MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | DAVID CUNNINGHAM
PACIFIC BASIN ECONOMIC COUNCIL
MAIN PAGE | EVENTS & PROGRAMS | 2002 | IGM | AVAILABLE SPEECHES | DAVID CUNNINGHAM
Striving for Growth
in a Challenging Environment PBEC 35th International General Meeting
Kuala Lumpur, Malaysia May 3-7, 2002 David L. Cunningham Thank you, Mr Chairman. I agree with the Chair that China's entry into the WTO will present both challenges and opportunities for China and the Pacific Basin economies. I have some comments today that would largely echo those of my distinguished colleagues on the Panel today, but focusing solely on the issues of logistics, a subject I am most familiar with. I am proposing a forward-looking view that China will inevitably become the third largest global transport and logistics hub in the world after the US and the EU. Robust growth can only be maintained if supply chains are equally robust and an underlying, world-class logistics infrastructure and industry is required. There will be many hurdles as China tries to achieve this goal. To use language that is appropriate as we approach the start of the FIFA World Cup in Japan and Korea later this month, China will be the logistics hat trick that will gel together the economies of the Eastern Pacific Basin. What is the situation in China today? Let us turn to the situation in China today. China has enjoyed an average of 10 percent growth in GDP since the reformist polices of Deng Xiao Ping have taken hold. This growth is dramatic and anyone who has been to Shanghai can see the evidence of it today with the dozens of skyscrapers that have sprouted in recent years. How has China fared in terms of the logistics industry? Credit Lyonnais Securities notes, in a study in 2000 that Chinese airfreight traffic grew by over 20 percent in the first four months of 2000 alone, compared with 18.5 percent per year over the past 10 years. Studies show that China's airfreight demand is expected to increase 60 percent by 2004 from 1999. Even with geometric growth, these figures indicate that China has a long way to go to reach the comparative levels in the US and EU. However, there are some unique issues that China faces.
Challenges and Opportunities Challenges and opportunities loom for both China and the other Pacific Basin economies as China attempts to both become a major trading nation as well as a major logistics hub. The nature of business today dictates that a world class integrated logistics infrastructure is needed for China's burgeoning manufacturing sector to thrive. Manufacturers and customers are going to require access to fast and reliable distribution, catering to both high-value and low-value goods. This applies to both domestic linkages as well as international ones. In fact, there will be an even greater need for a modern logistics system in place within China to facilitate the flow of goods across the country and as well as around the globe. I say this because three major trends are driving business. These trends are globalization, creating high value, high-tech products, and fast cycle manufacturing to achieve speed to market. Given the reliability and availability of express services, industries worldwide are able to adopt Just-in-Time inventory systems as part of their strategic plans for growth. The effects of these trends mean that enterprises in China will have to build tightly focused, efficient supply chains. This is especially so when you realize that today, for example, in the production of high value goods, 30-40 percent of the value or the cost of producing the product ends up being tied up in the supply chain. This need for efficiency in the supply chain is going to force manufacturers to demand more from their logistics service providers. This in turn will force logistics companies to lift their game and improve service levels. For example, one of the trends taking shape in China since 1996, is the development of hypermarket retail stores very much like America's Wal-Mart Stores and France's Carrefour Stores. In China, examples include Shanghai Hualian Supermarket and Lianhua Supermarket. By virtue of their high volume turnover and buying power, these retailers have forced a significant change in traditional distribution practices. They demand highly favourable payment terms, timely delivery, bar coding, priority services and minimized inventory, all of which were nonexistent a few years back. To meet these demands, local manufacturers and distributors have had to reassess and upgrade their internal capabilities. The result is a redefined distribution system in China that is set to accelerate as trade liberalizes on a national and international basis. Demand for more sophisticated logistics support in China is even forcing manufacturers to develop their own networks. For example, Kodak established a transport network in order to support its nationwide network of photo development studios. Konka, a Chinese appliance manufacturer also developed a distribution arm. In the same vein, the Haier Group has transformed its in-house distribution unit into an independent logistics services company and formed an alliance with a local distribution partner. The alliance will give Haier access to vast network and transportation assets. Efforts such as these indicate that the demand for better service standards is already growing. This lifting of standards is the first step towards China achieving its status as the world's third major logistics hub. Effects of WTO on China However, now that China has entered WTO, we can expect changes. Assuming that the positive effects of the WTO take place, the following might happen: The need to compete globally will force distributors and service providers to expand, standardize and improve their services. They will force improvements in existing models and increased integration in the value chain. This may be already happening. According to statistics issued by the Storage Industry Association, among China's 450 large and medium sized industrial enterprises, 45 percent are now looking for new agents to handle their logistics requirements, and 75 percent want to establish business relations with modern logistics companies with integrated capabilities. This demand will force forward movement in terms of increased integration by logistics players. Local and central government will find that improvements in logistics infrastructure will be critical. There is evidence that China's governing structures already recognize this need to invest in the infrastructure for a national distribution system in order to sustain growth. Domestically, RMB 100 billion has been allocated for rail development in the Tenth Five-Year Plan (2001-2005). Over the next 20 years, a comprehensive river transport system, using the Yangtze River as the main regional navigation channel, will be built. By 2010, China's Ministry of Transport will link all mainland provinces by highways, thereby reducing transportation time. Intra-provincial roads will also continue to be improved. I expect that China will optimize its air transport network. Airports in Beijing, Shanghai and Guangzhou will be developed into large hub airports. Airports in six cities - Chengdu, Xi'an, Shenyang, Wuhan, Kunming and Urumqi, will be transformed into medium-sized hub airports. New airports will be built and existing ones refurbished for a rational linkage of major economic centres. The three main hubs - Beijing, Shanghai and Guangzhou will be upgraded to provide better domestic transfer facilities and international operations. Air cargo in general will be one of the biggest beneficiaries of China's WTO entry. This is particularly so in the telecom equipment and electronics sectors grow, as they are predominately transported by air. I think we will see a great deal of consolidation in terms of airlines. For example, last year, it was reported that six local airlines formed an alliance, the China Sky Aviation Enterprises Group in order to remain more competitive. More recently, the merger between China's top three airlines, China Southern, China Eastern and Air China, is expected to save the three airlines as much as 3.6 billion yuan a year in costs, once the state-ordered industry consolidation is completed. Expansion of the freight sector in China will remain one of the brightest regional trends. Infrastructural improvements are clearly in progress. The change in mindset of Chinese logistics operators is also evident as they are pressured to improve quality of service. These incremental steps will push China forward in terms of becoming the third major global logistics hub. There is also synergy with the rest of the Pacific Basin as China gears up to be a major trading nation and logistics hub. The Effects of China on the Pacific Basin For the other economies in the region, particularly very networked ones such as Singapore, Hong Kong, Japan and Taiwan, the challenge would be to remain viable and to achieve synergy with the activities in China. As the logistics industry in China matures and develops and as China's logistics infrastructure improves, there will be a definite impact on the logistics players in the region. These 'Tiger Economies' have to realize that their superior edge can no longer be assumed. They have to re-examine their positioning and try to retain their primary areas of influence while at the same time try to align themselves to act as viable secondary nodes to China. There will be knock-on advantages for these economies as they network their own logistics infrastructures into the second largest economy on the planet. Singapore's PSA Corporation is a sterling example in this regard. Already operating the world's largest container port in Singapore, it signed an agreement last year with China's Guangzhou Harbour Bureau to form a JV company, Guangzhou Container Terminal Co. Ltd. The JV entity will operate the container port at Guangzhou Huangu Xingang. This supplements PSA's two previous relationships in Dalian and Fuzhou. I would expect a great deal of activity similar to this as the provisions of the WTO take effect. Conclusion The benefits of an open China will be extraordinary. Anchored by the WTO, China will continue to enjoy tremendous growth and according to most estimates, it will become the 2nd largest trading nation with 10 percent of all world trade. The entire Pacific Basin can only benefit from an economically ascendant China. It is clear that a nation requires a well-integrated logistics infrastructure in order to be successful. For China to meet the estimates of becoming the 2nd largest trading nation in the world, it must continue to invest in logistics infrastructure and remove hampering restrictions on competition. However, these challenges will take time to surmount. I think we should look forward but with patience Thank you. |
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