The Global Rail

By Dave Holloman

February 4, 2009

I came across a survey recently published by The Global Supply Chain Council that caught my eye for its boldness.  The report contains survey results of 125 companies operating in China regarding their respective warehousing and transportation practices.  Here is what caught my eye; companies responding to the survey indicated their average logistics cost were 10% of sales.  With this newly reported number, the authors therefore conclude that logistics in the China market are now approaching new levels of efficiency.  This is an astonishing assertion.

This number reported by companies sits in stark contrast with commonly held views.  In fact, efficiencies approaching levels seen in only the most mature economies.  Numerous sources report logistics costs greater than 16%.   Another reported metric to gauge logistics costs is as a percent of GDP.  Using that metric, the audit firm KPMG reports that China’s logistics costs are 18% of GDP, compared with 8% in the US and 7% in EU countries.  In these more common views, the difference between China’s logistics costs with the US and Europe is widely attributed to the state of infrastructure.  Developed markets not only benefit from better roads, but also improved integration between modes of transportation such as road and rail, and better information exchange through established IT assets.

The difference between these two reported numbers, 10% and 18%, is huge, or, more precisely, about $1.7 Trillion.  So, what accounts for the difference?  Finding the answer is critical to anyone operating a supply chain designed to serve the Chinese consumer.

The reason for the difference is geographical.  Reading through the plethora of published reports on the topic, a fundamental point seems to have gone unaddressed; that China is really, at its highest level, 2 distinct macro economies.  To understand China’s true supply chain picture, one must start by segmenting the country into two basic parts.  One part is the eastern one-third of the country.  It is this region that China’s economic success story took root and grew.  Its export-based economies of Shenzhen and Guangzhou are here.  So is the glittering world city of Shanghai, as well as the nation’s capital of Beijing.   This area has its own distinct characteristics.  These characteristics include a rising professional class and dense urban centers.  Its infrastructure, in many ways, not only matches but is moving beyond the rest of the world.  The other part is the western two-third’s of the country.  It this area of the country that is more diverse and has its own set of characteristics that contrast it with the east.  It’s more rural, more sparse, and dramatically poorer.

This marked contrast between the eastern one-third and the west that accounts for the difference in reported logistics costs.  A closer look at the first survey, where individual companies reported a logistics cost of 10%, shows a majority of these companies operating within the eastern one-third of the country.  Their base of operations is localized around Shanghai and Shenzhen.  Other sources citing a higher logistics cost of around 16% use country-wide data that includes economic activity from every province.

A look at infrastructure data from two different provinces illustrates the point.  The Jiangsu province, just inland from Shanghai, is a good example.  Jiangsu is comprised of over 71 million people and is home to Nanjing, China’s historical capital.  It is home to 6 major expressways, all built in the last twenty years.   Although far from the glittering lights of Shanghai, this province has enjoyed significant economic growth.  Yunnan, a province in the far Western part of the country, has a different profile.  Home to over 40 million, it has only 2 major expressways.  Roughly put, western Yunnan has 57% of Jiangsu’s population, but only a third of the major freeways.  The picture below, sourced from Wikipedia, offers a visual view of the disparity. It shows China’s freeway system, where the prosperous eastern one-third can be seen distinctly between the western two-thirds.  The contrast increases when you look at the colors.  The routes color coded in Blue are completed, but the freeways coded in Red are under construction.

To study the Chinese economy is to be awash in large numbers.  1.3 Billion people.  13 million cars sold last year (world’s largest).  185 million refrigerators sold last year (world’s largest).  Retail sales growth of 17%.  These large numbers can (and often do) create the impression that China’s 1.3 Billion consumers will be reached the same way with the same cost structure.  Don’t be tempted by that impression.  A supply chain system to fully serve the Chinese consumer will hold different models.  Designing these models will start by recognizing the disparity between a more prosperous east and the trailing west.