Chinese Trucking Market 2014: Best Highways & Worst processes

Chinese Trucking: Best Highways & Worst Business Processes.Part 1: 25 Shippers’ Practices Slowing Trucking Industry Development.

by Mirek Dabrowski

Intro

Lack effective controls over shipments, vendors and ever escalating costs?

Tired of handling routine transport complaints?

Do your transport tenders fail to produce expected results?

Unable to differentiate your delivery service and obtain competitive advantage?

Take ages to get reliable POD, KPI and freight billing?

Why you cannot get any transport systems to work?

Wonder why trucking industry develops so slowly in China? Read On

These are common issues for shippers and trucking providers in China. They lead to real financial losses for organizations and stressful daily routine for logistics professionals. Low quality and high cost of trucking serv-ices is the usual experience. Conventional wisdom is to lay blame for these on insufficient capabilities of trucking companies. Additionally, attributing them to “this is the Chinese trucking market” factor justifies inac-tion. Indeed traditional trucking & logistics industry develops at glacial speed, in contrast it to break-neck pace of related sectors of Chinese economy, such as highway construction, express transportation and e-commerce.

We argue here that transport providers (TSP) cannot possibly take full responsibility this situation; neither can they be relied on as sole change agents. Large TSPs are the most visible group in the market, so many natu-rally assume they play a pivotal role. In fact, they are just a thin layer squeezed between clients and vendors and interactions among all these players define market dynamics.

The reality is that trucking always involves at least four parties: shipper, trucking company, driver, and con-signee. In China, particularly within the B2B LTL segment, there are many layers of outsourcing. It therefore is easy to have as many as 8-9 parties involved. This includes at least 3 drivers usually assigned by 3 independ-ent sub-contractors of a TSP.

In this article, we look at typical a B2B shipper’s distribution process, starting from vendor selection through shipment dispatch, track and trace, and ending with performance reporting and billing. Information flow among all these parties involve multiple standards and processes that often will overlap or simply clash with each other, resulting in delays and distortions.

We will contrast it against fast-evolving e-commerce and related express carriers. Conventional understand-ing of differences between B2B and B2C transport doesn't provide a clear path for the B2B sector. Shipment size (parcel vs. LTL and FTL) and network ownership are not sole defining factors and B2B shippers and truck-ers can learn useful lessons from B2C area.

Development of road-express companies such as Deppon, CNEX, or TNT-Haou will enable them to capture a bigger market share of the LTL market, in particular for smaller and more profitable shipments. The trend is for shipments to get smaller, due both to evolving consumer behavior and intensive competition. Losing a large and profitable share of business will catch many TSPs off-guard. Many shippers will find themselves imple-menting long overdue data and process enhancements in order to be able to work with road express provid-ers. This will be a rather ironic development because these are factors holding back their current TSP from achieving promised cost and service level improvements.

This article is the first of a series. Over the next few months, we will provide more insight into the actual inner workings of the transport market itself, including the driver's perspective. We will look into emerging trends in the market. We will publish both long papers like this and shorter articles more frequently. You can help us chose their topics by voting in the survey included at the end of this article. Our content will be available in Chinese and English and will be published on China Domestic Transport Group in LinkedIn, our blog, and our Weixin (WeChat) account. Links to these groups are provided at the end of this article.

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Glossary3PL/LSP – Third Party Logistics Provider/Logistics Service Provider

B2B – Business to Business – traditional consumer, retail, industrial, and manufacturing companies

B2C – Business to Consumer – e-commerce sector

DC – Distribution Centre

ERP – Enterprise Resource Planning System – such as SAP, etc.

FTL – Full Truck Load

KPI – Key Performance Indicators

LTL – Less Than Full Truck Load

POD – Proof of Delivery

RFQ – Request for Quotation – transport tender – vendor sourcing

SLA – Service Level Agreement

SOP – Standard Operating Procedure

TMS – Transport Management System

TSP – Transport Service Provider

WMS – Warehouse Management System

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China Worst Traffic Jams Are Not on the Roads – They Are in Your Business Processes.

Manufacturers, brands, and distributors all need to set up suitable physical distribution systems, select qualified transport vendors, process shipments, monitor their execution, pay freight charges, and periodi-cally review vendors’ performance. The supply chain organization in charge of this process is a support func-tion for internal clients, such as sales and manufacturing. Finance and procurement departments aim to en-sure tthat he lowest cost is obtained through tenders.

Such organizational dynamics usually result in adopting nominally high service standards and nominally low freight rates, both of which may impossible to achieve in daily operation. Management intends to stimulate continuous improvements and innovation culture through such dynamics. Unfortunately, in the real corpo-rate world, most people under pressure tend to resort to playing internal KPI games, cut corners, and blame others. Obviously transport vendors will be most convenient scapegoats for internal failings – after all one of the key benefits of outsourcing is that you “outsource” the problems. As a result, these internal failings usu-ally are either ignored or not even noticed.

We believe years of easy double-digit sales growth are gone for most companies selling domestically in China. Therefore, "this is China" hands-off attitude will not cut it for much longer. It is time to take a closer look into the black box of transportation and gradually implement processes that will ensure sustainable competitive advantage.

We have written this article based on our experience in 3PL and logistics software companies over the last 14 years in China. This gave us the opportunity to look into practices of dozens of shippers across many in-dustries. We believe you will be able to identify with many of these issues from your own experience. You probably do not see many of them as transport bottlenecks and perhaps consider nothing can be done about them.

Issues below are arranged in 3 phases: planning, execution, and review.

Delivery coverage, type, and service levels (SLA) need to be set up, and then qualified vendors need to be se-lected and employed. Many daily issues have their root causes here.

Many bottlenecks are avoidable complexities cascaded down to operation and vendors because there is no sufficient thought given to their implications. Sometimes they are even a source of pride and self-validation of a strict vendor-management system, as if complexity in the transport process was a source of competitive ad-vantage for a shipper. Let’s look at some common examples:

Self-designed, Complex Transport Tariff Formats. Most trucking tariffs in China are based on individual city-to-city lanes. A sliding scale typically will be used with multiple brackets for LTL and FTL shipment sizes. Big shippers will have hundreds, if not thousands, of combinations. Accessorial fees often are added and follow incumbent a TSP structure that may be difficult to follow for new bidders. Often design is left to people with no real experience and little understanding of implications for operation and ease of billing. Individual shipper tariffs create lot of work for bidders, resulting in low quality bids. Granted, most RFQ are just benchmarking exercises – but why not benchmark properly? Why not simplify tariffs into zones and get initial quotations for the top 80% volume lanes?

Detailed Shipment Data Not Available or Not Shared. Shippers’ complex tariff format rarely is complemented with comprehensive shipment data useful to new bidders – not just total volume per year/month, but shipment frequency, size breakdown, and lane allocation. Usually, there is simply no data available from shipper ERP and such data isn't systematically collected from incumbents. Often the easy excuse of “business confidentiality” is used. The worst case is intentional short-term thinking to get more competitive nominal rates. Whatever the reason, this results in low-quality bids.

Flat Rates with No Minimums. This always appears like a great idea to procurement and finance, especially if most of your shipments are small. TSP will be pushed to “leverage its network” as if lane-haul was a key cost component in delivering 10kg shipments. In other words, TSP efficiency should result in a cost 100x lower to deliver 10kg than a 1,000kg shipment. As a result, in the real life, TSP or its subcontractors will indeed to “optimize” and batch/delay such shipments and probably fake delivery dates to keep good KPIs. That is unless an “informal” solution is found to compensate TSP for true delivery cost. Unfortunately, such solutions render RFQ efforts ineffective because bidders usually are not privy to such arrangements.

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Planning: Process Setup and Trucking Vendor Selection

Late Order Cut-Over Times. Sales pressure to offer high service level dispatch cut-off times are usu-ally set very late. It may even be welcomed by plant or shipper insourced warehouse – why not? DC workers can get much needed overtime by picking orders late. The usual side effect – shipments physically dis-patched prior to shipment data is transferred – because most DCs in China will rely on manual pick/shipment confirmation often done next morning. As a result, such shipments will anyway spend a night in the vendor's origin hub. Actual cost increases do not result in any service improvements.

Unrealistic Lead-Times – Sales department feedback about competitor's standards often determines lead-time requirements. If true, this is usually due to different network set up or order processing flow – it is rarely due to a competitor using faster transport companies. Most TSP will commit to shipper standards to win business and later work alone or in tandem with consignees or shippers to conceal the reality. If there is no feedback from consignees, most manual on-time delivery KPI reports will default to 100%.

Dead Standard Operating Procedures (SOP). It is easy for a big organization to get carried away and write lengthy transport SOP, adding unique requirements here and there. It appears like a compre-hensive tool and a sign of solid vendor management practice. It is also much easier than expressing your stan-dards in single-page flowcharts and concise driver instructions on delivery documents. Obviously, after initial writing and training, they just collect the virtual dust on hard drives, are rarely updated, and virtually are never shared with actual, operations level sub-vendors and drivers.

Insufficient Implementation. Transportation is treated as a simple, external activity where TSP should excel on its own. Usually no IT integration is needed. So, unlike in warehouse implementation, it is brief and often covers just documentation. Even though transport trials are much easier to execute than ware-house it rarely happens. Usually the incumbent TSP will stop or threaten to stop all service immediately after losing RFQ. Most likely he already is working behind the scenes to make the winner fail quickly. So, most is-sues arise during actual rollout and this usually sets the tone for the future relationship between the parties.

Daily Shipment Execution and Monitoring:

Client orders are processed via ERP, WMS, and transferred to a trucking company. TSP will pick goods and deliver them to consignees. Some form of shipment track and trace and Proof of Delivery (POD) usually is pro-vided. More issues will compound the shipper-TSP interface during shipment handover. This is where rubber really hits the road.

Incomplete and Inaccurate Shipment Data. Most shippers in China implement ERP without considering trans-port implications – so, even rudimentary data like full shipping addresses, postal codes, and contact informa-tion are maintained incompletely or simply don’t exist. Gross shipment weight and cbm capacity after packing in a warehouse also is unavailable because many shippers do not even utilize a fully functional WMS module.

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As a result, daily order files exported from ERP are incomplete and inaccurate. TSP will be supplied with other “master data” spreadsheets they are supposed to reconcile themselves on the daily basis. Finally, large ship-pers may have multiple ERP sales orders going to the same customer on a given day, and they are rarely con-solidated into shipments out of ERP. TSP has to handle far too much data processing then necessary – result-ing both in longer lead-time and errors that are difficult to trace.

Delayed Shipment Data. It is normal and accept-able in China that shipment data is provided to TSP only dur-ing or even after the physical shipment pickup. The shipper will never be short of excuses why such data is not available in advance – usually “being responsive to client last minute changes” is a solid one. Because there is no IT process gov-ernance, communication is based on Excel spreadsheets and there is no need to produce such orders in advance for TSP. While this may be a pain for TSP, it certainly looks con-venient for shipper. Shippers, however, miss much the larger opportunity of simulating various cost scenarios and using more dynamic allocation methods either to multiple vendors or multiple transport modes. Needless to say, "real-time" shipment pickup notification for consignees also is impossible in such a supply chain.

Loading and Unloading Requirements Even though this is customary practice, a TSP often will find itself baffled by the true scope of "loading" activities that may extend to sorting and virtually picking the goods. In addition, such activity may represent a source of illicit revenue for dock-level staff – a fact somehow most shippers find reluctant to address. Shippers often will use trucking to subsidize their in-house warehous-ing cost. The practice of a trucking company bringing its own loading staff (or worse, hiring freelance labor in the neighbourhood) may be baffling to industry outsiders. There is a clear cost, productivity, and quality advan-tage to perform this activity by your own warehouse staff, in addition to the benefits of controlling dock capac-ity and scheduling better. This practice, however, is so deeply ingrained in the Chinese logistics market that no TSP will question this. It is in particularly "sensitive issue" for "unloading" activities on a client (consignee) side, as we see later.

No Real FTL Loads With a few exceptions (shuttle, milk runs, specialized chemical transport, etc.) there is no such thing as real full-truck loads in China. FTL loads will be more expensive per-unit that corresponding LTL load, even on long distance line-haul. Major reasons are lack of standard truck types, limited palletization, and overloading. Paying TSP by LTL unit enables the shipper to deny any support for or acknowledge over-loading. Real FTL loads also would require shippers to prepare relatively uniform shipments – for example. 30-pallet FTL will not fit 45 pallets (clearly more is not always better) – but with LTL tariff such constraints are han-dled by the TSP. Shippers are solely responsible for not being able to optimize their processes and get true cost KPIs to facilitate FTL moves across plants and DCs. Claiming China’s 2011-14 labor cost environment that it is cheaper manually to load and unload cartons on a vendor truck to increase capacity is simply irre-sponsible, especially when you consider that most shipments likely will be reloaded many times at transport

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Shippers often will use trucking to subsidize their in-house warehousing cost. Claiming China’s 2011-14 labor cost environment that it is cheaper manually to load and unload cartons on a vendor truck to increase capacity is simply irresponsible.

hubs – wasting time and increasing damage and shortage risk.

Next, let’s look what happens after shipment departure; actual transport seems like deceptively simple activity.

It is important to realize that a typical LTL order will pass through the hands of three drivers: pickup, line-haul, and delivery, of which the last one is most critical to an overall experience. Most of these drivers are not directly controlled by TSP. TSP may use its own pickup driver, but outsource line-haul and final delivery to separate companies. 3PL may outsource the entire delivery to a single subcontractor, but eventually somebody has to separate shipments into legs, outsourced to different vendors. Here is what happens next among different vendors:

Vendor/Driver Management Shippers will have very high expectations on TSP’s ability to "manage" its vendors, but this term really is an oxymoron in China. Not only vendors and drivers are independent contractors, but their incentives are misaligned. The big problem in China is not high a percentage of driver-owned trucks (also high in Europe and US) but the financial compensation model that pushes the majority of the financial risk down to drivers. TSP rarely assumes pricing risk by paying vendors and drivers for full capacity, for a round trip let alone for monthly km quota. As a result vendors, and drivers are forced to optimize their profit based on factors under their control - such as overload-

ing, delaying/batching shipments, etc. This corner-cutting, in turn, necessitates provides distorted information up the outsourcing chain. Shippers would be better served by replacing the word “management” with "moni-toring" and the TSP may think of incentives rather than penalties for subcontractors in order to move forward.

Outsourcing with Little Monitoring. Unfortunately, effective vendor and shipment monitoring is rarely in place with a TSP. Because of industry compensation models mentioned above, there is little incentive for a TSP to invest in proper controls and certainly there is plenty of resistance from subcontractors. The TSP defaults to the easiest but least effective solution: most track and trace happens via phone and email/XLS filed by subcontractor which already would be best practice in China. Vendor or drivers don't need to be pro-active or truthful at all – they are used to being reactive – they have been conditioned by TSPs to act like this. TSPs compensate for their subcontractor “weaknesses” essentially by maintaining their own internal systems (spreadsheets) that are based on verbal feedback. Ironically, this behavior actually enforces current subcon-tractor and driver behavior.

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Typical LTL order will pass through the hands of three drivers: pickup, line-haul, and delivery, of which the last one is critical to an overall experience. Most of these drivers are not directly controlled by TSP

The big problem in China is not high a percentage of driver-owned trucks but the financial compensation model that pushes the majority of the financial risk down to drivers

But Most TSP Use GPS! For years, every decent trans-port RFQ in China called for “GPS tracking” and every respect-able TSP has “all trucks equipped with GPS.” China 2012 regu-lations to have GPS installed at registration for trucks over 8 mt capacity lend this statement some truth – irrespective if they are kept switched on by drivers or not. GPS can be an ef-

fective asset and truck monitoring tool, especially when other truck data points are added (engine start/stop, door open/close, temperature, etc.). However, shippers give little thought how GPS can really be used to track their shipments, especially LTL. For this to work, the driver/TSP needs to register, in real time, shipment loading/unloading between trucks and hubs and this information has to be made available to a client in a use-ful, meaningful way. It is hard to imagine shipper's staff leaning over computer monitors filled with hundreds or thousands of shipments tracked on a map on a daily basis – or perhaps several maps provided by different TSPs. Let’s also not forget the simple fact that trucks and GPS units are controlled by various sub-vendors of the TSP, each using different a GPS provider. As a result, GPS tracking is little more than a sales tool. It con-tributes little to tracking information reliability for shipper and nothing at all to the long cycle of POD returns. Next time ask your TSP how it really uses GPS to keep you informed about your shipments.

But Most Large TSPs Own Their Hubs! More diligent shippers visited their TSP flagship hubs in Shanghai and Beijing. Projection is made that this also applies to “their” 20-50 hubs in other cities that promi-nently feature on network maps that TSPs love to show in their sales presentations. Existence of public de-pots that process perhaps >80% of general LTL cargo on very competitive rates is conveniently forgotten. Some more honest TSPs (usually ones that lack sufficient client/volume base to make their own hub story plausible) will admit to use of public depots, but always have their “own staff” located there. Of course, such measures are implementable and can be very effective as long as this staff is 1) actually TSP directly hired em-ployees and not usual local subcontractor staff paid and managed by them, 2) well trained in shipper SLA, and 3) incentivized for truth telling and problem fixing

Lack of Common Language – Shipments have to be handed over between hubs, vendors, and driv-ers using a combination of electronic and paper formats. Electronic information exchange between TSP and vendors involves using various TMSs (optimistic version) or multiple excel files (realistic version). Paper docu-ments will include various TSP, lane expert, and last-mile delivery company hand-written delivery notes in “fill a form” standard. Usually none of these have space for shipper requirements so diligently written into ship-per’s SOP and SLAs. Actual delivery dates also may be changed – intentionally or by mistake. Shippers’ ERP delivery note that may serve as POD standard is rarely designed to convey any direct instructions for drivers (often just ERP packing list), so usually it is not much help. Low quality of final delivery thus usually results from low awareness of real shipper expectations, especially because last-mile driver base is dynamic in all but tier 1 cities. On the other hand, these drivers and hub employees have real on-the-ground experience valuable to the shipper, but it is rarely collected and presented to them.

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Shippers give little thought how GPS can really be used to track their shipments, especially LTL.

Finally let’s look at shipment delivery. All the previous efforts and issues culminate with final delivery experience for a consignee so driver physical contact will determine the outcome as success, failure, or just another bland experience. Shipper and TSP are miles away with their SOP, SLA and KPIs. Driver-to-consignee interaction will define if delivery is considered successful. Common issues in-clude:

Fragmented Feedback. Consignee usually will call shipper sales/customer service to inquire about delivery status or to complain. Shipper will call its TSP. TSP will call its vendor. Finally, right vendor will call the driver. The process of giving feedback will now repeat in reverse. Can you see how dis-torted, delayed, and effort-consuming the whole process is for TSP and shipper?

Distorted Feedback. It happens that a consignee staff has personal incentive to provide negative feedback to make life difficult to a new TSP. TSPs understand well that consignees’ feedback is an important weapon in retaining old business and incumbents often will resort to this in cases of losing an RFQ. This is easy with no formal and systematic complaint channels and frag-mented information flow; any responsibility for false information can be easily deflected.

Limited Flexibility to react to changing expectations: because of extended and indirect information flow, consignees will find it difficult to make effective dock arrangements, which costs real money in large DCs or hypermarkets. This results in complaints that could be avoided.

Too Much Flexibility. On the flipside, the, scope of receiving activities, such as extended "unloading," can be very a effective weapon against a new TSP. Most shippers are passive about it because of difficulties to reconcile the true story. The new vendor will be blamed for the lack of customer understanding and bad service attitude. This costs real money and benefits nobody except the former incumbent TSP hoping to re-capture lost business.

Self-Delayed Deliveries. TSPs do not cause all the delays. Consignees may temporarily lack receiv-ing capacity. In certain industries, it’s a general practice for shipper sales to overload distribution channels to meet their quarterly or monthly quotas. However, it will be convenient to blame the TSP, especially if the ship-per can avoid paying temporary storage or truck detention fees.

Proof of Delivery (POD) – one of biggest issues for shippers in China is to obtain trustworthy docu-ments in an acceptable timeframe. Usually “originals” (paper documents) are required, especially if TSPs were caught faking them in the past. Because it takes a long time (weeks) to collect them from Pan-China deliver-ies, shippers usually ask for “ePOD,” especially for shipments with consignee-reported damage/loss/delay.

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Driver-to-consignee interaction will define if delivery is considered successful. Low quality of delivery usually results from low awareness of shipper expectations, especially because last-mile driver base is dynamic in all but tier 1 cities

Such ePOD is usually a form of a fax (not very readable), digital photo, or in the best scenario a high-quality scan made at the TSP hub. Usually it takes days to collect it and if the information on the TSP ePOD is differ-ent from the consignee version (various remarks and dates "mysteriously" tend to appear or disappear there) shipper will have hard time to reconcile this information. It would be simple if the consignee always could be trusted over the driver; but, as we saw before, this is often not the case…

Because most shippers also play the consignee role themselves, their supply chain and transport team could learn many valuable lessons by going down to their own receiving dock, talking to drivers, and seeing their own formal and informal process.

Periodical Reviews

Done usually on a monthly basis, it involves looking at key performance indicators (KPI) to determine opera-tional and financial performance and some improvement plans may be agreed upon. Finally, freight billing is processed between vendor and client so actual fapiao can be issued.

Manual KPI Reports based on Excel spreadsheets usually are prepared by vendors in a one-off, end-of-the-

month exercise. Minimum standards will include on-time delivery, damage, and loss rate. For KPI-driven shippers, more data points will be added. Many shippers in China do not invest much effort in KPI design and review. So, it's common to have TSP KPI 100% because it is common to have 100% stock accuracy in a warehouse managed by an Excel spreadsheet. Even when KPIs are reviewed seriously, spreadsheets are cumbersome to prepare; so, only in very critical performance issues would they be analyzed down to lanes, order types, actual root causes, etc. Few action-able items can be derived from a typical KPI reports used in China.

Manual Billing It may take weeks for new a TSP to assemble billing data in a format demanded by a ship-per, that looked like such a smart idea during RFQ. Process is usually manual – done in a spreadsheet and prone to mistakes - intentional or not. Over months, billing usually can evolve out of the original tariff if the shipper allows adding various ad-hoc and special fees needed to compensate TSP if nominal RFQ rates are too low. Seeds of another useless RFQ exercise will be planted here again. It is amazing that the vast majority of Fortune 500 companies in China run tens and often hundreds of millions of RMB on “free & easy to use” XLS spreadsheets. A lot of time and energy is focused on nominal cost reductions via RFQ that typically have double if not triple digit percentage variance between bidders and questions are rarely asked about root causes. Instead, it is more convenient to assume that some reputable large local and global TSPs with years of presence in China still "do not understand the market" and "do not own trucks.” Such shippers shot them-selves in both feet, one representing cost and another service.

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Excessively Long Payment Cycle Effective pay-ment cycles usually extend to 90 or even 180 days with many of large shippers. Because total payment cycle for a TSP may include paper POD recovery, preparation, and checking of pro-forma billing plus customary 60-90 days payment terms. Many shippers have informal directives to extend payments as much as possible and the TSP will account for it in its pricing. In fact, TSP subcontractors will account for that, too, in the first place

because most TSPs never will pay before monies are received from a shipper. Quite a few TSPs happily will extend vendor payments even more to improve their cash flow and net working capital. Since particular ship-per and TSP “payment reputations” transcend down the subcontractor market, the latter rarely take for granted empty assurances of faster payment. It is estimated that for 1 mln spent monthly, vendors facing driv-ers need to be able to absorb 4-6 mln cash flow. Does it really make financial sense to have small subcontrac-tors fund large shippers? Overall supply chain cost is certainly higher considering Chinese "shadow-banking" extraorbitant loan cost. Sure, shippers and TSPs can do little about nominal payment terms imposed by fi-nance policy. However, plenty can be done by supply chain departments to reduce POD and billing cycle time. Shippers need process and tools exposed in RFQ that would make bidders believe that this time it is really possible to be paid earlier…

High Risk to Change: TSP unsatisfactory cost and operation performance will rarely lead to any changes unless the situation reaches a real crisis level that puts shipper's staff career at risk. TSP change is a high risk step in China. Transport arrangements are based on a manual, opaque, and unwritten set of processes and the devil hides in the details – as shown in this article. TSPs serious about a particular RFQ needs extremely good preparation to bid suc-cessfully. Many TSPs find wins rather than victory if the contract is unprofitable and even worse when imple-mentation is a failure with reputational consequences. However, low vendor turnover leads to low industry competitiveness and persistently low service levels experienced by shippers.

Shippers usually expect that one day some “super-qualified” TSP will emerge that will be able to solve issues their incumbents can’t. However, for most of the issues mentioned here, TSP “solutions” canonly be work-arounds leading to the shipper losing control and understanding of their true delivery experience. Such ship-pers end up being overly dependent on the incumbent TSP

This situation is very different in B2C and express delivery sectors. Let’s find out why.

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It is estimated that for 1 mln spent monthly, vendors facing drivers need to absorb 4-6 mln cash flow. Considering Chinese "shadow-banking" exorbitant interest rates your transport cost is much higher.

Changing vendors in China is risky so it is rarely done. As a result development of competitive TSP is slow.

People working for shippers and TSPs can't help but notice recent success of B2C and related fast-paced de-velopments of Chinese express companies. It is easy to conclude that these transport sectors are completely different for two key reasons: Shipment sizes and unit transport prices are quite different. Express carriers can offer standard service levels because their own networks employ drivers directly and run strong internal systems, including IT software and hardware.

We argue that network ownership and employee base is just a liability - a necessary evil – the same as what inventory is to manufacturer or retailer. Likewise, IT hardware and software are expensive to develop and main-tain, but they are a must to enable the process. 

Consistent, replicable process is everything. It is a key to profits and customer satisfaction and, therefore, lays the foundation to scalable growth. The key difference with B2B trucking is that the express process binds clients as much as themselves. 

Let’s assume 2 major global industry leaders and fierce direct competitors want to use Shunfeng Express (SF) service in China. SF shipment process, tariffs, and service levels will be considered a given and by no concern will appear be about sharing process or network with direct competitors. A fortune 100 company using an express provider can, of course, get the best volume discounts and dedicated key account management, but the underlying process is never custom-ized. They all are based on the same shipment documentation format, same tariff format, same choice of serv-ice levels (express products), same track and trace tools, and best of all, consignees will except exactly the same service level from SF no matter if the delivery is made for competitor 1 or 2.

For this "privilege," shippers happily will pay SF much higher freight rates than they pay to their B2B truckers, who carry the remaining +95% of their goods. Yes, service levels are higher, but they also demand shipper compliance. It would be unthinkable for a B2B TSP to demand their its process compliance from a shipper in China; they would not even qualify to shortlist. The typical large shipper perception of working with a trucking company is to impose its own standard as validation of doing a good job of strong "vendor management." On the other hand, TSPs have little motivation to set such process because they outsource most risks down and so far they usually get away with this.

Consignees, on the other hand, not only expect the same service level from SF no matter who the shipper (supplier), but also they will readily accept seemingly lower service levels. For example, motorcycle delivery is

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B2C vs. B2B Delivery Model and Experience: B2C Wins Big.

The key difference with B2B trucking is that the express process binds clients as much as themselves. Same shipment documentation, same tariff format, standard service levels, same track and trace tools, and best of all same delivery experience.

perfectly OK for express shipments but similarly sized shipments should be sent by the closed truck of TSP. Obtaining clean POD can be a hassle for TSPs, but SF delivery will be confirmed without carton contents checking. Any "rude behavior" by a TSP driver immediately will be escalated when nobody would even bother to complain about the staff of a large express vendor.

These divergent expectations of shippers and consignees toward express and trucking companies represent an interesting phenomenon and are major limitations for TSPs  The situation has some ironic implications for the shippers, too. Eventually, they will be pushed into compliance with processes of express and road-express companies, which will provide more competitive LTL products.

The point is that the asset ownership is necessary to get started. Cloud and mobile technology changes every-thing, and proper application of modern technology is an enabler that would help both shippers and B2B truckers to drive their standards higher. Do you really need an industrial-grade scanner and proprietary in-house system to exe-cute similar process? Is this even possible with multi-tier outscor-ing where drivers deal with orders coming from multiple out-sourcing chains, each with different requirements? Our answer is no in both cases - that is, unless the B2B trucking company de-cides to commit commercial suicide and roll out an express-type asset-based network.

So what is holding back Deppon, TNT-Hoau, and CNEX from gaining the mar-ket share from TSP right now?

Obviously these companies initially focus on building scale and replicable process by pursuing small and me-dium shippers, especially because such clients pay higher rates and must settle payments faster. They won’t need to focus their attention on large shippers targeted by TSP, but only until current the SME base offers high growth rates. Time inevitably will come when they turn their atten-tion to larger shippers and larger shipments offering service and cost better than TSPs. We believe most LTL-oriented TSPs will be caught off guard and by then it will be too late to defend their most profitable chunk of business.

Shippers, on the other hand, may celebrate such developments for as long as they enjoy lower cost and lower internal and external cli-ent pressure because big service provider costs will be considered as a given. Ironically, adopting such standards not only will be bet-ter for shippers as a company, but also for individual supply chain

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These divergent expectations of shippers and consignees toward express and trucking companies represent an interesting phenomenon and are major limitations for TSPs 

Supply chain managers will benefit because they will be able to lean on industry standards and fend off often unreasonable requirements and complaints from their sales and manufacturing colleagues.

managers who will be able to lean on industry standards and fend off often unreasonable requirements and complaints from their sales and manufacturing colleagues.

However, the path will not be easy considering the low starting point of most shippers in China - most bottle-necks described in this article will have to be eliminated. Most can be eliminated without waiting for market developments and it may be in the best interest of shippers and their incumbent TSP to start right away. Not all shippers would benefit from working with road express companies directly; many still prefer the conven-ience of outsourcing the complete service or geography to a single TSP.

We believe TSP and 3PL, in particular, should build both volume (unique discounts) and management capabil-ity to work with express and road-express vendors and add their capabilities along with other service modes required by their clients, such as FTL or large LTL, etc. This is a successful model in EUR and USA, and such developments will happen in China, probably only faster.

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Now, as we saw a typical B2B trucking delivery process and contrasted this with B2C express/road express, we can look at implications for the trucking industry as a whole.

Sector Consolidation Is Slow and Uncertain. Investments so far failed to meet investors’ expectations. Spec-tacular failures of U.S. companies focus just on superficial cul-tural reasons - the main point we make here is that economies of scale are difficult to achieve without standard processes that binds clients and independent vendors.  There is a vast supply of subcontractor and driver resources that offer risk-free mar-gins for TSPs. While their quality may be low, there are simply no commercial or operational standards with which to refer. Therefore, there is no clear payoff to assume management/ownership controls. There are low barriers for entry into the mar-ket itself and also into a specific contract.

Technology Fails Based on our observations, TSP investments in technology are marginal and largely ineffective. Microsoft Excel spreadsheets remain the most widely used transport management and communi-cation tools in China. It seems like a no-brainer- they are free, easy to implement and use, and they are wide-spread even among most basic of companies. However, their very flexibility is one of key reasons of poor serv-ice levels and high costs.

Moreover, traditional transport management software (TMS) focuses on optimization based on non-existing data and processes and is cost prohibitive to the vast majority of vendors represents very high friction to adop-tion. It adds no value in the current environment effective information flow among all the parties. Using tradi-tional TMS will mean this process still will be fragmented and involve emails, XLS spreadsheets, phone calls, etc. while daily productivity will drop and the system effectively will be abandoned. Therefore, most TMS in China are used just for sales presentations and demos, at best.

Widespread Corruption. It is a no-brainer choice for many - it's very easy in a 100% manual environ-ment with little effective oversight and opaque outsourcing chains. Separation of procurement activity from the logistics/operations department achieved by most shippers does little in itself to address this. We believe it may even be counterproductive – more sophisticated actions are taken to enable, facilitate, and conceal the

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Wider Implications on Industry Development

Economies of scale are difficult to achieve without standard processes that bind clients. This also results in low barriers for entry into the market itself and also into a specific contract.

Microsoft Excel spreadsheets remain the most widely used transport management and communication tools in China

bribery leads to much lower productivity and customer service losses. This – rather than higher direct physical delivery cost - is the real issue here.

It's also a prevalent business practice of the majority of TSPs. Such TSPs usually overestimate "guanxi fac-tor," do not invest for the long term, and do not innovate as much as they should. This situation hinders the emergence of large TSPs that could rival road-express carriers in size and quality. Most of large express ven-dors do not need to waste their time and resources finding ways to find "guanxi" and bribe decision makers, which contributes to their faster and more sustainable growth.

Costs Rise Faster than Productivity. Can we expect that productivity gains will offset inevitable escalation of input costs as TSP grows in size?

The mantra of bigger-is-better plays out in industries that provide true economies of scale and replicable stan-dard process that lead to consistent quality. Some logistics sectors such as express or international freight bear such characteristics and so favor the leaders.  Trucking in some developed markets, especially in the USA, may fit this description better.

Unfortunately, this is not the case in the Chinese trucking industry. Even when the TSP really owns and oper-ates some hubs and lanes, many of the large shipper requirements do not fit there. Such contracts will be op-erated largely out of the TSP core network, on back-to-back contract transfers to subcontractors. This is done to by the TSP to avoid excessive risk and overhead to manage, but comes at a cost of limited leverage. Such TSPs may find little cost and quality synergies from new large clients. It is very common for 3PL and even TSPs in China to have multiple tariffs with the same subcontractor for a different client’s business.

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Outsourcing trucking to large TSP is the only feasible option for B2B shippers. Successful outsourcing relation-ships must be, however, based on a fair allocation of responsibility and effective monitoring (trust but verify). Shippers who simply “pass the buck” to their TSP and remain hands off cannot seriously expect that such TSPs will behave any differently toward their own subcontractors. This cascading buck passing exercise down to the drivers is the essence of a glacial development speed of improvement of the trucking sector in China.

Trucking in China is and always will be a buyer’s market and therefore clients play a defining role in industry dynamics. Technology and increasing competition among the shippers’ own business environment make trucking a logical target for review and change. Eventually, clients reap what they sow.

We decided to leave it up to readers to consider their own circumstances and experiences first and then draw their own conclusions. Individual company and personal circumstances will vary a lot and it would be too easy to dispense some generic advice. Feel free to share your opinions (in particular if you disagree with some statements here!) and experience both through the survey included in the article or on our blog. You can sub-scribe to our newsletter or join our LinkedIn group. Note that English and Chinese content usually will not just be a direct translation of each other because authors and audience differ, so you may want to subscribe both.

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Conclusions “If you always do what you've always done,

you'll always get what you've always got” – Henry Ford

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