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  1. 1. Course website:• Offices:• Prof. Xiande Zhao, Room 906• Cheng Yu Tong Building• Email:• Tel. 2609-7650• Mr. Bochao Zhuang, Room 941• Cheng Yu Tong Building Email:• Tel. 2696-1657 1
  2. 2. Welcome to DSME6932WSupply Chain and Logistics Management - Managing Supply Chains in China Prof. Xiande Zhao Director, Center for Supply Chain Management & Logistics Li & Fung Institute of Supply Chain Management/ Logistics Chinese University of Hong Kong 2
  3. 3. Organization Structure Li & Fung Institute of Supply Chain Management & Logistics Center for Logistics Technology &Center for Supply Chain Supply Chain OptimizationManagement & Logistics Supply Chain Management Research Center Joint R & D Center for Supply Chai & Logistics (with Tsinghua) Cyber-logistics Research Center Knowledge Transfer Office 3
  4. 4. Course Overview and Objectives• Understand the business environment in China and roles that China plays in global supply chains.• Comprehend Chinese culture and traditions and how they influence supply chain operations and decisions• Make important decisions related to the choice of supply chain strategies, design and improvements of supply chain processes• Learn how to select supply chain partners and manage supply chain relationships in the dynamic business environment of china 4
  5. 5. Course Assessments• Items Weight• Case reports 50%• Final project report and presentation 30%• Attendance and class participation 20% 5
  6. 6. Managing Chinese Supply Chains: Challenges and Opportunities Dr. Xiande Zhao Professor and Director Center for Supply Chain Management and Logistics Li& Fung Institute of Supply Chain Management and Logistics Chinese University of Hong Kong Tel. 2609-7650, Email: 6
  7. 7. A Brief History• The world’s oldest surviving civilization – Evidence of communities from almost 6000 years ago• Dynasties dating back to 2200BC• 1908: fall of the Qing dynasty• Last Emperor Puyi 7
  8. 8. Dr. Sun Yatsen• Father of Modern China• First Provisional President of Republic of China in 1912• Quickly fell out of power• Respected in both Mainland China and Taiwan 8
  9. 9. Kuomintang (KMT) 国民党• Nationalist Party• 1920: dominant political force in eastern China• 1925: power struggle within KMT – Those sympathetic to communists – Those who favored a capitalist state supported by a military dictatorship• Chiang Kaishek tried to stop growing influence of the communists• 1928, Chiang held both military and political leadership – Half of China ruled by local warlords 9
  10. 10. Chinese Communist Party• Made of Chinese Marxist groups which joined together in 1921• Deeply concerned with social problems in China• 1927: Mao Zedong advocated rural-based revolt 10
  11. 11. The Long March• Chiang Kaishek led series of extermination campaigns against CCP• 1934: CCP suffered heavy losses, hemmed into an small area in Jiangxi• Marched north to Shaanxi to join other CCP armies• Took a year to complete, 8000 miles• Established Mao as paramount leader of CCP 11
  12. 12. Japanese Invasion• 1931: invaded and occupied Manchuria• Chiang , still obsessed with threat of communists, did nothing to resist• Kuomintang bitterly criticized for not defending against the Japanese• KMT forced to unite with CCP to resist Japan• 1937: rest of China invaded by Japan – “Burn all, loot all, kill all” campaign• KMT forced into retreat 12
  13. 13. Post WWII• CCP expanded enormously during WWII years, filling vacuum in local government in vast areas behind and beyond Japanese lines• 1946: civil war – Thousands of KMT troops defected to CCP – KMT defeated – Chiang Kaishek and KMT fled to Taiwan – USA dismayed by KMT’s failure, refused further support 13
  14. 14. Birth of People’s Republic of China (PRC)• 1949: Mao Zedong founded PRC and start to rule mainland China• President Truman ordered a protective US naval blockade to prevent attack from mainland 14
  15. 15. Early Days of PRC• KMT legacy: unbridled inflation, economic mismanagement, shortage of materials• Crumbling infrastructure, plummeting agricultural output• With the help and support of the worker and the factory owners, CCP improved the economy• By 1953, inflation halted, industrial production back to prewar levels, land redistributed to peasants 15
  16. 16. Hundred Flowers Campaign• 1956-57: CCP encouraged a variety of views, welcomed open criticism• Many overseas Chinese intellectuals returned to help with reconstruction• Many KMT intellectuals stayed, rather than flee to Taiwan• 600,000 intellectuals incarcerated or sent to labor camps for thought reform 16
  17. 17. The Great Leap Forward• One of the greatest failed economic experiments in history• CCP told everyone to build backyard blast furnaces to increase steel production – “Take steel as the key link, leap forward in all fields”• Massive slump in grain output• 30 million Chinese starved to death 17
  18. 18. The Cultural Revolution • Differences in opinions as to how to develop the economy between Mao and other leaders such as Liu Shao Qi and Deng Xiao Ping • Power struggle within the parties • Mao started to purge other leaders and establish personal worship • Little red book of Mao’s selected thoughts 18
  19. 19. Red Guards• Students issued red armbands and took to the streets• Went on rampage, shutting down schools, intellectuals re-educated, publications ceased, temples ransacked• Physical reminders of China’s past destroyed• Neighbors and family turned each other in• Millions of people died 19
  20. 20. Stages of economic development in China 20
  21. 21. Stage 1: State-Planned Economy (pre-1978)• Several measures introduced by the central government to discredit and abolish individual commerce• Private enterprises largely replaced by state- or collectively-owned entities• Economic activities were governed by the State Plan 21
  22. 22. Principles of the State Plan• Reallocation of resources to the people, following Socialist principles• Socialist focus on providing employment for the entire population• self-reliance and control• What’s missing? – Efficiency – Meeting market needs 22
  23. 23. Factories• Needed only to follow the State Plan• Strategic and operational issues decided centrally• Typical plant manager selected for political savvy• Little incentive to produce new products• Often operated at a constant level• Huge shortages and excess inventories common 23
  24. 24. Quality• Operations existed in a noncompetitive environment• No clear definition of quality or quality consciousness• Defects inspected out• Modern quality control introduced in the 1950s, only in selected pilot companies – Workers formed teams to discuss problems – Several SPC tools introduced 24
  25. 25. Distribution• Not the concern of plant managers• Resources reallocated centrally• Little or no support for marketing activities• Ministry of Commerce developed various corporations to handle specific categories or product lines• Materials and goods are allocated by a bureau of material management 25
  26. 26. Three-Tier Vertical Distribution• Tier 1: large, mostly coastal cities – Purchased goods from all over China – Accepted imported goods• Tier 2: Received goods from Tier 1 distributors, according to the State Plan – Located mostly in provincial capitals• Tier 3: Wholesalers in the cities and counties – Redistributed to state- or collective-owned retailers• Each tier added 5-17% margins 26
  27. 27. HRM Practices• “Iron rice bowl” employment – Young workers allocated jobs by local labor bureau – Guaranteed job until retirement – Children could inherit retired worker’s job• Limited incentives for good performance• Little incentive to improve performance• Enterprises often hired more people than needed 27
  28. 28. Stage 2: Economic Reform andRapid Development (1978-2001) • 1978, Deng Xiaoping opened China to market competition – Reduced reliance on central planning – Moving factories closer to their markets – Stimulating competition between organizations – Developing managers who were more autonomous and accountable – Restructuring state-owned enterprises – Introducing contract responsibility system – Establishing privately-owned enterprises – Encouraging foreign direct investment 28
  29. 29. Special Economic Zones• Established four SEZs as laboratory for economic reform policy experiments – Xiamen, Shantou, Shenzhen, Zhuhai – Preferential treatment for foreign investors – Local governments and enterprises given more freedom to make economic decisions• 14 economic development areas (EDAs) – Helped to attract significant FDI 29
  30. 30. 30
  31. 31. Benefits of Foreign Direct Investment• Established modern manufacturing facilities• Brought badly needed technology and management know-how• Brought knowledge – How a market economy works – How a business enterprise should compete in a market economy• Some economic zones developed very rapidly 31
  32. 32. Quality• Beginning in 1978, quality concepts applied rapidly• Modern quality control reintroduced• Exposure to knowledge, expertise and high- quality products of foreign organizations• Laws established quality management standards• Shanghai companies took the lead in TQC 32
  33. 33. Reforms in Other Areas of China• Reduce reliance on central planning• Control of manufacturing and logistics gradually shifted to provinces and municipalities• Dual distribution system – 1986 – Manufacturers expected to supply products to central government in specified amounts – Permitted to develop supplementary plan for meeting market needs of privately owned retailers 33
  34. 34. Logistics• Substantial improvement, with shift of control away from central planners• Still major problems – Unreliable and slow rail transport – Poor road conditions – Lack of bridges – Many toll roads – Numerous roadblocks and checkpoints• Better matching of supply with demand than before• But still substantial mismatch 34
  35. 35. Logistics• Strong regional and provincial loyalties – Boundaries for distributors set by old systems – Stiff tariffs, mountains of red tape• Cargoes offloaded at regional boundaries• Severe restrictions on distribution activities of foreign distributors 35
  36. 36. Regional Protectionism• Affected manufacturing and sales• Local governments encouraged to focus on local economic growth• Many state-owned enterprises controlled by local governments 36
  37. 37. Major Progress• Privately owned enterprises allowed to grow, state-owned enterprises reformed• 1990s: opened SOEs to the markets, held responsible for their profits and losses• Iron rice bowls gradually smashed – Labor contracts – Higher pay for those with more knowledge – Challenge of recruitment, training, development 37
  38. 38. Social Problems• What to do with workers who were no longer needed?• How to deal with workers whose companies had gone bankrupt?• Created need for social welfare and insurance• Income disparity between state/collectively owned enterprises and foreign owned• Uneven economic development across regions 38
  39. 39. Stage 3: WTO Membership and Continued Rapid Development (2002-present)• December, 2001: member of WTO – Signaled presence as a player in the global economy – Large step forward toward increased economic exchange with international trading partners• Growth and development have accelerated at an astonishing pace• Vast improvements in market access 39
  40. 40. Stage 3: WTO Membership and Continued Rapid Development (2002-present)• Substantial increase in exports to industrialized markets• Fierce competition in domestic markets• Attractive target for FDI• The largest exporter of many consumer products – Electronics – Toys – Garments 40
  41. 41. Manufacturing• Developed competence in low-cost manufacturing• QM is becoming increasingly imperative• Incentive systems started to be changed for effective implementation of QM• Quality Management practices are being implemented to an increasing degree in different enterprises• Usually the state owned and collectively owned are more behind• Wide variation for privately owned companies• Foreign owned and joint venture companies are more advanced in QM and have more modern plants and advanced technology 41
  42. 42. Logistics• Many problems from earlier stages continue• Sheer size presents formidable logistics barrier• Most distributors quite small, specialize in limited range of goods and regions• Large foreign companies start enter into china• Some domestic ones also grow bigger• But the really big ones are still controlled by the state such as COSCO, China Overseas, China Merchant• The government still controls the railway, most airport, container terminals• Number of airlines and airport increases rapidly• Road improved dramatically but with many toll roads and bridges 42
  43. 43. Emerging Issues• Construction projects everywhere• Environmental issues have accompanied rapid modernization and growth• Shortages of energy• Widening income disparity between urban and rural areas• Vast migration to urban areas 43
  44. 44. Emerging Issues• Houkou system makes migration difficult – Leads to labor exploitation• Living and working conditions of the “mobile population” – Unsafe working conditions, unmonitored work hours, delay of wage payments, wage level – Schooling of Children• SOEs facing increased competitione pressure to improved or be closed• More people “off post” 44
  45. 45. China’s Emerging Role in the Global Economy • Largest emerging economy in the world • GDP growth of 10%/yr. since 1978 • Ranks third in the world in total world trade •Exports growing faster than imports, $61.5 billion trade surplus •Over $600 billion in FDI, ~200 countries 45
  46. 46. Economic Growth in China Gross Domestic Product (GDP) of China Between 1952 - 2006 GDP (in billion of RMB) GDP growth rate 25000 16 14GDP (in billion of RMB) GDP growth rate / % 20000 12 15000 10 8 10000 6 4 5000 2 0 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2006 Year 46
  47. 47. 2004 2005 2006 2007 2008GDP(0.1 15,9878.3 183867.9 210871.0 246619.0 300670.0billionRMB)Growth 10.1% 9.9% 11.1% 11.4% 9.0%Rate
  48. 48. 2004 2005 2006 2007 2008Import and 11545.5 14219.1 17604.0 21738.0 25616.0export(0.1 billiondollars)Export 5933.2 7619.5 9689.4 12180.0 14285.0Import 5612.3 6599.5 7914.6 9558.0 11331.0Growth 17% 23.2% 23.8% 23.5% 17.8%Rate
  49. 49. Major economic indicators in 2008• GDP = more than 30 trillion RMB with 9% increase• The price level had been controlled• Fiscal revenue 6.13 trillion RMB with 19.5% increase.• Total imports and exports amount is up to $2.56 trillion with 17.8% increase• FDI in China is up to $92.4 billion last year.
  50. 50. Economic trends in 2009: Six Indicators– Economic growth rate: "8%" • Government report 2009: Chinas economic growth rate target on 8%. This is fifth consecutive year that the government set on this number.– Employment levels: create more than 9 million new jobs. – In 2009, government will implement an active employment policy, and intends to invest 42 billion RMB with the policy.– Price level: "4% increase" • 1.9% lower than actual price increase last year.
  51. 51. China’s Emerging Role in the Global Economy• Similar in size to the US, but much larger in population – US: 296 million – China: 1.3 billion• 20% of the world’s population• Personal incomes rapidly increasing• Economic development a top priority •Able to affect change very quickly 51
  52. 52. Pearl River Delta• The first to develop after open- door policy in 1978• Following the lead of Shenzhen, other cities transformed from rural areas into modern manufacturing bases •Light industry dominates •Among highest percent of private and foreign-owned companies in China 52
  53. 53. 53
  54. 54. The PRD Guangdong Province Map of Pearl River Delta
  55. 55. Pearl River Delta •Guangdong province accounts for 36.4% of total value of China export• Shenzhen is one of China’s financial centers• Beginning to eliminate trade barriers, free labor movement• Problems – Worsening pollution – Labor shortage – Rising wages 55
  56. 56. Current situation of Guangdong Province• Guangdong: One of the largest manufacturing bases, especially its Pearl River Delta Area. – In 2008, 4900 enterprises have shut down – Among them 2400 were foreign-invested enterprises, mainly located in the Pearl River Delta.• “It’s a normal phenomenon, it won’t become a wave of shutdown of firms.” Governor of Guangdong Province Mr. Huang Huahua said in 13-3-2009.• In 2008, The number of foreign investment firms increased 506 and the growth rate is 0.5% compared with 2007.
  57. 57. Which firms Shut down?• Majority of enterprises are labor-intensive, low value- added processing trade enterprises. – Lack both technological advantage and market advantages• High-tech enterprises have more chance – That is why those well-known enterprises in United States were becoming larger and larger, stronger and stronger over the past several crisis. – In their eyes, the financial crisis is a golden opportunity.
  58. 58. Survey Evidence• In December 2008, the Guangdong Science and Technology Bureau studies 836 high-tech enterprises.• Economic situation in Jan. to Nov. 2008 was good• Industrial output value of these enterprises increased 33.18% over the same period in 2007.• Industrial added value was 34.84% average increase over the same period last year.• The export increased 27.89% on average over the same period last year.
  59. 59. 59
  60. 60. Yangtze River Delta • Designated as region for high technology and heavy manufacturing• Gateway – Central and northern China’s industries – Vast interior markets and natural resources• In some areas, an average of one new plant opens per day• Shanghai: major financial, logistical and manufacturing center 60
  61. 61. 61
  62. 62. Bohai Sea Area • Beijing: political, economic and cultural center • Tianjin: one of largest ports in northern China • Designated as a main focus for economic development in 11th Five Year Plan • Third highest in GDP per capita• Increasing emphasis on this areain the future 62
  63. 63. PRD+YRD+BHSA• Three major economic powers• Account for 3% of the total area of China• Account for 46.5% of the GDP• Higher income and cost of labour• Future emphasis in development: optimization• Help to lead and help developments in other areas 63
  64. 64. 64
  65. 65. Northeast China• Once had a strong heavy manufacturing base• Still home to some of the largest SOEs• Relative competitiveness of these industries is decreasing in today’s highly competitive marketplace• Inefficient, ineffective 65
  66. 66. 66
  67. 67. Central China (west Strait)• Fujian: close to Taiwan – Preferential treatment from central government – Many connections with Taiwan and overseas Chinese – Fastest growth after economic reform policies were introduced – One of the new areas of development due to the recent collaborations with the Taiwanese Government headed by Ma Yong Jiu 67
  68. 68. 68
  69. 69. Southwest China• Contains more ethnic minorities• Developing more slowly• Chongqing is under direct guidance by central government• Large manufacturing base with many industries, including steel and automobiles 69
  70. 70. 70
  71. 71. Northwest China• Relatively undeveloped• Lowest GDP per capita, disposable income, salary and expenditures• Xi’an has fairly good manufacturing base, some good universities• Limited infrastructure and foreign investment 71
  72. 72. Unbalanced Economic Development• PRD, YRD, BSE: faster pace of development – Earliest beneficiary of economic reform efforts• Vast inland region: slower pace of development• Relatively greater focus on agriculture• Significant disparity in standard of living 72
  73. 73. Impact of Culture on SCM• What are some of the major cultural issues related to managing supply chains in China? 73
  74. 74. Guanxi• Granting of preferential treatment to business partners, in exchange for favors and obligations• Morally binding social norm• Requires reciprocity among business associates• If obligation isn’t fulfilled within a short amount of time, social harmony between the managers will be disturbed – Non-reciprocating manager will lose face 74
  75. 75. Guanxi• If a foreign purchasing manager doesn’t not reciprocate a favor within an appropriate amount of time, his company could become the target for opportunistic behavior by the supplier• Guanxi can be transferred between social networks• Use of China-based agents may be essential to improve trust and supplier relationships 75
  76. 76. Collectivism• At the heart of guanxi• Characteristics of Chinese national culture – Preference for tightly knit social networks – Expectation that in-group members will support each other – Strong urge to maintain social harmony and interdependence within the in-group• Expectation of support by in-group members• Lack of obligation to those who are not members of in-group 76
  77. 77. Deep Supply Chains• Each of these issues will be exacerbated in adeep supply chain• With more links in the chain, difficult to knowwhat is going on in each of them• Likely that there are hidden links •May be true, even in the presence of a contract which explicitly prohibits such practices• With more links, more difficult to communicate• Guanxi can be very helpful in deep supply chains 77
  78. 78. Power Distance• Expectation that power is distributed evenly• Chinese people accept and expect that power is distributed unevenly• Naturally defer to those they perceive to be their superiors – Expect superiors to be benevolent, provide them with stability, close supervision, explicit rules• Chinese suppliers expect to be closely supervised and provided with very explicit rules• More difficult with deep supply chains 78
  79. 79. Uncertainty Avoidance• Society’s tolerance for uncertainty and ambiguity• Comfort in unstructured situations• High: belief in absolute truth, try to avoid risks in business• Low: more tolerant of opinions different from what you are accustomed to, as few rules as possible 79
  80. 80. Masculinity/Femininity• Distribution of roles between genders• Masculine national cultures – Assertive, competitive, driving for success• Feminine national cultures – Modest, caring, nurturing• Greatest gender differences are in masculine national cultures 80
  81. 81. Long Term Orientation• Valuing stability over change• Reflected in – Bureaucracy – Difficulty incorporating voice of the customer – Dedication to a lasting guanxi relationship• Long history of reliance on central planning• Passive working behavior, lack of incentives, poor product quality, bureacractic bloating 81
  82. 82. 82
  83. 83. 83
  84. 84. 84
  85. 85. 85
  86. 86. 86
  87. 87. The effects of Ownership• Joint ventures and wholly foreign-owned companies are much more advanced in adopting modern management principles• Importance of being selected as a supplier to US- owned company• Private and SOEs may be much farther behind – May make promises, honestly believe it is capable of producing desired quality level 87
  88. 88. Contracts• US: belief that a good contract will ensure that customer’s specifications will be met• China: lack of enforcement of contractual provisions• In the absence of a facilitative government, informal relationships more important• Historical perception of contracts as a means for foreigners to take advantage of Chinese 88
  89. 89. Conclusions• China is not like the rest of the world and never will be• Manufacturing in China is heavily influenced by the past• Think long and hard about where to locate and source in China• Relationships may be difficult to understand or participate in satisfactorily 89
  90. 90. Conclusions• Chinese manufacturing dragon is raising its head and isn’t going to back off• To truly understand it, need to understand – Where it comes from – What it has been through in its life – The culture that it lives in 90