China in Transition

Logistics will play a critical role as Asia’s most powerful nation moves to a consumer economy.

The following is based on a speech given by Mark Wallace, UPS Senior Vice President-Global Engineering and Sustainability, at the Harvard Asia Business Conference in Cambridge, Mass.

In the first of a two-part series, Wallace focuses on China in transition. 

There are two powerful streams of change emerging to create the new Asia: Its most powerful nation is in transition, and its most dynamic region is undergoing a transformation.

In both instances, logistics and transportation are enablers and drivers of change.

Transition centers on China, where history’s greatest economic story is struggling to complete one of history’s epic changes of direction.

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The world has never seen anything on this scale.

The second type of change, transformation, is happening just beyond China’s shadow, to the Southeast, where the world’s next great economic story is taking shape.

Combined, they will present logistics and transportation with one of history’s great opportunities and one of its greatest tests.

Economic Karma

We’re probably all a little numb to the numbers that quantify China’s mind-boggling economy.

Experts now forecast its economy will double to $12 trillion by 2020. The world has never seen anything on this scale or at this pace.

It was inevitable that China would become a victim of its own success. Economies grow, wages rise and lower cost competitors arrive. Call it economic karma.

China is hard at work building a consumer economy to make up for the fact that it’s no longer the world’s low-cost workshop.

There may be a perception that one era is replacing another.

In fact, China is going to be a vital and vibrant manufacturing center for decades to come. But the basis for its vitality is shifting.

[Also on Longitudes: Will Disruption Take a Bite Out of Logistics Jobs?]

Quality, Service Trump Cost

UPS recently published a study called Made in China 2.0, which was based on feedback from 1,000 manufacturing decision-makers.

Sixty percent of the respondents said quality and service have moved to the top of the list of competitive advantage while cost has become less important.

While the priority on manufacturing quality and service is a progression, the shift to a consumer-driven economy is a full-blown economic and social disruption.

Most projections say that China’s consumers are going to power a 50 percent increase in the consumer sector – to $6.5 trillion dollars – in the next five years.

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Asian consumers lead the world in tech adoption.

Three factors are converging to fuel its growth.

First, the new middle class – well over 100 million people – will be joined by a freer-spending upper-middle class.

Second, a new generation of consumers – young, optimistic, educated and hungry for the things and experiences life has to offer – is coming.

Third, the one that is closely aligned to transportation and logistics, is e-commerce.

China is already the world’s largest e-commerce economy.

By 2020 online spending is projected to reach $1.6 trillion annually.

At that pace, Chinese consumers will be spending $438 million a day, $18 million an hour, $304,000 a minute.

Those are some big numbers that pose a big question: Can the logistics infrastructure, which has supported a cost-driven export economy, also support an in-country consumption economy?

The answer from my vantage point is no. Not even close.

Infrastructure Meets Reality

China’s logistics sector was built to be part of the cost equation. In those days, the cheaper you were, the more you grew.

That made logistics competitive, fragmented and, especially in the warehouse sector, stuck in the early stages of technology.

That fragile infrastructure is now running up against a new reality.

Our research confirms that Asian consumers lead the world in tech adoption. They also lead the world in buying by phone.

By 2019, half of all of their online purchases will be made using a smartphone.

But we also found that Asians are the least satisfied with both their online and in-store shopping experiences. That’s not a great starting place for the consumer economy.

Their dissatisfaction reflects the emergence of a new kind of entitled, empowered and impatient shopper. We call them “flex shoppers.”  They use all channels and rely on technology to decide when, where and how they’ll receive their orders.

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Failure is not an option.

And therein lies the challenge for a Chinese logistics system: It was simply not built with today’s consumers in mind.

UPS in China is a byproduct of the same low-cost manufacturing economy and the need to cost-efficiently transport Chinese products.

We were built to connect China to the world. Our Shanghai hub, for example, can handle 36,000 pieces an hour – and get them to other Asian countries and across the world.

We’re currently adding more automation and other efficiencies to our warehouses, telematics to our fleet and partnering with domestic companies to extend our reach.

We recently announced that we were optimizing service in 33 cities where we already operate and that we were entering 20 additional cities in China.

[Also on Longitudes: What Does it Mean to Trade in the 21st Century?]

Closing the Gaps

But between now and the arrival of the consumer economy, there’s a huge gap to close.  Just one example: Estimates put the cost of modernizing China’s warehouses as high as $2.5 trillion.

But if you spend any time in China, you learn that if something needs to be done, it gets done.

When I was looking for land to build our Intra-Asia hub, near Shenzhen Bao’an International, I was taken to what airport officials considered an ideal building site.

It was perfect – except for one thing. The site was a massive fish farm. My hosts said, “The warehouse can be here, the roads there, the ramps there.”

I had my doubts, but they had none. Nine months later, when we were ready to start development, the fish were swimming elsewhere and the land was ready.

Granted, transition to a consumption economy is a problem on a somewhat larger scale than relocating fish. But I’m confident.

After all, 2016 is the year of the Fire Monkey, whose motto is: “Anything can happen because everything is possible.”

Another reason for my confidence is that there is no choice. Failure is not an option.

China’s consumer economy simply won’t happen without a healthy e-commerce sector.

A healthy e-commerce sector won’t happen without making deliveries and returns part of the consumer-value equation.

And adding value through service won’t happen without a new logistics infrastructure.

As China moves from a manufacturing to a consumer economy, the race is on to develop the infrastructure and logistics that support a nation in transition. goldbrown2

Next: The transformation of Southeast Asia.


Every morning, wake up to the blog that gives you the latest trends shaping tomorrow.

Mark Wallace is UPS Senior Vice President of Global Engineering and Sustainability.

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Reprinted with permission of Longitudes, the UPS blog devoted to the trends shaping the global economy.