Chaina Mar Apr 2007

8/2/2019 Chaina Mar Apr 2007

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THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS

MARCH/APRIL 2007 www.chaina-online.com

AUS$7.50

EUR5

HK$40

RMB40

SG$9

UK3.50

US$6

solving Chinasskills shortage

Mindthe talent

gap:


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18

Mind the talent gapSome fresh perspectives on how to solvethe massive skills shortage that is slowingdown your China supply chain

24

Danger: Proceed with cautionImprovements are needed in the transportation, handlingand storage of dangerous goods in China

18

27

Setting the standardSusanne Lehmann, logistics planning manager,Shanghai Volkswagen

REGULARFEATURES

7 COMMENTARY A look at Chinas industrial land auction process

After-sales blues

The impact of rising energy prices

Developing a China operations strategy

11 NEWS ROUNDUP

29 REGIONAL FOCUS Tianjin: Chinas third engine37 CAREERS

40 CLASSIFIEDS

41 EVENTS CALENDAR

41 COMPANY INDEX

42 CHINA SUPPLY CHAIN IN NUMBERS

THE MAGAZINE FOR GLOBAL SUPPLY CHAIN LEADERS

CONTENTS

MARCH/APRIL 2007

www.chaina-online.com

34

Navigating the logisticsreal estate mazeChinas complex real estate environmentremains a major obstacle to improvingoverall supply chain efficiency 34

MARCH/APRIL 2007 5www.chaina-online.com

24

SUPPLY CHAIN FEATURE

Q&A

Q&A

COVER STORY


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Copyright 2007, Red Circle Group (Hong Kong) Limited. All rights reserved. CHaINA (or Chaina magazine) is published by the Red Circle Group (Hong Kong) Limited, Room 813, Hollywood Plaza, 610 Nathan Road, Kowloon, Hong Kong. Telephone: +852 8192 5719. Fax:

+852 3015 8 719. No charge or subscriptions to qualifed individuals. Annual rates or subscriptions to non-qualifed individuals dier depending upon the subscribers country or territory and can be ound at: www.chaina-online.com

Send address changes to: [email protected] The contents o the publication may not be reproduced in whole or part without the written consent o the publisher. The publisher is not responsible or product claims and representations.

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DISTRIBUTIONBy direct mail to subscribers in China, Hong Kong and Singapore who are involved

in supply chain management, manuacturing and logistics including: supply chaindirectors and managers; logistics, warehousing and transportation directors and

managers; sourcing, materials management, procurement and purchasing directors

and managers; operations, manuacturing, import/export and trade managers; and

chie executive oicers, chairpersons, presidents, vice presidents, general managers,managing directors and country managers.

For subscription enquiries please contact our subscriptiondepartment at: [email protected] or subscribe online at:

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We welcome your comments and eedback, please contact thePublisher at: [email protected]

Jamie BoltonExecutive Partner

Supply Chain ManagementNorth AsiaAccenture

Mark MillarDirector o Strategic BusinessDevelopmentUPS Supply Chain Solutions

Eugene LimRegistered Foreign LawyerBaker & McKenzie, Hong Kong

Henrik Anker OlesenTransport & LogisticsLeader, AsiaIBM Global Business Services

Bee-Choo LimMaterials Director

Asia and Latin AmericaIntel

Amit KumarLogistics Manager Asia

Intercontinental Freight andLogistics ServicesElectrolux Group

Jean-Luc LaboucheixSupply Chain DirectorAsia Paciic, Goodyear

Sean ShaoLogistics ManagerNuSkin China

Jeffrey TewGeneral Manager andLab Group ManagerGeneral Motors R&D Centre

Ash LimMarket Development DirectorSupply Chain Management

APACOracle

Chaina magazines sponsors:

CHaINA MAGAZINE

PublisherMichael [email protected]

Editorial ConsultantMax Henry

Contributing WritersChris Horton, Russel Beron,Yang Ning, Shirley Liu

Art DirectorColin Dizengo

Graphic DesignerHow Xu

CHaINA MAGAZINE EDITORIAL ADVISORY COMMITTEE

www.chaina-online.com6 MARCH/APRIL 2007

Many in China have recently returned towork after the week-long Chinese New Yearholiday, a Golden Week holiday that turned

out to be especially golden for Chinas retailers, withthe government reporting a 15 percent year-on-yeargrowth in retail sales over the period (see Growth inChinas retail market, page 42).

But not all workers in China will be returning towork, or at least not to the same company. The resultsof a recent survey with 700 white-collar workers (mostof them in Shanghai) working across 15 differentindustries in China showed that a whopping 40 percentof them were planning to change jobs in the monthimmediately after the holiday.

With the large-scale job-searching peak in 2007expected to come in mid-March this is a particularlyfitting time for Chaina magazine to take a look at one ofthe biggest problems currently afflicting most companysChina supply chain operations: the talent shortage (seeMind the talent gap, page 18).

This is not a problem restricted to the supply chainarea and most sectors in China are reporting similar skills

deficiencies at all levels, with the problem most acutelyfelt at a mid- to senior-management level. The bad newsis that the problem is not likely to go away in the extremeshort term: it will take at least five years, though probablycloser to ten years, before the current crop of junior-levelexecutives (who are already benefiting from the millionsof dollars that many companies are now spending ontraining programmes in China) come of age.

The confusing industrial real estate environment inChina (and subsequent lack of quality warehousingspace) is another oft-cited obstacle to the continuedsmooth development of China supply chains. Towardsthe end of 2006 the government announced newregulations intended to increase efficiency in the buyingand selling of industrial land. But the move has leftmany analysts wondering whether the new regulations

have just made matters worse (see A look at Chinasindustrial land auction process, page 7; and, Navigatingthe logistics real estate maze, page 34).

Its not all doom and gloom however: 2007 is theyear of the golden pig, which only comes around every600 years, and is supposed to be notably auspicious.Lets hope this year is a golden year for your companysChina-based operations too.

Michael PenningtonEditor and [email protected]



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In what appears to be a confusing time forindustrial companies looking to buy real estatein China, its worth taking a look at the impact

of the new regulations governing the purchaseof industrial land usage rights in China, and toanalyse some of the implications and constraintsplaced upon industrial companies growth andexpansion plans as a result.

Before the end of 2006, the transfer ofland usage rights for industrial land, had been

predominately handled through a private treatyprocess. Due to the perceived absence of anopen and fair competition for the purchaseof industrial land, the central governmentfelt that this process had led to an apparentundervaluation of industrial land prices. Inorder to enhance efficiency and increasetransparency, the government thereforeannounced a new policy to tighten the controlof land administration in August last year.

New benchmarksAccording to the new policy, the government

has set the new benchmark of industrial landuse rights as of December 28, 2006 and allindustrial land can only be granted by bidding,

auction and/or listing. And from now goingforward, prices for land usage rights, shouldnot be lower than the benchmark set by thecentral government. Local governments havealso studied and finalised the respective baseprices in their areas of control.

Juncho Logistics Park located in themunicipal-level Shanghai Northwest LogisticsPark was the first to announce their base priceat RMB 700,000 per mu or approximatelyRMB1,050 per square metre. (Editors note: amu is a traditional Chinese unit for measuringarea and is approximately 667 square metres)

According to the central governments edict,Chinas industrial land has been divided intodifferent levels. Many areas of tier 1 cities for are

in the 6th level (see chart, below).

The benchmark for such 6th level industrialland has been set at RMB 336 per square metremeaning very simply then that throughout2007 any industrial land in the Jiading districtof Shanghai for example must be sold througha bidding, auction and listing process at abase price of RMB 336 per square metre.

An increase in land value...As a result of this new policy, second hand

industrial land transactions will become moreattractive to buyers and thus force a considerableknock on increase in land values. Anticipatingthe price increase, some local developers haveland banked large amounts of land prior to thisimplementation, hoping for the excepted, and allbut certain, increase in land values.

And despite the the increase in the askingprices, most investors and developers are nowpreferring to deal with private land owners. Arecent transaction involving an industrial landparcel adjacent to Pudong Airport was completedbetween two private developers with a transactionprice of RMB 1,200,000 per mu. Whilst this mayseem like a high price, the purchaser is expectingto see a further increase ahead of any additional

transactions there.

...and in rentsThe obvious consequence of increasing land

prices is that the rental rates for logistics andwarehouse facilities will most certainly continueto grow. Even though new benchmarks havebeen set and theres no way to avoid the industrialland auction process in 2007, there is still no landquota release, as this widely expected policy hasnot been customised for local governments as yet.And the longer this policy takes to implement, thefurther it will drive land values and rents.

A look at Chinas industrial

land auction process


COMMENTARY

Trent Illife is the Regional

Director, Head o Industrial or

Jones Lang LaSalle, based in

Shanghai.

6th level industrial land

Source: Jones Lang LaSalle

DistrictsCity

Beijing

Tianjin

Shanghai

Guangzhou

Daxing, Changping, Shunyi

Jinnan, Xiqing

Jiading, Baoshan, Minhang

Panyu, Nansha


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COMMENTARY

December 2004 marked the big bang forforeign investment in the distributionsector. Foreign investors applied to

establish their foreign-invested commercialenterprises (FICEs) in droves. One area oftenneglected in this process is after-sales services.Having worked with numerous companies andindustries, some of my thoughts on planningan efficient after-sales program in China areas follows.

Appropriate spare inventory levelsSpeed and service satisfaction are often

synonymous in after-sales programmes. Tominimise the time taken to repair and replacegoods, companies often maintain spareinventories in China. But there is a trade off.Increasing inventory levels reduce delivery timesbut tie up cashflow in inventory, customs dutyand import VAT costs. Duty deferral schemes,such as the use of bonded warehouses, mayameliorate these costs. However, optimisinginventory levels is often an essential criterion.

Pricing issuesTraditionally, foreign investors faced immense

difficulties providing after-sales services in China.They had to use third party service providersor provide such services through consultingarrangements. These arrangements were oftenunsatisfactory and cumbersome.

FICEs are allowed to perform after-salesservices relating to goods set out in theirbusiness license. Repair and replacementservices, unlike other types of services, aresubject to VAT and not business tax. This hastwo consequences:

Investors which previously providedsuch services through consultingarrangements are now required to levy VAT.This increases turnover tax cost for such

services (from 5 percent business tax to 17percent VAT); and

Transitioning to a VAT model also meansthat input VAT costs of importing or procuringspare parts or replacement products may beoffset against the output VAT levied on therepair and replacement costs. Hence, theentire turnover tax burden may be transferredto the consumer.

These consequences need to be taken intoconsideration when pricing after-sales programsin China.

Defective returnsThe disposal of defective goods that are returned

(or defective returns) can be problematic.If the defective returns were initially imported

into China pursuant to a customs duty exemptionand are subject to Customs supervision, consentfrom Customs is required before they can bereturned by the customer.

If the defective returns are exported overseas,special programmes (such as temporary export for

repair and replacement without cost) may be usedto reduce the customs duty and import VAT costson imported replacements or repaired parts. Theseprogrammes may however increase complexity toafter-sales operations (for example, tracking serialnumbers of exported defective goods, having thedefective goods undergo commodity inspection,and so on).

Need for updated regulationsThe ability to provide efficient after-sales

services is crucial to protecting Chinese consumerrights. The problems foreign investors and FICEscurrently face are often due to rules that werenot designed to account for modern demandsof the Chinese consumer. As China becomesmore developed, consumers will demand moresophisticated after-sales programs. Many existingrules and regulations will need to be updated tocope with these developments.

After-sales

bluesEugene Lim is a Registered

Foreign Lawyer with Baker &

McKenzie, based in Hong Kong.


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COMMENTARY

The impact of oil prices on your China supplychain is a strategic issue both for companiesselling in China as well as those sourcing for

export. Oil price increases may affect the cost-to-serve customers, thus negatively influencing theperformance of your supply chain. The rise in oilprices may also ignite higher energy input costs formanufacturing and fuel costs for transportation.Indeed, according to recent reports domesticlogistics expenses in China in 2006 increased by

13.7 percent when compared to 2005.It is critical for companies with supply chainsin China to remain aware of changes taking placein their markets in response to oil price hikes.In order to avoid, or at least delay a rise in yourcost-to-serve, companies are advised to closelywatch for changes in the buying behaviour oftheir customers and the selling behaviour oftheir supplier segments, adjusting their supplychains accordingly.

And as a result of the rise in energy prices, somequestions worth asking include: Will consolidationof orders and shipments become more of anecessity? Will warehouse receiving practices ofcustomers need to be adapted towards larger, lessfrequent deliveries? Will companies operating Just-

In-Time manufacturing and distribution modelsbe required to add more distribution centres totheir network, improve inventory management,and carry more inventory? And, will highertransportation costs offset the gains achieved bysourcing in China?

US versus ChinaIn the United States, changes and

fluctuations in oil and energy prices, and theirimpact on total logistics costs, are muted bythe relatively small percentage that energycosts represent of total logistics costs, wherea 20 percent rise in fuel costs results in only a4.8 percent rise in transportation costs. Evena doubling of fuel costs an extreme example

even by todays rapidly changing oil pricescenarios represents only a 24 percent risein transportation costs.

There is another less significant but presentimpact of energy on logistics costs: the componentof warehousing that is energy related. In the USutilities bills, including water, electricity and gas,make up approximately 5 percent of the cost ofwarehouse operating costs.

Energy costs in China however make up alarger component of total logistics costs due inpart to the lower wage rates and the relativelyhigh total fuel costs as a percentage of sales.

Therefore, any fluctuation of energy costs inChina would drive a much larger change inoverall costs and a correspondingly larger impacton logistics strategy.

Avoiding irrational strategy changesA case study which shows that increases in

fuel prices in China may have an irrational impacton the decisions made by executives involves amultinational manufacturer of consumer goodssold in the local market. The company wasrationally pursuing a sound strategy involvingreducing domestic logistics costs in China bycutting the number of warehouses, encouragingdirect flows from factories to customers, reducinghandling, consolidating product in fewer locationsand reducing the number of 3PLs they dealt with.

However, due to the recent increases in globalenergy prices many international 3PLs in China

were forced to raise their prices. In response,this multinational cut the relationship with theirstrategic 3PLs and instead began to work on a moread-hoc basis with a much larger number of localChinese warehousing and trucking companiesthat offered cheaper rates. Clearly this decisionwas not consistent with their original long termstrategy which had been to become more leanand agile. More rational strategy changes mighthave included keeping temporary warehouseswhich could be easily shut-down, creation ofcross-docking platforms and having distributorshandle logistics on their behalf.

The impact of rising

energy pricesDustin Mattison is a

management consultant with

Established, based in Shanghai.

China vs US trucking cost factors(percentage of sales)

Source: Establish

USChina

Fuel

Toll Charges

Driver Wages

14-40

20-40

3-5

20-25

20-25

25-35


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China is not always an easy country in which todo business. Despite its entry into the WTOin 2001, complex distribution, licensing,

health, technical and packaging restrictions thatdont necessarily infringe WTO tenets but putforeign competitors at a disadvantage still exist.These restrictions can inhibit newcomers fromusing existing distribution channels and rapidlygaining economic access to markets, thus givingdomestic companies advantages in preparing fordirect competition. Regulatory fragmentation isanother challenge for new entrants.

Logistics in China has been micro-regulated foryears, with different service components treatedas distinct subsectors by various governmentdepartments. Although efforts are being madeto improve coordination, shared jurisdictionfor the logistics sector remains a challenge.Companies still must acquire separate licensesthrough multiple governing bodies, and oftenmust obtain separate licenses for each provincein which they operate.

One step at a timeAlthough there are hundreds of steps

companies can take to address the abovechallenges from a supply chain perspective, afew are critical to a companys ability to thrivein China. The most important of these is to thinkend-to-end and develop a China operationsstrategy. China is one of the worlds mostdynamic markets. This makes planning for anintegrated supply chain much more critical andunderscores the importance of fully coordinatingdemand, production, supply, distribution,information technology and human capital. End-to-end integration is particularly important whendeveloping a China operations strategy because ithelps align supply with demand: Companies withsuperior supply/demand-matching capabilitieswill have a significant advantage in this marketbecause they are more responsive to changingmarket conditions.

Investing wisely in capabilities is critical.For many companies, high costs and lengthytimetables make the development of proprietarysales and distribution channels or networksunfeasible. As a result, investing in the capabilitiesof domestic distributors has particularly highpayback potential. Such investments could takethe form of incentives and performance auditsto improve distribution efficiency. Well-focusedinvestments also will align with regional/localparticularities and relationships, since every cityor investment zone has different policies designedto attract certain types of investment.

Managing third party relationshipsFor most companies, a China operations strategy

will involve collaboration with numerous entities not just distributors. Relying on qualified thirdparties is therefore critical. In addition to minimizingrisk, the right third-party relationships make it easierto quickly identify and enter new markets, and torapidly achieve scale. The ability to fully quantifyrisk and plan for its mitigation can separate successfrom failure. Companies that understand their

baseline cost structure, know the drivers of supplychain excellence, and have the ability to calculatetotal net landed costs will dramatically increase theirchances of success in China.

A final must have is clear expertise in supplychain technology. Maximising informationvisibili ty and correctly managing supply chainmovements, leveraging the contributions ofsupply chain partners, and flexing the supplychain to meet changing objectives are just someof the reasons. Yet expertise in supply chaintechnology cannot be separated from expertiseas it applies to people. On balance, the conceptof functional or service excellence needs to beimproved in China. Some believe that up to90 percent of China distribution initiatives fail

because of workforce capability. To surmountthis obstacle, make training a priority, developleadership capabilities at all levels, and set clearcriteria for advancement within the organization.

Some baseline questionsThe best way to understand and prioritize the

supply chain capabilities needed to thrive in Chinaand develop a China Operations Strategy is to createa detailed understanding for your companys entryand operations. Start by addressing the followingbaseline questions: How can we best leverageChina as a supplier and consumer market? Whatdoes our company have to offer? What do wewant to bring to China? Does our company havesufficient knowledge of the China market? Have

we considered all the supply chain complexitiesassociated with sourcing, manufacturing, sellingand distributing products in China? Do ourservice model, technology know-how, existinginternational network and/or management skillsprovide us with a competitive advantage? Do weknow how to continually reduce operating coststo support attractive pricing?

Asking the right questions, and subsequentlydeveloping the right supply chain capabilities,could provide the China operations strategy thatmany China-focused companies desire, but farfewer achieve.

Developing a China

operations strategyJamie Bolton is Executive

Partner, Supply Chain

Management, North Asia or

Accenture, based in Shanghai.


COMMENTARY


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[email protected]

Calls for China to restrict foreignaccess to local logistics market

There have been recent calls inChina for the central government torestrict foreign access to the domesticlogistics market.

The calls come after a report compiledby 20 domestic logistics industry andrelated associations urged moves betaken to prevent foreign firms frommonopolising the domestic logisticsindustry at the expense of local small-and medium-sized enterprises.

According to the findings of the report,

leading overseas firms are dominating theinternational express and shipping industries,as well as logistics services catering to foreignmanufacturers based in China.

DHL, FedEx, UPS and TNT togethercontrol an 80 percent share of Chinasinternational express market.

The report said that 98 percentof clients of international logisticscompanies based in China are foreigninvested companies whereas the clientsof local logistics businesses tend tobe domestic firms, indicating that thecustomer service networks of both sidesare separate and not yet overlapping.

FedEx Express recently completed

a buyout of Tianjin Datians 50 percentstake in their JV and Tianjin Datiansdomestic delivery network as part of aUS$400 miion deal, giving FedEx Express89 locations across China.

China, US reach pact onadvance pricing

Tax authorities in China announcedin January that they had reached the firstever bilateral advance pricing agreement(APA) by signing an agreement with theUnited States. The APA, which involvesWal-Mart Stores, makes it possible for taxdepartments and the retail giant to resolvetransfer pricing issues before they arise

during an audit. It also gives the companygreater confidence that its transfer-pricingmethods will be upheld during an audit.

The APA program also enablestaxpayers and the Chinese tax authoritiesto work together to resolve potentialdouble taxation disputes.

Were working more closely with theUS Internal Revenue Service with thedevelopment of economic cooperationbetween the two countries, said acommissioner from the Chinese StateAdministration of Taxation.

China is worlds top spot for R&DChina is the most popular country

in the world for setting up new R&Dfacilities, according to the UN.

61 percent of foreign companiesestablishing new R&D centres globallyare choosing to set up in China, comparedto 41 percent in the United States and 29percent in India. By 2005, multinationalcorporations had established 700 R&Dcentres in China, the UN report states.

Shanghai Automotiveups R&D spend

Shanghai Automotive is planning toinvest more than RMB3 billion in R&Dand business expansion.

The auto manufacturer is set toinject RMB868 million into its jointventure with General Motors, ShanghaiGeneral Motors, and also plans to investRMB142.25 million into Shanghai GMDongyue Power, a producer of third-generation engines.

Shanghai Automotive also plans to takea 50 percent in SAIC Iveco CommercialVehicle Investment for around US$25million with the acquisition comingas part of the companys program todevelop commercial vehicles.

The company will also establish aUS$9.82 million subsidiary in the UK, SAICMotor UK Holding, which will become itsmain platform for European operations.

LEGAL

R&D

R&D

MSN setting up Shanghai R&D centreMicrosoft is setting up a US$20 million R&D centre in Shanghai for its online

MSN service, its first such centre outside of the United States.The move comes after the software giant saw setbacks in its online services in

China, including the resignation of a top executive responsible for the companysWindows Live unit in China late last year.

The R&D centre will be based in Shanghais Zizhu Science Park close towhere Intel already has a research facility.

The centre will also host a technical support team for Microsofts onlinecommunication tool MSN Messenger, which has over 20 million users in China.

Luo Chuan, former head of Microsofts Windows Live unit in China andalso responsible for the China site of the companys MSN portal, resigned fromMicrosoft at the end of 2006.

Luo is tipped to become the first chief executive for MySpace China, anonline networking website.


NEWSROUNDUP


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Tommy Hilfiger to sellglobal sourcing division

Fashion brand Tommy Hilfiger Groupis reportedly planning to sell its globalsourcing group to Li & Fung, a providerof outsourced procurement and import/export services.

Under the agreement, Tommy Hilfigerwill sell its global sourcing operations,with offices in Hong Kong, Taiwan, India,Bangladesh and Sri Lanka, to Li & Fung forclose to US$250 million. Hilfiger will thenuse Li & Fungs global sourcing operationson an outsourced basis.

Tommy Hilfiger procured a little overUS$700 million in goods in 2006.

Fred Gehring, the chief executive officerof Tommy Hilfiger Group, said, Our ownoperated buying offices have contributedtremendously to the development of ourbusiness to date, but we believe thatto take things forward we can benefittremendously from the integration ofthese offices within the greater networkof Li & Fung, with over 70 offices in over40 countries and territories, including asmany as 19 offices in China alone.

Visteon to lift China sourcingGlobal automotive supplier Visteon

expects to buy substantially more Chineseparts and components as its strives to lowerits cost base.

About 20 percent of Visteons globalpurchasing is in China today and abouthalf of the companys Asian supplier baseis located in there.

China is critical to our success. This iswhy we have located our global electronicsand our regional purchasing at our Chinatechnical centre in Shanghai, said SylvainGaillet, global purchasing director ofVisteons Asia-Pacific electronics divisions,noting that the company is looking to liftits Chinese auto electronics buying by about30 percent at the same time as it develops its

network of Chinese suppliers.Our long-term goal is to improvethe capability of key suppliers in Chinato play an increasingly important role inVisteons development both locally andglobally, said Gaillet.

Visteon recently announced plans toclose a parts plant in the United States,the start of a turnaround program that willsee no fewer than 30 facilities in NorthAmerica either restructured, sold or closed.The company has complained that highproduction costs in North America aremaking it uncompetitive.

Intel plans new China plantChipmaker Intel plans to invest in a

major new plant in China to manufactureleading-edge chips. One source saidthe investment in the new plant would

total a couple billion of [US] dollars,making it Intels biggest investment inthe country to date.

The plant will manufacture 65-nanometre multi-core processors andwill be Intels first such manufacturingfacility in Asia.

Intel, which has invested aboutUS$1 billion in China to date, alreadyhas major test and assembly plants inShanghai and Chengdu.

Sources declined to give furtherdetails of the project, such as the locationand timing. Intel also said last monthit would make China an independentsales and marketing region from thebeginning of 2007.

Mizuno plans US$4.2

million warehouseMizuno will invest US$4.2 million onthe construction of a 30,000 square metrewarehouse in Shanghai.

The sportswear manufacturer also plansto decrease production costs and open morefranchise retail stores in China. There arecurrently around 700 Mizuno retail outletsin China and the company aims to raise thatnumber to 1,200 by 2008. Mizuno has set asales target of US$135 million for this year.

SOURCING

MANUFACTURING


NEWSROUNDUP

Xu (Ian) Yanggeneral manager,Intel China

ImagineChina

ImagineChina


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[email protected]

Hershey and Lotte announce JVUnited States-based confectionarymanufacturer Hershey and SouthKorea-based Lotte Confectioneryhave announced plans to set upa manufacturing JV in the Jinshandistrict of Shanghai.

The manufacturing facility inJinshan gives us the flexibili ty to makeproducts closer to our consumers,bringing locally relevant andinnovative new products to marketsfaster and fresher, said Hersheysenior vice president J.P. Bilbrey.

The Jinshan manufacturing facilityis expected to begin operations in

June 2007, with products available inretail locations in China by August.Lotte added that it will use the strategic

partnership to sell its Xylitol chewinggum in North America via the distributionnetwork owned by Hershey.

Semiconductor giants plan Suzhou JVNXP Semiconductors, formerly

Philips Semiconductors, andAdvanced Semiconductor Engineering(ASE) have signed an agreementto form a JV in Suzhou focused onsemiconductor testing and packaging.The entity will focus on the testingand packaging of a wide range of

semiconductors in areas such asmobile communications, consumerelectronics and automotive products.

Were pleased to be able tostrengthen our relationship withASE through the formation of thisJV and appreciate the willingness ofgovernments to help in this regard,said Ajit Manocha, chief manufacturingofficer with NXP. The JV combines theexpertise of both companies to providehigh-quality, competitive productsto address the needs of electronicsmanufacturers around the world.

3M to establish health

care products factoryDiversified technology manufacturer3M is establishing a new health careproducts factory in Shanghai andexpects the facility will help thecompany maintain 20 percent salesgrowth in greater China, includingHong Kong and Taiwan, over the nextfew years.

3M currently has six factoriesin China, but this new facility willbe its first devoted to health careproducts in the medical, dental,

orthodontics and microbiologycategories according to Brad Sauer,

executive vice president of 3MHealth Care.

3M has already invested US$35million in the first phase of thefactory, slated to start operation inJanuary 2008.

Nestle open new petcarefactory in Tianjin

Swiss food giant Nestle has opened apetcare factory in the Tianjin EconomicDevelopment Area (TEDA). It is Nestlesfirst pet food factory in mainland China.

Sim Joo Hua, business unit head ofNestle Purina Petcare China, said when

considering the site for a factory, andweighing up all the different factors suchas the proximity of resources, the qualityof infrastructure and the nearby portfacilities, in case in future we wish toexport from this plant to other countries,Tianjin clearly came out on top.

Annual sales of pet food and suppliesin China are projected to reach someUS$750 million by 2008. And, in fiveyears time the total value of the countryspet-related economy could be aroundUS$2 billion.

Nokia to merge China JVsNokia has received government approval to merge its four manufacturing JVs

in China. The restructuring involves a JV between Nokia and handset manufacturerCapitel, a JV between Nokia and a telecoms gear manufacturing company inBeijing, a Nokia JV plant in Dongguan, and a Nokia JV in Suzhou.

Nokia filed the necessary applications for the merger in January 2006, andobtained approval from all relevant local governments in June that year. Thecentral government issued its preliminary approval in August 2006.

The new entity, which will produce mobile phones and network equipment,will be based in Beijing, and Nokia will hold approximately a 60 percent sharewith the four Chinese partners holding the remaining stake.

MANUFACTURING


NEWSROUNDUP

ImagineChina

ImagineChina


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Dell may add new factory in ChinaThe general manager of Dell Chinasclient service centre, Li Yuanjun, hassaid that Dells sales in China willincrease by 30 percent in 2007 andwith this fast growth, the companymay need to build a new computerfactory in the next three to four years.

Dell opened its second computerfactory in China in May 2006. Thefactory covers 55,000 square metresand is designed to produce 7 millioncomputers each year, doubling theannual production capacity of Dellsold factory in Xiamen, which mainlytargets the Chinese domestic market.

At present, Ch ina is Dell s th irdlargest market after the UnitedStates and the UK. Dell hopes totake up to ten percent of Chinascomputer market.

Cathay, Air China form Shanghai JVAir China and Cathay Pacific are

organising a 50-50 Shanghai JV that aimsto be mainland Chinas biggest airfreightenterprise after it starts operations in thesecond quarter of 2007.

The establishment of the JV withCathay will lay a solid foundation forour cargo business, said Air Chinavice president Fan Cheng. We arenow busy preparing for the jointventure programme and hope to realisepractical progress in the cargo businesspartnership with Cathay in the first halfof 2007.

SITC Logistics plans formajor expansion

SITC Logistics plans to investmore than RMB100 million overthe next two years to acquire thelatest technology and expand itsdistribution network to cover 75percent of China, including all majorand secondary cities.

SITC Logist ics was formedin December 2006 followingthe merger of the logist ics unitof SITC Marit ime with Beij ing-based New Times Internat ionalTransport Service, Chinas largestprivately-owned forwarder ofoutbound airfre ight .

LOGISTICS

DHL invests extra US$110 million in ChinaExpress delivery and logistics services provider DHL plans to invest more than

US$110 million into China in the next few years.

The investment will be used to expand infrastructure, including more transportvehicles and service centre equipment, and for training its employees.

DHL also said in the report that it is considering setting up a North Asia hubeither in Shanghai Pudong International Airport or Incheon International Airportin South Korea.

China is one of DHLs fastest-growing markets and accounts for 25 percent ofits revenue in Asia-Pacific and ten percent of its global sales. The company hasmaintained an annual growth rate of 35 to 45 percent in China in recent years andhas set up 73 branches, making it the largest network among international expressdelivery firms in the country.

In January this year, DHL launched domestic airfreight operations in 17 citiesacross China.

LOGISTICS


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Li Yuanjungeneral manager,Dell Chinasclient servicecentre

ChinaFotoPress

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[email protected]

SITC Logistics wants to become Chinasleading supply chain management andintegrated logistics service provider.

The company last year purchasedOracles Transportation ManagementSystem (TMS), a web-based applicationthat allows authorised internal andexternal users to execute booking/tendering and en route planning, plusreceive status updates.

We are now working with Oraclesconsultant and system developer inAustralia and India to carry out thesecond phase integration of the TMSsuited for the Chinese market, said YangShaopeng, chairman and chief executiveofficer of SITC Logistics.

Yang said in a company statementthat when the first stage of the system iscompleted in April, SITC Logistics wouldbecome the first logistics companyto utilise this technology in its dailyenterprise resource planning (ERP)management in Asia.

SITC Logistics anticipates net profitto increase by more than 30 percent in2007. The main source of the growth isexpected to be from the development ofits supply chain management business.

Maersk Logistics helps establishessupply chain innovation centre

Maersk Logistics is teaming up with anumber of industry leaders to establisha supply chain innovation centre (SCIC)in Hong Kong. The project is beingundertaken by Maersk Logistics togetherwith Cisco, the Metro Group and PCCWSolutions plus five other companies.

The SCIC is a supply chain enablingtechnology centre that is designed toshowcase Electronic Product Code/Radio Frequency Identification (EPC/RFID) integrated solutions fromaround the world.

Maersk Logistics, as a foundingmember of the supply chain innovationcentre in Hong Kong, has been anactive user of RFID technology throughthe RFID Core Competence Centreestablished in 2004, and this initiativewill further support RFID development inthe market, especially here in Asia, saidSteffen Schiottz-Christensen, managingdirector of Maersk Logistics China.

Our customers rightfully expectthat we deploy the most up-to-date technology, such as RFID, toimprove their supply-chains. It hasbeen a positive experience for MaerskLogistics to cooperate with the SCICand we believe this co-operationwill enhance our abil ity to deliverimproved supply chain visibility andoptimisation to our customers throughcontinuous innovation.

The SCIC is intended to provide afocal platform for professionals in supplychain management deploying EPC-standards-based RFID development andapplication activities.

Nippon Express announcesChina tie-up

Japanese transportation providerNippon Express announced that it haslinked up with a logistics subsidiary ofChinese automaker Dongfeng Motor,targeting growth in China.

Nippon Express also said it hadstarted transporting auto parts for enginemanufacturer, Dongfeng Cummins Engine.

The Japanese firm said it was its firstfull-scale tie-up an affiliate of a Chineseautomaker. Nippon Express will initiallyoffer shipping services for 13 autopartssuppliers in eastern Hubei province andexpand the operation to other auto-related

sectors in China.

Kerry and Talke sign chemicallogistics services deal

Kerry Logistics and GermanysTalke Logistic Services have signed aJV agreement to provide a full rangeof specialist chemical logistics servicesthroughout China.

We are convinced Kerry-Talke willprovide a powerful combination oflocal experience and specialist chemicallogistics know-how for the benefit of our

clients in this fast developing market,said Vincent Wong, joint managingdirector, Kerry Logistics.

Talke Logistic Services, based nearCologne, is a chemical logistics serviceprovider and has been working withmajor global chemical manufacturers forthe last 60 years.

Joining forces with Kerry Logistics inChina gives us an ideal platform to furtherimplement our strategy of internationaldevelopment with strong local partners, saidRichard Heath, chief business developmentofficer of Talke Logistic Services.

First China investment forNew City Corporation

New City Corporation hasannounced its acquisition of alogistics facility in Shanghai PudongsWaigaoqiao Bonded Logistics Park,which marks the companys firstinvestment in China. New City isa real estate merchant bankingand investment management firmheadquartered in Tokyo.

The site it will acquire is theWaigaoqiao Logistics Centre PhaseII, a two-storey warehouse completedin June 2006, which occupies morethan 250,000 square metres and iscomposed of 28 independent units.New City will hold 27 of these withthe remaining unit already owned bythe State Grid.

Along with the countrys growingforeign trade, Chinas logistics industryhas attracted considerable attention,including from New City itself, saidthe firms chairman and chief executiveofficer, Frank Orrell.

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The acquisition is in line with thecompanys strategy to capitalize onlogistics opportunities in the Chinamarket and the Asia region.

Ningbo to build coldstorage logistics hub

Author iti es in N ingbo are plann ingto build a cold storage logisticscentre in the citys Jinzhou districtto ease the shortage of specialisedwarehouse space.

The facility will cover an areameasuring 2,200 square metres, makingit the largest cold storage logistics facilityin eastern Zhejiang.

Mapletree moves into WuxiMapletree announced that it will

develop a logistics centre in WuxiNew District with a gross florr area ofabout 42,000 square metres on a 6.8hectare site.

The development consists of three-storey warehouses with mezzanineoffices. The project is Mapletrees thirdin China after Lingang in ShanghaisPudong district and Tianjin.

Best Buy to open up to 26 storesin China in the next 12 months

Best Buy plans to open up to 26stores in China during the companysfiscal year beginning March 4 2007.

The top US consumer electronics retailchain, which recently opened its first storein Shanghai, said that it expects to open upto 23 Five Star Stores, as well as to establishtwo or three Best Buy locations in the next12 to 18 months. The company also saidthat it expects to generate about US$100billion in annual sales in China by 2010.

Best Buy estimates that its China retailsquare footage will exceed 5 millionsquare feet by the end of the upcomingfiscal year.

Alliance Boots moves into ChinaBeauty and drugs retail giant Alliance

Boots has gained a new foothold inChina after signing a JV agreementwith the countrys third-biggestpharmaceuticals wholesaler.

The UK-based company, formed lastyear through the merger of AllianceUniChem and the high street chemistBoots, said it would buy a 50 percentstake in GP for US$74,635,660.

The deal is part of a 50:50 JV withGuangzhou Pharmaceutical, whichcurrently owns 90 percent of GP, asAlliance Boots moves to cash in on therapid growth of the Chinese market. Itunderlies our commitment to be a majorinternational player in pharmacy-ledhealth and beauty, said Alliance Bootschief executive Richard Baker.

Baker expects China to go frombeing the worlds ninth-biggestmarket to the sixth-biggest by 2010.

Wal-Mart confirms Trust Mart dealRetail giant Wal-Mart confirmed

in late February that it had acquireda 35 percent stake in TaiwansBounteous, an operator of 101

hypermarkets in 34 Chinese citiesunder the Trust-Mart brand. Wal-Martexpects to acquire complete controlof the company by 2010, subject tounspecified conditions.

Michael Duke, a Wal-Mart vicechairman, called the investmentan important step in bringing ouradditional scale to our China retailbusiness. Wal-Mart already operates73 stores in China.

Trust-Mart stores employ morethan 31,000 people, and will

Decathlon sets up Shanghai distribution centre

Sports retailer Decathlon has rented more than half the AMB JiutingDistribution Centre in eastern Shanghai.

Guy Jaquier, AMBs president, Europe and Asia, said, China is Decathlonsretail entry into Asia, and we are proud that they rely on the efficiency of AMBfacilities as part of their Asia logistics operations. The delivery of the rightproduct, to the right place, at the right time is a key component of Decathlonscommitment to retail customers.

REAL ESTATE

RETAIL


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ImagineChina

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[email protected]

continue to operate under the Trust-Mart name.

New eCard solution for B&Q ChinaBeijing-based integrated software and

professional services provider e-Futurehas been selected by IBM to provide acustomer management eCard solution forB&Q China.

B&Q has reportedly chosen IBM as itstotal solution provider of front businessprocesses optimisation in China andintegration with SAPs end solutions.

B&Qs parent company, Kingfisher, isEuropes leading home improvement retailgroup and the third largest in the world.Kingfisher operates over 700 stores in 11countries in Europe and Asia under variousretail brands including B&Q, Castorama,Brico Depot and Screwfix Direct.

Since 1999, B&Q has developed andoperated in excess of 50 stores inapproximately 20 cities in China.

China accounts for 90%of chip growth

Chinese manufacturing productsaccounted for 90 percent of the growth of

semiconductor demand in 2006, according toa report issued by PricewaterhouseCoopers.

Despite Chinas demand for chips,the report stated that China continuesto rely on multinational suppliers forsemiconductors. No Chinese-brandedcompanies ranked in the top 70 chipsuppliers to China in 2005.

WhereNet establishesAPAC HQ in Shanghai

Wireless solutions provider fortracking and managing enterpriseassets WhereNet has announced theopening of its Asia-Pacific headquarters

in Shanghai in response to growingmarket demand.

The WhereNet active RFID, real-timelocating system (RTLS) technology wascertified by the China State Radio RegulationCommittee in 2004 and is already deployed atseveral automotive manufacturers in China.

With the opening of the Shanghai office,WhereNet continues to expand its presenceas a global solutions provider of activeRFID, RTLS technology. The companyis currently focusing on two markets inChina, automotive and transportation, anddistribution and logistics.

WhereNet also recently hired Jinbo Yang

IT


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www.joneslanglasalle.com.cn

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Business ParksJileen Loo+86 21 6132 [email protected]

Consulting ServiceLouise Zhao+86 21 6393 [email protected]

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18


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Mind thetalent gapSome fresh perspectives on how to solvethe massive skills shortage that is slowingdown your China supply chain

Facing exponential growth across their China operations,companies are being forced to find innovativealternative solutions to address the increasing talent

shortage in the booming supply chain sector.

One of the biggest factors impacting recruitment andretention strategies in the logistics sector in China is thespeed at which the supply chain area is evolving globally.The rules for such planning and strategy in more matureindustries (and in less dynamic markets) have to be adaptedon the run here.

We are moving towards full network connectivity,says Diana Chan, a principal with Heidrick & Struggles, anexecutive recruitment specialist based in Shanghai. We nowhave real time access to information, transparent inventoryand more predictive sales forecasting on a very advancedtechnology platform.

The effect of such changes, which have only happenedin the last five to ten years, has left a void of knowledgeworkers to operate and manage a sophisticated globalsupply chain.

According to a much-cited McKinsey study, the supplychain area is facing a demand for 75,000 new employeesa year in an industry in which there are only 5,000 newgraduates per year. The number of universities in Chinaoffering logistics courses has grown from one in 2001 to165 by 2005, but the training the students receive tendto be more academic rather than practical, resulting inmost students graduating with diplomas but without anyreal experience.

With such a severe shor tage across a wide rangeof positions, talent, or rather the lack of it, is one ofthe top items on the agenda for companies in Chinaand the first-ever supply chain focused HR conferencerecently took place in Shanghai. The summit provided aforum to present current and relevant insight into bestpractices in the areas of recruitment, retention, training

and leadership development.

The long searchOne very simple issue many companies face is that

finding the right employee in China takes along time. Thelead time to find the right candidate is very long, saysAlex Yang, HR Director of Borgwarner China. You needto find the right combination of technical background,soft skills and aptitude.

19

Russel Beron is a reelance journalist specialising in

supply chain and logistics based in Shanghai. He is a

regular contributor to Chaina magazine.

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Supporting Yangs view, We need highlyspecialised people, says Jiva Guragai of Hamilton.Because we need such technically specialisedpeople, we use all kinds of avenues to findpeople. Some of the attributes we look for areworkplace experience, English skills, a supplychain background and foreign experience.

Faced with such stringent requirements itseems unlikely the skills shortage will ease anytime soon.

With the gap between supply and demand ofskills so huge, its impossible to find everything inone person, says Diana Yang, co-leader of Hewitt

Associates Talent and Organization Analyticsbusiness in China.One of the problems Yang observes is that

contract logistics is such a relatively new idea inChina, having developed only in the last five years.Furthermore, leaders need soft skills in addition totechnical skills. That is, they need the ability togain support across the organisation.

With strategic sourcing on the increase,employees who understand western stylebusiness practices and needs coupled with a solidknowledge and experience of the local marketsare in high demand.

According to Olivier Levy, managing directorof Dragon Sourcing, there is a drastic shortageof highly experienced buyers. The key skill

required is the ability to negotiate, which can behard to find.Some companies have also complained about

the disconnect and lack of understanding betweenHR departments and line managers.

Other specific skill areas in supply chainmanagement where shortages exist include: ashortage of logistics engineers, quality processengineers, commodity managers and, moregenerally, people that combine strong technicalskills with business acumen.

A void in solid local leadership is at the heartof the talent gap. According to a recent survey of60,000 respondents, initiative and communication

were two of the most sought after leadershipcriteria, and were typically found to be lackingamong the generation of workers who are now intheir 40s or 50s, the so-called lost generation.

This next generation of children brings theirown set of dynamics to the employment market.Typically from single child families they in turnhave been called the coddled generation. It willbe interesting to see how these coddled youngsterswill fit into the workforce.

Expat talent versus local talentOne of the biggest challenges facing

companies operating in China is finding the rightcombination of skills and experience in oneindividual. While hiring an expat might give youthe skills and knowledge of the latest westernbusiness operational practices, such individualsrun the risk of finding it difficult to operate in anunfamiliar environment.

And though more and more foreigners arebecoming conversant in Mandarin, being able tospeak the language doesnt always fully bridge thecultural divide. Furthermore, according to DianaChan, the problem with hiring an expat is oftenthe lack of China market knowledge in terms oflegal, tax and people management issues.

One of the top reasons why foreign executivesin China fail according to Ivo Hahn, chief

executive officer of recruitment firm XecutiveGroup is because of cultural differences (72percent) much more so than a failure in leadershipabilities (only 37 percent).

The prevalence of regionalisation in China isalso a problem, says Chan. As many expats inChina find out to their dismay, not every city inChina is as international as, say, Shanghai.

Can the talent problem then be addressedthrough hiring local talent? The answer is onlypartly. According to the experts, some of theproblems in hiring local candidates include aninability to engage global counterparts and a lackof home-grown talent.


COVERSTORY

With the gap

between supply

and demand oskills so huge,

its impossible to

ind everything

in one person

Diana Yang, Hewitt Associates


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Another big problem with local talent is thefast-tracker mentality which makes retention abig issue.

Finding the bad applesThe issue of pre-employment due diligence

is a much more crucial factor in China than itis in other countries, argues Peter Humphries ofChinawhys consulting. As much as 16 percent ofChinas GDP is reportedly not realised as a resultof corruption and white-collar crime, comparedto an estimated four percent in the US, whichmakes it increasingly important for companies to

do due diligence on potential hires.Our goal is to help promote goodbusiness ethics and due diligence, says PeterHumphries. One area that Chinawhys focuseson is pre-employment checks and facilitatingemployment integrity programs whichcategorise staff into different screening levels.They will run background checks for instancesof previous litigation.

Legislative changesChanges to Chinas employment contract

law are also making it more difficult for foreigncompanies to manage employees in terms of

contracts and layoffs.Until recently, says Dr. Andreas Lauffs, head

of the China Employment Practice Group forBaker and McKenzie, most companies haveused short term or fixed term contracts to hireemployees. However, Lauffs remarks, underthe new law, in most cases severance will benecessary and there will be restrictions on thenumber of fixed term contracts an employercan use to hire an individual.

Added to this fact i s that labour unions arebecoming increasingly important, which doesnot bode well for foreign companies whohave always profited from lower salaries inChina. Lauffs noted one case where a logisticscompany with branches in China was being

pressured to equalize pay and benefits acrossthe board.

Some solutionsTo meet the hiring chal lenge employers have

to balance a mix of local and foreign talent byimplementing strategic planning throughoutthe organisation.

Bee-Choo Lim, Intels materials director forAsia and Latin America, noted the importanceher company places on organisationaldevelopment. With Intel operating in 13countries and utilising English as the commonlanguage platform, Lim stressed how crucialit is for companies such as hers to create adialogue, identify common goals and values

and create opportunities for learning.According to Sim Cheng Hwee, a Singaporebased consultant focused on strategic planningand demand forecasting, one of the keysolutions to the HR challenge in China is to planahead. As anybody who has worked in Chinacan testify however, business tends to movemuch faster than in other markets which oftenleaves HR planning lagging behind.


COVERSTORY

Employers have

to balance a

mix o local andoreign talent by

implementing

strategic planning

throughout the

organisation.

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Some of the strategies that Intel uses tocombat the HR challenge is extensive on the jobtraining, classroom training, web-based e-learningand innovative approaches to facilitating intra-

company dialogue, such as learning circles.Ainsley Mann of Coca-Cola has other ideasabout how to find the solve the problem. Withrecruitment, I think its possible that we arelooking at too narrow a field. Maybe we needto find people from other sectors that can beretrained for positions in logistics.

And similarly some companies have tried tomitigate the skills shortage by putting employeesinto cross-functional teams. That way people withspecialized skills can offset the deficit in otherpeoples skills.

The difficulty of retentionWith an explosion of opportunity and

an increasing demand for their skills, topworkers can and do have their pick of jobs.Accord ing to one disgrunt led manager of aforeign strategic sourcing company, many ofthe potential hires he sees have spectacularresumes with multiple big name companieslisted, but each position lasting typically lessthan one year.

Investing in training also brings risk as localcompanies take advantage of the more developedtraining programs foreign companies offer bypoaching employees. 12 out of 15 people trainedin CPRM at Philips left within one to two years,commented one Philips Lighting manager. Yet, touphold standards, Philips is still willing to investin training, she says.

According to some experts, in China there isa 50 percent chance of a new employee leavingwithin the first two years.

Interestingly, salary is not always the numberone reason for people changing positions.Xecutive Group recently reported that Chinesetop managers switch jobs every 15 months. One

of the top reasons cited for this job-hopping isinternational training, 66 percent, followed bysalary increases, 53 percent, and coaching andmentoring, 51 percent.

How to hold on to your star per formersRetaining good employees in such a dynamic

market is not easy. Forward thinking employersare using a variety of strategies to hold on to thetheir star performers. These strategies includeoffering training and development, a clear careerpath and of course offering competitive salaries.

One solution to the retention problem putforward by Chan at Heidrick and Struggles is forcompanies to make retention part of their corporateDNA. Rather than waiting for the exit interviewto discover employee concerns, companies shouldconduct stay interviews, retention workshops andfocus on career development.

Companies also have to make themselves highlyattractive to employees. Being an employer ofchoice is also a competitive advantage, says Chan.Companies with solid brand names, offering theright mix of training and development and careerprogression, have a substantial advantage.

According to Ivo Hahn companies need to treatemployee candidates more like customers. Theyneed to give the employee an emotional associationthrough offering a fun place to work, a passionateintelligent culture and a strong team feeling.

Philip Kwa at Accenture thinks training is thekey stating that, companies that invest in traininghave reported and on average a 53 percentincrease in profit.


COVERSTORY

Maybe we need to

ind people rom

other sectors thatcan be retrained

or positions

in logistics.

Ainsley Mann,

Coca-Cola

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Danger: Proceed with cautionImprovements are needed in the transportation, handling and storage of dangerous goods in ChinaRussel Beron is a reelance

journalist specialising in supply

chain and logistics based

in Shanghai. He is a regular

contributor to Chaina magazine.

The recent introduction of Chinas Restrictionson Hazardous Substances (RoHS) on March1 has made the dangerous goods, or hazmat,

supply chain a prevalent topic for many logisticsservice providers and manufacturers. Theres alot of confusion surrounding this directive andalso surrounding the transportation, handling andstorage of dangerous goods in China in general. Asecond document to be published later this yearwill cover substance restrictions and compulsory

pre-market testing and certification.One area in particular where companieswill need to become more proficient is in theirpreparation of documentation for shipmentsinvolving dangerous goods both into and outof China. 90 percent of rejections of dangerousgoods are due to documentation errors, says JimPowell, president of Transportation DevelopmentGroup, which provides training in transportationof dangerous goods best practices. Its easier toreject a shipment. And post 9/11, security hasbecome a global concern, driving an increasedinspection of international shipments.

A potentially expensive problemThere are plenty of reasons why companies

should be concerned and cost is just one non-compliance of regulations such as RoHS directivescan be very expensive. One such case in the UnitedStates saw a company fined US$97,500 for shippingan aerosol can, which was not reported.

Companies face potential liability from 3PLs fornon-compliance or accidents, meaning the shipper isresponsible for ensuring compliance of regulations.Sometimes criminal liability can be involved.

One of the biggest issues raised at therecent China Supply Chain Council-organisedHazmat conference held in Shanghai was thecomplications of licensing for the transportationof dangerous goods.

Robert Jiang with logistics service provider DajinLogistics recently remarked that, the governmentis very strict about licences. Companies like us arestruggling with licensing issues.

To complicate matters, different licensesapply to different goods. There is not onelicence, there are many, depending on whatkind of chemical youre transporting, saysUrsula Schumacher, technical manager atIntertek Testing Services.

Talk of licences mostly applies to truckingwith road sti ll the opt imal transportat ionmethod for dangerous goods in China. Andaccording to Helen Liu, director at S&WInternational Chemical Logistics, due to theshortage in dangerous goods transportationvehicles, we think China s inland transportat ionmarket has potential.

Improvements are neededAs infrastructure improvements take place

and more companies expand their operationsinto western China, significant improvementsin the quality and service of dangerous goodstransportation are needed.

One insight that surfaced repeatedly at theHazmat conference is that manufacturers andservice providers need to work together moreclosely to improve safety. The fundamental gapbetween manufacturing and forwarding is lack ofknowledge. Manufacturers are not supplying theright information, said a China-based 3PL.

Shippers need to get together and demandcompetency on the part of them as a group. This willincrease their buying power as consumers, says Liu.

Enforcement of regulationsAnother big concern raised at the conference

is the gap between the actual regulation and theenforcement of those regulations.

ChinaFotoPress


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HAZMATFEATURE

As one representative from a multinationalchemical manufacturer remarked: The questionis how strong is the enforcement of thoseregulations. Now the standard doesnt really

exist. As chemical manufacturers we need to helpestablish those regulations.Foreign companies have further difficulties

operating in this market, as they tend to havestricter internal standards and cant navigate themarket as smoothly as local companies.

Terence Li, national logistics manager forArkema, one of the larger chemical manufacturersin China expressed this concern which drewconsiderable agreement from other foreigncompany representatives: We as foreign companiesare competing with Chinese companies that arenot complying.

Part of the problem as chief business developmentmanager with Talke Logistics Services AndreasKirschner highlighted is that Chinese governmentauthorities cannot really cope with the rapid growth inthe industry. Obviously this is a problem felt in everyindividual aspect of the supply chain across China.

Move towards moresustainable manufacturing

There is a greater move toward a consideration ofthe potential environmental problems caused by themanufacturing of products that include potentiallyharmful components or by-products and companiesare becoming more aware of their corporate socialresponsibility in this area and looking at moresustainable manufacturing.

One point raised by Dirk von Czarnowski, a managerat TUV SUD, a testing laboratory, is that manufacturersshould design products to facilitate dismantling and

recovery of components eco-design.

Manufacturers should know their products,they can save money through the use of policydirectives to reduce components in productsand keep in mind market requirements, says

Czarnowski. For example mobile phones dontneed to [be manufactured to] last ten years inChina when people replace their phones everyone to two years.

Al though fast mov ing consumer trendsmight clash with environmental concernsdue to the disposal of mobile phones everyfew years, manufacturers have to balancethese concerns.

A need for greater dialogueOne of the problems, as Arnie Bornstein,

director of marketing and corporatecommunications at BDP International stated,is the lack of a formal forum for discussingsuch issues. What we need to do is to find a

way to get the smal ler players to the table toget their perspective.Both manufacturers and logistics service providers

acknowledged the need to work more closelytogether as an industry to ensure the safe and properhandling of dangerous goods. It is important thatwe enhance our dialogue, stressed Kirshner.

With dangerous goods logistics still in itsearly stages of development, the next fewyears will bring some much needed changes.Including the introduction into the market ofmore specialised service providers focusingon dangerous goods transportation. As onespeaker at the Hazmat conference noted: Allof the logistics companies in China will haveto specialise one day. None of the logistics

companies can hope to do everything.

Manuacturers

and service

providers needto work together

more closely to

improve saety.

Preparing for China RoHS

As China has emerged as one of the worlds leading trade nations and a key link in countless global supply chains,manufacturers must ensure that measures are in place to demonstrate and maintain compliance with the new China RoHS, alsoknown as Administration on the Control of Pollution Caused by Electronic Information Products. Non-compliance with thisdirective can result in stalled supply chains, lost revenue, fines and damage to corporate reputation.

What steps should manufacturers take now?

Establish an internal team or engage trade specialists to manage your compliance with China RoHS.Familiarise yourself with the law and stay aware of any evolving changes. An English translation of the directive isposted at the web site of the American Electronics Association: www.aeaneet.org.Familiarize yourself with the list of more than 1,800 specific parts, components and materials that China considers

to be electronic information products (EIPs). A list has been posted by the American Electronics Association here:www.aeanet.org/governmentaffairs/gabl_HK_Art3_EIPTranslation.asp.Comply with environmental labelling requirements and provide supporting self-declaration information in Chineserelating to the presence of any of the six hazardous substances in your EIPs.Perform supplier due diligence. Validate that your supply chain partners are shipping RoHS-compliant products.Maintain an audit trail to track and capture data pertaining to compliance measures you have taken.Do not assume that your compliance with, or exclusion from, the European Unions RoHS will result in compliancewith or exclusion from China RoHS.

Jiwei Ye

is vice president o JPMorgan Chase Vastera International

Trade Consulting (Shanghai), based in Shanghai.

ChinaFotoPress


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27/44


Q&A

Setting the standard

:What kind of logisticsoperations existed when you firstcame to China?

Susanne Lehmann:Well, ShanghaiVolkswagen had been handling itsown productive materials logisticsoperations for nearly 20 years andit worked somehow. We hadgreat factories and were buildinggreat cars without any logistics

planning department, which wasfounded when I arrived in July2004. The worst thing was it hadbeen functioning without structuredprocesses and planning activities,and without a clear focus on thelocal supply chain side. A lot of thefocus was on imported parts fromEurope and South America.

: Whats the primary focus of theteam that you manage?

Susanne Lehmann:Well, we have30 people in my team, which hasgrown from zero people when

I came here. We focus solely onlogistics planning of productivematerials for the manufacturingside of the business. The reasonthis side of our logistics operationsis separate from the automobileand spare part logistics is thathistorical ly a sales company handledthose operations.

: How many different materialssuppliers do you work with in China?

Susanne Lehmann: More than 400.50 percent of these are based in thegreater Shanghai area though littleby little we are starting to shift thefocus of our sourcing to the north,including the greater Beijing area andChangchun, and the south of China.Such a change is driven by the sourcingstrategies that we are implementing

where we are looking for the bestparts at best price and quality. We haveto of course also consider the logisticscosts of this change, and even thoughat the moment the logistics costs onlymake up around three percent of totalmaterial costs, we have seen a relativelybig rise in logistics costs as a result ofthis change to the sourcing strategy.

:What kind of standards doesShanghai Volkswagen have whenits looking at new suppliers towork with?

Susanne Lehmann:We have teams

with members from all relevantdepartments who are responsible forlooking at potential suppliers. Andwe also have audit teams that lookat suppliers not only from a qualityperspective but also from a logisticsperspective. Were looking to seewhether a particular supplier can readour material call-offs, what systemsthey have in place, do they have goodcontrol over their stock, do they havegood control over the technical validityof single parts, the whole processreally. The audit takes two days. Wealready have more than 200 suppliersaudited in such a way and the rest willfollow this year.

: In what areas is ShanghaiVolkswagen trying to cut costs inlogistics expenditure?

Susanne Lehmann: Well, the threepercent I have mentioned refers tomaterials logistics process costs. Whenyou compare this however to Germanyor Europe where typically thoseinbound logistics costs would be around1.6 percent to 2.4 percent, three percent

is pretty high. It is of course possible toreach these levels of efficiency in China.One of the reasons it is possible is thatin China the safety standards arent asstrict as they are in Germany wherelegislation requiring that all trucks arefully insured for example is one of thereasons that logistics costs there are sohigh. To give you an example, we have

started to localise airbags which have apotentially explosive material inside andare therefore classified as dangerousgoods. In Germany the airbags must bestored and transported in a closed metalbox. In China our suppliers wanted tojust transport the airbags on woodenpallets. Volkswagen of course puts agreat deal of emphasis on ensuring thesafety of our employees and the qualityof our products, so I will not allow thesebasic safety requirements to be broken.But in theory logistics costs here can beeven cheaper than in Europe.

: So what areas have you identifiedas those where costs can be cut?

Susanne Lehmann: Well, of coursewith regards to the containers andtrucks. The container dimensions are notsynchronised with the truck dimensions.There are no standard truck sizes. Nomodularised containers. These are threethings that could be easily improved.We refuse to use cardboard packageswithout pallets which helps to improveefficiency and quality. Implementingwarehousing management systems, verybasic things really.

: Can the problem of a lack of

standardisation of truck sizes berectified easily, and how can ShanghaiVolkswagen help?

Susanne Lehmann: It can be rectifiedand we try to push the changes bytalking with the local 3PLS and withour local logistics service providerwhich is Anji TNT. We work togetherwith Anji TNT to help standardisetheir truck fleet and we also use astandardised method of calculatingcosts which really helps.

&Susanne Lehmann is the logistics planning manager for German car manufacturer Volkswagens joint venturewith Shanghai Automotive Industry Corporation, Shanghai Volkswagen, based in Shanghai. Since July 2004 shehas been responsible for implementing a lean inbound logistics operation for Shanghai Volkswagen.


28/44

: How are the 3PLs doing inhandling the requirements of automotivelogistics in general?

Susanne Lehmann: We haveoutsourced the entire purchase partof the logistics process which includestransportation from local suppliersand bringing in containers from theport to Anji TNT. They also handle ourwarehousing, storage, re-packaging andline feeding. So they are responsible forquite a big part of our global logistics

chain. We are both working hard tobuild a strong working relationship andthey are also developed some softwarespecifically for Shanghai Volkswagen.Anji TNT is also handling the spareparts side of our supply chain. Withregard to other companies, all the big3PLS are trying to get into this area.But we find they tend not to focusmore on automotive logistics but moreon import/export related activities.

: Do you share ideas with yourcompetitors?

Susanne Lehmann: Yes, we meetregularly at conferences to share, to

learn and to see how we can worktogether to help automotive logisticsin China develop. I think its importantthat we dont just copy the way thingsare done in other parts of the world.Furthermore, the larger automotivemanufacturers, including the largerChinese companies, need to worktogether on developing standards inChina. But there arent standardisedsystems currently between Germany,the rest of Europe and the United States.

So if we three cant come together howcan we tell the Chinese companiesto accept one set of standards? Theautomotive industry globally needs toagree on one set of standards.

: Is there a formal forumwhereby the larger automotivemanufacturers can work togetherin China to try to develop suchstandardised systems?

Susanne Lehmann:At the momentunfortunately its done on an informalbasis. Wed like to have that formalised.I of course have some ideas abouthow that might happen but the finaldecisions have to come from theChinese authorities.

: Volkswagen has a number ofdistinct and separate JVs in China. Towhat extent is the materials logisticsoperations centralised in China forVolkswagen as a whole?

Susanne Lehmann: Responsibility

wise , it s comple tely separa te.But of course we are workingtogether and are starting to lookat our supply chain as a whole,comparing and benchmarking,finding synergies and thinkingabout how to improve thingsthrough economies of scales. Wedo have suppliers in commonso why not work together moreclosely in working with suppliers;this is starting to happen.

Chinese design meets German engineering know-how

If youve ever caught a taxi in Shanghai, chances are that your taxi wasa Shanghai Volkswagen manufactured Santana, one of Chinas best sellingsedans. Keen to replicate their success with the Santana, Shanghai Volkswagenlast year revealed the Neeza concept car, a crossover between a sportscoup and an estate with an off-road appearance, and a car which has beendesigned in China for China, unlike many of the companys other models.The car attempts to combine Chinese and German design philosophies.

Many analysts have suggested that the Neeza signifies the future of newmodels from Shanghai Volkswagen: produced with Chinese culture, tastes

and requirements firmly in mind, with a mix of traditional Chinese andmodern European features. The front of the concept features a grille andbumper design that is typically Volkswagen, yet traditional Chinese windowengravings are incorporated into the grille design.

The name Neeza originates from Nezha, the name of a famous andmystical figure from Chinese history who had magical weapons andfought evil spirits.


Q&A


29/44

Chinas third engineTianjin is poised to become the northern counterpartto southern powerhouses Shanghai and Shenzhen


REGIONALFOCUS

Since opening up as a treaty port in 1860,Tianjin has been one of Chinas busiest portsand one of its more robust domestic markets.

Now, almost 150 years later, this major port cityis being groomed to become northern Chinasanswer to boomtowns Shanghai and Shenzhenin the South.

Geographically located between Beijing and theYellow Sea, Tianjin is the largest city in the GreaterBohai Bay area, an economically dynamic areathat includes Tianjin and Beijing municipalities,and Hebei, Liaoning and Shandong provinces.

Tianjin is a city of more than ten million,boasting the Greater Bohai Bay areas largestport and most developed logistics infrastructure.Located only 120 kilometres from Beijing andbeing the capitals closest port Tianjin is poisedto benefit from central government mandates todevelop the city into an economic and logisticshub for north China and Northeast Asia.

Binhai New AreaThe government has made the comprehensive

development of Tianjins Binhai New Area a toppriority for the next several years, including it inthe 11th Five-year Plan (2006-2010) as a majorobjective. Well-positioned to facilitate northernChinas overseas trade, Binhai New Area has 153

kilometres of coastline and includes Tianjin Port,Tianjin Economic and Technological DevelopmentArea (TEDA), Tianjin Port Free Trade Zone and theTanggu, Hangu and Dagang administrative regions.

Under a familiar combination of preferentialgovernment policies, tax breaks and investmentincentives, Binhai New Area will be convertedinto Chinas third major economic engine,complementing Shenzhen and Shanghais Pudong.The area covers a total of 2,270 square kilometres.

The pace of Binhai New Areas developmentnoticeably quickened in 2006. For an idea of the impactthe area is having upon Tianjins economy, considerthat last year it was reported to have accounted for51.4 percent of the citys economic growth. Lastyear the area also imported more automobiles thananywhere else in China and produced ten percent ofthe worlds mobile phones.

Aside from upcoming physical infrastructureimprovements, the central government isworking to develop the necessary financialinfrastructure to facilitate the Binhai New Areasdevelopment. In February 2006, a decade-oldnational moratorium on new commercial bankscame to an end with the establishment of BohaiBank, which is headquartered in Tianjin andincludes UK-based bank Standard Charteredamong its shareholders.

Chris Horton is managing

director o the Meridian Group

o Hong Kong, a logistics-

ocused consultancy with oices

in Hong Kong and Kunming. He

is a regular contributor to Chaina

magazine.

ImagineChina


30/44

Room to growAs a major supply chain link in northern China,

Tianjin is an increasingly important logistics hubfor more than just itself and Beijing. Tianjin also

serves as a logistical gateway to areas furtherinland such as Shanxi, Shaanxi, Gansu, InnerMongolia, Ningxia and Xinjiang.

But Tianjin is still relatively underdeveloped,especially when compared to the facilities onshow in Shanghai and Shenzhen. What does thismean for logistics providers considering investingin the city sooner rather than later? In the short-term it will likely mean waiting for infrastructureimprovements to come online. In the mid- tolong-term it could mean early footing in what thecentral government is pushing to become one ofChinas main logistics hubs.

Leading European warehousing and logisticsspace developer Gazeley has set up a joint venturewith Hexing Logistics to develop its first G. Park

in China in the Tianjin Beichen Hi-Tech IndustrialPark, ten kilometres from Tianjins internationalairport. And the 266,700-square metre facilitysfirst major tenant will be Wal-Mart, whoseTianjin Distribution Centre will be completed inSeptember this year.

Jack Yang, Gazeley China country director, saidthat Tianjins status as a north China economiccentre with a strong industrial base and qualityport facility make it an appealing investmentdestination. Most importantly for logisticsproviders, the central government has alsoendorsed the citys ambitious plan to develop andestablish itself as the logistics hub for northernpart of China, he said.

Gazeley fully recognizes the importance

of Tianjin, not only for its economic strengthtoday, but the enormous potential for logisticsdevelopment in the future, Yang said.

Tianjins opportunity lies in its slowerdevelopment when compared to other Chinesecities of similar size, he said.

Compared with Shanghai, Shenzhen, Beijingand Guangzhou, Tianjin still lags behind in terms ofmodern logistics facilities, number of internationallogistics operators present and the citys overallbusiness service capacity, but with the centralgovernments preferable policies toward Tianjin,we expect the above to improve quite rapidly.

Tianjins free trade port

Theres serious money being invested in Tianjin Dongjiang Free Trade Port, the new partof Tianjin Port which is now nearing the end of its first phase of construction. Hao Yunhui,deputy director of the Department of Investment with Tianjin Port said, Investors from homeand abroad are showing great interest in the Dongjiang Free Trade Port thanks to its highpotential for economic growth.

The Tianjin Dongjiang Free Trade Port, with an expected area of ten square kilometres willbe the largest free port in China. The government approved the free port in the DongjiangFree Trade Port in August last year and it is the second free port to be established after theeight square kilometre Shanghai Yangshan Free Trade Port. But it is widely expected thatthe Dongjiang Free Trade Port will enjoy more preferential policies on financing and taxthan Yangshan.


REGIONALFOCUS

Tianjin still lags

behind in terms o

modern logisticsacilities, but

we expect the

environment to

improve quickly.

Jack Yang,

Gazeley

ImagineChina

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