Collaboration
Supply Chain Management in China:
Assessments and Directions
Robert J. Easton Accenture
There are few places in the world where – over the next
five to 10 years – the development of supply chain infrastructure
and capabilities will play a more critical role in improving
corporate performance.
Since joining the World Trade Organization
(WTO) in 2001, China is becoming a more
viable market. According to The New York
Times, the Chinese now buy more cellular
phones than any other country. They also
purchase about 100,000 Buicks annually
and patronize nearly 1,000 McDonald’s,
KFC, Pizza Hut, and Starbucks outlets.1 It’s
therefore no surprise that China’s economy
is growing by nearly 8 percent per year,
despite a global slowdown.
However, companies doing business in
China still face the following supply chain
challenges: inadequate services, frag-
mented logistics systems, a legacy of local
protectionism, few third-party capabilities,
and numerous anachronistic laws. China’s
geography also presents an additional chal-
lenge, since its Western and interior regions
(where two-thirds of the population live)
are largely inaccessible. This paper exam-
ines the state of China’s transportation and
distribution infrastructure, summarizes the
principal regulatory challenges faced by
companies doing business in the country,
and concludes with a discussion of the
future of supply chain management.
Infrastructure Challenges
Although it is one of the world’s most
industrialized nations, China lags with
respect to infrastructure. Consequently,
companies entering the Chinese market
often cannot apply standard logistical
approaches. Rail, for example, is China’s
cheapest distribution method – the result of
longstanding priorities given to moving
military and strategic commodities.
However, capacity shortages are routine,
resulting in unmet demand for cargo space.
The Ministry of Railways (MOR) controls
most of the country’s rail service, although
China Ocean Shipping Company (COSCO)
and Sinotrans (China National Foreign
Trade Transportation Corporation) also
offer limited service. Traditionally, these
entities have focused on passenger serv-
ices, but an awareness of the need for bet-
ter rail-freight capabilities is emerging. The
MOR has spearheaded several projects to
upgrade China’s rail infrastructure and
increase capacity and travel speed.
Road transport is the preferred option for
moving packaged finished goods, which is
why China is investing billions of dollars
on upgrades. The China Business Review
reported that China spent $26.6 billion on
50,000 kilometers of new highways in
2000, including 4,561 kilometers of new
expressways.2 However, these initiatives
are strained by strong demand and the
extensive fragmentation of China’s road
transport industry, where 5.4 million trucks
are registered to more than 2 million truck-
ing providers.
Airfreight is expected to grow consider-
ably over the long term but is currently
plagued by high prices, fragmented routes,
limited information exchange among air-
lines and forwarders, and inadequate cargo
capacity. Moreover, freight forwarders
rarely provide the kind of basic, value-
added services enjoyed in the United States
and Europe. The upside is that China is
allocating billions to airport construction
and expansion.
Ocean and inland water transport is
China’s most developed distribution sector,
Robert J. Easton is a Hong Kong-based partner in Accenture’s Supply Chain Management Service Line
responsible for supply chain services in Asia-Pacific. He has more than 20 years of experience in supply chain
strategy, process re-engineering, performance management, system integration, and change management.
with more than 1,200 ocean and river
ports offering berths for 33,000 ships –
including more than 780 deep-water berths
capable of handling 10,000-ton vessels.
China’s shipping companies also rank
among the world’s largest. However,
inland water transport for domestic distri-
bution is underutilized because ports can-
not process and manage cargo efficiently,
bureaucratic delays and pilferage are com-
mon, and many ports often cannot accom-
modate larger cargo vessels. Responding to
these concerns, China has invested $1.7
billion in inland water transportation, with
the goal of developing an international-
standard container network with inter-
modal capabilities.
In general, China’s distribution infra-
structure is hampered by inefficient ware-
house designs, low ceilings, and poor light-
ing. Goods usually are handled manually,
without racking or warehouse automation.
In response, the government – which con-
trols 90 percent of China’s warehousing
capacity – plans to build 30 distribution
and logistics centers. Two such initiatives
are in Shanghai, where $15 billion is being
invested to build a world-class logistics
business. Similar facilities also are being
built in Beijing.
Regulatory Challenges
One of the largest regulatory concerns is
that most supply chain services in China
are not logically linked to government
departments. Instead, logistics oversight is
shared by entities such as the State
Domestic Trade Bureau, State and
Economic Trade Commission, and State
Development Planning Commission. One
process that suffers from this sharing of
responsibility is customs clearance, which
is often dogged by excessive paperwork,
ASCET • 195
Collaboration

inefficient procedures, and short business
hours. On the positive side, customs is a
high-profile issue, and significant improve-
ments – including increased computeriza-
tion – are therefore taking hold.
Complicated and excessive regulatory
controls also are common. For example,
foreign trade corporations must sell goods
through distributors rather than to stores,
and they are forbidden to own distribution
channels and logistics infrastructure. They
must therefore rely on small local compa-
nies to distribute product through multi-
tiered wholesaler channels, since China
has few – if any – national distributors
(see Figure 1).
In response to regulations, companies
doing business in China often have little
choice but to develop redundant structures,
assets, operations, and contractual relation-
ships. This is because a foreign-owned
plant can sell goods manufactured in
China, but it cannot sell or distribute goods
imported into the country – including those
made by an out-of-country sister plant. Nor
can parent companies holding foreign-
owned companies in China sell products
from other company plants. These barriers
prevent foreign companies from consolidat-
ing shipments going to the same customer,
as well as issuing consolidated invoices.
Lastly, regulatory blocks have created a
shortage of third-party logistics providers.
At present, no logistics company has more
than a 2 percent share of the China market.
And only four wholly owned foreign enter-
prises offer logistics services outside of spe-
cial zones within China.
Drivers Fueling Reform
Despite China’s infrastructure and regula-
tory barriers, there is strong cause for
optimism. One reason is simply the power
of the market: China’s population (cur-
rently 1.2 billion) is expected to grow by
15 million people per year, and its gross
national product (currently $816 billion)
will increase by 8 to 9 percent per year.
Concurrent with this growth, Chinese
industries are consolidating, which is
inspiring retailers to push into new mar-
kets and is intensifying the call to modern-
ize China’s supply chain infrastructure.
The government is listening. In fact,
modernization of logistics and transpor-
tation is one of the top three priorities
cited in China’s Tenth Five-Year Plan
(2001-2005). As noted earlier, China’s
state and provincial governments also
are making huge investments to upgrade
infrastructure and build logistics centers
and hubs to promote consolidation
and collaboration.

Corporate Brand Owner

Suppliers
Key Accounts

Suppliers

Distributors Customers
Plants
Suppliers Regional
Distribution
Centers and Customers
Distributors
Wholesalers
Suppliers

Distributors Customers
Suppliers

Contracted
Manufacturer

Multiple Joint Venture Plants Multiple Distribution Centers Distributors Multiple

Suppliers and Wholesalers (500-1,000) Customers

• Local and imported • Often responsible for • Warehousing/distribution joint • Nonexclusive distributors • Little visibility of end
materials own operations, venture or handled by local or – Distribute product to store customers apart from
including purchasing joint venture third parties – Credit with stores key accounts
• Some contract – Execute in-store promotions
manufacturers for • Sometimes based in • Rudimentary automated systems • Actual demand and
specific projects multiple provinces • Some have willingness and service performance
• Delivery lead times in weeks, capability to improve masked
not days
• Little visibility of subcontracted
• Manual accounting distribution, unpredictable service

Figure 1 An example of a typical supply chain network for a consumer products company operating in China.

196 • www.ascet.com
 Collaboration

By 2002 By 2003 By 2004 By 2005 By 2006 By 2007

• Minority • Lifting of foreign • Lifting all • Books, chemical

ownership/joint majority, restrictions fertilizers, crude
ventures (JVs) geographic, and oil, and processed
to engage in • Establish wholly petroleum
quantitative
wholesale of owned foreign phased in over
restrictions
both import enterprises 3 to 5 years
and domestic (WOFEs)
Trading • Some
Restrictions products geographic • Few limitations
• All geographic
restrictions for
• Foreign restrictions lifted • No restrictions
retailing
investment for retailing for retailing
enterprises (FIEs)
can distribute
products made
in China

• Wholly owned
subsidiaries
Shipping and
• Majority • Foreign
Freight
ownership companies not
Forwarding
limited to
international
freight business

Maritime Cargo • Foreign-PRC

Handling, Customs ventures
Clearance permitted

Rail • Minority • Majority • Wholly owned

Transportation ownership/JVs ownership subsidiaries

Road • Minority • Majority • Wholly owned

Transportation ownership/JVs ownership subsidiaries

Warehousing • Minority • Majority • Wholly owned

and Storage ownership/JVs ownership subsidiaries

Courier Services • Majority • Wholly owned

ownership subsidiaries

Figure 2 Post-WTO Accession Regulations

Additionally, as a result of China’s
admission to the WTO, the country will
progressively remove restrictions that pre-
vent foreign companies from participating
in transportation and distribution (see
Figure 2). WTO status also will stimulate
economic growth by opening China’s econ-
omy to competition and encouraging col-
laboration between local and foreign com-
panies. Within a year, foreign companies
will be permitted to distribute imported
products and hold majority shares in logis-
tics joint ventures. Within three to four
years, all restrictions on primary and ancil-
lary logistics services will be phased out,
making it possible for foreign companies to
set up 100 percent foreign-owned sub-
sidiaries covering a variety of supply chain
management functions.
Looking Ahead
Sustained growth, favorable government
policies, and membership of the WTO will
drive significant changes in China’s sup-
ply chain landscape over the next five to
10 years:
1. An expanding market and increasing
demand will position supply chain
management as a competitive differen-
tiator. Since the government and busi-
nesses now recognize the immensity
and impact of China’s supply chain
performance gap – and for the first
time are in a position to do something
about it – status quo performance will
become less acceptable.
2. China’s presence in the WTO will pro-
duce major economic changes, but
transition delays and frustrations will
be unavoidable. The depth and dura-
tion of these delays will depend on
how liberally the government treats the

ASCET • 197
Collaboration
logistics sector and how committed it is
to exposing domestic players to open
competition. Most likely, China will
manage these efforts carefully, and in a
way that maximizes opportunities to
pass management and operational
expertise on to local companies. The
government’s objective is to give local
logistics providers enough time to han-
dle competition effectively. The govern-
ment also wants foreign companies to
regard local firms as attractive invest-
ment targets, and for foreign firms to
partner with local providers rather than
compete individually.
3. Rapid changes in China’s business and
consumer environment will dilute the
emphasis on guanxi (assigning para-
mount importance to relationships).
Supply chains in China clearly are on the edge –
the edge of spectacular change.
Strong networks and relationships are
important throughout the world, but
China’s emphasis on guanxi often has
come at the expense of commercial
realities. This will change.
4. Competition and consolidation will
intensify. This will be particularly true
in consumer goods, where significant
consolidation already has occurred in
the home appliance, television, and
beer sectors. In China’s planned econo-
my, even the smallest manufacturer has
its own truck fleet and warehouses,
which implies that significant duplica-
tion of logistics assets exists.
5. Ports will become more efficient.
Greater trade flows, intensified compe-
tition, increasing demands from ship-
pers for better service, and more for-
eign investment will lead to changes
in the port sector. Since the inefficien-
cy of China’s ports is one of the
largest obstacles to global competitive-
ness, major involvement of foreign
companies in infrastructure joint ven-
198 • www.ascet.com
tures is anticipated. Under WTO guide-
lines, foreign firms will be able to take
up to a 49 percent stake in shipping
joint ventures and participate in port
development projects.
6. Distribution channels will not prolifer-
ate. Given the time and expense, it is
unlikely that shippers will rush to
develop their own distribution chan-
nels and wholesale networks. Most will
continue to rely on local partners to
reach second-tier cities and remote
regions. They also will look for ways to
de-layer existing wholesaler structures
and build long-term relationships with
major distributors that already operate
distribution networks.
7. Integration, centralization, and rational-
ization of supply chain functions,
assets, infrastructure, and operations
will be widespread. This will be fueled
by removal of regulatory restrictions,
rising customer demands for one-stop
service, and the recognition that signifi-
cant cost savings are achievable. Given
the potential benefits, a rise in the
number of supply chain shared service
organizations is likely.
8. Third-party logistics providers will
mature and consolidate. The opportunity
for third-party logistics providers to
incorporate wholly-owned foreign enter-
prises within three years of WTO acces-
sion is significant. It should attract for-
eign firms to an industry projected to
grow by more than 30 percent per year
for the next five years – and one that is
very willing to invest in the infrastruc-
ture projects needed to create a modern,
national, logistics network. Many play-
ers already are joining the fray, includ-
ing traditional Chinese logistics compa-
nies, new logistics companies, the inter-
nal logistics departments of Chinese
companies, and foreign service
providers. This will force a consolidation
of the entire industry, as it did in the
United States and Europe.
9. Ministries, state-owned enterprises
(SOEs), and local logistics firms will
restructure. WTO membership will pro-
vide Chinese consumers, customers,
and shippers with more choice, which
means more competition. Thus,
China’s accession to the WTO will
have a more profound effect on local
Chinese companies than it will on
China-based multinationals. There also
will be strong impetus for entities such
as the MOR, SOEs, and local firms to
develop more efficient capabilities. The
current thinking is that China has three
or four years to restructure its compa-
nies and industries before foreign
providers become a significant force.
10. Outsourcing will grow in scope and
acceptance. According to Morgan
Stanley, third-party logistics service
providers have captured only 2 percent
of China’s overall logistics business,
compared with 8 percent in the United
States and 10 percent in Europe.3 This
will change significantly.
No one believes that China’s road to sup-
ply chain excellence will be free of bumps
or barriers. However, it also is clear that
the right conditions – strong market
demand, an enlightened perspective, and
serious commitments from within and
without – are in place. The challenges are
daunting and the risks are great, but the
opportunities are immense. Supply chains
in China clearly are on the edge – the edge
of spectacular change. ■
Endnotes
1 Joseph Kahn, “Made in China, Bought in China,”
The New York Times (January 5, 2003).
2 Robert Gates, “Beyond Sinotrans: China’s
Distribution Infrastructure,” The China Business
Review, vol. 28, no. 4 (July-August 2001).
3 Henry Ho and Chin Lim, “Spot the Early Bird,”
Morgan Stanley (October 5, 2001).