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| The heart of the dragon | | Print | |
| Sep / Oct 2008 | |||
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David Lammie looks at the logistical benefits and challenges of manufacturing in China's western and central regions. According to a number of recent press articles, rising costs in China are persuading an increasing number of foreign manufacturers to look at alternative countries in the region to site future manufacturing plants. Canon, for example, was said to be no longer building or expanding factories in China, but instead doubling its work force at a printer factory in Vietnam.  A less discussed trend is the increasing amount of investment being directed from China's coast to its interior by companies looking to achieve similar cost savings. This shift is already becoming apparent in official data. In 2007, for example, Chongqing's utilised FDI increased by 56 percent year-onyear to reach US$1.085 billion. Wuhan, capital of Hubei province, reaffirmed its status last year as the leading centre for foreign direct investment in central China, attracting utilised FDI of US$2.25 billion.Lower overheads are the prime motivational factor behind these numbers. A study conducted last year by Dezan Shira & Associates, a China-based business advisory and tax practice, found that the land and labour costs involved in establishing an export-oriented manufacturing business in a wealthy coastal city such as Shanghai were 40 percent to 60 percent higher than in the interior. Another reason for greater interest in the interior is the expectation of imminent investment incentives for central and western China. These will form part of the central government's ‘go west' campaign, designed to eliminate poverty and reduce the large wealth gap between the coast and the interior. However, the most important factor of all is the investment being channelled into improving transport infrastructure, especially along the Yangtze corridor. Until now, the logistical difficulties experienced outside the coastal regions have been the major barrier preventing companies from taking the bold step of looking beyond the better connected, but more expensive investment hotspots such as the Yangtze and Pearl River deltas. According to the Dezan Shira report, the cost advantage for inland cities was more than outweighed by the difficulties of transporting components and finished products to and from the coastal ports. These problems include longer and more unreliable journey times, higher shrinkage rates and monopolistic shipping practices in certain sections of the Yangtze that result in restricted competition, inflated prices and delays. The central government acknowledges these problems and is actively trying to address them. Most important are the major road, rail and river projects that are now close to completion, including a Riverside Expressway, a Riverside Highway and a Riverside Railway. All these projects connect Shanghai with Chongqing and, when completed, will significantly reduce journey times between the municipalities. Improvements to navigational conditions along the Yangtze itself, particularly as a result of the construction of the Three Gorges Dam, should have an even greater impact on manufacturing plants in the region, since water transport is by far the most cost effective means of transporting materials over long distances. By next year, the completion of the dam will slash average river journey times between Chongqing and Shanghai to no more than seven days; a non-stop container service on the 2,500km route will take as little as five days. Chongqing-based Yangtze River Acetyls, a joint venture between Sinopec and BP, is the largest acetic acid plant in China. It says increased water depths already allow bigger vessels to reach the city, which also helps reduce costs. While more foreign companies are expected to follow BP's lead by shifting plants to the cities in central and western China, the majority will be reluctant to shift plants towards the interior until it can be demonstrated that the major logistical difficulties in the region have eased. So, what are the major logistical challenges facing manufacturers in the interior? The difficulties faced by investors with existing plants in major port cities in China are obviously varied. These difficulties depend on the nature of the business, its precise location and the existence of a joint venture partner that can help navigate through the complexities of China's often chaotic transportation system. Generally, though, the major challenges include longer and more complex supply chains, fewer international air connections and greater bureaucracy - all of which tend to be more acute the further one travels from the coastal cities. For investors in Luzhou, Sichuan province, the major problems include shortcomings in the city's port infrastructure and the sheer distance to Shanghai situated at the other end of the Yangtze. Terex Changjiang, a manufacturer of mobile cranes, does not use Luzhou port to transport finished products because it lacks both a ro-ro terminal and the special vessels needed to transport cranes. Instead, the cranes are driven to its customers in eastern China, clocking up an average journey of 2,000km on each new product by the time it reaches its destination. At a time of sharply rising fuel costs, the company's management team is now looking into the option of using the ro-ro terminal at Chongqing.  Further downstream, in the city of Jingzhou in the middle reaches of the river, Philips Automotive Lighting Hubei operates one of the largest auto lighting plants in Asia. Imported spare parts from Europe are transported to the plant by road rather than river because of the time advantage. It takes about five days to clear Customs in Shanghai and to truck the cargo to Jingzhou. By comparison, says the company, it takes seven days to reach Jingzhou by river, and a further week for the cargo to clear Customs and to be transhipped onto river barges. The potential savings from inland shipping are more than offset by the cost of having to hold increased stock in order to accommodate the prolonged turnaround cycle, according to Philips.Speed is of great importance to the manufacturer, and it uses the river only to transport production equipment. If the number of days needed to ship parts and finished products between Shanghai and Jingzhou could be reduced to the same as the truck journey, however, the company says it would opt for the river as its main mode of transport. The Yangtze could be especially attractive for Philips in future, since it has recently joined the first batch of top-rated companies to be approved by the central authorities to clear Customs at local offices. This means that managers can deal with Customs in Jingzhou rather than having to fly to Shanghai to sort out any problems, effectively speeding up the clearance process. Just outside Shanghai, in the Jiangsu city of Taicang, Weiss-Voetsch runs a wholly-owned environmental testing instruments plant. There is an abundance of local suppliers in the area around Taicang and road connections in the area are good. As a result, all of its locally-sourced components and domestic-bound finished products are transported by truck. However, in the past the company has experienced problems with domestic trucking companies, due to poor protection from the elements and a lack of proper loading and unloading equipment when its large and highly sensitive cargo items are consolidated onto bigger trucks. Consequently, it is now paying a little extra to load the trucks itself and ensure that there is no intermediate handling. The company has also experienced significant problems with Customs clearance in Shanghai, especially the lack of legal consistency. Because Weiss-Voetsch does not have staff in Shanghai to sort out these problems, Customs clearance is handled in Taicang by means of a bonded transfer arrangement. At Shanghai the components are loaded onto a smaller vessel and transported to Taicang port for clearance there. There are many challenges experienced by FIEs (foreign invested enterprises) at different points along the Yangtze. Some are struggling to overcome the logistical problems associated with operating in the interior, and face high transport costs and uncertain delivery times. More encouragingly, however, a larger proportion appear to be adapting quite successfully to the local environment and are managing to shift components and finished products in a timely, safe and reasonably cost-efficient manner. ■ David Lammie is the editor of Yangtze Transport, a publication produced by Yangtze Business Services Ltd. For more information or to obtain a copy of the recently published Yangtze Transport 2008: Accessing China's Interior please contact the author on: T: +44 20 8874 3217 E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it Or visit the website: www.YangtzeBusinessServices.com In October Yangtze Business Services will conduct a fact-finding mission to Chongqing municipality's main transport infrastructure sites. Delegates will visit the Three Gorges Dam shiplocks, a major shipping bottleneck along the Yangtze, hear about future investment plans from senior local transport and investment officials and visit FIEs already located in the city. The trip is organised in partnership with Chongqing Yugang Consulting on behalf of Chongqing Foreign Trade & Economic Relations Commission and Chongqing's Port Administration Office. For registration forms and more information on the full itinerary, please contact David Lammie: E: This e-mail address is being protected from spambots. You need JavaScript enabled to view it T: +44 20 8874 3217
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