Historically, before Hong Kong reverted to Chinese rule and China’s entry into the World Trade Organization, the country relied on Guangdong province in southern China as a manufacturing center and Hong Kong as an export hub. Guangdong is in Southern China, close to Shenzhen and Hong Kong.

Today, as mainland China deals directly with other countries for trade after the country’s accession into the WTO, the role of Hong Kong as an export hub and Guangdong province (Pearl River Delta) as manufacturing base is gradually shifting toward central (Shanghai/Yangtze River Delta) and north (Beijing-Tianjin/Bohai Bay area) China. These regions have caught up with the momentum of the new foreign investment boom in China, and are now growing faster than the South.

With a natural geographic advantage and a strong commercial history, Shanghai has developed further and faster since the 1990’s, particularly in logistics infrastructure, commercial environment and government support. The city has also been a leader in offering new business models, with its variety of economic zones, trade zones, and bonded zones.

Logistics activity to service this economic boom has correspondingly shifted toward the center of China, thus allowing Shanghai and nearby ports access not only to the middle of the country but also enabling the area to serve as a collection and distribution option serving points both north and south.

The government’s plan to establish a network of distribution parks throughout the country will further encourage growth in Shanghai as a central trading hub. Organic growth is not an option—the “cow path” approach won’t provide a robust enough transportation network to serve the needs of the burgeoning population—so the country’s eleventh Five Year Plan proposes measures to improve and build new railways, ports and airports, and highways. The Plan articulates plans to deregulate transportation services, approve more third party logistics company licenses, and most importantly, build a network of 30 distribution hubs in various parts of the country.

Shanghai's scale and scope

Shanghai is now the largest port in the world by tonnage, and the third largest port by container throughput. It is the second largest Chinese container port behind Hong Kong. At the end of 2006, Shanghai’s TEU throughput reached 21.7 million, surpassing Los Angeles (Port of Long Beach), the largest container port in the U.S., by nearly 6 million TEUs. In addition to its scale, Shanghai is growing very quickly—its economy has been growing at about 12 percent per year, while Los Angeles is plodding along at about 3 percent per year.

The amount of trade that has passed through Shanghai has ballooned in recent years. Since 1994, the port has grown at 20 to 30 percent per year.

In connection with the growth, the port has received an extraordinary amount of foreign direct investment. From 1992 to 2002, investors poured six billion dollars into development at the port. And, more is coming. The Danish AP Moller Maersk group is a key investor in the second phase of expansion of Shanghai’s port, which will total $12 billion.

There have been dozens of important port construction projects, resulting in increased channel depths to handle larger containerships, longer berths, and wider channel widths. The Shanghai International Port Group has been instrumental in developing the infrastructure, forming joint ventures with local companies along the Yangtze River to develop terminals, warehouses and logistics facilities in smaller cities such as Chongqing, Wuhan, Nanjing, and Changsha.

The port invested $1.8 billion in dredging in 2006, and has cleared underwater reefs that blocked access. It has also improved navigability by improving signalization of the channel and mandating the use of global positioning systems (GPS).

The political and economic influence of Shanghai and its recent development cannot be overstated. One dramatic measure: Chinese exports to the US were up 22 percent to nearly $13 billion last year. Western companies continue to bet heavily on China; a Boston Logistics study on “The Asian Sourcing Boom” recently found that western companies favored China three to one over the next closest low-cost sourcing platform.

Access to the inland is improving

Shippers have a variety of options for accessing the hinterland. Ningbo, the closest major port, provides an alternative, especially for access to points south of Shanghai. In addition, there are many inland ports along the Yangtze that can provide lower-cost access to inland points than unloading at Shanghai and transporting by road or rail. There are six major inland ports within 170 miles of Shanghai: Nantong, Jiangyin, Changzhou, Yangzhou, Zhenjiang, and Nanjing. Ports farther inland include Maanshan, Wuhu, Tongling, Anqing, Jiujiang, Huanghshi, and Wuhan.

The road and air networks are getting progressively better. The road network has expanded, especially with the completion of the Shanghai portion of the trans-continental north-south freeway. And, airfreight frequency is increasing. UPS has been granted rights to fly six flights per day to Nagoya, Japan, and the carrier could eventually link this service with Shanghai. DHL is plowing $175 million into a hub in Shanghai’s Pudong Airport.

Still, inland transit times vary widely by mode. A trip from Chongqing to Shanghai takes two to three days by road, three to four days by rail, and four to six days by water.  A trip from Chongqing to Wuhan Road takes two to three days by road, three to four days by rail, and four to five by water.

Shipping to/from Shanghai is easier

Shanghai, the “laboratory for China’s ports,” has become much easier to do business with. Customs has launched an e-port initiative and waits and delays have been drastically reduced. Along with Tianjin and Guangzhou, Shanghai Customs has established electronic links with PRC Customs, the General Administration for Quality Supervision Inspection and Quarantine, the Ministry of Finance, and banks. It has also upgraded outdated systems, moving its old H883 system to a newer H2000 system. It has also expanded working hours at Customs.

The result has been a reduction in clearance time from 100 hours for imports and 30 hours for exports down to around three hours. In addition, e-filing has eliminated paper filing. Customs wait times are getting shorter.

China has put in place a security program akin to C-TPAT in the U.S. Participating companies that have a clean record get expedited treatment, while black-listed companies receive “the slow treatment.” U.S. Customs officials are working onsite in Shanghai on the Container Security Initiative (CSI)—Shanghai is the 36th operational CSI port.

Shanghai vs. Ningbo--cooperation vs. competition

The opening of the Shanghai Yangshan deeepwater port has prompted expansion and construction at competing ports such as Ningbo. In 2006, Ningbo and Zhoushan port authorities of Zhejiang province announced plans to merge and become a single entity in order to face the increasing competition for cargo volume against their northern neighbor.

The growth potential in Ningbo-Zhoushan Port is huge. The combined ports are expected to achieve throughput of more than 4,500 million tons and handle 10 million TEUs of container freight by 2010. By 2020, the joint port facility is expected to handle 6,500 million tons of cargo and 22 million TEUS of container freight.

Meanwhile, the Ningbo-Zhoushan Port Authority plans to invest $1.25 billion to build 12 container berths at Zhoushan’s Jintang Island with construction beginning this year.

Two other ports within the Ningbo area—Beilun (in Ningbo) and Nantong—are rapidly expanding as well. Beilun, which has water depths of 18.2 meters (vs. Shanghai Yangshan’s 15.5 meters) has partnered with Hutchison Whampoa for its expansion. Nantong already invested $140 million to build seven berths and can now handle 100 million tons of cargo and 350,000 TEUs of container freight annually. In five years, Nantong is expected to handle 200 million tons of cargo and 800,000 TEUs of container freight annually.

Service providers are abundant

Major carriers serving the mainland China to U.S. trade include Maersk/P&O Nedlloyd, COSCO, China Shipping, Hanjin, and APL. Other carriers serving the China-U.S. trade include OOCL, Evergreen, Mediterranean Shipping, Hyundai, and CMA/CGM. The largest port connections on the U.S. side include Los Angeles/Long Beach, New York/New Jersey, Seattle, Tacoma, Savannah, Oakland, and other East Coast ports in Virginia, South Carolina (Charleston), and Florida (Miami).

There is a wide range of third party logistics companies (3PLs) that can assist with multi-modal shipments and complete logistics solutions in and around Shanghai. These include state-owned companies like Sinotrans, COSCO, China Shipping, China Post, China Material Storage and Transportation Co., Ltd (CMST), and China Rail Logistics); privately owned Chinese companies like Da Tian W Group, PG Logistics, and ZJS Express; and multinationals like Deutsche Post World Net/DHL, FedEx, UPS, and TPG/TNT, OOCL and Menlo.

•     Sinotrans, whose facilities are primarily in Eastern China, has an extensive freight forwarding business.

•     COSCO, which is known for its shipping operation, is now a significant logistics service provider.

•     China Post, a division of the state postal service, offers a platter of freight logistics services such as transport, express (via China Courier Service), packaging, and warehousing.

•     Da Tian W operates over 1,500 vehicles serving 500 sites in China.

•     PG Logistics (PGL) offers a wide range of third party logistics services.

•     ZJS Express focuses on the express segment.



In addition, about 30 leading international providers offer services in and around Shanghai, such as Schnieder Logistics, APL Logistics, Maersk, DHL, OOCL and Menlo. As China fulfills its commitment to WTO by opening up of this transport and logistics sector, multi-national 3PLs are quickly gaining ground in the China market.

Schneider Logistics has been in Shanghai since 2005, offering a platform to deliver end-to-end freight management from China to North America and Europe.

Menlo Worldwide has recently acquired Shanghai-based domestic 3PL Chic Holdings and its subsidiaries Shanghai Chic Logistics and Shanghai Chic Supply Chain Management, increasing its footprint in central China.

Kuehne & Nagel was the first global logistics provider to operate a wholly owned enterprise in China under the Closer Economic Partnership Arrangement (CEPA). Since obtaining the legal status to own 100 percent of its operating subsidiary in Shanghai in 2004, the company has grown rapidly in international forwarding (sea, air and overland transportation) and logistics services (NVOCC operations, warehousing, packaging, distribution, transshipment, consolidation, customs and insurance brokerage). Kuehne & Nagel continues to invest in the Yangtze River Delta region and Shanghai area (Ningbo, Nanjing and Suzhou). wt

Sidebar: Progress Report: The World's Biggest Container Complex Enters Phase 3

Yangshan Deepwater Port, an off-shore island complex connected to the mainland by a 20-mile long Donghai Bridge (one of the longest structures in the world, costing $11.6 billion to build), is a mammoth container terminal complex intended for large cargo ships over 8,000 TEUs. Final completion of the seven-phase project is expected by 2020. The total investment for this 20-year project is expected to be as high as $40–50 billion. When it is complete, Yangshan Deepwater Port will likely be the largest container terminal in the world.

Phase 1, which took two and half years to complete and was finished in 2005 with the construction of five berths, brought the capacity to nearly 3 million TEUs annually. The original seven-meter deep and 250-meter wide channel has been deepened to 8.5 meters and widened to 300 meters. As a result, fifth- and sixth-generation ships can also berth in the deep-water port.

Phase 2, which was completed in end of 2006, features 0.6 square kilometers of land that was obtained via sea-fill and four additional berths have been built, which have a capacity of 2.2 million TEUs per year. Phase 2 attracted overseas investors such as Hutchison Whampoa, AP Moller Maersk, PSA, OOCL, as well as major domestic terminal operators such as Shanghai International Port Group, COSCO, and China Shipping Group. Hutchison and AP Moller were the two largest shareholders in Phase 2, each controlling 32 percent.

Phase 3, which will be completed by end of 2010, will involve seven new berths covering four square kilometers on the Xiaoyangshan Island. Designed to handle 5 million TEUs annually, it will be bigger than both of the previous two phases. According to development officials, Phase 3 will yield a handling capacity of at least 11 million TEUs to Yangshan.

Sidebar: What Does the China Logistics Scene Look Like on the Ground?

Frank Lange, Vice President of Global Development, Menlo Worldwide Logistics, who oversaw Menlo’s acquisition in 2007 of Shanghai-based Chic Logistics (130 operating sites in 78 cities), has seen big changes since he made his first trip to China in (1991). During an early warehouse visit he mistakenly assumed he had arrived at siesta time: “guys were sitting around and sleeping on the pallets.” But, he would learn this was standard operating procedure. “And the manager told me this was a very good facility with a very good staff, ‘they show up for work every morning.’ You were a hero if you could find a covered truck in Wuxi.”

In 2005, after the Chinese government opened up warehouse space to foreign businesses, Menlo committed to becoming a player in the market. Despite the change in national law, dealing with local bureaucracies as a Wholly Owned Foreign Enterprise (WOFE) wasn’t easy, “there were seven layers of approval required, a single ‘no’ could derail your license application.” Today, Menlo directly manages 2 million square feet largely devoted to managing product within China itself. “The vast majority of our clients are focused on the domestic demand market: consumer goods, automotive, electronics.”

Getting acceptable leased space remains a challenge. “The real issue is the quality of the buildings themselves,” observes Lange. “A lot of warehousing space in China originated out of the old economy. The buildings were not well constructed, some of the older ones even lacked lights.”

But now, with the entrance of warehouse developers like ProLogis into the market, the situation is starting to improve.  

So what’s it like today in most Shanghai warehouses? “Now you’ll walk in and see forklifts moving and workers in uniforms. You won’t find trash anymore in front of the doors. There’s a higher level of professionalism. Things are definitely improving.”

—Neil Shister

Sidebar: Intelligence: Information Used Wisely

Despite the progress made in Shanghai over the last decade, it is still possible for non-Chinese companies to make costly mistakes or omissions. A successful plan to make Shanghai part of your supply chain should include the following elements:

•     Gather information:

•     Figure out what location best suits your operations

•     Identify the suppliers that are best qualified to handle the aspects you want them to provide

•     Establish relationships, which includes but is not limited to gathering requests for proposal or quote

•     Establish robust processes that will form the basis of a long-term supply chain

•     Supply chain planning

•     Production processes

•     Quality procedures

•     R&D activities, with appropriate intellectual property protection

•     Tax and legal plans

•     Formalize expectations of partner providers

•     Negotiate contracts

•     Establish proper licenses, leases and facility agreements

•     Formalize expatriation of domestic managers

•     Recruit reliable local Chinese staff

•     Build system linkages

•     Supply chain systems architecture and implementation

•     Order placement and fulfillment mechanics

•     Pricing, accounting, and other billing aspects

•     Sales, distribution, and reverse logistics information flows

Singapore Connects: Economy of efficiency makes Singapore the world's best-rated hub. By Dann A. Maurno

Logistics is no less than “the lifeblood of Singapore’s economy,” according to Mr Tat-Win Law, head of logistics with the Singapore Economic Development Board.

Singapore has approached logistical superiority like the United States approached the Mercury space program—by teaming government, industry, and the best minds in academia toward achieving a lofty nationwide goal.

Singapore, as a hub, offers the world’s best logistics capabilities and performance. So say the world’s logistics providers in a November 2007 World Bank survey, called Connecting to Compete: Trade Logistics in the Global Economy. Those providers ranked 150 countries according to a “Logistics Performance Index” that measured customs procedures, logistics costs, infrastructure quality, the ability to track and trace shipments, timeliness in reaching destination, and the competence of the domestic logistics industry.

 They ranked Singapore a whisper ahead of the Netherlands, followed by Germany, Sweden, Austria, Japan, Switzerland and Hong Kong. As the report title suggests, connectivity is key to Singapore’s preeminence. “All of the connectivity, sea, air, land financial, flow of information, flow of finances, flow of physical documents, flow of physical cargo―all of that has been created such that it is almost unique in the world,” says Brian Lutt, president of Singapore-based APL Logistics.

Twenty of the world’s 25 leading 3PLs have established a presence in Singapore, while 6,000 multinational corporations use the hub for logistics. About 3,600 of those multinationals have located regional head quarters in Singapore, including Boeing, Citigroup, ConocoPhillips, ExxonMobil, Lockheed Martin, Raytheon, IBM and Lenovo. A good many of those multinationals use Singapore for transportation and distribution alone. Moet Hennessy Louis Vuitton established a regional distribution center there, from which it distributes more than 50 brands of luxury goods (e.g. Christian Dior, Givenchy) to Asia-Pacific, the U.S. and Canada.

Free trade, connectivity

“With a small domestic market and population, Singapore understands that opening up to free trade is key to its survival on the global stage and crucial to its economic prosperity,” says David Ross, regional vice president of FedEx Express, South Pacific. As Ross describes, FedEx in looking for a hub was attracted to Singapore’s mission of access and connectivity in the region. Since opening in Singapore in 1984, FedEx has leveraged Singapore’s commitment to access to grow its operation, and now originates more dedicated flights out of Singapore than any other express carrier.

Besides its obvious geographic advantage (being within a seven-hour flight of half the world’s population), Singapore has signed 13 free trade agreements with key markets, including the U.S., that make up 60 percent of the world’s GDP. Under the U.S.-Singapore FTA, more than 90 percent of tariffs on Singapore goods entering the U.S. have been removed.

The U.S.-Singapore FTA aside, the remaining FTAs benefit American manufacturers and distributors that assemble or refine product in Singapore. They can leverage such key markets as China, India, Japan, South Korea, Jordan, Australia and New Zealand at preferential tariffs. Singapore is also part of the ASEAN Free Trade Area that facilitates the movement of goods within the emerging ASEAN regional bloc.

Increasingly, Singapore enables U.S. companies to source regionally. “It’s a huge hub, with huge economy of scale, creating opportunities for poorer countries in the region to develop, and where you have sea, air and different possible combinations,” said Jean Francois Arvis, senior economist of the World Bank’s International Trade Department, and a co-author of Connecting to Compete. “You hear interesting stories of people sending containers of garments from the poorest companies in regions like Cambodia or Vietnam, then reconsolidating to ship part by air cargo to Europe or the U.S.” 

Efficiency, a pro-business environment

Singapore is famous for its air and seaport infrastructure, of course, but Law emphasizes the “ pro-business environment that is transparent, reliable and stable, as well as a host of comprehensive services such as financial, legal services and niche supply chain solutions that support trading activities.”

Certainly, Singapore offers remarkable economy of scale. It reigns as the world’s busiest container port (one out of ten containers worldwide passes through Singapore), linked to 600 ports in 123 countries via over 200 shipping lines. Moreover, Singapore’s Changi Airport is Asia’s fifth largest air cargo airport.

While that scale creates economy, Law emphasizes efficiency and control. “This can be attributed to the logistics solutions that Singapore offers through electronic systems such as TradeNet and TradeXchange, proprietary systems that expedite customs clearance and information exchange with key partners and service providers including freight forwarders and financial institutions. Thus the government, freight forwarders and financiers are all keyed into one system, and customs on a typical shipment takes between ten minutes and four hours, versus four days.

Sophisticated manufacturing

Manufacturers find Singapore less a “gateway to Asia” or “gateway to the West” than the best first link in a global supply chain. For example, Singapore-based Flextronics used easy access from Singapore to build a competitive, 30-country supply chain: it designed a product in San Jose and Singapore, tested prototypes in Sweden, and manufactured in low-cost locations including China and Brazil. 

Most of that manufacturing is very high-tech and high-value, observes APL’s Brian Lutt. “Singapore doesn’t have the personnel or staffing that China has to make labor a significant factor in making a manufacturing investment. Motorola, the chip guys and IBM do a lot of [research and development] there, not so much manufacturing as R&D itself. It’s really a high-tech high-end research [environment]; one of knowledge creation and innovation.” Lutt expects that “only high-end manufacturing will stay at the end of the day, and real labor-intensive work will continue to come through India and China.”

These activities demand a high level of technological know-how, special skill-sets, supply chain efficiency and intellectual property protection.

The strong manufacturing sector creates an equally strong need for value-added services, including the usual end-to-end solutions of sourcing, order management and optimized network distribution, but also kitting, postponed manufacturing and light assembly.

UPS Express package services opened in Singapore in 1988, and quickly branched into supply chain and 3PL solutions in 1990 with UPS Supply Chain Solutions, for logistics value-added services and freight forwarding. UPS has taken full advantage of Singapore’s easy, pro-global customs and trade policies. In 2006, UPS opened a 425,000 square foot facility in the Airport Logistics Park of Singapore (ALPS), a free trade zone adjacent to the Singapore Changi Airport.

Finally, U.S. companies are finding that Singapore offers a refreshingly strong intellectual property protection and enforcement environment for the region. Singapore “has been consistently ranked first in Asia for intellectual property protection,” says Law, which “provides a much-needed assurance for U.S. companies moving their goods to the region from Singapore.” Singapore has enacted world-class security measures at its airport and seaport, and Singapore’s Changi Airport is the first non-U.S. airport to clinch the International Excellence in Airport Security Award from the U.S.-based publication Airport Security Report. wt

Sidebar: Singapore's Competition: Hong Kong

Do any serious competitors for Singapore’s #1 status exist in the region?

In an SRI International study commissioned by FedEx, measuring both physical and information access, Hong Kong beat out Singapore among 75 locations.

“Hong Kong is probably the first that creates a natural land-side connection to their port,” says says APL’s Brian Lutt, “as well as offering a significant airport.” But Lutt sees Hong Kong as “losing its edge a bit. Most of the product goes into Hong Kong for finished assembly or light assembly, and may in fact go up to China for re-export, and the process for doing that is convoluted, with a great deal paperwork, regulations and restrictions.

“In Singapore you’re only dealing with Singapore—product going in, product being worked, product going out.”

Jean Francois Arvis of the World Bank sees regional progress. “The gates in China are pretty efficient, and when you look at the land borders with central Asia, Thailand and Vietnam are also doing very well. I think a good question is, how much time will it take for major international [player] in logistics to emerge in East Asia to compete with major European or American companies? I would think that ten years from now you will have a Chinese company to compete with UPS.”

None of this means sunset for Singapore. “When you’re talking about a hub, you’re really talking about a place that product will flow into and be distributed to a number of countries,” says Lutt. “You don’t see that in Shanghai, it’s either in or out. But in Singapore what you’ll see is product going in, being inventoried, potentially adding value at the point of rest, and then moving on to multiple countries in a broken down format into factories for finishing or export for final consumption.”

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