Monday, 27 October 2008

Are poor transport networks a brake on China's growth?

Another artice from the recent "Doing Business in China" series in the FT.

In my research where I control of transportation networks odd results are thrown up due to the geography of China and the differences in quality of network across provinces especially for rail.

Whilst certainly true that poor transport networks can act as a brake on growth, I would imagine that China is in a much better position that the perceived competition from India or more recently Vietnam where transport is certainly in a worse state than China. The investment in transport in China in recent years has been enormous and whilst a lot remains to be done China is well on the way.

It is interesting to note how the way the road network operates leads to an increase in bribes and theft. Regulations clearly make this worse than it needs to be.

Missing links [FT]

Distribution and the moving of goods remains one of the biggest headaches for almost every company looking to sell products across China.

The principal reason is the uneven development of the country’s transport sectors, with extremely high spending in some regions and sectors – above all, on the country’s expressway network – but poor overall co-ordination.

The outcome has been not just a hugely fragmented transport industry, with barely any logistics companies offering nationwide services, but also one of the world’s most expensive logistics sectors, with transport and related costs accounting for more than twice the share of gross domestic product as in the US, and about four times as much as in Europe.

On the plus side, provinces across China have spent enormously on developing an expressway network – from having less than 10,000km a decade ago, the country’s total length has grown to 78,000km, second only in total length to the US.

This roll-out is set to continue under a master plan that during the next three decades should see every city with 200,000 or more inhabitants linked into the network.

Ports have also seen heavy spending, especially around China’s main export manufacturing locations: at Shenzhen in Guangdong province, around the Lower Yangtze Delta region centred on Shanghai and at Tianjin, Qingdao and Dalian in the north and north-east.

And the country has some of the world’s biggest and most modern airports, notably at Beijing, Pudong in Shanghai and Guangzhou.

With these three elements in place, China has an excellent infrastructure for importing inputs and materials and exporting finished products – by air, if necessary, as well as by ship.

The country also has some excellent regional networks but its transport shortcomings are exposed when a company tries to move goods from one part of the country to another – links between provinces and major cities remain surprisingly poor.

The most obvious weakness is the country’s rail network, whose total length has barely grown in the past five years.

China’s transport shortcomings can be attributed to a lack of central co-ordination and the large number of competing bodies involved in overseeing the transport and logistics sectors.

Railways, aviation and road each fall under separate ministries or central government commissions: the Ministry of Commerce is responsible for licensing various logistics and other transport services; the National Development and Reform Commission, the state’s main planning body, aims at co-ordinating transport policy but has to fight turf wars with the other local and state entities; and China’s customs and State Administration for Industry and Commerce (the latter with both central and local arms) are also involved in regulating the movement of goods.

Throw in a decentralisation of administrative power that has taken place in the past two decades, and it is unsurprising that while China’s richest regions have successfully been able to fund their own infrastructure programmes, central officials have struggled to impose their will in getting different parts of the country to work together.

Making things worse are a series of additional factors that seriously hinder the movement of goods, and make the whole process a lot more expensive.

First, is that road haulage is an intrinsically more expensive and inefficient way of moving large volumes of goods long distances than railways.

Second, are road charges. China now has 70 per cent of the world’s mileage of toll roads, according to the China Supply Chain Council, which local governments have to levy in order to fund their road-building projects.

And then there is local protectionism, with provinces or cities discriminating against transport and logistics firms from other parts of the country.

The consequence of these factors are multiple changes of goods from one trucking company to another, multiple payment of fees at provincial and city borders, and lots of trucks making empty return journeys.

Such practices, of course, all encourage the demanding of bribes, create opportunities for petty theft, make the tracking of goods all but impossible and – arguably most important of all – build in long delays.

The good news is that improvements are coming. Expenditure on railways has been lifted. This summer saw the opening of a high-speed rail link between Beijing and Tianjin, and at the start of the year work began on a 1,300km high-speed route from Beijing to Shanghai, scheduled for completion in 2013.

Plans have also been announced to increase the total railway length to 120,000 km by 2015 (advanced from an original target of 2020) – a credible figure given that expenditure has been raised to more than £23bn a year, up from an average of less than £9bn a year in the first five years of this decade.

And there are also signs that the central government is looking to exercise tighter control over both planning and funding, and an opening of the logistics sector to greater foreign participation, which between them should both lower barriers between provinces, raise managerial standards and see increased investment in the soft side of the transport industry.

Nonetheless, given the time that it will take for the planned new rail lines to come into operation, a continuing shortage of experienced logistics managers, and the almost certain continued prevalence of local protectionism, distribution is going to remain one of the main obstacles to companies doing business in China – whether Chinese or foreign – for at least a decade.



BizBlogged1 said...

Transport needs of poor people living in rural areas should be discussed
with focus groups and incorporated into transport interventions.

Finance blog, finance,economics,Corporate finance,Personal finance,Investing,Marketing

custom brokers said...

very nice :)
Beautiful expression.
Beautiful stuff! That’s not just tagging, that’s art.