Michael Kuchenbecker: On the future of German-Chinese interconnectedness in the logistics sector

China, Germany’s most important trading partner outside of Europe, has risen to become the world’s second-largest national economy in a short span of time. Trade relations with the rising giant from the Far East also pose challenges to the logistics sector. The Logistics Alliance Germany (LAG) focuses on the increased interconnectedness of the logistics sector between both countries.

In 2009, China overtook Germany to become the world’s largest exporter, and in 2013, it surpassed the USA to become the biggest trading nation. Thus, the USA and Europe have become China’s most important trading partners.

German-Chinese economic relations today. China’s­­ gross domestic product has increased fiftyfold over the past three decades. Though China’s economy was once predominately production- and export-oriented, it is now becoming increasingly consumption-oriented. This is not lastly due to a domestic market totalling 1.34 billion people and a growing middle class that is concentrated primarily in the coastal regions.

The largest logistics centres in the country are Shanghai, the Pearl River Delta and Beijing. Shanghai is home to the world’s largest port, and Hong Kong offers the most efficient transshipment handling centre in “Greater China”. Seven of the ten world’s largest container ports are located in Asia, with Shanghai, Hong Kong and Shenzhen being among the leaders.

The China of tomorrow. New transport routes are expected to become a reality in the future – not only from Asia to Africa but also to South America. Growing pros­­perity and increasing wages are promoting additional growth in inner-Asian transport as production re­­locates to neigh­bouring countries. It is expected that, by 2030, 17 of the 25 largest bilateral sea and airfreight routes will lead to China and the flow of goods between Germany and China will also reach the fifth-highest volume in the world by 2030, totalling more than 200 billion US dollars.

Growing urbanisation, together with an increase in income of the urban population, is changing the population’s lifestyle and consumption habits. This is manifested by the increasing significance of B2C solutions and e-commerce offers in a Chinese market that has grown to 274.5 billion US dollars in 2014.

Chinese consumers are increasingly demanding fresh products such as meat and dairy products. In 2015, China is expected to supersede the USA as the largest food market in the world. German dairies have in the mean­time established themselves as the leaders in drinking milk exports to the Middle Kingdom. Such transports require solutions for the cold chain as well as efficient transport and distribution networks with domestic transshipment locations. An annual growth of 25 per cent is expected in the cold chain logistics sector. Roland Berger forecasts a market volume of around 470 billion yuans (approx. 57 billion euros) by 2017. This brings with it a corresponding demand for expertise on the establishment and operation of reilroad networks.

It remains to be seen whether logistics service offerings in rail transport will be able to fill the niche between air­freight and ocean transport. Noteworthy examples are projects such as the “New Silk Road,” the “Yuxinou” train operated by DB Schenker via Transsib between Duisburg and Chongqing in the Chinese hinterland.

China will remain a growth driver in the mechanical engineering sector and continue to serve as the world’s workbench. Here in particular do rising wages pose special challenges while creating a growing demand for automation, increased efficiency and logistical networking.

Within the past ten years, China has developed into the world’s largest automobile production location with around 14.5 million motor vehicles and has increased its vehicle production tenfold. The consulting company PwC predicts substantial growth amounting to an additional 86 per cent by 2017. This growth requires new capacities and stable supply chains. Together with the different infrastructure conditions of the provinces, this results in new logistical challenges, primarily in terms of punctuality, flexibility and capacity. Logistics costs are expected to increase due to underdeveloped road networks and poorly developed rail networks.

China is currently also the third most important production location for the chemical industry. The chemical sector is experiencing an above-average growth of 10 to 20 per cent. This results in high demands on safety and corresponding services, including IT systems for planning and controlling supply chains. The high safety standards adopted by international logistics providers are thus likely to become even more important.

Challenges. China has al­ready invested considerable efforts in expanding the traffic in­­frastructure in order to keep pace with the economic de­­velopment. The connection of the inland industrial metro­polises and the establishment of a national logistics network in particular continues to be major challenges faced by China. The expan­sion can hardly keep up with the economic development despite massive investments – ­in 2013 alone, 14 billion euros were invested in the expansion of road, rail and waterway infrastructures as well as airports.

New market segments, such as the booming e-commerce sector, depend on functioning logistics structures as the backbone of enterprise resource planning. This development offers tremendous growth potential for experts in the field of contract logistics.

Chinese companies demonstrate considerable interest in logistics expertise as well as standards and regulations that can be expected to result in additional efficiency, increased safety and reliability of logistical processes.

Rising wage costs are a limiting factor for production across all sectors. Advances in productivity are unable to offset the increasing wages. In addition, the increase in companies in the high-tech sector requires an even greater number of qualified professionals. This problem could be alleviated not only by professional training, but also by a training-related know-how transfer from Germany.

Strengthening ties with China boosts potential. In a worldwide comparison, Germany is the third-largest export nation in the world and the third-largest importer of goods, The safe and reliable transport of goods can only be accomplished successfully with an expert, well-connected partner. Located in the heart of Europe and bordered by nine countries, Germany offers the right logistics solutions.

Germany’s logistics market achieves not only the highest turnover in Europe; as a gateway and hub, the country is also home to many major logistics companies that are active around the world, such as Deutsche Post DHL (ranked 1 out of 25 worldwide) and DB Mobility Logis­­tics AG (ranked 7 out of 25 worldwide). Even a number of small and medi­um-sized companies in the logistics sector offer industry solutions that make them leaders in their respective segment. The German logistics industry uses the motto “Logistics made in Germany” to promote the expertise of its highly qualified logistics services internationally. The Logistics Alliance Germany (LAG) marketing initiative is a public-private partnership, implemented by the Fed­eral Ministry of Transport and Digital Infrastructure and the German logistics industry.

One of LAG’s core services is supporting foreign parties who are interested in selection the right logistics service provider for the transport of their products to Germany or other European countries.Potential customers include Chinese ship­­ping agents (e.g. manufacturers of electronic products), cooperation partners from the logistics sector (e.g. for es­­tab­­lishing end-to-end transport chains) or Chinese companies which require expertise on logistical issues (such as un­­­interrupted cold chains).

Networking is decisive for dynamically developing countries, as road transport alone cannot usually handle the burden created by growing transport volumes. Highly efficient processes ensure that logistics costs in Germany are up to 70 per cent lower than those in China.

This makes China one of the most important countries for promoting Germany as a specialist in logistics. As a result, LAG holds a diverse range of activities in China. Delegations from the LAG initiative participate in trade fairs, events and trips to and within China, with the specific purpose of building contacts within the Chinese export industry.

In conclusion, thanks to its logistical solutions, Germany has all the attributes to form an even closer network with the Chinese market in the future.

Michael Kuchenbecker has been General Manager and Senior Consultant at the LogisticNetwork Consultants GmbH since 2008. He heads the Berlin branch of the logistics consulting company and has been Director of the Logistics Alliance Germany (LAG) since 2011.