Expanding Your Business in China: What You Need to Know

April 13, 2012
Tips on how to grasp the nuances of operating your supply chain, warehousing and distribution operations within China.

It is an exciting time to be working in the supply chain industry in China. The logistics sector lies in the cross-section of all the growth and changes taking place across the country. The infrastructure is being developed alongside international businesses seeking to manufacture their products, source suppliers or even to begin tapping into the end markets and selling products to consumers.

When well-established businesses seek to expand into China, it is important for them to understand the dynamics of supply chain, warehousing and distribution decisions in this new territory, rather than expect the same rules to apply, or their brand name and reputation to carry over from other parts of the globe. In order to best service international clients in China, my background provides me with the perspective of understanding both local and U.S. customs.

I am a Chinese native and I earned my MBA in the United States, at Michigan State University. I have also worked for a number of other global companies, and all of these experiences allow me to relate to large foreign companies seeking to do business in China, understanding their business practices and priorities, and helping their team achieve success.

Over the years Ive worked with many logistics services in China that include class-A forwarding, customs clearance, ocean and air booking, international trading and duty, trade finance, Foreign Trade Zones, and non-bonded inventory and warehouse management all of which allow us to help shippers establish their supply chains in China.

The volume of business is smaller in China than in the U.S. or Europe, but is rapidly growing. The supply chain process is very dynamic, and we have to be flexible enough to cope with all possible changes. Contingency plans have to be thoroughly developed with all possible scenarios.

Problem-solving skills are key to driving excellent customer service. Some customers are new to this, bringing with them stocks that sold well in their home countries. We work with them on the inventory analysis to promote the aged stocks, and stock the right products for the local markets.

With the increasing popularity of online shopping site like Taobao and 360buy, people are starting to realize that logistics can be a core business and are a competitive advantage for companies. The competition is becoming fiercer, and we will see a trend of consolidation.

Multinational companies who are already well-established in China would like to leverage their scale and work with just a few providers. They also like to have visibility into and transparency over the supply chain. Creative solutions, carrier management expertise and localized systems will be areas that can help bring supply chain management to the next level.

While there are challenges to doing business in China, things can be done very quickly when the right relationships are cultivated, while proactively adapting to changing laws and regulations. Logistics providers can offer various services and sound local market advice and experience.

There are several key things to think about when establishing your strategy for China and below are a few starters to grasping some of the nuances of operating your supply chain, warehousing and distribution operations within one of the worlds fastest-growing economies with a population of over 1.3 billion.

Embrace Cultural Differences

The Chinese work culture is more personal than in the U.S. In the U.S., cultural norms often dictate a work-life separation. However, in China, work and personal lives are blended together.

Chinese people want to understand you as a person. For example, we have a very open culture with our employees. We have many team-building exercises that bring us together and this provides us with an opportunity to learn more about our colleagues and to serve our customers more effectively.

Chinese people also typically want you to spend quality time with them to find out what is going on in their lives, as well as take the time to train and teach them. We even use Sina Weibo, which is the Chinese version of Twitter, in order to keep up with each other digitally. The micro-blogging site is very popular in China.

These approaches work well since employees tend to be young, and more talent management is required to offset the talent shortages in the logistics and supply chain industry.

This personal nature also applies to doing business with carriers, customers, vendors and even potentially your own employees once youve established business roots in China.

Sometimes it takes longer to do business in China because of this getting-to-know-you phase. Yes, it can test the patience of non-Chinese but this is a key cultural difference worth remembering. Not understanding and respecting this cultural difference can be perceived as being insulting, overly aggressive, and result in lost business and relationships.

Understanding Just-In-Time and Data Integrity

China is a rapidly developing marketplace. Entire new cities, roads and infrastructure are constantly under construction. So, just-in-time (JIT) takes on a slightly different meaning. We often have to educate customers on these challenges.

When we contract with local shippers to transport their goods and services via trucks that are much smaller than in the U.S. or elsewhere, we understand roads in some areas are not as well developed and travel time increases. A traffic delay caused by an accident in the U.S. can divert your drivers for a few hours. In China, a major road disruption can translate to delays that are days in length.

GPS capabilities are also not as robust, and obtaining updates on shipment progress is still more manual in nature. Thankfully, cell phone signals are very strong throughout the country, as the number of mobile devices greatly exceed landline phones.

Navigating Customs

Working properly and in compliance with Chinese customs is critical and demands good planning and data management practices. Proper documentation is critical, as is complying with the HS Code (Harmonized System Code, for China, is a 10-digit code of which the first six digits are international nomenclature). When a U.S. company begins importing and exporting in China, accurate quantity counts are part of the firms reputation, lest you want to be suspected of smuggling.

If you list the incorrect number of items too often, customs officials will not hesitate to inspect and detain your shipments for an extended period of time. Future shipments may be flagged and detained needlessly due to poor reputation. As a result, your company and its customers may miss out on valuable sales and opportunities, thereby losing ground before much can be gained.

In order to obtain accurate updates, truck drivers must be contacted directly. Culturally, Chinese truck drivers do not always convey accurate data when contacted, sometimes stating theyre 30 minutes from reaching their destination, when in actuality they are a few hours away. Contacting them directly helps to provide visibility to customers. Logistics providers do safety background checks on drivers, providing upfront and ongoing training.

Also, the Chinese truck carrier market is more fragmented and not as mature as it is in the U.S., similar to Chinas transportation infrastructure, which brings with it challenges as well. There are no major truck carriers that work across the nation, but rather medium- or small-sized businesses and entrepreneurs who are good at certain lanes or region.

At Penske, we spend more time upfront to do the due diligence with these carriers, including customer service mentality, management culture, employee turnovers, financial and industry expertise. We view them as our business partner, develop and grow them, especially in customer service and quality communication.

With VAT reform and fuel cost increases, we help them absorb part of the costs, to ensure they can continue to grow while we work with them to optimize routes and improve efficiency in the overall process.

Working with these entrepreneurs also provides us with challenges that they could be short-term driven and can discontinue services abruptly and with little warning. Regular communication and review with these carriers is key.

Logistics Costs

Logistics costs are a higher amount of Chinas gross domestic product than in the U.S. I estimate it to be at 20 percent, over double of U.S. GDP costs. Logistics costs are getting better in China, as more professional services across the board are being developed, the work force is maturing by the day, and the environment is becoming more pro-business.

There is a strong need for integrated solutions to drive optimization and consolidation, with many of the supply chain managers focused on unit cost reduction, with frequent bidding and changing suppliers.

Companies are now starting to do a better job of examining the supply chain as a whole, and moving away from seeing logistics as an isolated part of the business. Logistics management is being viewed less in terms of warehouse and freight cost, and more as a way to forecast and plan, and maintain order management, packaging and consolidation across different regions.

With more logistics professionals on the customer side, it will help drive the trend of sustainable improvement, by working together as one team.

Yang is managing director for Penske Logistics Asia and can be reached here. She is based in Shanghai.

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