This week China celebrates the end of the Year of the Snake and the beginning of the Year of the Horse. The Chinese New Year also represents a good opportunity for companies to review their supply chain strategies in China given the changes—both economic and logistics-specific—that could unfold in 2014.
These changes will put greater emphasis on increasing productivity as well as the role of technology such as transportation management system (TMS) solutions to increase efficiency and capture savings.
Blue collar wages in sectors such as manufacturing are expected to rise by 10% or more in 2014 and for the foreseeable future. Energy and water, which are in short supply, and raw materials are also projected to be more costly over the next year.
An important development both in terms of China’s evolving economy and supply chain management is the success (or failure) of the Shanghai Free Trade Zone. Work on the zone began in September 2013, and as the pilot phase advances companies need to keep an eye on its progress.
Why is the free trade zone so important? Its significance cannot be overstated because the zone represents a big step in the Chinese government’s efforts to conform to global trade trends and establish an open, free market economy. For example, within the 30 square kilometer area, restrictions on foreign investment will be eased and interest rates set by the markets. China’s heavily regulated currency, the yuan, will be traded freely within the zone.
The logistics implications are also far-reaching. Looser customs oversight and the possibility of exemptions could boost international transshipment volumes at Shanghai, and make the port more attractive by speeding up cargo flows. Although Shanghai has been the world’s busiest port for the past three years (they handled 32.5 million 20-foot equivalent units, or Teus, last year), international transshipments only account for 5.5% of throughput compared to 50% at Hong Kong. Other potential benefits to shippers include improved services and more competitive rates as foreign logistics firms invest in the zone, more modal options (i.e., short-sea to domestic ports on foreign vessels), and the ability to transfer and store goods without incurring duty or customs costs.
As the Shanghai Free Trade Zone takes shape, shippers need to work with their supply chain partners to identify ways to use the zone to lower costs and improve their import/export operations in China.
Deploying technologies such as TMS solutions is another strategy that shippers should consider. TMS-based control towers, for instance, provide a blend of on-the-ground and global supply chain expertise. The best solutions offer standardized processes that are tailored to local regions, a single global platform that gives 360-degree network visibility, improved compliance, and access to mission-critical business intelligence that translates into reduced costs.
Capabilities like these are gaining in importance as China’s dynamic economy, driven by innovations such as the Shanghai Free Trade Zone, requires companies to manage both locally and globally if they are to stay competitive in the region. They will need to keep pace with new developments and form alliances with trading partners to optimize freight networks.
Although China’s annual growth rate of almost 10% is expected to moderate in 2014, the country will remain a top priority for companies looking to expand their businesses through domestic growth or broader supply chain strategies such as nearshoring.
Also keep in mind that the potential for improving operational efficiency in the country is vast. For example, even in today’s modern business environment where the number of technological supply chain solutions seems limitless, many shippers in China continue to manage freight transportation manually using pen and paper or spreadsheets.
One thing seems clear: in the Year of the Horse the galloping pace of change in China will not falter!
新年快乐 (Happy New Year!)