As featured in Journal of Commerce, June 26-July 3, 2000

By David Biederman

China is slowly opening up to North American logistics companies, and one firm was lucky enough to get a close-up look at the world's last great untapped market.

Last March, PBB Global Logistics of Ontario led a delegation of 20 companies from the U.S. and Canada on a 16-day tour of eight Chinese cities. The trip offered a rare opportunity for the company to investigate first-hand potential Chinese joint ventures partners. Transportation is one industry that will be opened to foreign competition when China formally joins the World Trade Organization.

PBB corporate marketing director John Ferguson said that the trade mission was one of the first organized by a private North American logistics firm and included clients, representatives of major Canadian exporting and manufacturing associations and regional politicians.

One of PBB's goals was to make contact with Chinese freight forwarders. Several people from PBB's international freight forwarding section were brought along specifically to evaluate their suitability as joint venture partners.

In China, forwarders are ranked according to the size and scope of their operations, Ferguson said. In general, the firms are looking forward to the entrance of foreign competitors with a mixture of excitement and fear. They are eager to do business with Western companies, he said, but after years of operating under an inefficient, state-controlled system they know that they cannot compete with European and North American forwarders on the technology side of the business. So they must form joint ventures.

Normally, when employees are sent to assess potential partners they endure endless meetings and long waits, but in the southern port city of Xiamen, a crowd of forwarders was waiting at the port to meet the visitors.

In assessing the Chinese firms, Ferguson said one of the first things that the PBB team members considered was whether they could offer coverage throughout China. That's sort of the holy grail for forwarders there, he said, and like the grail, it doesn't really exist. "Coverage may be great in the South or in the major cities, but to have complete coverage in China is very rare, even if the forwarders try to give you that impression," Ferguson said.

The company considered existing client bases and levels of skills and services. In particular, PPB wanted to know if any of the Chinese forwarders were able to handle project cargo, which often requires moving oversized machinery to remote areas. Given the explosion of large infrastructure projects in China, PBB has been building up its market in that sector, Ferguson said.

One market sector that has not really emerged yet in China is third-party logistics. One Chinese forwarder told Ferguson that the 3PL market there is barely in its infancy. Reasons include the fact that China is primarily an export market. Also, the lack of advanced tracking technologies, coupled with regional regulatory hurdles, make it difficult for any one firm to offer significant competitive advantages. There is also the issue of China's abundance of cheap labor. Everyone has been given jobs by the state, Ferguson was told; if you bring new efficiencies what do you do with all the people whose jobs will be displaced?

Ferguson said most of the Chinese are eager to do business with Western firms. "Everyone there seems to be so excited about the WTO deal, about the potential of doing business with North American companies," he said. "All the young people are talking about e-commerce and they all want to learn English."

There are still huge logistic obstacles that need to be overcome. Trade rules and customs regulations vary from region to region, and customs brokers in certain provinces lack the authority to enter goods into other regions. Without an established relationship with local customs officials, exporters can be victimized by the corruption that is rampant at certain Chinese ports. For that reason, freight forwarders operating in China always advise clients to ship goods to the port closest to the consignee; you don't want to be moving goods internally, Ferguson said.

The infrastructure is in terrible shape by Western standards. There is no tracking and tracing of goods and almost no intermodal service. Ferguson said that in the smaller cities goods are moved by bicycles with engines in the front and small trailers in the back. In one city, he saw 10 such vehicles carrying stones to a construction site.

As much as PBB and other firms are trying to get in the door in China, there are other firms that suffer from "China fatigue"and are rushing to get out after finding that the costs and complexities in doing business in China are not worth the effort. PBB definitely does not fall into that category. "We are making the long-term commitment," Ferguson said. "Many of the world's trading lanes are saturated with forwarders, brokers and logistics companies, and this is a chance to get in at the start and do some great things."