A recent article in the China Daily states that Beijing has issued guide lines to “promote the healthy development of the country’s logistics industry”.

China has made amazing strides in the past 10 years in terms of infrastructure to move goods in and out of China.  Thanks to China opening up the logistics industry under their WTO obligations, the headaches supply chain managers face in China today are nothing like the migraines of the pre-WTO years.

Yet despite spending a higher % of GDP on infrastructure improvements than most developed countries, China’s current logistics sector has some major problems. The article explains:

Statistics showed that road tolls accounted for nearly one third of the operational costs of logistics enterprises, which not only weighed on the companies’ profit margins but also reduced logistics efficiency.

In China when they use the term “logistics company” they are talking about 2 guys and truck type operations. These drivers have 1/3 of their total expenses tied up in road tolls. That is insanely high and these costs are passed along the supply chain.

As a foreign buyer, when you talk logistics, you are probably thinking about how to move goods out of China from the sea port or airport. And you may not have given a thought to the Chinese truck drivers and their tolls. But as your products Bill of Material (BOM) may be coming to your supplier from sub-suppliers all across China, tools and other domestic trucking charges play an important role in determining your buy price.

To tackle the problem, the country pledged to cut fees and road tolls by gradually eliminating tolls on secondary roads, reducing toll gates and restricting the number of toll ways, according to the guidelines.

Additionally, the country encouraged big logistics enterprises to consolidate the fragmented industry through mergers and acquisitions, while small- and medium-sized enterprises should consider forging alliances for common development, the guidelines said.

I am very excited to hear of these reforms because they will help move production to the interior of the country and this will bring costs down for buyers.

As explained in other blog posts such as  “Labor Shortage in China on Coast” and factories are not picking up and moving out of China, but they are exploring a move to the inland of the country where costs are much lower.

One of the reasons more factories don’t make the move inland is because their sub-suppliers have not yet made the move and the additional costs of logistics to get raw materials into the interior of the country often outweigh the saving that lower labor rates bring on the production line.

As road tolls occupy a large slice of a total cost pie chart, if tolls where to come down, it would make sense for more factories to move inland.

Another positive change would be that suppliers could start to looks for sub-suppliers at a more national level. This would increase competition and help drive costs down.

In my line of work, I often do the research to find new BOM sub-supplier for my suppliers. Even if I find better quality and lower costs, some of my suppliers are hesitant to go with sub-suppliers outside of their immediate vicinity because they are scared of the logistics costs.

If your supplier is based in the expensive Pearl River Delta or Yangtze River Delta and they are not willing to look outside the deltas for sub-suppliers, soon you may find their pricing noncompetitive. And 6.3 RMB to the USD isn’t helping at all! So let’s pray Beijing can bring tolls down as they plan.

 

Wishing you successful China Sourcing!

Best Regards,

Mike Bellamy

China Operations Director, PassageMaker Sourcing Solutions (3rd party assembly & inspection to protect intellectual property and ensure quality.)

Chairman of the Advisory Board, China Sourcing Information Center

Author, The Essential Reference Guide to China Sourcing

LinkedIn Profile: http://www.linkedin.com/pub/michael-bellamy-author-business-owner-volunteer-advisor/8/52a/389

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