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China’s spectacular economic development record has largely been concentrated in two areas – the so-called Pearl River Delta just north of Hong Kong and the immediate hinterland of Shanghai.

That process is starting to change, however. Over the past few years, labour costs have started to rise sharply in these coastal areas, threatening the competitiveness of lower-margin operators. Meanwhile, as these regions have prospered, they have become less tolerant of the pollution rapid industrialisation has created.

Although a few companies have started to shift operations overseas, most of the companies under pressure are looking to move elsewhere in China. “I would say 90 per cent of Chinese companies would rather move inland than move offshore,” says Stephen Green, economist at Standard Chartered in Shanghai.

The big question for the development of China is where the companies move to. Many would prefer to inch further inland from their coastal operations to the next provinces such as Anhui, near Shanghai, and Jiangxi in the south so they can take advantage of the better logistics available on the coast. However, the government would prefer a large number of companies jump further inland to more deprived areas.

The key will be the quality of logistics available to them in those more inland areas.

To encourage such investments, the government has been spending heavily on new road infrastructure in recent years. China has just over 45,000km of highways and the authorities plan to nearly double the total to 85,000km by 2010. “It is very similar to the expansion of the US road system in the 1950s,” says Chris Lofgren, chief executive of Schneider National, the US trucking company that is establishing an operation in China and recently acquired the operating assets of a Chinese logistics company.

'''Yet companies wishing to move goods around by road quickly face the dilemma that there are no national trucking networks. Instead most of the country is dominated by small trucking operations, often with old and inefficient vehicles, that cover only limited regions. Transportation costs are around 16 per cent of total product costs in China, compared with around 5 per cent in developed economies.'''

The weak road logistics infrastructure is particularly difficult for the retailers that are trying to establish hypermarkets and supermarkets in some of China’s inland cities and require sophisticated, refrigerated trucks to bring food to their stores. Carrefour, for instance, has three stores in Urumqi in the far west of China, a five day drive from Beijing. The consultancy AT Kearney estimates China will need to invest $100bn to build an efficient and safe food distribution system.

In the eastern region of China – the area that has Shanghai as its bridgehead – companies are becoming increasingly interested in the Yangtze river as a means of transport.

Between 2000 and 2005, the amount of cargo travelling on the river nearly trebled and in 2006 it surged a further 25 per cent to 900m tonnes. The authorities have announced plans to invest Rmb 16bn ($2.2bn) by 2010 on port construction, dredging and other infrastructure improvements on the river.

The Yangtze has developed into a particularly strong logistics platform for the transport of bulk commodities. If you stand on the margins of the river or its many tributaries of the lower Yangtze region these days, you will see a constant procession of barges carrying coal, iron ore and cement – the building blocks for the country’s rapid industrialisation.

It is also becoming increasingly important to the auto industry. Ford has its China manufacturing base in Chongqing, 2,500km from Shanghai, and several auto companies have factories in Wuhan, another important Yangtze city. Components from overseas and the Chinese coast travel up the river to the factories and completed cars travel down – on barges that carry 200 vehicles, compared with the eight cars a truck can carry.

“The government’s plan to develop the Yangtze for transport will greatly improve the links between the inland logistics system and the ports along the river with international shipping routes,” says Xu Maozeng at Chongqing Jiaotong University.

However, users of the river are not without their complaints. Traffic can suffer from regulatory delays, with several different local governments and shipping departments competing for jurisdiction, while on certain stretches local state-owned companies exert a near-monopoly. Some experts believe the planned investment will not be enough to prevent future problems. “The inland ports and their facilities are becoming a bottleneck,” says Liang Haicheng, a professor at Wuhan Technical College of Communications.

Railways are the transport branch that companies in China are least optimistic about. The sector is not short of investment – the government plans to spend Rmb 1,500bn from 2006 to 2010 on locomotives and other rail investments.

But the sector is dominated by the Ministry of Railways, which is viewed as one of the most bureaucratic in the country. Companies say the huge numbers of passengers who use rail travel to get around the country mean that freight is often considered a lesser priority.