China business flows: developments and trends in the Pearl River Delta

After the dust of 2020 has settled

Last year will go down in history as one of the most un-traditional years for a very long time.

While 2020 began as normal for the rest of the world, China announced in early January that it had been hit by a new coronavirus and that very strict measures were necessary to control its spread. For the rest of the world life continued as usual. This writer attended the Fruit Logistica Exhibition and Conference in Berlin in the first week of February. Visitors and stand holders were attending except for the Chinese stand holders and most Chinese visitors. One month after Berlin, this writer had his last face-to-face customer meeting for the next nine months.

Where do we stand at the beginning of 2021?

China:

The Covid-19 situation has been under control in China since the summer. At that time senior cadres and management in China were allowed to travel again.

Despite having the situation under control, there continue to be local out-breaks of Covid. The Chinese control system to counter these break-outs is to create immediate local lockdowns and/or quarantine measures for people travelling in these areas.

In Q3 of last year traces of the virus were found on packaging of imported frozen products. Since then, a very strict regime of inspection is used on frozen imports such as fish and meat. For meat, close to 80% of all containers are inspected, while for fish this percentage was around 65%, which is still more than double normal inspection rates.

Despite many restrictions, especially in the first half of 2020 and ongoing local lockdowns and a world outside Asia in severe lockdown, China managed to have a year-on-year increase of GDP in the fourth quarter of 2020 of 6.5%. These are growth percentages similar to before the Covid pandemic.

So, China is back to where it was before, but the world around it still has many restrictions in force.

Ocean freight situation:

At the end of February 2020, with the virus rapidly spreading out beyond Asia many businesses had to close-down temporarily. Especially in the entertainment industry, restaurants and cafés, but also in retail, where most businesses had to close down their traditional bricks and mortar business models.

This, together with a closed-down China still in Q1 and a post Chinese New Year lull in business, created a feeling of major overcapacity that needed to be adjusted.

Most major container lines are now participating in vessel sharing alliances. These alliances were quick to adjust capacity to the free fall in demand in these first Covid-19 months. Many sailings were blanked out and capacity was taken out of the trades.

The adjustment to the slowly growing demand has been done very successfully by the alliances in the subsequent months. A free fall of ocean freight rates, ocean carriers in trouble and disrupted market conditions have been avoided during the first three quarters of last year.

But retail business, service providers and manufacturers were very successful to develop digital transformation models to increase spectacularly the on-line sales channels to make up for much of the losses of the traditional bricks and mortar sales channel.

At the same time the ongoing government support of the economies (large economic support programmes in the US and Europe) combined with strict lockdown measures created consumers who had more to spend on home improvement, money they could not spend on travel, tourism and outdoor entertainment.

This created in Q4 2020 a real boom of cargo, firstly on the transpacific trade between Asia and North America. Because Covid-19 still very active in North America it is clear that the American infrastructure, like ports and connections with hinterland and warehousing operations, have struggled to handle this influx of import containers.

Also ports on the west coast became heavily congested, with containers stuck on board of waiting ships. This has drastically increased the average usage time of the containers. Meanwhile, carriers faced with the uncertainty of the Covid-19 situation scaled back on investment in new ocean containers.

This container shortage started to ripple down to other trades, like the Far East-Europe trade. In Q3 20, on average the ocean freight for a 40ft container from Shanghai to Rotterdam was $3,000; this has drastically increased in Q4 and January 2021 to a range of $8,000-$10,000.

These are levels never seen before and are starting to impact the small- to medium-sized business segment sourcing from the Far East and more dependent on short term ocean contracts of one-to-three months maximum.

Another effect of the high cost of ocean freight is a narrowing of the difference with the rail freight costs. This could have a lasting push for more rail usage between China and the European countries.

Finally, with such high transportation costs some businesses might start to look even harder at alternative areas for sourcing products or components, like near-sourcing or domestically.

Added to this the recent Suez Canal blockage and we can expect the chief supply chain officers (CSCOs) to have a risk-awareness level not seen for a while.

China ports:

In China most deepsea ports despite the Covid-19 crisis have seen modest volume growth in 2020. Something that was not expected in the beginning of last year. (please see table).

It confirms again how fast China managed to gain control over its pandemic early 2020, and also that in principle the trade volumes of consumer products in particular has remained strong and has been able to find alternative retail channels, maybe even much better than expected initially.

Latest stats on volumes of Chinese ports (top 10), 2020 Vs 2019 (container throughput volume: million teu)

China business flows: developments and trends:

Despite all the issues with the pandemic and the volatility in ocean freight, there are some major underlying trends happening in China.

• Technology development. Not only used for higher value products, but also increasingly for improving productivity, because of increased costs in China.

This development creates a slower transformation of low value manufacturing moving to South East Asian countries, while developing new segments of products, especially in hi-tech.

As an example, think of German robotics company KuKa, bought by the biggest e-goods and home appliances manufacturer in South China, Midea. Midea is increasing at a fast pace automation in its production processes.

• Transformation to a consumer market, stimulated by the central government.

The realisation of China to move from an export-dominant economy model to a more integrated economy with increased service sector and increased consumer products imports.

The central government has actively stimulated the biggest import exhibition, in Shanghai in 2019. The 2020 event was obviously cancelled. But future import-expo events can be expected in the years to come.

This stimulates more import infrastructure hubs, in coastal areas near ports or at important cross points in the inland provinces.

• A rapidly developing on-line e-commerce retail and serviced model

This has created e-commerce warehousing campuses. For the import of products ideally located near free trade zones, to be able to make use of a so-called simplified cross border process for e-commerce.

• Besides of the development of the coastal areas, China has now increased development of inland provinces under the ‘Go-West’ strategy

This trend began some years ago in the export dominant model, moving production to lower cost areas inland, sometimes supported by provincial or local government subsidies. But with the more integrated model of China, inland provinces are gaining in GDP and consumption of imported goods.

This means that connectivity for these inland areas with ports or hubs becomes more important. This can be connectivity by rail, waterways and highways.

In addition, the One Belt One Road programme also has implications for China’s inland provinces, increasing the overland trade with their partners to the west.

• Environmental policies

China has identified the need for sustainability of the environment, which only can be reached by major policies. In the transportation industry we see strong measures to promote electrical vehicle usage (commercial and private), sustainability targets for infrastructural companies like ports and terminals, and the promotion of rail and waterways.

Combining the above trends with one year of Covid-19 pandemic and the turmoil in the ocean freight industry has increased the awareness of sourcing and supply chain risk for many companies in the world.

As mentioned before, small- and medium-sized business might need to look at their business model to see if increased transportation costs make the overseas sourcing still viable. And for all businesses, including major companies, dependency on long haul supply chains need to be re-evaluated, which may lead to increasing dependency on near-sourcing for Europe and the US with areas like Eastern Europe and Latin America respectively, or domestically.

At the same time, it has increased the attractiveness of alternative routes, like more usage of rail between China and Europe or using creative combination like a shorter ocean leg combining with rail. But the increased ocean freight also already had an inflationary effect on rail and the capacity has started to be used up rapidly as well.

I would summarise the following expected developments in the trade:

• Picking up of imports into China, especially in foreign branded products, fresh food (meat, fish, fresh produce) and foreign beverages, like wines and spirits.
• Increased importance of multimodal transport, moving beyond the coastal areas, especially with environmentally friendly modes of transport, like rail and barges. This puts more pressure on connectivity of ports and terminals with the hinterland.
• New product segments, in line with high tech development and environmental policies. Examples are electric vehicles, mid- and high-end electronics, white goods etc. Also to watch are the biotech and pharma sectors, as well as the higher end of fashion and footwear.
• Increased importance of hub development, near the ports or at important inland cross points. These hubs will have availability of trade-inducing policies, like free trade zone status.

3. A live example: the Greater Bay Area (GBA), South China:

The Greater Bay Area (see main image), also known under its abbreviation GBA, is an area comprising the major cities of Guangzhou, Shenzhen and Hong Kong, nine municipalities and the Pearl River Delta with a vast developing infrastructure within the area.

While GBA has 4.5% of China’s population, it produces about 9.5% of China’s GDP and is responsible for more than 16% of foreign investment and almost a quarter of China’s foreign trade.

In this area we see different directions of development. Where Hong Kong used to be not only the financial centre, but also the trade and logistics centre, we have subsequently seen the remarkable growth and development of Shenzhen as a special economic zone in China. Shenzhen initially focusing on joint ventures with foreign entities and production has now grown in a Tier 1 city with 15 million inhabitants, developing more into hi-tech, Fintech and services industries.

Transformation in the GBA:

At the same time we see a transformation of production and the logistics activities coming with it from East Pearl River Delta to the more Western areas of the Pearl River Delta and to the inland provinces of South-west China, even up to Sichuan province.

In the consumer and service industries, Guangzhou and Shenzhen are also transforming their local economies. With large amounts of consumers around the Pearl River Delta, imports of goods, especially frozen and fresh foodstuffs, and beverages and branded consumer goods have grown consistently with double-digit figures over the last few years.

A major factor helping the GBA to grow consistently in all directions is the development of infrastructure to connect GBA with the inland provinces, but as important is the infrastructure connections within GBA itself, so that it can truly develop as a megalopolis – a new Bay Area, like some of the famous bay areas that we see in other parts of the world such as New York, Tokyo or San Francisco.

Within the GBA all major cities are now connected via high-speed, high-frequency trains, making it possible to travel within the GBA from every major city to another in less than an hour.

The under-construction Hong Kong Macau bridge-tunnel connection is another example of the GBA masterplan.

GBA port development/port of Nansha:

If we take a closer look at the picture from a port development perspective: originally Hong Kong was the major deep seaport of the Pearl River Delta, but in the late 1990s the major growth of the Shenzhen ports.

Today, more and more China business can ship directly from or to the mainland onto the mother vessel, given that Shenzhen’s draught is deep enough to accommodate the vessels in the large east-west trades.

Over the last 10 years the size of the vessels in the east-west trades, but also in the north-south trades further has increased. With the increase of the vessel size and the transformation of export especially towards the west side of the Pearl River Delta and the inland provinces, the volumes of the Shenzhen ports have started to stagnate, Hong Kong volumes are falling, while the increase in volume now shifts towards the Western Pearl River Delta.

In the long-haul east-west trades, two out of three alliances are directly calling port of Nansha (2M and Ocean Alliance), while THE Alliance is planning to start soon with direct calls in the Far East to/from Europe trade.

At the same time, with the growth of imports and distribution functions more space is required for warehousing, preferably in free ports or bonded areas. Port of Nansha still has this space, while Hong Kong and Shenzhen are increasingly limited by city boundaries.

To further support these developments a direct rail link is being built all the way into the West Pearl River Delta terminals of port of Nansha (the major deepsea port in the West Pearl River Delta) to connect the port with the inland provinces and support the ‘Go-West’ Strategy.

The Pearl River estuary also allows barges to travel more than 200km inland and to load or unload their cargo at the deepsea ports in the Pearl River Delta.

Nansha port itself is located in a Free Trade Zone of more than 60sq km, with increasing development of commercial general warehouses and also temperature-controlled warehousing to support the increase of imported meat, fish, dairy, fresh produce and other products that need temperature-controlled handling.

It is a good example of how China’s infrastructure is adapting itself to the major transformation trends in the country.

Guangzhou’s port of Nansha