Friday 28th Oct 2016 - Logistics Manager

THE China factor

China has been much in the news lately, especially regarding the demise of the Rover car plant at Longbridge. Geographically, China is the world’s most populous and third largest country, with an estimated population of 1.3 billion people. But there is much more to China than just having a large population or getting British car manufacturing knowledge on the cheap.

Today, Europe and indeed Britain has now woken up to the economic powerhouse that China has become and which is casting a giant shadow over global markets. What is known as the “China Factor” is resulting in major implications for the logistics industry. Little wonder then that China was the dominant theme throughout the Freight UK 2005 conference, which was recently held at Liverpool.

Speakers at the conference identified several developments in particular which have assisted the upsurge in trade from China to Europe and Britain. These developments include:

• Containerisation – the growth of larger ships and lower transport costs.

• The outsourcing of manufacturing from the West to the East

There is no doubt that China’s trade with the rest of the world, especially Europe, has exploded during the past decade. A combination of private and public investment in China has initiated the economic boom. However, the surge and growth in trade from China to the West was largely unforeseen, catching most in Europe unaware.

Many in Europe, who thought trade with China was around 5% in 2003, were surprised to learn that the actual figure had exploded to 21%. Today, the action is no longer in the Atlantic trade from Europe, but the other direction – from the East.

According to the conference speakers, without the rapid development of container traffic globalisation as we know it could not have happened and countries like China would not be in a position to develop their economic base and export trade. Above all else the development of the container has assisted towards fuelling and sustaining China’s economic growth. For example, containerisation brings down the costs of transport – containers provide for a cheap, secure, safe and efficient way to move goods. Delegates heard that it cost a mere 10p to send a pair of jeans from China to Europe.

To gain an idea of scale on container movements on the East / West trade routes consider that in 1965 China sent 8,000 TEUs (20ft equivalent units) to Europe, including Britain. Today, that figure has grown to three million-plus TEUs, and the market is growing at more than 8% per year.

Shipping, and in particular deep sea container shipping, is vital to continuing world trade growth. The growth has been aided by the development of the large container ship and resulting economics of scale which has seen the cost of transport per unit become more cost efficient over long distance.

In the 1980s the average ship size measured in TEUs was under 1,000, with the largest ship at 3,000 TEUs (see Box 1). Today those figures have more than doubled with an armada of ships in the 8,000 TEU range servicing the world’s trade routes. A number of ships in the 10,000 TEU category are already being built.

There is speculation of a 12,000 TEU ship and possibly an 18,000 TEU being built in the foreseeable future. If such ships were built transport costs for containers would fall even further. However, delegates were told that the possibility of such ships would result in a nightmare for ports, and there would be many problems – the cost of transporting containers in these ultra large ships might become cost prohibitive because of the diseconomies of scale.

Vast amounts of land space would be required at ports to load /unload and store containers on a massive scale. The lack of adequate feeder shipping or rail / road facilities to move the containers inland to their delivery destinations that is cost effective and efficient was questionable. Finally, putting aside the actual financial cost, there are a limited number of ports that could accommodate these ultra large size ships.

In terms of scale and to give perspective to the volumes of containers (and more importantly their annual growth rate) the figures were given for the volumes of containers moving through the major ports in China and Felixstowe – Britain’s major container port (see Box 2). For comparison purposes, the annual growth rate for containers at Shanghai was more in 2003 than the total throughput container at Felixstowe.

To gain an appreciation on the actual physical scale of trade growth on the East / West route delegates were told that it has been growing at an annual rate of between 16-17 %. China had concentrated on the export markets for clothes, textiles, computers and other consumer products. In the past China has been a major location for the assembly of goods, the components being globally sourced from all over the world. That is no longer the practice.

Instead companies have been establishing manufacturing plants in China and engaging in the complete production process. The finished goods were then exported. Today, China is a manufacturing powerhouse (see Box 3).

Put at its simplest, companies outsource to China for one simple reason – the labour market is huge and cheap. Basically, it is a question of supply and demand dynamics. Coupled with this there exists a well established supply chain route to Western markets, via containers and large ships at very competitive rates.

This is a recipe for lower costs and bigger profits and in the process attracts more manufacturing outsourcing of production from the West to the East – and hence a new cycle of cheap exports to Europe and Britain. With the average hourly rate in China being 6p compared with a European average of £6 it is little wonder that outsourcing of manufacturing production is being done outside in China, not Europe and Britain.

Next time you pass the empty and dilapidated textile mills in the north of England you may ask why? Now you know the answer. However, one speaker did point out that as demand for labour increase so too will the wage rate. Unfortunately, just how high that wage rate would have to increase before Europe became cost competitive with China was never explored.

The conference identified a number of implications emanating from the China factor. First, world trade is growing as globalisation continues. Trade from China in particular is targeted at the vast and rich consumer markets of Europe and Britain. Particular focus is on retail outlets selling clothes and electrical goods. This strategy will continue and expand in the future – with the strong possibility that China will also be exporting Rover cars to Europe.

Second, to feed this consumer market requires a combination of raw materials, manufacturing facilities to produce goods and access to cheap and efficient transport to remain competitive. China has been successful in all these areas. The conference heard that China’s insatiable appetite for growth is similar to a huge vacuum cleaner that continuously sucks in massive amounts of outsourcing production (from the West) scrap metal materials, waste paper and plastic. These products are recycled into added-value goods and then re-exported to the West. To do so, again, requires China to suck up all available shipping capacity on the export East / West trade route.

Third, congestion was a major problem in 2004 at British and European ports, mainly resulting from the massive inflow of containers from China. The situation caused costly delays and frustration at ports. If, as anticipated, China’s containers flood into Western ports congestion problems will continue. The government’s lack of a coherent transport policy and indecision has not helped matters. For example, the rejection of the Dibden Bay application for the development of an ultra modern container development at Southampton was regarded as a disaster for Britain’s future logistics infrastructure. It is possible that a little extra expansion can be squeezed from current facilities at Southampton, but this is mere tinkering in comparison to what the new proposed development would have provided. Equally, Felixstowe experienced congestion problems, as did the European ports of Hamburg, Rotterdam and Le Havre. With bigger ships on the horizon expect more of the same in the future.

Fourth, an increasing proportion of deep sea British trade is moving via European ports. Today, more than one million containers for the British market move through European ports. Last year there was a 40% increase in British deep sea traffic via Rotterdam. To serve the European and the deep sea ports in the South-east of England will cause an upsurge in the demand for short-sea feeder shipping services.

Five, container ports operate on a 24/7 basis but there is a mismatch with the other parts of the supply chain not operating on the same time basis. Focus is upon the inland freight infrastructure which is under pressure and deemed inadequate – rail is experiencing gauge and terminal problems; road transport is facing many difficulties, many of which will drive up costs. The Working Time Directive is now in force, fuel costs are rising and road congestion means it takes longer to deliver goods. Moreover, there are serious difficulties recruiting sufficient lorry drivers, with the average age of drivers at 48 and no young men being attracted to the industry.

Six, delegates heard that there is a growing demand for the extra length 40ft-45ft length high cube containers, because of their lower costs of transport and larger volumes carried. However, difficulties are encountered in transporting these by rail and road is not suitable. These extra length containers are transited via the world’s major ports. An ideal solution for transshipment of the high cube extra length containers are by short sea feeder ships to point of final delivery. The ports of Liverpool, Manchester, Bristol, Clyde, Teesside and Newcastle are expected to benefit from the development of such trade.

Seven, China trade has distorted the world market in trade, not only in sucking in materials and transport capacity, but also transport rates. Freight rates on the East / West trade routes have going up, but the reverse is happening the other way, reflecting the imbalance in trade from the East. Finally, the conference questioned just how much longer can the exceptional growth rate in China continue? Unfortunately, another more important question was not addressed – what are the implications for the West in terms of exports, jobs or prosperity if the policy of outsourcing production to the East continues?

At what stage do ports become totally clogged, or people in Europe and Britain can no longer afford goods from China or we run out of scrap materials and other waste to export? Do we lower Western wage rates to 6p per hour to tempt China to reverse the trend and outsource production and jobs back to Europe and Britain? I think not.

Frank Worsford works in the transport studies group at the University of Westminster.