainly targets the Chinese domestic market. At present, China is Dell’s third largest market after the United States and the UK. Dell hopes to take up to ten percent of China’s computer market. LOGISTICS

SITC Logistics plans for major expansion

Cathay, Air China form Shanghai JV

SITC Logistics plans to invest more than RMB100 million over the next two years to acquire the latest technology and expand its distribution network to cover 75 percent of China, including all major and secondary cities. S ITC L ogi st i c s was fo r med i n Dec em ber 2006 fo llowin g t he merger of t he l o g istics u n it of S ITC M a ri t i me with Beijin g based New Times Inter national Tr a nspor t S er vi c e, C hin a’s larg est privately-owned for warder of out bound a i r f rei ght .

Air China and Cathay Pacific are organising a 50-50 Shanghai JV that aims to be mainland China’s biggest airfreight enterprise after it starts operations in the second quarter of 2007. “The establishment of the JV with Cathay will lay a solid foundation for our cargo business,” said Air China vice president Fan Cheng. “We are now busy preparing for the joint venture programme and hope to realise practical progress in the cargo business partnership with Cathay in the first half of 2007.”

LOGISTICS

DHL invests extra US$110 million in China Express delivery and logistics services provider DHL plans to invest more than US$110 million into China in the next few years. The investment will be used to expand infrastructure, including more transport vehicles and service centre equipment, and for training its employees. DHL also said in the report that it is considering setting up a North Asia hub either in Shanghai Pudong International Airport or Incheon International Airport in South Korea. China is one of DHL’s fastest-growing markets and accounts for 25 percent of its revenue in Asia-Pacific and ten percent of its global sales. The company has maintained an annual growth rate of 35 to 45 percent in China in recent years and has set up 73 branches, making it the largest network among international express delivery firms in the country. In January this year, DHL launched domestic airfreight operations in 17 cities across China.

MARCH/APRIL 2007

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SITC Logistics wants to become China’s leading supply chain management and integrated logistics service provider. The company last year purchased Oracle’s Transportation Management System (TMS), a web-based application that allows authorised internal and external users to execute booking/ tendering and en route planning, plus receive status updates. “We are now working with Oracle’s consultant and system developer in Australia and India to carry out the second phase integration of the TMS suited for the Chinese market,” said Yang Shaopeng, chairman and chief executive officer of SITC Logistics. Yang said in a company statement that when the first stage of the system is completed in April, SITC Logistics would become the first logistics company to utilise this technology in its daily enterprise resource planning (ERP) management in Asia. SITC Logistics anticipates net profit to increase by more than 30 percent in 2007. The main source of the growth is expected to be from the development of its supply chain management business.

Maersk Logistics helps establishes supply chain innovation centre Maersk Logistics is teaming up with a number of industry leaders to establish a supply chain innovation centre (SCIC) in Hong Kong. The project is being undertaken by Maersk Logistics together with Cisco, the Metro Group and PCCW Solutions plus five other companies.

The SCIC is a supply chain enabling technology centre that is designed to showcase Electronic Product Code/ Radio Frequency Identification (EPC/ RFID) integrated solutions from around the world. “Maersk Logistics, as a founding member of the supply chain innovation centre in Hong Kong, has been an active user of RFID technology through the RFID Core Competence Centre established in 2004, and this initiative will further support RFID development in the market, especially here in Asia,” said Steffen Schiottz-Christensen, managing director of Maersk Logistics China. “Our customers rightfully expect that we deploy the most up-todate technology, such as RFID, to improve their supply-chains. It has been a positive experience for Maersk Logistics to cooperate with the SCIC and we believe this co-operation will enhance our ability to deliver improved supply chain visibility and optimisation to our customers through continuous innovation.” The SCIC is intended to provide a focal platform for professionals in supply chain management deploying EPCstandards-based RFID development and application activities.

Nippon Express announces China tie-up Japanese transportation provider Nippon Express announced that it has linked up with a logistics subsidiary of Chinese automaker Dongfeng Motor, targeting growth in China. Nippon Express also said it had started transporting auto parts for engine manufacturer, Dongfeng Cummins Engine. The Japanese firm said it was its first full-scale tie-up an affiliate of a Chinese automaker. Nippon Express will initially offer shipping services for 13 autoparts suppliers in eastern Hubei province and expand the operation to other auto-related sectors in China.

Kerry and Talke sign chemical logistics services deal Kerry Logistics and Germany’s Talke Logistic Services have signed a JV agreement to provide a full range of specialist chemical logistics services throughout China. “We are convinced Kerry-Talke will provide a powerful combination of local experience and specialist chemical logistics know-how for the benefit of our www.chaina-online.com

clients in this fast developing market,” said Vincent Wong, joint managing director, Kerry Logistics. Talke Logistic Services, based near Cologne, is a chemical logistics service provider and has been working with major global chemical manufacturers for the last 60 years. “Joining forces with Kerry Logistics in China gives us an ideal platform to further implement our strategy of international development with strong local partners,” said Richard Heath, chief business development officer of Talke Logistic Services.

REAL ESTATE

First China investment for New City Corporation New City Corporation has announced its acquisition of a logistics facility in Shanghai Pudong’s Waigaoqiao Bonded Logistics Park, which marks the company’s first investment in China. New City is a real estate merchant banking and investment management firm headquartered in Tokyo. The site it will acquire is the ‘Waigaoqiao Logistics Centre Phase II’, a two-storey warehouse completed in June 2006, which occupies more than 250,000 square metres and is composed of 28 independent units. New City will hold 27 of these with the remaining unit already owned by the State Grid. “Along with the country’s growing foreign trade, China’s logistics industry has attracted considerable attention, including from New City itself,” said the firm’s chairman and chief executive officer, Frank Orrell. MARCH/APRIL 2007

NEWSROUNDUP

The acquisition is in line with the company’s strategy to capitalize on logistics opportunities in the China market and the Asia region.

Ningbo to build cold storage logistics hub Authorities in Ningbo are planning to build a cold storage logistics centre in the city’s Jinzhou district to ease the shortage of specialised warehouse space. The facility will cover an area measuring 2,200 square metres, making it the largest cold storage logistics facility in eastern Zhejiang.

RETAIL

Best Buy to open up to 26 stores in China in the next 12 months Best Buy plans to open up to 26 stores in China during the company’s fiscal year beginning March 4 2007. The top US consumer electronics retail chain, which recently opened its first store in Shanghai, said that it expects to open up to 23 Five Star Stores, as well as to establish two or three Best Buy locations in the next 12 to 18 months. The company also said that it expects to generate about US$100 billion in annual sales in China by 2010.

The UK-based company, formed last year through the merger of Alliance UniChem and the high street chemist Boots, said it would buy a 50 percent stake in GP for US$74,635,660. The deal is part of a 50:50 JV with Guangzhou Pharmaceutical, which currently owns 90 percent of GP, as Alliance Boots moves to cash in on the rapid growth of the Chinese market. “It underlies our commitment to be a major international player in pharmacy-led health and beauty,” said Alliance Boots chief executive Richard Baker. Baker expects China to go from being the world’s ninth-biggest market to the sixth-biggest by 2010.

REAL ESTATE

Decathlon sets up Shanghai distribution centre Sports retailer Decathlon has rented more than half the AMB Jiuting Distribution Centre in eastern Shanghai. Guy Jaquier, AMB’s president, Europe and Asia, said, “China is Decathlon’s retail entry into Asia, and we are proud that they rely on the efficiency of AMB facilities as part of their Asia logistics operations. The delivery of the right product, to the right place, at the right time is a key component of Decathlon’s commitment to retail customers.”

Imagine China

Wal-Mart confirms Trust Mart deal Imagine China

Mapletree moves into Wuxi Mapletree announced that it will develop a logistics centre in Wuxi New District with a gross florr area of about 42,000 square metres on a 6.8 hectare site. The development consists of threestorey warehouses with mezzanine offices. The project is Mapletree’s third in China after Lingang in Shanghai’s Pudong district and Tianjin. 16

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Best Buy estimates that its China retail square footage will exceed 5 million square feet by the end of the upcoming fiscal year.

Alliance Boots moves into China Beauty and drugs retail giant Alliance Boots has gained a new foothold in China after signing a JV agreement with the country’s third-biggest pharmaceuticals wholesaler.

Retail giant Wal-Mart confirmed in late February that it had acquired a 35 percent stake in Taiwan’s Bounteous, an operator of 101 hypermarkets in 34 Chinese cities under the Trust-Mart brand. Wal-Mart expects to acquire complete control of the company by 2010, subject to unspecified conditions. Michael Duke, a Wal-Mart vice chairman, called the investment “an important step in bringing our additional scale to our China retail business.” Wal-Mart already operates 73 stores in China. Trust-Mart stores employ more than 31,000 people, and will www.chaina-online.com

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continue to operate under the TrustMart name.

New eCard solution for B&Q China Beijing-based integrated software and professional services provider e-Future has been selected by IBM to provide a customer management eCard solution for B&Q China. B&Q has reportedly chosen IBM as its total solution provider of front business processes optimisation in China and integration with SAP’s end solutions. B&Q’s parent company, Kingfisher, is Europe’s leading home improvement retail group and the third largest in the world. Kingfisher operates over 700 stores in 11 countries in Europe and Asia under various retail brands including B&Q, Castorama, Brico Depot and Screwfix Direct. Since 1999, B&Q has developed and operated in excess of 50 stores in IT approximately 20 cities in China.

semiconductor demand in 2006, according to a report issued by PricewaterhouseCoopers. Despite China’s demand for chips, the report stated that China “continues to rely on multinational suppliers for semiconductors. No Chinese-branded companies ranked in the top 70 chip suppliers to China in 2005.”

WhereNet establishes APAC HQ in Shanghai

China accounts for 90% of chip growth Chinese manufacturing products accounted for 90 percent of the growth of

Wireless solutions provider for tracking and managing enterprise assets WhereNet has announced the opening of its Asia-Pacific headquarters

in Shanghai in response to growing market demand. The WhereNet active RFID, real-time locating system (RTLS) technology was certified by the China State Radio Regulation Committee in 2004 and is already deployed at several automotive manufacturers in China. With the opening of the Shanghai office, WhereNet continues to expand its presence as a global solutions provider of active RFID, RTLS technology. The company is currently focusing on two markets in China, automotive and transportation, and distribution and logistics. WhereNet also recently hired Jinbo Yang www.joneslanglasalle.com.cn

We Open Industrial Frontiers with You. At Jones Lang LaSalle, our team of industrial experts can unlock the mysteries of the new industrial frontiers in China. With the varied labor and the expansive geography in the emerging cities, multinationals can choose from over 2,000 industrial zones. You can now closely align with your business objectives and achieve more economical and specialized industrial locations. For expert advice, contact Jones Lang LaSalle today: Investment Trent Iliffe +86 21 6132 3706 trent.iliffe@ap.jll.com

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COVERSTORY

Mind the talent gap Some fresh perspectives on how to solve the massive skills shortage that is slowing down your China supply chain

acing exponential growth across their China operations, companies are being forced to find innovative alternative solutions to address the increasing talent shortage in the booming supply chain sector. One of the biggest factors impacting recruitment and retention strategies in the logistics sector in China is the speed at which the supply chain area is evolving globally. The rules for such planning and strategy in more mature industries (and in less dynamic markets) have to be adapted on the run here. “We are moving towards full network connectivity,” says Diana Chan, a principal with Heidrick & Struggles, an executive recruitment specialist based in Shanghai. “We now have real time access to information, transparent inventory and more predictive sales forecasting on a very advanced technology platform.” The effect of such changes, which have only happened in the last five to ten years, has left a void of knowledge workers to operate and manage a sophisticated global supply chain. According to a much-cited McKinsey study, the supply chain area is facing a demand for 75,000 new employees a year in an industry in which there are only 5,000 new graduates per year. The number of universities in China offering logistics courses has grown from one in 2001 to 165 by 2005, but the training the students receive tend to be more academic rather than practical, resulting in most students graduating with diplomas but without any real experience. With such a severe shortage across a wide range of positions, talent, or rather the lack of it, is one of the top items on the agenda for companies in China and the first-ever supply chain focused HR conference recently took place in Shanghai. The summit provided a forum to present current and relevant insight into best practices in the areas of recruitment, retention, training and leadership development.

The long search One very simple issue many companies face is that finding the right employee in China takes along time. “The lead time to find the right candidate is very long,” says Alex Yang, HR Director of Borgwarner China. “You need to find the right combination of technical background, soft skills and aptitude.” Russel Beron is a freelance journalist specialising in supply chain and logistics based in Shanghai. He is a regular contributor to Chaina magazine.

COVERSTORY

With the gap between supply and demand of skills so huge, it’s impossible to find everything in one person Diana Yang, Hewitt Associates

Supporting Yang’s view, “We need highly specialised people,” says Jiva Guragai of Hamilton. “Because we need such technically specialised people, we use all kinds of avenues to find people. Some of the attributes we look for are workplace experience, English skills, a supply chain background and foreign experience.” Faced with such stringent requirements it seems unlikely the skills shortage will ease any time soon. “With the gap between supply and demand of skills so huge, it’s impossible to find everything in one person,” says Diana Yang, co-leader of Hewitt Associates’ Talent and Organization Analytics business in China. One of the problems Yang observes is that “contract logistics is such a relatively new idea in China, having developed only in the last five years. Furthermore, leaders need soft skills in addition to technical skills. That is, they need the ability to gain support across the organisation.” With strategic sourcing on the increase, employees who understand western style business practices and needs coupled with a solid knowledge and experience of the local markets are in high demand. According to Olivier Levy, managing director of Dragon Sourcing, “there is a drastic shortage of highly experienced buyers. The key skill required is the ability to negotiate, which can be hard to find.” Some companies have also complained about the disconnect and lack of understanding between HR departments and line managers. Other specific skill areas in supply chain management where shortages exist include: a shortage of logistics engineers, quality process engineers, commodity managers and, more generally, people that combine strong technical skills with business acumen. A void in solid local leadership is at the heart of the talent gap. According to a recent survey of 60,000 respondents, initiative and communication 20

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were two of the most sought after leadership criteria, and were typically found to be lacking among the generation of workers who are now in their 40s or 50s, the so-called “lost generation”. This next generation of children brings their own set of dynamics to the employment market. Typically from single child families they in turn have been called the “coddled generation.” It will be interesting to see how these coddled youngsters will fit into the workforce.

Expat talent versus local talent One of the biggest challenges facing companies operating in China is finding the right combination of skills and experience in one individual. While hiring an expat might give you the skills and knowledge of the latest western business operational practices, such individuals run the risk of finding it difficult to operate in an unfamiliar environment. And though more and more foreigners are becoming conversant in Mandarin, being able to speak the language doesn’t always fully bridge the cultural divide. Furthermore, according to Diana Chan, “the problem with hiring an expat is often the lack of China market knowledge in terms of legal, tax and people management issues.” One of the top reasons why foreign executives in China fail according to Ivo Hahn, chief executive officer of recruitment firm Xecutive Group is because of cultural differences (72 percent) much more so than a failure in leadership abilities (only 37 percent). “The prevalence of regionalisation in China is also a problem,” says Chan. As many expats in China find out to their dismay, not every city in China is as international as, say, Shanghai. Can the talent problem then be addressed through hiring local talent? The answer is only partly. According to the experts, some of the problems in hiring local candidates include an inability to engage global counterparts and a lack of home-grown talent. www.chaina-online.com

COVERSTORY Legislative changes

Imagine China

Another big problem with local talent is the fast-tracker mentality which makes retention a big issue.

Finding the bad apples The issue of pre-employment due diligence is a much more crucial factor in China than it is in other countries, argues Peter Humphries of Chinawhys consulting. As much as 16 percent of China’s GDP is reportedly not realised as a result of corruption and white-collar crime, compared to an estimated four percent in the US, which makes it increasingly important for companies to do due diligence on potential hires. “Our goal is to help promote good business ethics and due diligence,” says Peter Humphries. One area that Chinawhys focuses on is pre-employment checks and facilitating employment integrity programs which categorise staff into different screening levels. They will run background checks for instances of previous litigation.

Changes to China’s employment contract law are also making it more difficult for foreign companies to manage employees in terms of contracts and layoffs. Until recently, says Dr. Andreas Lauffs, head of the China Employment Practice Group for Baker and McKenzie, most companies have used short term or fixed term contracts to hire employees. However, Lauffs remarks, “under the new law, in most cases severance will be necessary and there will be restrictions on the number of fixed term contracts an employer can use to hire an individual.” Added to this fact is that labour unions are becoming increasingly important, which does not bode well for foreign companies who have always profited from lower salaries in China. Lauffs noted one case where a logistics company with branches in China was being pressured to equalize pay and benefits across the board.

Employers have to balance a mix of local and foreign talent by implementing strategic planning throughout the organisation.

Some solutions To meet the hiring challenge employers have to balance a mix of local and foreign talent by implementing strategic planning throughout the organisation. Bee-Choo Lim, Intel’s materials director for Asia and Latin America, noted the importance her company places on organisational development. With Intel operating in 13 countries and utilising English as the common language platform, Lim stressed how crucial it is for companies such as hers to “create a dialogue, identify common goals and values and create opportunities for learning.” According to Sim Cheng Hwee, a Singapore based consultant focused on strategic planning and demand forecasting, “one of the key solutions to the HR challenge in China is to plan ahead.” As anybody who has worked in China can testify however, business tends to move much faster than in other markets which often leaves HR planning lagging behind.

Imagine China

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COVERSTORY

Maybe we need to find people from other sectors that can be retrained for positions in logistics. Ainsley Mann, Coca-Cola

Some of the strategies that Intel uses to combat the HR challenge is extensive on the job training, classroom training, web-based e-learning and innovative approaches to facilitating intracompany dialogue, such as learning circles. Ainsley Mann of Coca-Cola has other ideas about how to find the solve the problem. “With recruitment, I think it’s possible that we are looking at too narrow a field. Maybe we need to find people from other sectors that can be retrained for positions in logistics.” And similarly some companies have tried to mitigate the skills shortage by putting employees into cross-functional teams. That way people with specialized skills can offset the deficit in other people’s skills.

The difficulty of retention With an explosion of opportunity and an increasing demand for their skills, top workers can and do have their pick of jobs. According to one disgruntled manager of a foreign strategic sourcing company, many of the potential hires he sees have spectacular resumes with multiple big name companies listed, but each position lasting typically less than one year. Investing in training also brings risk as local companies take advantage of the more developed training programs foreign companies offer by poaching employees. “12 out of 15 people trained in CPRM at Philips left within one to two years,” commented one Philips Lighting manager. “Yet, to uphold standards, Philips is still willing to invest in training,” she says. According to some experts, in China there is a 50 percent chance of a new employee leaving within the first two years.

Interestingly, salary is not always the number one reason for people changing positions. Xecutive Group recently reported that Chinese top managers switch jobs every 15 months. One of the top reasons cited for this job-hopping is international training, 66 percent, followed by salary increases, 53 percent, and coaching and mentoring, 51 percent.

How to hold on to your star performers Retaining good employees in such a dynamic market is not easy. Forward thinking employers are using a variety of strategies to hold on to the their star performers. These strategies include offering training and development, a clear career path and of course offering competitive salaries. One solution to the retention problem put forward by Chan at Heidrick and Struggles is for companies “to make retention part of their corporate DNA.” Rather than waiting for the “exit interview” to discover employee concerns, companies should conduct “stay interviews,” retention workshops and focus on career development. Companies also have to make themselves highly attractive to employees. “Being an employer of choice is also a competitive advantage,” says Chan. Companies with solid brand names, offering the right mix of training and development and career progression, have a substantial advantage. According to Ivo Hahn companies need to treat employee candidates more like customers. “They need to give the employee an emotional association through offering a fun place to work, a passionate intelligent culture and a strong team feeling.” Philip Kwa at Accenture thinks training is the key stating that, “companies that invest in training have reported and on average a 53 percent increase in profit.”

China Foto Press

MARCH/APRIL 2007

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Improvements are needed in the transportation, handling and storage of dangerous goods in China Russel Beron is a freelance journalist specialising in supply chain and logistics based in Shanghai. He is a regular contributor to Chaina magazine.

he recent introduction of China’s Restrictions on Hazardous Substances (RoHS) on March 1 has made the dangerous goods, or hazmat, supply chain a prevalent topic for many logistics service providers and manufacturers. There’s a lot of confusion surrounding this directive and also surrounding the transportation, handling and storage of dangerous goods in China in general. A second document to be published later this year will cover substance restrictions and compulsory pre-market testing and certification. One area in particular where companies will need to become more proficient is in their preparation of documentation for shipments involving dangerous goods both into and out of China. “90 percent of rejections of dangerous goods are due to documentation errors,” says Jim Powell, president of Transportation Development Group, which provides training in transportation of dangerous goods best practices. “It’s easier to reject a shipment.” And post 9/11, security has become a global concern, driving an increased inspection of international shipments.

A potentially expensive problem There are plenty of reasons why companies should be concerned and cost is just one – noncompliance of regulations such as RoHS directives can be very expensive. One such case in the United States saw a company fined US$97,500 for shipping an aerosol can, which was not reported. Companies face potential liability from 3PLs for non-compliance or accidents, meaning the shipper is responsible for ensuring compliance of regulations. Sometimes criminal liability can be involved. One of the biggest issues raised at the recent China Supply Chain Council-organised Hazmat conference held in Shanghai was the complications of licensing for the transportation of dangerous goods. 24

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Robert Jiang with logistics service provider Dajin Logistics recently remarked that, “the government is very strict about licences. Companies like us are struggling with licensing issues.” To complicate matters, different licenses apply to different goods. “There is not one licence, there are many, depending on what kind of chemical you’re transporting,” says Ursula Schumacher, technical manager at Intertek Testing Services. Talk of licences mostly applies to trucking with road still the optimal transportation method for dangerous goods in China. And according to Helen Liu, director at S&W International Chemical Logistics, “due to the shortage in dangerous goods transportation vehicles, we think China’s inland transportation market has potential.”

Improvements are needed As infrastructure improvements take place and more companies expand their operations into western China, significant improvements in the quality and service of dangerous goods transportation are needed. One insight that surfaced repeatedly at the Hazmat conference is that manufacturers and service providers need to work together more closely to improve safety. “The fundamental gap between manufacturing and forwarding is lack of knowledge. Manufacturers are not supplying the right information,” said a China-based 3PL. “Shippers need to get together and demand competency on the part of them as a group. This will increase their buying power as consumers,” says Liu.

Enforcement of regulations Another big concern raised at the conference is the gap between the actual regulation and the enforcement of those regulations. www.chaina-online.com

China Foto Press

Danger: Proceed with caution

HAZMATFEATURE

China Foto Press

As one representative from a multinational chemical manufacturer remarked: “The question is how strong is the enforcement of those regulations. Now the standard doesn’t really exist. As chemical manufacturers we need to help establish those regulations.” Foreign companies have further difficulties operating in this market, as they tend to have stricter internal standards and can’t navigate the market as smoothly as local companies. Terence Li, national logistics manager for Arkema, one of the larger chemical manufacturers in China expressed this concern which drew considerable agreement from other foreign company representatives: “We as foreign companies are competing with Chinese companies that are not complying.” Part of the problem as chief business development manager with Talke Logistics Services Andreas Kirschner highlighted is that “Chinese government authorities cannot really cope with the rapid growth in the industry.” Obviously this is a problem felt in every individual aspect of the supply chain across China.

Move towards more sustainable manufacturing There is a greater move toward a consideration of the potential environmental problems caused by the manufacturing of products that include potentially harmful components or by-products and companies are becoming more aware of their corporate social responsibility in this area and looking at more sustainable manufacturing. One point raised by Dirk von Czarnowski, a manager at TUV SUD, a testing laboratory, is that “manufacturers should design products to facilitate dismantling and recovery of components – eco-design.”

“Manufacturers should know their products, they can save money through the use of policy directives to reduce components in products and keep in mind market requirements,” says Czarnowski. “For example mobile phones don’t need to [be manufactured to] last ten years in China when people replace their phones every one to two years.” Although fast moving consumer trends might clash with environmental concerns due to the disposal of mobile phones every few years, manufacturers have to balance these concerns.

Manufacturers and service providers need to work together more closely to improve safety.

A need for greater dialogue One of the problems, as Arnie Bornstein, director of marketing and corporate communications at BDP International stated, is the lack of a formal forum for discussing such issues. “What we need to do is to find a way to get the smaller players to the table to get their perspective.” Both manufacturers and logistics service providers acknowledged the need to work more closely together as an industry to ensure the safe and proper handling of dangerous goods. “It is important that we enhance our dialogue,” stressed Kirshner. With dangerous goods logistics still in its early stages of development, the next few years will bring some much needed changes. Including the introduction into the market of more specialised service providers focusing on dangerous goods transportation. As one speaker at the Hazmat conference noted: “All of the logistics companies in China will have to specialise one day. None of the logistics companies can hope to do everything.”

Preparing for China RoHS As China has emerged as one of the world’s leading trade nations and a key link in countless global supply chains, manufacturers must ensure that measures are in place to demonstrate and maintain compliance with the new China RoHS, also known as Administration on the Control of Pollution Caused by Electronic Information Products. Non-compliance with this directive can result in stalled supply chains, lost revenue, fines and damage to corporate reputation. What steps should manufacturers take now? Establish an internal team or engage trade specialists to manage your compliance with China RoHS. Familiarise yourself with the law and stay aware of any evolving changes. An English translation of the directive is posted at the web site of the American Electronics Association: www.aeaneet.org. Familiarize yourself with the list of more than 1,800 specific parts, components and materials that China considers to be electronic information products (EIPs). A list has been posted by the American Electronics Association here: www.aeanet.org/governmentaffairs/gabl_HK_Art3_EIPTranslation.asp. Comply with environmental labelling requirements and provide supporting self-declaration information in Chinese relating to the presence of any of the six hazardous substances in your EIPs. Perform supplier due diligence. Validate that your supply chain partners are shipping RoHS-compliant products. Maintain an audit trail to track and capture data pertaining to compliance measures you have taken. Do not assume that your compliance with, or exclusion from, the European Union’s RoHS will result in compliance with or exclusion from China RoHS. Jiwei Ye is vice president of JPMorgan Chase Vastera International Trade Consulting (Shanghai), based in Shanghai.

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Setting the standard

Susanne Lehmann is the logistics planning manager for German car manufacturer Volkswagen’s joint venture with Shanghai Automotive Industry Corporation, Shanghai Volkswagen, based in Shanghai. Since July 2004 she has been responsible for implementing a lean inbound logistics operation for Shanghai Volkswagen.

: What kind of logistics operations existed when you first came to China? Susanne Lehmann: Well, Shanghai Volkswagen had been handling its own productive materials’ logistics operations for nearly 20 years and it worked – somehow. We had great factories and were building great cars without any logistics planning department, which was founded when I arrived in July 2004. The worst thing was it had been functioning without structured processes and planning activities, and without a clear focus on the local supply chain side. A lot of the focus was on imported parts from Europe and South America. : What’s the primary focus of the team that you manage? Susanne Lehmann: Well, we have 30 people in my team, which has grown from zero people when I came here. We focus solely on logistics planning of productive materials for the manufacturing side of the business. The reason this side of our logistics operations is separate from the automobile and spare part logistics is that historically a sales company handled those operations. : How many different materials’ suppliers do you work with in China?

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Susanne Lehmann: More than 400. 50 percent of these are based in the greater Shanghai area though little by little we are starting to shift the focus of our sourcing to the north, including the greater Beijing area and Changchun, and the south of China. Such a change is driven by the sourcing strategies that we are implementing where we are looking for the best parts at best price and quality. We have to of course also consider the logistics costs of this change, and even though at the moment the logistics costs only make up around three percent of total material costs, we have seen a relatively big rise in logistics costs as a result of this change to the sourcing strategy. : What kind of standards does Shanghai Volkswagen have when it’s looking at new suppliers to work with? Susanne Lehmann: We have teams with members from all relevant departments who are responsible for looking at potential suppliers. And we also have audit teams that look at suppliers not only from a quality perspective but also from a logistics perspective. We’re looking to see whether a particular supplier can read our material call-offs, what systems they have in place, do they have good control over their stock, do they have good control over the technical validity of single parts, the whole process really. The audit takes two days. We already have more than 200 suppliers audited in such a way and the rest will follow this year. : In what areas is Shanghai Volkswagen trying to cut costs in logistics expenditure? Susanne Lehmann: Well, the three percent I have mentioned refers to materials logistics process costs. When you compare this however to Germany or Europe where typically those inbound logistics costs would be around 1.6 percent to 2.4 percent, three percent

Q&A

is pretty high. It is of course possible to reach these levels of efficiency in China. One of the reasons it is possible is that in China the safety standards aren’t as strict as they are in Germany where legislation requiring that all trucks are fully insured for example is one of the reasons that logistics costs there are so high. To give you an example, we have started to localise airbags which have a potentially explosive material inside and are therefore classified as dangerous goods. In Germany the airbags must be stored and transported in a closed metal box. In China our suppliers wanted to just transport the airbags on wooden pallets. Volkswagen of course puts a great deal of emphasis on ensuring the safety of our employees and the quality of our products, so I will not allow these basic safety requirements to be broken. But in theory logistics costs here can be even cheaper than in Europe.

: So what areas have you identified as those where costs can be cut? Susanne Lehmann: Well, of course with regards to the containers and trucks. The container dimensions are not synchronised with the truck dimensions. There are no standard truck sizes. No modularised containers. These are three things that could be easily improved. We refuse to use cardboard packages without pallets which helps to improve efficiency and quality. Implementing warehousing management systems, very basic things really. : Can the problem of a lack of standardisation of truck sizes be rectified easily, and how can Shanghai Volkswagen help? Susanne Lehmann: It can be rectified and we try to push the changes by talking with the local 3PLS and with our local logistics service provider which is Anji TNT. We work together with Anji TNT to help standardise their truck fleet and we also use a standardised method of calculating costs which really helps.

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Q&A

: How are the 3PLs doing in handling the requirements of automotive logistics in general? Susanne Lehmann: We have outsourced the entire purchase part of the logistics process which includes transportation from local suppliers and bringing in containers from the port to Anji TNT. They also handle our warehousing, storage, re-packaging and line feeding. So they are responsible for quite a big part of our global logistics chain. We are both working hard to build a strong working relationship and they are also developed some software specifically for Shanghai Volkswagen. Anji TNT is also handling the spare parts side of our supply chain. With regard to other companies, all the big 3PLS are trying to get into this area. But we find they tend not to focus more on automotive logistics but more on import/export related activities. : Do you share ideas with your competitors? Susanne Lehmann: Yes, we meet regularly at conferences to share, to learn and to see how we can work together to help automotive logistics in China develop. I think it’s important that we don’t just copy the way things are done in other parts of the world. Furthermore, the larger automotive manufacturers, including the larger Chinese companies, need to work together on developing standards in China. But there aren’t standardised systems currently between Germany, the rest of Europe and the United States.

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Chinese design meets German engineering know-how If you’ve ever caught a taxi in Shanghai, chances are that your taxi was a Shanghai Volkswagen manufactured Santana, one of China’s best selling sedans. Keen to replicate their success with the Santana, Shanghai Volkswagen last year revealed the Neeza concept car, a crossover between a sports coupé and an estate with an off-road appearance, and a car which has been designed in China for China, unlike many of the company’s other models. The car attempts to combine Chinese and German design philosophies. Many analysts have suggested that the Neeza signifies the future of new models from Shanghai Volkswagen: produced with Chinese culture, tastes and requirements firmly in mind, with a mix of traditional Chinese and modern European features. The front of the concept features a grille and bumper design that is typically Volkswagen, yet traditional Chinese window engravings are incorporated into the grille design. The name Neeza originates from Nezha, the name of a famous and mystical figure from Chinese history who had magical weapons and fought evil spirits.

So if we three can’t come together how can we tell the Chinese companies to accept one set of standards? The automotive industry globally needs to agree on one set of standards.

: Is there a formal forum whereby the larger automotive manufacturers can work together in China to try to develop such standardised systems?

Susanne Lehmann: At the moment unfortunately it’s done on an informal basis. We’d like to have that formalised. I of course have some ideas about how that might happen but the final decisions have to come from the Chinese authorities.

: Volkswagen has a number of distinct and separate JVs in China. To what extent is the materials’ logistics operations centralised in China for Volkswagen as a whole? Susanne Lehmann: Responsibility wise, it’s completely separate. But of course we are working together and are starting to look at our supply chain as a whole, comparing and benchmarking, finding synergies and thinking about how to improve things through economies of scales. We do have suppliers in common so why not work together more closely in working with suppliers; this is starting to happen.

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REGIONALFOCUS

Imagine China

China’s third engine Tianjin is poised to become the northern counterpart to southern powerhouses Shanghai and Shenzhen

ince opening up as a treaty port in 1860, Tianjin has been one of China’s busiest ports and one of its more robust domestic markets. Now, almost 150 years later, this major port city is being groomed to become northern China’s answer to boomtowns Shanghai and Shenzhen in the South. Geographically located between Beijing and the Yellow Sea, Tianjin is the largest city in the Greater Bohai Bay area, an economically dynamic area that includes Tianjin and Beijing municipalities, and Hebei, Liaoning and Shandong provinces. Tianjin is a city of more than ten million, boasting the Greater Bohai Bay area’s largest port and most developed logistics infrastructure. Located only 120 kilometres from Beijing – and being the capital’s closest port – Tianjin is poised to benefit from central government mandates to develop the city into an economic and logistics hub for north China and Northeast Asia.

Binhai New Area The government has made the comprehensive development of Tianjin’s Binhai New Area a top priority for the next several years, including it in the 11th Five-year Plan (2006-2010) as a major objective. Well-positioned to facilitate northern China’s overseas trade, Binhai New Area has 153 www.chaina-online.com

kilometres of coastline and includes Tianjin Port, Tianjin Economic and Technological Development Area (TEDA), Tianjin Port Free Trade Zone and the Tanggu, Hangu and Dagang administrative regions. Under a familiar combination of preferential government policies, tax breaks and investment incentives, Binhai New Area will be converted into China’s third major economic engine, complementing Shenzhen and Shanghai’s Pudong. The area covers a total of 2,270 square kilometres. The pace of Binhai New Area’s development noticeably quickened in 2006. For an idea of the impact the area is having upon Tianjin’s economy, consider that last year it was reported to have accounted for 51.4 percent of the city’s economic growth. Last year the area also imported more automobiles than anywhere else in China and produced ten percent of the world’s mobile phones. Aside from upcoming physical infrastructure improvements, the central government is working to develop the necessary financial infrastructure to facilitate the Binhai New Area’s development. In February 2006, a decade-old national moratorium on new commercial banks came to an end with the establishment of Bohai Bank, which is headquartered in Tianjin and includes UK-based bank Standard Chartered among its shareholders.

Chris Horton is managing director of the Meridian Group of Hong Kong, a logisticsfocused consultancy with offices in Hong Kong and Kunming. He is a regular contributor to Chaina magazine.

MARCH/APRIL 2007

REGIONALFOCUS Room to grow

Tianjin still lags behind in terms of modern logistics facilities, but we expect the environment to improve quickly. Jack Yang, Gazeley

Imagine China

As a major supply chain link in northern China, Tianjin is an increasingly important logistics hub for more than just itself and Beijing. Tianjin also serves as a logistical gateway to areas further inland such as Shanxi, Shaanxi, Gansu, Inner Mongolia, Ningxia and Xinjiang. But Tianjin is still relatively underdeveloped, especially when compared to the facilities on show in Shanghai and Shenzhen. What does this mean for logistics providers considering investing in the city sooner rather than later? In the shortterm it will likely mean waiting for infrastructure improvements to come online. In the mid- to long-term it could mean early footing in what the central government is pushing to become one of China’s main logistics hubs. Leading European warehousing and logistics space developer Gazeley has set up a joint venture with Hexing Logistics to develop its first “G. Park” in China in the Tianjin Beichen Hi-Tech Industrial Park, ten kilometres from Tianjin’s international airport. And the 266,700-square metre facility’s first major tenant will be Wal-Mart, whose Tianjin Distribution Centre will be completed in September this year. Jack Yang, Gazeley China country director, said that Tianjin’s status as a north China economic centre with a strong industrial base and quality port facility make it an appealing investment destination. Most importantly for logistics providers, the central government has also endorsed the city’s ambitious plan to develop and establish itself as the logistics hub for northern part of China, he said. “Gazeley fully recognizes the importance of Tianjin, not only for its economic strength today, but the enormous potential for logistics development in the future,” Yang said. Tianjin’s opportunity lies in its slower development when compared to other Chinese cities of similar size, he said. “Compared with Shanghai, Shenzhen, Beijing and Guangzhou, Tianjin still lags behind in terms of modern logistics facilities, number of international logistics operators present and the city’s overall business service capacity, but with the central government’s preferable policies toward Tianjin, we expect the above to improve quite rapidly.”

Tianjin’s free trade port There’s serious money being invested in Tianjin Dongjiang Free Trade Port, the new part of Tianjin Port which is now nearing the end of its first phase of construction. Hao Yunhui, deputy director of the Department of Investment with Tianjin Port said, ‘Investors from home and abroad are showing great interest in the Dongjiang Free Trade Port thanks to its high potential for economic growth.’ The Tianjin Dongjiang Free Trade Port, with an expected area of ten square kilometres will be the largest free port in China. The government approved the free port in the Dongjiang Free Trade Port in August last year and it is the second free port to be established after the eight square kilometre Shanghai Yangshan Free Trade Port. But it is widely expected that the Dongjiang Free Trade Port will enjoy more preferential policies on financing and tax than Yangshan.

MARCH/APRIL 2007

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REGIONALFOCUS Naturally, domestic logistics providers are also keen to tap into the opportunities offered by an ascendant Tianjin. Qiao Wei, a manager at Tianjin Port Sinochem DG Logistics, a state-owned dangerous goodsfocused 3PL provider that will launch operations in Tianjin Port later this year, said Tianjin’s primary appeal was the promise of its future development. “As a 3PL provider we feel Tianjin possesses excellent development potential,” Qiao said. “And the logistics sector in general has significant room for growth across the board, not just in terms of 3PLs.” One of the appealing elements of moving into the Tianjin logistics market during its current developmental stage, Qiao said, was the ability for early movers to affect the course and speed of Tianjin’s metamorphosis into a regional logistics hub. “The market is still relatively undeveloped, you could say we’re first movers,” he said. “We want to help nurture the Tianjin market as it becomes more standardised and raise the level of professionalism among logistics providers.”

Upgrading capacity, expanding links A crucial element of elevating Tianjin’s regional and international significance is increasing the city’s international transport links and its capacity to handle more cargo. In August of last year, Tianjin Binhai International Airport began a RMB3 billion renovation and expansion project which will see the airport triple in size by May 2008. The airport’s passenger volume is expected to grow from 2.15 million in 2005 to 6.5 million by 2010 and cargo shipments are expected to jump from 96,000 tons to 500,000 tons during that same period.

Furthermore, the expansion of Tianjin’s air cargo links beyond northeast Asia are already underway – in June 2006 Singapore Airlines Cargo launched the first cargo flights between Tianjin and the United States. The twice-weekly flights link Singapore and Los Angeles with stops in Nanjing and Tianjin. Tianjin Airport International Logistics Park, located on the northwestern edge of Tianjin Binhai International Airport, is being built up to serve the growing cargo demands of the airport. The bonded airport logistics park is currently using 0.55 of a planned 0.95 square kilometres for sorting, storing, allocating distributing and processing air cargo. The park is adjacent to the Beijing-Harbin railway artery, the BeijingTianjin-Tanggu expressway, the Tianjin-Binhai expressway and Tianjin’s outer ring road. Located some 30 kilometres from Tianjin Port and TEDA, the park has leveraged the promise of Tianjin’s future air cargo to attract foreign investment from companies including Singapore-based Mapletree, which has begun construction on a 57,000-square metre warehouse project in the park. In anticipation of growing trade in the coming years, Tianjin Port is also focused on expanding capacity to meet the coming demand. During the current Five-year Plan, more than RMB 27.3 billion will be invested in 30 major construction projects at Tianjin Port, raising its commodity handling capacity by 300 million tons over the same period. Among these projects are the completion last year of a 200,000-dwt vessel lane as well as the speeding up of construction of the southern port area’s deep water, large-scale crude oil, ore,and coal berths. Construction of a large scale coal wharf was completed in late 2006 and by the end of 2007 a 250,000-dwt large-scale crude oil berth and large-scale dry bulk handling berth will also go into operation.

Tianjin’s primary appeal is the promise of its future development.

China Foto Press

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MARCH/APRIL 2007

REGIONALFOCUS

Tianjin Port is placing a lot of emphasis on taking expert analysis and opinion to create a road map for development. Yu Rumin, Tianjin Port Group

Schneider moves into Tianjin Its been widely reported in the news recently that transportation company Schneider was recently given authority to operate as a domestic carrier and logistics service provider in China, making them the first US trucker to establish a domestic business there. And Schneider has chosen Tianjin as the base for their China operations having established an office in TEDA. “We see this as a great opportunity for customers in China, whether they are foreign-invested companies or Chinese-based businesses,” said Martin Winchell, managing director of Schneider Logistics China, a part of the Schneider National enterprise. “We will now be able to help customers build out their intra-China network and grow their business in the various provinces.”

Tianjin Port is also bringing in outside expertise. Tianjin Port Group has signed a 50-year agreement with the investment arm of Singapore’s PSA to build and operate six berths in the western part of Tianjin Port’s Dongjiang Free Trade Port at a cost of approximately RMB6 billion. The agreement will give the mainland port operator a controlling 51 percent interest in the berths, three of which are planned to be operational in time for the Beijing Olympics in 2008. Tianjin Port in February announced that it had signed agreements with shipping companies Mediterranean Shipping, Compagnie Maritime d’Affretement and Hanjin Shipping to transport containers through Tianjin Port’s Dongjiang

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Bonded Harbour Area. The area, mainland China’s largest bonded harbour area, covers 10 square kilometres and is being promoted as an international free trade zone. It is expected to begin operating by the end of this year and will offer preferential taxation and forex policies with a focus on international distribution, global procurement and export processing. Other companies that have signed letters of intent to operate in Dongjiang Free Trade Port include HSBC, China Merchants Bank and Mapletree. Tianjin Port Group President Yu Rumin said that in addition to improving Tianjin Port’s facilities, it is also of paramount importance to expand relationships with international shipping lines.

A road map for development “In terms of increasing Tianjin Port’s international interaction and influence, we have made a lot of progress recently,” Yu Rumin said. “We have attracted investment from the world’s top 20 shipping companies, including Maersk, China Far East and Mediterranean. They’ve been coming here one after another, and through their investments they are creating a strategic alliance with us for the future. In terms of attracting worldclass management experience, we’ve also made great advances and are already operating the port in accordance with global standards.” Yu said that Tianjin Port has benefited greatly via its increasing interaction with international enterprises from global shipping lines to port operators such as PSA. “We’ve made major gains in terms of increasing our employees’ knowledge base, modernising our facilities and upgrading our information management,” Yu said. “From this perspective, Tianjin Port is placing a lot of emphasis on strategy – taking expert analysis and opinion to create an informed road map for development.”

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Navigating the logistics real estate maze Chinaâ&#x20AC;&#x2122;s complex real estate environment remains a major obstacle to improving overall supply chain efficiency

Jeremy Chapman is Director, China Industrial and and Ying Shin Lee is Senior Manager, China Industrial for Colliers based in Shanghai.

MARCH/APRIL 2007

ome of the most prevalent hot topics that are discussed when looking at the logistics sector in China include: government investment in infrastructure for the development of new ports, roads and rail, inefficiencies in supply chain management, the impact of Chinaâ&#x20AC;&#x2122;s ascension to WTO, trade sanctions on exports, tariffs and outsourcing trends. While the gradual liberalisation and growth of the logistics market encourages increased participation by foreign companies, few have given due significance to the knock-on requirement for modern warehousing facilities and the evolving trends and the policies needed to support the development of the logistics real estate sector. This sounds like a simple demand-supply issue: if the government is trying to encourage the growth of the logistics sector then naturally we should see an increase in demand for logistics space. And it would also follow that with the introduction of such policies to allow the logistics sector to flourish, regulations must also be imposed to allow for the complementary growth of the logistics real estate sector. The reality is not quite as simple. There exists a gap between the wants and wishes of the central government responsible for making the policies, and the local governments who execute them. The single greatest factor hindering the development of the logistics real estate market in China is the tax revenue generated from industrial land. Why? Because local governments are reluctant to devote increased plots of industrial land to logistics service providers, but rather prefer to reserve the land for higher income generating industries such as manufacturing and R&D, where the government in turn will generate a higher return. That, along with the recent introduction of new policies, whereby all primary industrial land is subject to an auction system with new minimum benchmark prices, has inflated land prices anywhere from 20 percent to www.chaina-online.com

REALESTATEFEATURE providers and manufacturers were experiencing phenomenal growth and rental increments were insignificant, thus leading to difficulties in rational and effective planning. Fast-forward to 2007 and a snap snot of the current lease trends in the market will show that change is underway. As a result of more predictable growth and increasing rentals, we now see manufacturers and logistics companies consolidating their operations to allow for increased efficiency through economies of scale.

A three-way tug-of-war

China Foto Press

60 percent and brought about a unique market situation. Stake holders will need to develop creative and innovative means to weather the storm brought on by the added complexities.

A question of supply versus demand There is currently a shortage in the supply of quality, modern warehousing in the market. In an environment where end users have little choice but to accept what is currently available, many developers have taken a speculative approach to seeking a foothold in this bullish economy. The gains that industrial facilities yield are so substantial that investors who traditionally acquire only income producing properties are also considering taking on development risks. The key drivers fuelling the increase in demand arise from manufacturers outgrowing existing warehouses, increased outsourcing to 3PLs, consolidation of storage by both end-users and 3PLs and the growth in export as well as domestic demand. And there are few choices due to the tight supply. Traditionally, logistics service providers and manufacturers have been unwilling to accept longterm leases, as they were typically unable to plan for more than a year in advance. This especially held true in the days when logistics service www.chaina-online.com

Real estate remains a major obstacle to improving overall efficiency for the logistics sector though it is often forgotten or not given priority by companies seeking to optimize their supply chain. The market can be visualised as a constant three-way tug-of-war between investors, end users and the local governments. The normal market mechanisms needed to bring equilibrium are absent in this market. The biggest byproduct of this tug-of-war is developers inability to match supply with the pent up demand. Investors operate in an environment plagued by risk, uncertainty, tax inefficiencies and volatile government regulations. In most transaction there exists a kind of compromise. It is rare that all parties get exactly what they want, when they want it. In addition to the natural discord in rental expectations between landlord and tenant, lease term expectations is also an area for heated discussions. Developers seeking profit and minimal risk will prefer a longer lease term, while logistics service providers and manufacturers with higher growth are unable to commit to such lease terms. International developers have responded to this discrepancy by providing more highly evolved products, by being more creative with lease terms and gaining a better understanding of their tenantsâ&#x20AC;&#x2122; businesses. Armed with stronger knowledge of market dynamics developers are becoming more open minded when negotiating lease terms. Due to recent trends, developers have recognised that shorter lease terms provide an opportunity to adjust rental incomes more frequently. In this fast paced market, characterised by strong demand and increasing rentals, negotiating shorter lease terms to some extent allows developers to more accurately match rentals with current market rates. As the reliability, efficiency and coverage of infrastructure continues to progress, and in lieu of the healthy growth of the logistics industry, we are witnessing more and more international developers who are willing to bare increased exposure by entering the market with a speculative approach. With the time critical nature of the logistics and supply chain business, the development of hgh standard speculative development projects is an effective way to absorb the excess demand. However, development zones that hold the largest stock of industrial land have been unwilling to bridge the gap between supply and demand, leaving it to the private sector to do so.

The market can be visualised as a constant three way tugof-war between investors, end uders and the local governments.

MARCH/APRIL 2007

REALESTATEFEATURE Local governments as a driver of land prices

Traditional warehouses of low quality are becoming obsolete as the market transitions to high volume, timely and efficient space utilisation.

Local governments and development zones have to do deal with the pressure that tax revenue generation is the most prevalent performance indicator of any local official. Development zones therefore require that tenants register locally, thus ensuring that the tax revenue generated will flow directly in to its coffers. In addition to tax revenue, minimum investment costs and big corporate brand names also give buoyancy to a zoneâ&#x20AC;&#x2122;s bottom line and overall prominence. Zones will also take into consideration the projected revenue it will collect from a particular company, and depending on the forecast, either artificially inflate or discount the price accordingly. Manufacturers generally can achieve higher operating profits and thus more tax revenue for its respective development zone. Because logistics service providers do not generate huge tax revenues when compared to manufacturing and R&D focused entities, land for them is generally more expensive than that for manufacturers (with local governments also unwilling to subsidise the cost of infrastructure and land clearing for logistics service providers). And despite the higher price that logistics service providers pay for land, the return generated by such tenants for the local government are still much lower when compared to a manufacturer because of many other aspects including local taxes, stimulation to local economy and so on. Not in the habit of pushing away business however many zones will still respond to proposed logistics projects, albeit with some ambivalence.

A look at Shanghai Current industrial rentals in Shanghai are determined by a number of related factors. Traditional warehouses of low quality and design are becoming obsolete as the market transitions to high volume, timely and efficient space utilisation. Warehouse space is increasingly focused on a cost per cubic metre and pallet rate rather than cost per square metre rate. This is because logistics providers are faced with higher costs per square metre of floor space as unit costs increase for newly developed internationalgrade high volume warehouses. Inadequate

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supply of quality warehouses does not arise just because there are not enough warehouses; very often, local developers lack the experience and know-how to construct facilities to meet international standards. With the emergence of international developers providing a new tier of products, a new market is created where a premium is required for high quality warehousing in the greater Shanghai area. For several years now, low-grade warehouses have remained at US$22 to US$36 per square metre per year (which is approximately RMB0.50 to RMB0.80 per square metre per day), while modern non-bonded warehouses average around US$35 to US$42 per square metre per year (RMB0.75 to RMB0.90 per square metre per day) and bonded warehouses such as Shanghai Bonded Logistics Park hover around US$65 to US$75 per square metre per year. Throughout this period, land prices have remained steady with little change. With the expected spike in land prices due to the newly introduced land auction system and a raised minimum benchmark pricing for primary land and the surfacing of a new tier of high quality products, tenants have to accept that rentals will experience upward adjustments.

The need for specialisation Piggybacking the growth seen in the Chinese economy as a whole, the logistics industry is characterised as a sector poised for tremendous growth in the coming years. And additionally with Chinaâ&#x20AC;&#x2122;s export levels and domestic appetite for imports growing, developers of logistics real estate face a challenging yet lucrative situation. Despite the introduction of the land auction system, minimum benchmark pricing structure, land appreciation tax levy and other hindering factors, the logistics real estate sector, driven by strong consumer demand will continue to thrive. As the market evolves, developers will begin to offer more specialised products catered to niche markets, including temperature controlled/cold storage facilities, consolidated regional distribution hubs, export oriented/city distribution facilities, dangerous goods storage facilities, cross dock facilities and many other variations to support the economic progression of the sector.

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CAREERS Changed jobs in the past month? Hired someone new recently? careers@chaina-online.com

Home Depot appoints new China retail operations president Home Depot has appointed Yves Chen as president of retail operations in China. Chen most recently served as the executive president of Chinese retail company Beijing Hualian Group and has also held executive positions in China and France with French retailers Carrefour and Promodes. “As a local Chinese business leader, Yves will bring invaluable insight to our operations and growth strategy,” said Annette Verschuren, president, Home Depot Asia and Canada. Chen will have full responsibility for the operating and financial performance of retail operations in China and will report directly to Verschuren. He will also be responsible for integrating newly acquired Home Way into Home Depot, and working on growth in China.

Changes at Dell Dell has named former Motorola executive Ron Garriques president of a new division that will sell technology products to consumers in developing markets such as China and India. Most recently Garriques was an executive vice president at Motorola and president of their mobile-devices division. Before joining Motorola, Garriques held management jobs at AT&T, Lucent Technologies and Philips. The new division led by Garriques will sell all consumer products, including desktop and notebook computers, software and peripherals. As Dell continus to grow worldwide, it as recgnised the importance of manufacturing close to its customer and fully integrating its supply chain into one global organisation. The company will innovate and adapt its supply chain model to help drive differentiated product design, manufacturing and distribution models.

Horak will have oversight of Warner Home Video’s worldwide marketing, sales, supply chain and operations, as well as broad responsibility for the teams handling pre-production, category management and business and legal affairs.

Wuxi PharmaTech fills key position Wuxi PharmaTech, China’s leading provider of pharmaceutical R&D outsourcing services, has promoted Dr. Suhan Tang to chief manufacturing officer. Tang joined the company in 2003 as vice president of process R&D, from Schering-Plough. Over the last three years, he has been instrumental in shaping and developing the process chemistry and scale-up manufacturing service offerings.

FedEx Express appoints new China sales vice president FedEx Express has appointed Marco Lee vice president, sales, for China.

Sony China names new China president Haruyasu Nagata has been named president of Sony China, and chairman and vice president of Sony Marketing China. Former Sony China president Seiichi Kawasaki has been named vice president of Sony Supply Chain Solutions in Japan. Nagata formerly headed the Sony consumer electronics business for Asia Pacific, Middle East and Europe.

Wako Logistics adds CEO for China, Hong Kong Anthony Leung has been appointed the chief executive officer of Wako Logistics Group’s operations in Hong Kong and China. Leung has over 30 years freight forwarding and logistics industry experience. Chris Wood, chief executive officer of non-asset based 3PL and freight transportation provider Wako Logistics, commented: “[Anthony Leung] comes to us at a time when our offices in China are showing double digit growth, and he has the experience and management skills to make our business in China into a world-class provider of a full range of logistics services to fully satisfy the diverse needs of our global customers.” www.chaina-online.com

Dell has also appointed Solectron chief executive Mike Cannon to oversee global manufacturing, procurement and supply chain. Cannon and Garriques will both report directly to chief executive officer Michael Dell.

Warner Home Video names executive vice president Mark Horak has been named executive vice president, general manager, worldwide operations and new packaged media, Warner Home Video.

Lee will lead a team of sales professionals and provide dedicated strategic focus on China to capture long-term revenue growth in the market, and ensure continued growth and development of the FedEx sales organisation. Reporting to him will be two managing directors from the China sales division and five managers from sales strategic solutions. Lee joined FedEx in 1995 as managing director, sales, Hong Kong and China. MARCH/APRIL 2007

CAREERS Changed jobs in the past month? Hired someone new recently? careers@chaina-online.com

Red Hat names new Asia Pacific president

TNT announces new Hong Kong operations director

Open source vendor Red Hat has appointed Gery Messer as the new president Asia Pacific. He will report to Alex Pinchev, executive vice president, global sales, and Charlie Peters, chief financial officer. Messer previously successfully founded and launched SAP in Korea. He was most recently a vice president for EMC Asia Pacific. His key responsibilities included execution of EMC’s go-tomarket strategy and integration of the professional services and system engineering practice into a singlecustomer facing organization.

TNT Express has named Thomas Tse as its new director of operations for Hong Kong, responsible for supervising the Hong Kong operations team, improving operational efficiency, enhancing service quality and reliability as well as staff development. Tse was previously the general manager of Maersk Logistics Hong Kong and operations director for DHL International Hong Kong. TNT Express delivers 3.5 million parcels, documents and pieces of freight each week to over 200 countries using its network of nearly 900 depots, hubs and sorting centres.

What’s it like to work for... Goodyear?

Jean-Luc Laboucheix, Supply Chain Director, Asia Pacific, Goodyear

Who’s the boss?

How do you get a job at Goodyear?

The vice president Operations is Harold Smith. He covers not only supply chain, but also manufacturing. He is located in Shanghai.

All job opportunities with Goodyear are listed at www.goodyear. com. We also occasionally work with executive search firms in the region. The three people in the regional supply chain team here were all promoted internally. My job is to train these people and for them to eventually handle our supply chains at a ‘cluster’ level.

How many staff? Goodyear employs 89,000 people globally, with 10,000 in Asia Pacific and around 700 here in China. Most of those people are based at our manufacturing facility in Dalian, in north China’s Liaoning province. The China head office is based in Shanghai.

Supply chain responsibilities? Asia Pacific is divided into five ‘clusters’: China, India, South East Asia, Australia/New Zealand, and Japan/Korea/Taiwan. Goodyear is starting to focus more or more on country flows in our supply chain, and changing from a focus on ‘supply chain by country’ to ‘supply chain by region’, with one factory serving several countries. Our supply chain in Asia Pacific will become more and more complex as a result. And that is why we need to have a team at the regional level to handle the change and the operational aspects going forward. In the regional supply chain team in Shanghai there are three people that report directly to me. My role is to coordinate the supply chain flows between clusters and between countries. And to support each cluster in establishing a world class supply chain.

Who are your customers? We have three types of ‘customers’. There are internal customers: we manufacture in Asia for Goodyear in North America, in Latin America and in Europe. And we also manufacture for domestic clients in Asia Pacific, with two distinct channels in this area. The first is OEM, which includes all the big car manufacturers, such as Ford, Volkswagen, GM, and so on. The second channel is the replacement market, which includes all the service centres where customers can replace their tyres. We do operate some of own service centres. 38

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Any training offered? We believe in extensive training. I personally am involved in about three days of training sessions every three months. And, we sometimes use external consultants to help with training.

Pay or perks? The pay is on a par with other large international companies in the region. Senior foreign staff can expect expatriate packages. We provide locally employed staff with benefits consistent with what is required in a particular country.

Long hours? I do work long hours! 10-12 hours as a minimum. As we move from country to regional supply chain everything there is a lot of work to be done and as we do not yet have an integrated IT system we face extra manual work. I am sometimes obliged to stay late in the office for conference calls with North America.

Business travel? Not as much as I expected when I took this job, which has been a nice surprise. I usually spend one week per month away from Shanghai. We do try to find effective ways to communicate without the need for travelling, such as regular conference calls. www.chaina-online.com

NOW SPECIALISING IN PROCUREMENT & SUPPLY CHAIN RECRUITMENT We can offer you exceptional opportunities with some of the world’s leading employers. There is a strong demand for professionals with your qualiﬁcations and experience to take on a number of roles we currently have within supply chain and procurement. As specialists in this area, we have the experience and business relationships to help you ﬁnd your ideal role.

CURRENT EMPLOYMENT OPPORTUNITIES General Manager – China

Director – Supply Chain

Country Manager – Procurement

Multinational automotive organisation looking for a General Manager reporting directly to the UK based Managing Director. You will be responsible for the achievement of annual budgets for sales, proﬁt margins and cash ﬂow.

A leading brand of high quality fashion wear and accessories. A well established brand globally, they are now looking to appoint an experienced Supply Chain professional. Experience in the fashion industry would be an advantage but is not essential.

Working with Line Managers, you will be responsible for reviewing and improving the buying processes for one of the largest consumer products companies in the world.

Asian Sourcing Buyer

Quality Control Manager

A world leader in the food industry, this company is now looking for an experienced professional to evaluate regional opportunities, in order to meet the demand for new products worldwide.

A leading apparel manufacturer employing over 25,000 employees across Asia. Reporting to the Head of Operations you will take overall charge of all quality issues in the knit garment factory.

Regional Quality Assurance Manager An export trading ﬁrm managing supply chains for major brands and retailers worldwide. This position will work closely with customers, factories, mills and merchandising teams to resolve quality issues.

Fluency in English and Mandarin would be highly regarded.

Shanghai Tian Cai Network Co. Ltd., under license from Michael Page International Group PLC.

#3929

Olly Riches Manager +86 21 3222 4758 ollyriches@michaelpage.com.cn

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Go Kunming

Whether you're going to Kunming on business or for leisure you'll need to know how to get around, where to stay and the top places for food, drinks and fun. GoKunming is the only English-language website serving the needs of visitors to and residents of Kunming, China's 'Spring City'. Filled with useful listings, an insightful blog that is updated daily plus forums and classifieds, GoKunming makes it easy to get the most out of one of China's top second-tier cities.

www.GoKunming.com

mghk = china logistics The Meridian Group of Hong Kong (MGHK) is an integrated business consultancy and research house based in Hong Kong with operations in mainland China. Our knowledge of China's logistics infrastructure and connections with key players inside and outside of China make us the premier source for high-value China logistics information. Need answers? Contact us today: Mainland Director: Christopher Horton E: chris.horton@meridiangrouphk.com Logistics Consultant: Lee Perkins E: lee.perkins@meridiangrouphk.com T: +86 871 551 9116 www.meridiangrouphk.com

MARCH/APRIL 2007

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www.chaina-online.com

EVENTSCALENDAR

COMPANYINDEX

MARCH

13-15 13

3rd China Logistics Summit March 13 - March 15 Shanghai, China www.eyefortransport. com/china

APRIL

23 23-25

Post Harvest 2007 April 23- April 25 New Delhi, India www.postharvestindia.net

17-18 17

Automotive Logistics 24 China 2007 April 23- April 25 Shanghai, China www.automotivelogisticsasia. com

Logistics Mergers and 25 Acquistions in China Forum April 25 Shanghai, China www.supplychain.cn

China Rail Financing Summit 2007 April 17 - April 18 Shanghai, China www.globaleaders. com/en/2007/rail.asp

Services Procurement in China April 4 Shanghai, China www.supplychain.cn

MAY

23 23-25

Logistics World 2007 May 23 - May 25 Suzhou, China www.logisticsworld-expo.com

17 17

Supply Chain Risk Summit May 17 Shanghai, China www.supplychain.cn

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3M............................................................................................. 13 Accenture ................................................................. 2, 10, 22, 40 Air China .................................................................................. 14 Alliance Boots .......................................................................... 16 AMB.......................................................................................... 16 American Electronics Association ........................................... 25 Anji TNT ................................................................................... 27 ASE ........................................................................................... 13 AT&T ........................................................................................ 37 B&Q ......................................................................................... 17 Baker & McKenzie ............................................................... 8, 21 BDP International .................................................................... 25 Best Buy ................................................................................... 16 Borgwarner .............................................................................. 19 Bounteous ................................................................................ 16 Capitel ...................................................................................... 13 Carrefour .................................................................................. 37 Cathay ...................................................................................... 14 China Far East .......................................................................... 32 China Merchants Bank ............................................................ 32 China Supply Chain Council ....................................... 23, 24, 43 Chinawhys ............................................................................... 21 Coca-Cola ................................................................................. 22 Colliers ..................................................................................... 32 Compagnie Maritime d’Affretement........................................ 32 Dajin Logistics .......................................................................... 24 Decathlon................................................................................. 16 Dell ........................................................................................... 13 DHL .............................................................................. 11, 14, 37 Dongfeng Motor ...................................................................... 15 Dragon Sourcing...................................................................... 20 e-Future .................................................................................... 17 EMC Asia Pacific ...................................................................... 38 Establish ..................................................................................... 9 FedEx ................................................................................. 11, 37 Gazeley ................................................................................ 3, 30 GM............................................................................................ 11 Go Kunming ............................................................................ 40 Goodyear ................................................................................. 38 Hamilton .................................................................................. 20 Hanjin Shipping ....................................................................... 32 Heidrick & Struggles ......................................................... 19, 22 Hershey .................................................................................... 13 Hewitt Associates..................................................................... 20 Hexing Logistics....................................................................... 30 Hitachi ...................................................................................... 38 Home Depot ............................................................................ 37 Home Way ............................................................................... 37 HSBC ........................................................................................ 32 Hualian Group ......................................................................... 37 IBM ........................................................................................... 17 Intel .................................................................................... 12, 21 Iveco......................................................................................... 11 Jones Lang LaSalle ............................................................... 7, 17 JPMorgan Chase Vastera..........................................25, 40, Back Kerry EAS ............................................................................. 4, 40 Kerry Logistics ......................................................................... 15 Kingfisher ................................................................................. 17 Li & Fung ................................................................................. 12 Lotte ......................................................................................... 13 Lucent Technologies................................................................ 37 Maersk Logistics........................................................... 15, 32, 37 Mapletree ..................................................................... 16, 31, 32 McKinsey.................................................................................. 19 Mediterranean Shipping .......................................................... 32 Meridien Group of Hong Kong .............................................. 40 Michael Page ............................................................................ 39 Microsoft .................................................................................. 11 Mizuno ..................................................................................... 12 Motorola ................................................................................... 37 Nestle ....................................................................................... 13 New City Corporation ............................................................. 15 Nippon Express ....................................................................... 15 Nokia ........................................................................................ 13 NXP Semiconductors ............................................................... 13 Oracle....................................................................................... 14 Philips ................................................................................ 22, 37 Promodes ................................................................................. 37 PSA ........................................................................................... 32 Red Hat .................................................................................... 38 S&W International Chemical Logistics.................................... 24 SAP ..................................................................................... 17, 38 Schneider ................................................................................. 32 Shanghai Automotive ........................................................ 11, 26 Shanghai Volkswagen.............................................................. 26 Singapore Airlines Cargo......................................................... 31 SITC .......................................................................................... 14 Sony ......................................................................................... 37 Talke Logistics Services ........................................................... 15 TEDA ...................................................................... 13, 29, 31, 32 Tianjin Port Group............................................................. 31, 32 Tianjin Port Sinochem DG Logistics ....................................... 30 TNT .................................................................................... 11, 37 Tommy Hilfiger ........................................................................ 12 Transportation Development Group ...................................... 24 Trust Mart ................................................................................. 16 TUV SUD.................................................................................. 25 UPS ........................................................................................... 11 Visteon ..................................................................................... 12 Wako Logistics ......................................................................... 37 Wal-Mart ....................................................................... 11, 16, 30 Warner Home Video.......................................................... 37, 38 WhereNet ................................................................................. 17 Xecutive Group ....................................................................... 20

MARCH/APRIL 2007

CHINA SUPPLY CHAIN IN NUMBERS

China manufacturing PMI watch The CFLP China Manufacturing Purchasing Managers’ Index (PMI) provides a monthly indication of economic activity in the manufacturing sector, compiled each month from data about their purchasing activities and supply situations from more than 700 manufacturing companies. % 60 58 56

55.1

54 52 50 JAN 07

FEB 06

Source: China Federation of Logistics and Purchasing

Shanghai foreign trade up in 2006 Shanghai’s foreign trade increased to US$428.75 billion in 2006, up 22.3 percent on 2005, according to recent report in Logistics Week. The value of exports rose to US$266.56 million, an increase of 25.5 percent over 2005, while the value of imports climbed 17.3 percent to US$162.19 billion. Shanghai’s largest trading partner is the European Union with trade valued at US$87.07 billion, closely followed by the United States with total trade volume of US$81.76 billion. Japan is still the biggest exporter to Shanghai with imports worth US$31.19 billion in 2006. Exports from Shanghai included mechanical and electrical equipment which carried the highest value at US$152.72 billion, up 28.3 percent. Textiles grew by 15.9 per cent to US$21.17 billion. In comparison, the Suzhou Export Processing Zone handled trade worth US$10.4 billion in 2006, a year-on-year rise of 85 percent.

January car market Chinese auto manufacturer Chery overtook Shanghai Volkswagen to secure the second highest car sales in China in January 2007, with Shanghai General Motors securing the top spot. 42

MARCH/APRIL 2007

Growth in China’s retail market China’s retail market is expected to grow by about 51 percent between 2007 and 2011, to reach a total value of over RMB7.17 trillion according to recent study by Research and Markets. The study also showed there is aggressive consolidation in China’s retail market, as larger operators swallow up smaller players. In a golden ‘Golden Week’, retail sales of consumer goods in China rose 15 percent year-on-year to RMB220 billion during the recent weeklong Spring Festival holiday. Chery sold 37,207 vehicles in January, compared to the 40,570 units sold by Shanghai General Motors, while Shanghai Volkswagen and FAW Volkswagen recorded sales of 35,128 vehicles and 32,084 units respectively.

Pudong Airport ranks 7th globally Cargo and mail throughput at Shanghai Pudong International Airport reached 2.16 million tons in 2006,

ranking the airport seventh in the world and third in Asia. Shanghai’s two airports, Pudong and Hongqiao, together handled 409,000 planes in 2006, representing an increase of 9.21 percent. Currently there are 64 domestic and international airlines operating regular services from Shanghai, with the ﬂight network covering 169 cities at home and abroad.

Top China ports in 2006 Port Shanghai Shenzhen Qingdao Ningbo-Zhoushan Guangzhou Tianjin Dalian Lianyungang Zhongshan

TEUs handled in 2006

(million) Increase on 2005

(million)

(%)

21.7 18.46 7.7 7.06 6.6 5.95 3.21 1.3 1.17

20.1 14 22.1 36 41 23.9 21.2 30 9.1

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your entire supply chain while mitigating risk. At JPMorgan Chase Vastera, we help global organizations with complex supply chains optimize working capital, drive cost savings and improve supply chain efﬁciencies while helping maintain compliance with ever-changing government regulations.

Global Trade Management market leader AMR Research and ARC Advisory Group, 2004, 2005

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To ﬁnd out more, go to jpmorganchase.com/vastera, or contact: Europe, Middle East, Africa Asia-Paciﬁc Latin America North America

Jenette Stiles at 44-207-777-2456 Jiwei Ye at 86-21-6101-0241 Alvaro Quintana Elorduy at 52-55-91-77-15-88 Michael Golden at 1-212-552-2952

The products and services featured above are offered by JPMorgan Chase Vastera International Trade Consulting (Shanghai) Co., Ltd., a wholly-owned indirect subsidiary of JPMorgan Chase & Co. JPMorgan Chase is a marketing name for the treasury services businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. ©2006 JPMorgan Chase & Co. All rights reserved.