The industry of logistics is a very important driving force towards national economic growth and development, with the logistics cost being an important factor for measuring and evaluating the level of the logistics industry development. The social and economical benefits arising from effective cost control of logistics are clearly notable, and this makes it one of the most direct modes in extension of the third-party profit. As such, the means of implementing the logistics cost control rationalization has been of great focus recently, with explorations and fulfillment being undertaken. Since it opened up in 1978 and following its economic reforms, China's economy has largely grown into a global manufacturing center with annual GDP growth rate of roughly 10 percent. Some economists have forecasted that China's economy will grow to be the world's largest economy in the next twenty years. Before looking at the China's logistical system and where it intends to move, it is necessary to understand where it has been formerly. Before mid-1980s, both production and distribution networks of China were solely dictated by the plan that was issued by the state. In this regard, manufacturers and companies produced and sold what the central government issued (Waters 65). The same was observable concerning the quantity of the manufactured. Logistic channels in the country were under strict regulation of the central government.
Distribution networks in this state were structured along stringent, vertical lines. Tier-1 distributors were based in Tianjin, Shanghai, Guangzhou, and Beijing. Tier-2 included wholesalers that were based in the provincial capitals as well as cities of medium size. Tier-3 wholesalers carried their operations in towns and smaller cities. Distributors that were government-owned ferried products for every industry from tier-1 facilities all the way to cities and provinces. Due to the lack of market forces, those additional costs added to costs of production and distribution and, hence, higher prices of products. With time, China developed interests for foreign businesses, and this forced it to liberalize the logistic system.
To exploit the enormous market potential, a large number of multinational enterprises have found their way into this market, with China becoming a large beneficiary of world foreign investments. Logistics industry of China has entered a fast growth phase. There are tremendous opportunities and also stiff competition mostly since the period China joined the World Trade Organization (WTO) in the year 2001. The approximate yearly growth rate of logistics industry is reported to be 22.2%, with expenditures attributable to logistics amounting to 21.8% of the GDP from1992 to 2004 (Liu 64). The logistics industry is said to have reported 31% annual growth rate in 1999, 35% in the year 2000, 55% in the year 2001, and it has been predicted that this trend will continue increasing fast in the near future.
In the market, there are three kinds of players, considering their mode of ownership, and these are the state-owned, the private enterprises, and the logistic companies from foreign countries. Under the category of centrally planned economy, it is only the logistics suppliers from state that were allowed entry into the market. These were basically concerned with offering warehousing services, as well as transportation, but were hardly bothered to conduct value-added and other sort of logistics activities. In the year 1978, the government implemented some reforms concerning the logistics industry through the establishment of a system for commodity circulation. In this kind of system, government-owned enterprises played a significant role, whereas private enterprises were motivated to undertake some logistics activities. It is worthy to note that some restrictions that were imposed on foreign enterprises were not removed until the country joined the World Trade Organization in the year 2001. Many foreign restrictions were lifted towards the end of 2005.
The promising potential of the market has had the effect on many foreign logistics companies joining the economy, including UPS, DHL, and FedEx among other greatest providers of logistics services. According to case examples from previous researches on a similar subject, it is noted that as labor and land costs escalate in the cities along the coasts, expansion of warehousing continues, especially in the 2nd/3rd tier cities. This leads to a need for deliveries that are quicker, better, and more accurate, as they are often demanded by clients. This opens an opportunity for foreign investors (Waters 67).
Recently, new businesses have started with a focus point of market developments that are tailor made for Specialist Sectors Retail. In addition, enterprises for consumer brand have been expanding fast, thereby building capabilities for logistics. Automotive logistics is also of great target for foreign investments, with retailers of large sports like Nike and Adidas taking a center stage in dominating the market. E-commerce like Dang, Alibaba, and Amazon has also taken a large share in the segment. Retailers include the Watson, Tesco, and Carrefour among others. Automobile companies that have utilized the opportunity are the BMW, Benz, Faurecia, and GiTi. In the food industry, market entry is witnessed by enterprises like Havi LC (McDonald) (Liu 61). In general, there has been a tremendous desire by both foreign and local logistic enterprises to obtain a share in the market due to the encouraging potential of the same. The entry into the World Trade Organization by China has opened more chances for the foreign enterprises to tap into this great opportunity as a result of lifting the trade restrictions that formerly discouraged them.
However, there have been a number of challenges for the China's logistic market. This has partly been attributed to the transport infrastructure. To curb this challenge, an initiative has been taken, which is aimed at reaching a $450 billion market demand, transformation of the transportation facilities plus availing a world class logistic infrastructure to reinforce the overall restoration of the country's market. It is targeted that express freight by road, air freight, and international forwarding freight will enhance five significant logistic segments and boost logistic industry by the year 2015 (Waters 69). It is, therefore, clear that many foreign enterprises will find their way even more than it has been before, since the improved logistical services and infrastructure will ease supply of inputs and foster quick and efficient distribution of manufactured products to the consumers.
Chinese culture is completely different from the Western culture in various ways, including the way of conducting business. A significant difference is the fact that the Chinese prefer doing business deals with those people whom they know and trust. Literally, this seems no different from the procedures of doing business by the Western community, but the depth of it is that Chinese companies from other regions and also Western companies have to establish themselves and create rapport with the Chinese businesses before they can enter any trade deals. This is termed as "guanxi", which can literally be translated as "man relationships". Guanxi can be seen as friendship or relationship the effects of which have a continued exchange of favors. Enterprises doing business in China have to understand that varied business logics applies to China, as opposed to the US and Europe (Bookbinder 97). Unless a business has thorough understanding of the Chinese culture, which is the logics upon which decisions are reached at, it is hardly possible to accomplish any business deals with these companies.
Guanxi relates to an attempt to establish one's kind of relationship with other parties and clarifying whether what one is doing is really reasonable according to definitions of the Chinese, as well as if the business nature is legal or not. In this country, the right connections or guanxi increase the business success or the odds (Liu 78). Although the Western business enterprises do not view this as a cost effective policy, it has several advantages to the trading parties. By establishing the right connections, a business entity mitigates the risks as well as potential disappointments and frustrations of conducting business in China.
The main question one would ask themselves is probably how to create this guanxi, or connections. Well, it is not connected with unnecessarily throwing one's financial resources into a problem, which the majority would term as bribery. Treating everyone fairly and with decency is the foundation of creating a relationship. Conducting oneself with ethical standards commences and establishes the trustworthiness of the business enterprise or the individual. If a business organization has always been delivering on their promises, then this is the creation of trustworthiness, and this places freedom and confidence among the Chinese citizens to trade business with them again (Bookbinder 56). However, non-adherence to the rules of equity and reciprocity leads to the loss of face, and, thus, one is labeled as untrustworthy. Being reliable and dependable in whatever circumstances also reinforces the relationship. For instance, during the political instability of 1989 in China, those organizations that remained in the country were seen as friends and, therefore, earned a great deal of goodwill in the eyes of Chinese partners (Waters 54). The relationship was strengthened.
Once a business entity has established guanxi, it can be applied to various situations, because the relationship is dynamic, with particular social guanxi being transferable. For instance, if company J wants to seek some business help from company K, and company J has no guanxi with K, but has reputable relationship with company L, then company J can make use of L as a intermediary to K. In this matter, J will have transferred its relationship to K and will, therefore, benefit from whatever they want to accomplish. Given that L introduces J to K, a guanxi starts being build, and chances are high that they will establish a relationship. It is argued that a party that brings a seller and a buyer together is more than a broker or a middleman, since it vouches for the one's goodwill which it is introducing. Therefore, strangers conducting business together no longer remain strangers. Chairman of the Hong Kong investment bank Prudential Asia, Victor Fung, states that "If you are being considered for a new partnership, a personal reference from a respected member of the Chinese business community is worthy more than any amount of money you could throw on the table" (Waters 45).
How It Works
Relationship with state officials is also necessary for conducting business in China. However, this necessity in the central government is eroding, as such connections are not as important as they used to be some time ago. As administrative and political overhead has diminished, many companies are capable of doing business on their own without the need for subsidies from the central government (Liu 71). When dealing with officials from the local government, however, government relationship is of paramount importance. Therefore, culture of the people of China plays a key role in the logistic development in the country.
Technology often plays a significant role in the distribution system of any given product. In the logistic industry, the innovativeness and inventions through which products are packaged largely determine the cost of distributing the products (Bookbinder 89). It is for this reason that technology is of paramount importance. In China, sustainable production has been heavily emphasized as a means to address logistical issues through adoption of what is commonly known as the green technology logistics. Green technology logistics advocates for the production that is in line with the custom pack and labeling that are made as per the customers' specifications.
A company by the name JSI, for instance, purely concentrates on offering logistical services of this nature, thereby promoting sustainability. It is among the greatest companies that provide services that are related to logistics supply management in China and other parts of the globe. Innovative, cost-effective, and customized solutions are offered to the customers. This has allowed China to offer their customers products that are unique and, hence, permit refining customized supply chain, which has resulted to real cost effectiveness as well as quicker time to market. There is a clear concept amongst the Chinese enterprises to think outside the box and offer to their customers products with exact specifications of the customers' needs. According to past research, logistic service providers' capital size may possibly have positive influences towards adoption and application of innovative technologies for logistics. This has the implications that providers of logistics services with a greater scale may be more willing to adopt innovative logistics technologies (Liu 63).
Accumulation of technologies, explicitness of technology, quality of labor force, governmental support as well as organizational encouragement are all said to exhibit knowledge within the enterprise, thereby raising the willingness to adopt technological innovations. It is argued that logistics companies that are rich in experiences in the adoption and application of such related logistic technologies and innovations will have more willingness to adopt and apply technological innovations. Organizational encouragement, as well as support from government, may possibly give employees some motivation towards embracing technology in logistics. Government support ensures that service providers are better encouraged and guided towards adoption of new technologies in logistics. The government can play an important role in creation of establishing vital public policies seeking to encourage performance improvement by the private sector, which could be attained through trade and intermodal policies and strategies, creative financing techniques, tax incentives, investment in infrastructure and development, special projects and programs, safety regulation, and private/ public partnership (Liu 77-8).
As the economy of China expands, so does its transportation network and logistic industry. China is growing into a more stable and mature nation, thereby becoming a driving force in the world economic structure. However, this has brought a number of challenges in the country's transportation network, and these issues have to be addressed. Five major sectors of the country's transportation and logistics industry that are affected include freight, road, air freight, international freight forwarding as well as contract logistics. Leadership of this country will have to suggest innovative techniques and expansion, as well as redesigned network, so as to redress the challenges of transportation. In this regards, transportation and logistics industry in China are said to be poised for enormous growth in the next period of five years. Since boundaries in the transportation networks blur, consolidation accelerates; hence, coverage of network and density will expand (Bookbinder 98).
Most companies that engage themselves in transportation and logistics have already started adapting their tactics and strategies so as to focus their attention on business models that are more innovative to offer them an opportunity to grow and thrive in the circumstances of the changing environment. There is an adoption of new strategies for growth and redesigning of networks, as well as improvement of cost structures, in order to meet the upcoming challenges. Many international companies that deal with contract logistics are currently finding there way into the market of China due to the great potential that it offers. Dachser Transport of America Inc., which is one of the leading world providers of global logistics, has recently announced that the parent company was launching its warehouse in Shanghai so as to offer support for growth and expansion of its business of contract logistics in China. The industry of contract logistics in China has been growing gradually to assist the country ongoing trade both in imports and increasingly in exports, whose target is the expanding consumer base in the outside markets. Many contract logistics companies that have been in existence in China are currently moving from their original locations so as to establish themselves in geographical locations that offer capacity for expansion. For instance, it is reported that Dachser transferred from the existing regional warehouse that was located at Shanghai so as to have more capacity (Bookbinder 33).
The new asset is said to be located near the heart of Shanghai, directly on the G1501 Shanghai ring road and G2 Beijing- Shanghai expressway, with this giving easy access to the administrative area of Greater Shanghai and its over 23 million inhabitants. The new warehouse is reported to have a capacity to serve up to 16,000 pallets within an area of around 108,000 square feet. China is and continues to be a significant bridgehead for the growth and expansion of intercontinental network for great multinationals. The new warehouses that are being established by the multinational companies entering the market are fully vanished with warehouse management system (WMS), which has been employed elsewhere for many years and proved reliable. The warehouse are also said to be well equipped with shelving systems that are modern and completely comply with all requirements of fire prevention. Video surveillance, access controls, and full time guard service are among the key security measures that are employed within the warehouses. Adjustable and covered ramps for loading allow easy and safe handling of cargo. These companies offer intelligent logistic solutions, with many of them drawing on many years of experience in the same operations from other countries all over the world. They also benefit from state-of-the-art information and communication technology, as well as continuous cooperation between many people, which is greatly motivated by different cultures and countries (Liu 95).
As customers require more, Chinese companies are concentrating on their key competencies like manufacturing, research and development, and marketing, while they outsource secondary competencies like transportation and logistics to sub-contractors, which can consolidate resources in a more efficient manner. In recently conducted survey by A.T. Kearney about executives at more than 200 shipping companies in China, 81% of interviewed executives said they were outsourcing their transportation requirements, with 47% outsourcing their warehousing needs. It is reported that managements largely perceive logistics as a critical strategic area that can offer a significant competitive advantage. In addition, pricing is becoming less meaningful in selection of providers of transportation and logistics services, since quality of such services now ranks as most important, with reliability following flexibility and the range product offerings (Waters 85). This will result to offerings that are more integrated, complicated, and of higher quality, including synergies of new supply chain and basic services like the recent just-in-time logistics of production, product repackaging, vendor- managed inventory, category management, supply chain financing, and spare parts testing.
In road freight and contract logistics, nearly all leading companies are seen to be diverting their attention on security and reliability. Margin pressures that are imposed on air freight could possibly bring integrated commodities such as door- door services, which are only offered by express companies today. A growing transportation and logistics industry in China will most probably experience many cases of mergers and acquisitions, and finally the market will become more concentrated. This will have the effect in a way that local companies will strongly compete with multinationals, reduce costs, and increase profitability. Future consolidation is perceived to be about what is termed by business enterprises as "value growth", since companies concentrate on growing stronger while at the same time becoming larger. As companies in China continue to expand rapidly, their requirements for logistics will also expand beyond cities in the Coast (Bookbinder 11-14).
Analysis and strategy of logistics cost reduction in China
Currently, it is a common practice to consider the amount of logistics cost accounting for GNP, which is a significant indicator for determining the effectiveness and efficiency of logistics. In majority of developed regions and countries, it has been regulated around a value that is not greater than 10%. However, for China, which is in the category of developing nations whose modern logistics industry measure is still comparatively low, and the summed amount in GDP is less than that of the developed countries by one third, the cost of logistics is twice higher. Currently, the caliber of operation in most of logistics enterprises still remain in the primary and extensive phase, the idea of logistics in modern sense is far much yet to adapt, and their capacity for services, effectiveness, and quality are quite far much behind those of the advanced nations. As such, it is commendable to reinforce the cost management of logistics, conduct analysis and have implementation of the strategies that are effective enough to lower the logistics management costs of the enterprises so as to have an overall goal of reduction of the logistics costs and have the logistics quality far much improved (Bookbinder 44).
A number of factors that affect logistics cost have been cited, since according to famous saying, identifying sickness is part of cure. From the perspective of logistics, these factors can be grouped into two calibers, namely the micro influencing factors and the macro economic ones. The micro influencing factors comprise the industry strategies. They are used in respect to the enterprises which serve as the logistics business main body. At this category, the enterprise management will impose direct influence on the cost of logistics. Under macro influencing factors, a country or a regions strategies towards overall cost management in logistics are considered. Poor implementation of government strategies and policies is one of the elements that act as key constraint of logistics cost reductions (Waters 33-35). Some of macro factors that the Chinese government is undertaking to reduce logistics costs include the government management orderliness. It is reported that cross- industry, cross- department as well as cross-regional phenomenon is prominent in China.
Presently, the main fragmentation issues among the sectors or industries in China have to a great extent hampered the rational and scientific allocation and complete play of the social merits of the logistics resources, which exists and bounds the logistics industry effective development. This factor also contradicts the modern logistics network and systematic exercise. Consequently, there has been poor compatibility of logistics industry, increased cost as well as information blockade. Another macro factor that influences effectiveness of industry logistics in China is the industrial structure. In the cost of logistics composition, inventory cost, as well as transportation, can accumulatively account up to 85%. It is, therefore, provable that when logistics costs extremely rises, the transportation and inventory costs also move upward, since they have a direct correlation and vice versa (Bookbinder 68).
From different industry's demand, for the services of logistics, mining and manufacturing industries that belong to category of secondary industry avail the physical shape commodities, which can hardly be distinguished from the storage and transportation, in the entire process of production and consumption. As a result, the secondary industry requires more transportation and storage, thereby its logistics costs are relatively high. On the other hand, in the tertiary industry, which is characterized by being service based, the output value is mainly from the services that are intangible in nature and, consequently, has less dependency on logistics. Therefore, the cost of logistics is quite low and when compared with the value of output, represents just a small proportion. The approach of the macro logistics cost reduction should also be employed in reducing of the costs of logistics in China. It is worthy arguing that the government should undertake overall planning, raise the investments, and give maximum support to the growth and development of logistics enterprises. The rationale behind distribution, logistics system planning, and the channels of distribution convenience is of paramount importance as far as logistics cost is concerned (Liu 21-25). Logistics management and system plan ought to be fulfilled in scientific and effective manner.
With the employment of improved logistics technology, it is easy to maintain low cost of logistics as efficient logistics system. It is, therefore, advisable for the country to perform some good plan in the cities and the entire country's logistics development planning initially. Logistics development planning entails establishing a uniform initiative among the structure of industry, social and economic development, and logistics distribution system planning. Besides, it entails logistics infrastructure planning, implementation of the logistics development policy, logistics information platform planning (Liu 31-34). Then the government has the mandate of setting up, basing on the development policy of appropriate logistics, a department of specialized logistics management and a trade association to deal with logistics only.
The government of China should further increase its financial investments in logistics industry to ensure that there is more advancement towards cost reduction. There should be thorough improvement of the present logistics level, transforming and upgrading the existing resources as well as giving full play to the overall effectiveness of facilities that are in existence. Lastly, the government should have maximum support towards the development of enterprises for logistics so as to enhance optimization of the industrial structure (Waters 40). This could be accomplished by advocating for manufacture and circulation business enterprises to reform their procedures and separating and subcontracting for their non-core business activities with an intention of concentrating on core business.
Following the continued efforts by the government of China to actively formulate policies towards encouraging a more firm linkage between global and national economy, China has grown to be an important investment destination in the world. Many foreign companies have continued to invest in China so as to exploit the low costs of labor and the huge market. It is owing to this that logistics development has been greatly emphasized by the government. The costs of logistics in China are relatively high compared to most developed nations. To redress this logistics issue, acceleration of the development of the logistics industry is seen as one of the key policies of the government of China (Liu 51).