Market Logistics In China Management

Essay add: 27-03-2017, 12:26   /   Views: 37

1. Introduction:

Since China joined the World Trade Organization (WTO) in late-2001, its trade with foreign countries has surged along with the growth of logistics activities (Zhou et al, 2008). As a matter of fact, China has generally been experiencing consistent attention from multinational companies (MNCs) for ages. According to Goh and Ling (2003), one reason to explain such phenomenon is the attraction of the low cost of production and tremendous market potential. Second, with a fast growing middle class, the purchasing power of people for domestic and foreign products is increasing steadily (Einhorn, 2001). As a result, China has become the workshop of the world because MNCs are desired to invest, manufacture and deliver through China.

The potential economic strength of outsourcing logistics function has been realized by more and more MNCs as they are under constant pressure of enhancing their transportation efficiency and logistics operation level without increasing their overheads (Vasiliauskas & Barysiene, 2008). Companies under growing pressure of reducing costs and providing better service can improve their logistics by outsourcing to third-party logistics (3PL) firms, an option can improve both effectiveness and efficiency (Wang et al, 2006). This has stimulated the development of logistics industry in China, bringing tremendous opportunities as well as intense competitive challenges.

Logistics in China

There are three kinds of participants in China's logistics market in terms of their ownership such as state-owned, private, and foreign logistics companies (Hong & Liu, 2007). Back to the pre-reform era, prior to mid-1980s, China's all production and related logistics activities were conducted on the base of central-planned economy (Liu, 2008). During the period of planned economy, only state-owned logistics service providers were permitted to provide transportation and warehousing services in the market, they rarely offer other value-added logistics services (Hong & Liu, 2007). There was no market pressure for them in the period of State-Plan.

In the mid-1980s, the Chinese government launched the economic reform and accordingly, the logistics industry was reformed as well. In the new established logistics system, state-owned companies played the leading role while the collectives and individuals were encouraged to take part in a few logistics activities (Hong et al, 2007), although the private logistics companies were allowed to provide only some simple services such as transport, warehousing and distribution. The reform boosted the development of the logistics industry in China and the early foundation of today's logistics industry has been formed since then.

Before China's entry into the WTO, neither the Chinese government nor market itself was familiar to the conception of logistics. The participants in Chinese logistics industry were just single logistics service providers like transportation and warehousing companies. There were few foreign logistics companies in China during that period (Liu, 2008) because foreign participation was regulated in most logistics sectors such as freight forwarding, trucking, shipping, aviation, and customs brokering. According to Goh and Ling (2003), a foreign logistics service provider (LSP) would face further challenges if it intended to provide a full range of logistics services in China because it must apply for a multitude of licenses from different agencies. In fact, those Chinese LSPs faced the same problems of licensing rule as well. In addition, local companies would encounter regional protectionism when they extended their business across provincial borders. Such regulations and protectionism curtailed the full potential of logistics industry in China.

Logistics in China has developed at top speed since China joined WTO. On the one hand, the government endeavored to create a better environment through strengthening building of infrastructure and logistics networks, such as railways, ports, and regional logistics parks (Liu, 2008). The lengths of railways and highways have an increase year by year. On the other hand, the rules and regulations governing the logistics industry have been eased for domestic and foreign logistics providers. Most restrictions to foreign investment were removed. Several clauses and contents are related to logistics industry. An agreement was reached for a specific timeframe to establish wholly foreign-owned enterprises (WFOEs) in logistics (See table 1). This will enable foreign LSPs to develop business more flexibly and offer more diversified service (Goh & Ling, 2003). As a result, the gate of China's promising logistics market was opened to foreign LSPs for their further involvement.

Table 1. Timeframe for establishing WFOEs in logistics services

Under WTO

Freight transport by road

January 2005

Storage and warehousing

January 2005

Courier services

January 2006

Freight forwarding

January 2006

Freight transport by rail

January 2008

Maritime transport related services*

Joint venture with foreign majority ownership allowed

Maritime agency services

Joint venture allowed with foreign ownership not more than 49%

*This includes maritime cargo-handling services, customs clearance services for maritime transport, container station and depot services.

Source: Hong Kong Trade Development Council

The entry of the foreign 3PL companies has far-reaching influences of the development of China's logistics industry. Liu (2008) describes that sophisticated foreign 3PLs providers introduce innovative logistics concepts, advanced technologies and modern management systems into Chinese markets, which enable firms in China to keep up with development of current logistics industry. It is obviously seen that more and more companies regard logistics as their source of profit, and outsourcing as their main strategy to gain competitive advantages. Especially, MNCs are searching for high-quality solutions from foreign 3PL providers in China.

Admittedly, China's logistics industry has progressed steadily over past decades. It is still in its infancy, which means there are gaps to fill as well as potential to exploit. For example, logistics costs in China have been more than 18 percent of gross domestic product (GDP) since 2001 (KPMG, 2008). This is relatively high because logistics costs of other western developed countries are usually less than 10 percent of GDP (See figure 1.1). Moreover, the rate of outsourcing logistics functions to 3PL providers is much lower than that in developed countries. A survey conducted by China Supply Chain Council (2005) presents that the 3PL usage rate is 56 percent in China while the numbers are 79 percent in North America and 76 percent in Western Europe. It can't be denied that there are great opportunities in the Chinese logistics industry.

Figure 1.1

Source: EIU, ARC Advisory, CLSA

Nowadays, more and more foreign logistics companies, including some leading international ones such as Maersk, UPS and DH, are inspired to enter the market full of promising potential. They have mature international networks and sophisticated logistics specialists, and provide all aspects of logistics services for Chinese and international companies. Now, foreign 3PL providers play as much important role as their domestic counterparts do in Chinese 3PL industry. However, as foreign companies, they are also facing great challenges besides opportunities in the flourishing market.

Research problem generation

Currently, there is a tendency that due to globalization, many companies prefer outsourcing their logistics function to 3PL providers in order to concentrate on increasing their core competencies (Cheong, 2003). It is not surprising that research in the field of outsourcing or 3PL is gaining popularity in recent study.

A good many researchers have studied the Chinese logistics industry from different perspective (Jiang & Prater, 2002; Goh, & Ling, 2003; Dai et al, 2002; Dai et al, 2003; Wang et al, 2006). The researches mostly studied on distribution and logistics development in China, the 3PL users in Chinese logistics, or strategic aspects of 3PL providers in China by employing survey instrument and quantitative method.

To a certain extent, previous studies provide reasonable understating of 3PL industry in China. Nevertheless, none of those studies focus on investigating competitive strategies pursued by foreign 3PL providers through a qualitative research method.

Objective

In view of the increasing focus on the development of 3PL and the role of China in the global economy, it is suitable and necessary to understand and evaluate the situation of LSPs in China (Hong et al, 2006). However, unlike previous studies investigating 3PL logistics in China, this research focuses on foreign logistics companies in China. Therefore, the key objectives of this article are to identify the challenges faced by foreign logistics providers and suggest strategies for multinational 3PL companies in a progressively competitive environment.

Thesis outline

The paper is organized as follows. In subsequent section, a literature review is conducted to review outsourcing and third-party logistics, presenting current challenges in 3PL service provision. Next, the methodologies and techniques will be introduced, such as case study strategy selection, the data collection methods, and the AHP method of data analysis. Finally, based on the study results, the findings of analysis are presented and discussed, before concluding the paper.

Article name: Market Logistics In China Management essay, research paper, dissertation