Logistic In China

Distribution & Logistics Development in China: the Revolution has begun.

Bin Jiang* and Edmund Prater*
*Department of Information Systems and Operations Management The University of Texas at Arlington

International Journal of Physical Distribution and Logistics Management (The authors would like to thank the anonymous reviewers for their helpful comments)

Abstract Prior to the economicreform movement, China’s centrally planned, three-tier system dominated the distribution sector. After the 1980s, this system gradually shifted away from the socialist mode to the free market mode. Today, China’s distribution system lies somewhere between these two modes. Since the reform, China’s government has been encouraging export-oriented foreign firms investments in Free Trade Zones alongthe coast. Foreign firms do not enjoy the same inland distribution and logistics rights as their Chinese counterparts. However, the distribution puzzle is not only faced by foreign firms, but also by Chinese firms that operate nationwide. China’s undeveloped infrastructure, government regulations, and regional protectionism fragment distribution channels throughout China. However, there are threemain forces that are changing and modernizing China’s distribution and logistics system. These are the booming economy, entering the WTO and e-commerce. The inevitable revolution of China’s distribution and logistics system is on the way.

Keywords China, Distribution, WTO, e-commerce

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Introduction

Prior to the economic reform movement, China’s centrally planned, three-tier systemdominated the distribution sector. After the 1980s, this system gradually shifted away from the socialist mode to the free market mode. Today, there are three main forces that are changing and modernizing China’s distribution and logistics system. These are the booming economy, entering the WTO and e-commerce. While great changes have been made, China’s distribution system still lies somewherebetween socialism and freemarket capitalism. This paper addresses issues of interest to firms wishing to distribute good throughout China. It provides a historical structure for viewing distribution and logistics in China as well as providing a snapshot of current problems facing firms expanding operations there. Finally, it provides a synopsis of lessons learned by firms currently operating in Chinaas well as views of future trends.

2.0

China’s Traditional Distribution System

Before we know where China’s distribution system is and where it is going to go, we must determine where it has been in the past. In the pre-reform era, prior to the mid-1980s, both China’s production and distribution were conducted solely according to the dictates of the State Plan; factories manufacturedwhat, and how much, central planners told them to produce; distribution channels within China were strictly controlled by the three-tier system. China’s distribution networks during this period were organized along rigid, vertical lines. Tier-1 distributors were located in Beijing, Shanghai, Tianjin, and Guangzhou; tier2 consisted of wholesalers in the provincial capitals and medium-sized cities; andtier-3 wholesalers operated in smaller cities and towns (Chen, 2001). State-owned distributors shipped products for each industry from Tier-1 facilities to province and cities, then to local retailers. With no market forces at work, this extended distribution system increased the prices as each layer added additional operating margins ranging from 5-17%.

Distributors essentially provided basiclogistics services (transportation and warehousing) but no marketing support. Distributors were not allowed to import products since that right was reserved for foreign trade corporations (FTCs). Once an import entered the country, it was handed over to the appropriate distributor because FTCs were forbidden to sell the goods downstream (Baldinger, 1998). This huge system was formed in the...