1. Course website:
http://ihome.cuhk.edu.hk/~b103313/index.htm
• Offices:
• Prof. Xiande Zhao, Room 906
• Cheng Yu Tong Building
• Email: xiande@baf.msmail.cuhk.edu.hk
• Tel. 2609-7650
• Mr. Bochao Zhuang, Room 941
• Cheng Yu Tong Building Email:
bochao@baf.msmail.cuhk.edu.hk
• Tel. 2696-1657
1
2. Welcome to
DSME6932W
Supply 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
http://lf-scml.baf.cuhk.edu.hk/index/
2
3. Organization Structure
Li & Fung Institute of Supply Chain
Management & Logistics
Center for Logistics Technology &
Center for Supply Chain Supply Chain Optimization
Management & 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. 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. Course Assessments
• Items Weight
• Case reports 50%
• Final project report and presentation 30%
• Attendance and class participation 20%
5
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: xiande@baf.msmail.cuhk.edu.hk
6
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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. 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. 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. 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. Stage 2: Economic Reform and
Rapid 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. 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Economic Growth in China
Gross Domestic Product (GDP) of China Between 1952 - 2006
GDP (in billion of RMB) GDP growth rate
25000 16
14
GDP (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
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. Economic trends in 2009: Six Indicators
– Economic growth rate: "8%"
• Government report 2009: China's 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. 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. 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
54. The PRD
Guangdong Province
Map of Pearl River Delta
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. 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. 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. 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.
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
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 area
in the future
62
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
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
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
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
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. 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. Impact of Culture on SCM
• What are some of the major cultural issues
related to managing supply chains in China?
73
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. 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. 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. Deep Supply Chains
• Each of these issues will be exacerbated in a
deep supply chain
• With more links in the chain, difficult to know
what 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. 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. 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. 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. 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
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. 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. 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. 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
