Transportation & Logistics: All Roads Lead to China

by Lara L. Sowinski
May 1, 2006

Transportation and logistics companies are fine-tuning their offerings to meet the demands of more sophisticated U.S.-Asia supply chains.

Whether you're a shipper or a transportation provider, when it comes to China nowadays if you're not already there the question is, `When will you be?' Far from being saturated, the Chinese market is still a bonanza for most everyone.

Although early forays into any developing market come with a fair share of bumps and bruises, today's newcomers to the China market are finding considerably less infrastructure and regulatory deficiencies than even a year ago.

In short, China's still red-hot and the mad dash to get into the market, either as a sourcing destination or as a selling market, hasn't subsided. What has changed (for the better), is the transportation and logistics services, which have not only become more readily available, but more sophisticated too as shippers' supply chains have simultaneously evolved.

Finding a niche
Matson Navigation Company, a U.S.-based ocean transport firm that has maintained a significant presence in the Hawaii and Guam trade lanes for years, launched a new service in February that includes calls in Shanghai and Ningbo. The announcement was notable for several reasons. For one, there's already an adequate amount of capacity in the U.S.-Asia trade lane at the moment, and furthermore, more capacity is set to come online throughout the year. And, competition in this trade lane is tight. Yet, Matson figures there's a market for their service, and they're probably right.

Dave Hoppes, senior vice president, ocean services, spoke recently about Matson's history in the Pacific and what the company expects to gain from their China-Long Beach Express service.

“We are definitely a new start-up,” he acknowledged. “We had a ten-year alliance with APL, and as part of that alliance we had five ships that served the U.S. West Coast to Guam.” Matson contributed three ships to the alliance and APL operated two ships. “Guam is an important piece of business for Matson. At the expiration of this ten-year agreement we were unable to come up with a resolution on how to continue it. We wanted to be able to continue serving Guam, so one of the primary drivers for this new China-Long Beach Express service sprang from a desire to continue serving Guam.”
One major advantage that Matson has over a number of its competitors is they have substantial cargo booked on their westbound U.S. to Asia portion. “When our vessels leave Long Beach for China, they're full of cargo for Hawaii and Guam,” said Hoppes. “That's the strength of our service—we have full vessels on the westbound leg.” The Hawaii and Guam trade lane is very stable, he added. “Hawaii's having some great economic growth and as a result the trade's been good and strong for us. We think that Guam has a great future with the U.S. military, which will really enhance prospects for us, because they're going to pull some Marines out of Okinawa and put them in Guam. When they do that, they're also talking about some other ship deployments there, which when you have a population of 150,000 plus people and you add 5,000 or 10,000 more, really impacts things. We also think Guam is a good vacation destination, especially for people in the Far East, and as China's economy continues to improve you'll see as many Chinese tourists going to Guam as there are Japanese and Koreans today.”

Although Matson is fortunate to be operating full vessels on the westbound leg, the company is faced with some challenges. “The weakness in our service is that we have smaller ships, so we don't get the economies of scale that you get with the massively bigger ships entering the trade today,” said Hoppes, referring to the five, smaller 2,600-TEU vessels it operates in its China-Long Beach Express service. “Our costs per-container-carried are also higher,” he said. “In addition, because we're a U.S.-flagged ship our crew costs are higher. By contrast, our competitors' capital costs are lower because we have a U.S.-built ship. If you compared the pluses and minuses, from an operational standpoint our ships are more expensive to build, they're more expensive to crew, and they don't carry as many containers. We therefore have a higher cost on the eastbound (Asia to U.S.) leg than a vessel with an 8,500-TEU capacity.”

However, there are areas in which Matson is differentiating itself from its competitors. “Our transit time is eleven days (one of the fastest in the trans-Pacific trade), and this is another area where we have an advantage. We also call on our own proprietary terminal. We don't call at any multi-user terminals and we don't have any alliances. It's a purely Matson facility. We are able to discharge our freight in a very short period of time compared to the bigger ships, as well as move our freight to an off-dock facility that's available 24/7 for our customers,” he said.

Emerging Opportunities

Matson isn't the only newcomer to China. In recent months, a host of other transportation companies, both air and ocean, have established or expanded product offerings to keep up with growing demand from shippers.

At the same time, central and northern China are also growing into sizeable manufacturing regions,

which has prompted more carriers to include such ports as Shanghai, Ningbo, Dalian, Qingdao, Xiamen, and Xingang in their rotations, and more importantly, offer direct service from these ports to the U.S.

Maersk has rolled out a number of new services that include China and is also expanding service to U.S. ports like Norfolk and Savannah. In March, Evergreen Marine and COSCO debuted a new China-U.S. East Coast/Gulf all-water container service to provide additional capacity for the coming peak shipping season. Nine 2,700-TEU vessels have been deployed in the service, which calls Shanghai, Yantian, Hong Kong, Colon, Savannah, and Miami.

On April 2, American Airlines began daily nonstop 777 service from Chicago O'Hare to Shanghai. “The expansion of our network to China is a profoundly significant event that strengthens American as a global competitor and further enhances Chicago as one of the nation's foremost international gateways,” said chairman and CEO Gerard Arpey. “As a provider of premium air cargo service on this route, we expect to facilitate the movement of both finished and raw materials between Shanghai and cities throughout our extensive network in the U.S. and Latin America,” noted Dave Brooks, president of American Airlines' Cargo Division.

In the meantime, FedEx was just given approval to add three more weekly flights to China, while UPS says it too is planning to add three more flights to China this year.

While much of the initial trade between the U.S. and China was built upon low-cost manufacturing—U.S. companies manufacturing goods in China for import into the U.S.—a lot of the recent activity has centered around American firms manufacturing in China and/or exporting there to sell to a growing middle-class of Chinese consumers.

Warner Bros. announced recently that it will open some 200 stores in China over the next few years as demand for branded merchandise increases. The company opened its first China store in Shanghai in March. Disney, meanwhile, already sells its merchandise in China through approximately 2,600 retail spaces in larger stores and expects to grow that number to 6,000 by 2009.

Although U.S.-China trade has been dominated by goods, particularly consumer goods, the services trade is also heating up and so too is research and development.

Microsoft's Beijing facility, which employs about 200 people, is working on a range of advanced technologies. In March, Germany's SAP said it plans to build a Chinese R&D center, while Motorola announced that it would open another facility in Hangzhou (the company already has 16 facilities in China) to focus on wireless technology. Meanwhile, BNSF railway just announced that it will establish an office in Shanghai. This makes it the first U.S. rail firm to set up operations in the country.

Even celebrated American icon Harley-Davidson is two-wheeling it to China. The company just opened a dealership in Beijing in April. “We are looking at China as a long-term market exercise,” remarked Harley-Davidson's managing director for China in a BusinessWeek interview. That seems prudent, given that per capita income in China is about $1,200—well below the $6,600 to $21,000 price tag on a Harley motorcycle. And while manufacturing the motorcycles in China would obviously help bring the price down to a more affordable level for the average Chinese consumer, the company doesn't have any immediate plans for that—yet.

Matson Orders Revive Philadelphia Shipyard

The Jones Act (also known as the Merchant Marine Act), ratified in 1920, is a United States federal statute that requires U.S.-flagged vessels to be built in the United States, owned by U.S. citizens, and documented under the laws of the United States. Additionally, all officers and 75 percent of the crew must be U.S. citizens. Vessels that satisfy these requirements comprise the “Jones Act fleet.”
U.S.-based Matson's orders for four new vessels was a much needed boost to former Philadelphia Naval Shipyard, which was shuttered in 1995.

In order to mitigate the impact of the closure, one year later a public-private partnership comprised of the City of Philadelphia, the Commonwealth of Pennsylvania, the federal government, and the Kvaerner group of companies, founded the Aker Philadelphia Shipyard, Inc. to help revive the shipyard.

Facilities construction was completed in 2000 and in 2002, Matson placed its order for two container vessels. Matson took delivery of the M.V. Manukai on September 4, 2003 and the M.V. Maunawilli on July 30, 2004. In 2005, Matson agreed to purchase two additional container vessels. The first of these two vessels, the M.V. Manulani, was delivered on May 19, 2005, one month ahead of schedule. The contract delivery date for Matson's last vessel is May 7, 2006.
The vessels are used in Matson's new China-Long Beach Express service.

Next Port of Call: Vietnam

Sure, Vietnam has been in the news lately, but it's pretty much buried in the back pages behind the stories on China and India. And while some economic success stories follow the `surely but slowly' rise to the top, Vietnam's emergence on the world stage is probably going to resemble more of an explosion, and it's building up now.

Agriculture remains one of the country's biggest sectors, from rice and tea to soybeans and bananas. But, aside from a growing consumer goods industry based on products such as garments and shoes, there's a growing interest in what the country has to offer in more advanced industries.

Intel recently received approval from the Vietnamese government to build the biggest single technology project in the country's history. The investment in the Ho Chi Minh chip assembly plant could reach $605 million. Meanwhile, a visit by Microsoft's Bill Gates in April and a meeting with Prime Minister Phan Van Khai has many guessing that another large-scale investment by an American firm is around the corner.

Two hundred sixty American firms have a presence in Vietnam already and other investors are also pouring money into Vietnam's economy, which now ranks as one of the fastest growing in the world. Last year, foreign investment in Vietnam exceeded $5 billion and this year it's likely to pass $6 billion. A report by Merrill Lynch says Vietnam “will be the fastest-growing [Asian] country in the next 10 years, far more exciting [than] Thailand, far more than anywhere else in ASEAN (the Associated of Southeast Asian Nations).” And, Moody's recently upgraded the country's sovereign rating for the first time in seven years, from B1 to Ba3.

Labor rates in Vietnam are extremely attractive to foreign firms—on average about $60 per month, which is a bargain even to the Chinese who have actually lost some of their manufacturing to Vietnam. Sixty percent of the country's 82 million population was born after 1975, which means that although labor is primarily low-skilled, it's also young, energetic, and willing to learn.

On the trade front, containerized exports to the U.S. grew 40 percent last year after growing 50 percent in 2004, and carriers are adding more routes to accommodate the growth.

APL launched its Haiphong-China Express service on March 8. The ocean carrier started serving Vietnam with service between Hong Kong and Ho Chi Minh City in 2004.

Evergreen Marine, OOCL, and Yang Ming recently launched a jointly operated twice-weekly Taiwain/Hong Kong to Vietnam service, which has a round trip transit time of 21 days. The ports of call include Kaohsiung, Keelung, Hong Kong, Ho Chi Minh City, and Taichung.

In addition, Mitsui O.S.K. Lines recently launched its new Vietnam service—VH2—with service between Haiphon, Hong Kong, and Shenzhen. The service boasts the fastest transit times from northern Vietnam to North America.

Vietnam is hoping to join the WTO this year (possibly as early as June), a move that will greatly enhance both the country's economic growth and foreign investment. At the same time, WTO membership means Vietnam will be forced to lower its tariffs on imported goods. Its average tariff rates currently ranges from mid- to upper-twenty percent, however it's expected to drop to the low twenty percent to upper teens after joining. Regulatory and non-tariff barriers will also be reduced, while protection of intellectual property rights will be improved.

Furthermore, once it joins the global trade body, the country must work harder to reform public administration. There already has been some notable progress, including changes to the country's Unified Enterprise Law (UEL) and the Common Investment Law (CIL), which will level the playing field for foreign and domestic businesses.

According to the U.S. Commercial Service, some of the best prospects for American exporters include the sectors of information technology, infrastructure, and oil and gas production.

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