China Is ripe for logistics automation

Editor’s Note: The following column by Pratap Chakravarthy, Director of Marketing, Accu-Sort Systems, Inc., is part of Modern’s new Other Voices column. The series, published on Wednesdays, will feature ideas, opinions and insights from end users, analysts, systems integraters and OEMs. Click here to learn about submitting a column for consideration.

On a recent trip to China, I discovered something surprising: distribution center (DC)  managers there are talking more about labor costs as they evaluate warehouse automation and barcode systems. Considering that the average wage there is less than US$2 an hour, it sounds a little crazy. Yet many businesses in China are being forced to increase wages to compete for workers and combat high turnover rates. In an economic expansion, it seems that workers can easily find another job that pays a little more. It doesn’t help that the Chinese Government has raised minimum wages by double-digit percentages in manufacturing areas such as Guangdong. This increase in wages has raised costs, diverting monies that once went to profit. In addition, countries such as India and Vietnam are now competing directly with China to gain business from multinational companies. This competition is forcing companies to reevaluate labor costs. Taken together, these are signs that automation will be critical to China’s distribution centers, which is good news for the materials-handling and logistics industry.
 
As the world’s most populous country and the fastest growing economy, China is a land of opportunity. Gross domestic product is back to double-digit growth after dipping in 2009. China has leapfrogged Japan as the second largest economy in the world, and it’s now the largest automotive market. In addition, the Chinese consumer has more disposable income than ever before and domestic consumption of goods is growing.

To sustain economic growth, supply chains must be efficient and cost-effective, yet in terms of logistics, China has some work to do before it catches up with the West. Many facilities have little or no warehouse automation. I visited a parcel delivery company that had only one tunnel sortation system in its DC. Until recently, manual handling of parcels has been cheap, and parcel volume was light, so automation is only now becoming an attractive proposition.

Narrowing the gap in logistics technology is becoming increasingly important to Chinese DC managers. Consulting firm CB Richard Ellis points out that logistics facilities vacancy rates are low, and the land available for the development of new facilities is limited, so efficiencies must be gained within the confines of their current distribution space. Money is now being spent toward improvements and equipment. According to the research firm Tomkins Associates, the materials-handling equipment industry in China is growing 22% a year.

I’m optimistic when I see numbers like these, especially when they are placed in context. When I analyze the history of barcode systems in materials handling, three phases of development may be seen in China over the past 40 years.

Stage 1: From 1970 to 2000, most Chinese companies used manual labor to move goods through warehouses because wages were low and workers were plentiful.

Stage 2: From 2000 to 2010, many DCs automated, driven by the need to integrate operations with foreign companies that wanted to incorporate Chinese DCs into their global supply chain. These large manufacturers needed track-and-trace capabilities to handle medicines and consumer goods such as tires.

Stage 3: From 2011 forward, automation will be driven in part by cost. Rapid economic growth has caused a shortage of workers in areas along the east coast of China where many DCs are located. As a result, decisions about automation are based more on increasing throughput without increasing headcount, a model familiar to Western warehouse professionals.

Beyond cost, there is a need for reliable throughput. Many workers who travel home for the Chinese New Year don’t come back, having found new jobs closer to home in China’s interior or at a factory down the street. An undependable workforce makes it difficult to meet shipping deadlines that are critical to the logistics business. In contrast, DC managers can count on automation equipment to show up for work every day.

The Chinese government may be another driver of automation. According to the “Logistics Industry Restructuring and Revitalisation Stimulus Plan” issued in 2009, the Chinese government includes improving efficiencies in logistics as a crucial element of its national strategic policy. In fact, Tomkins Associates says that national standards are being issued for standardized DC design and performance, so DCs will be compatible with the needs of global companies.

For all of these reasons, I believe material handling in China will transition into the types of automation processes that are already successful in more developed countries, and it will be highly integrated with global businesses. Global companies will be able to standardize material handling systems, simplifying and lowering the cost of supporting those systems.

This is an exciting time for the materials handling and logistics industry. The chance to play a significant role in China’s continued economic growth by helping DCs automate new and existing supply chains is one opportunity we can’t afford to miss.