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By Jennifer Baljko Shah 

While China's allure has electronics companies scrambling to set up shop there, the ability to assemble a comprehensive logistics network is shaping up to be a make-or-break challenge. 

Unlike the United States, where infrastructure is well developed and commerce regulations between states are relatively standard, companies entering China will be forced to contend with a number of thorny issues when it comes to moving products into, out of, or within the country, according to industry experts. 

"It's extremely complicated to do business in China, and it will be that way for a while," said Joe Abelson, an analyst at iSuppli Corp., El Segundo, Calif. "The logistics infrastructure is improving, but only in the urban areas. There are many informal distribution channels to deal with, including trading companies and other agents. There are many people involved in the transaction and it's difficult to manage goods from end to end." 

Inconsistent government policies are a big part of the problem. One of the chief complaints of multinational companies trying to do business in China is the number of restrictions at variance with one another that are imposed by local officials. John Davidson, senior vice president of the Asia region for TTI Inc., Fort Worth, Texas, has experienced the effects of this. 

"Defining the rules and managing the internal transportation within China are the most challenging," he said. "Local officials [in the free trade zone] and government officials will give you two different answers when you ask them about rules or regulations." 

A different model

The key to pulling off a successful logistics strategy, some say, is to better understand and plan for cultural gaps before investing heavily in China. For starters, companies must recognize that the logistics model is different than what they would find in the United States, said Diana Huang, a Beijing-based principal for Mercer Management Consulting. 

The market for logistics service providers in China is fragmented, consisting of more than 16,000 registered companies, many of which derive as much as 85% of their revenue from basic transportation management and warehousing. In all, no single logistics provider commands more than a 2% market share, Huang said at last week's Council of Logistics Management conference in San Francisco. 

There are numerous hurdles in China even when a company is dealing with what are straightforward transportation practices elsewhere, according to Mark Kadar, a Lexington, Mass.-based vice president at Mercer Management. 

"If you're shipping from point A to point B, and you're going into different cities and provinces, you need a license from every agency for every mode of transportation," said Kadar, adding that it's not unusual to see a truck driver stop in one city and hand over the delivery to another because he lacks a license. 

Moreover, in many cases multinational companies are looking to outsource much more than the physical movement of products, and will turn to global logistics providers like UPS or FedEx, or distributors that have established a presence in China and offer logistics services. 

However, even that has proved to be a challenge in some cases, said Gilbert Lau Wai Kwong, managing director for Oriental Logistics Holding Co. Ltd., a Hong Kong concern that is setting up operations on the mainland. In some cases, foreign companies must partner or form a joint venture with local brokers to make inroads in China. 

"Companies need to cooperate with third-party logistics providers [that] are already there if they want to compete in this market. These 3PLs have the experience in China," Kwong said. 

The role of 4PLs

Additionally, the notion of a fourth-party logistics provider, or a subcontractor to the primary logistics provider that handles various aspect of logistics management, is a common layer in the Chinese model. 

"The 3PL market is not well organized in China and there's a need to better meet the upstream demand for a variety of logistics services. 4PLs are the entities that handle those logistics needs," Lau said. "4PLs will eventually fade out as the 3PL market matures, but for the next five years it will be important for you to have a 4PL strategy in China." 

Despite the trouble spots, the need for manufacturers to outsource logistics capabilities is growing. Mercer Management estimates that the outsourced transportation and logistics market in China was about $4.8 billion in 2001 and is expected to grow 25% annually for the next few years. 

The Chinese government is also keeping pace with those demands, setting aside billions of dollars for near- and long-term road, airport, rail, and other infrastructure projects, Kadar said. "There's no question that China will be a big market, but we're still in the early stages of development," he said.

Additional reporting by Laurie Sullivan