Introduction
TRANSPORTATION AND LOGISTICS
Shanghai seeks to serve as the “Dragon’s mouth,” the logistics hub for the entire Yangtze River Basin, an area that nearly half of China’s 1.2 billion people call home. Some 8% of Amcham Shanghai members are engaged in providing Transportation and Logistics services, in disciplines including:
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n Express Package Delivery
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n Warehousing and Third Party Supply Chain Management
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n Household Removal and International Relocations
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n Freight Forwarding
China’s logistics industry is estimated to be growing at annual rates of over 30%, with domestic{foreign?} players leading the way in international shipping, domestic air cargo, domestic trucking, and express package delivery. AmCham member firms are proud of the role they have played in the growth of this key industry, via investment, training, technology transfer, and in many other ways.
Challenges for the industry remain in two key areas:
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n An inefficient national logistics system has a dampening effect on China’s otherwise buoyant market growth. Some reports estimate inventories in Chinese businesses average up to 40% of sales, compared to under 8% in most developed economies. Logistics costs are often over 16% of product costs in China, while under 4% for similar products in many developed economies.
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n Unless the regulatory environment for logistics can be improved, China risks losing out on the lion’s share of the benefit from its massive investment in logistics infrastructure
While the Chinese government continues to invest in massive infrastructure projects, like superhighways and deepwater ports, the country cannot reap the full value of these improvements due to a fragmented, low tech, non-professional transportation sector. More efficient supply chains will not only benefit the health of the nation’s economy, but also the personal safety of its citizens who suffer from alarming rates of traffic-related injuries and deaths, and of health issues associated with spoiled food shipments.
AmCham members look forward to contributing to this growth, in partnership with government officials and local logistics firms, to ensure that market reforms are carried out consistently and fairly across China. Implementation will require government cooperation on the national and local levels, in bureaus including: Communications and Transport, the Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the State Administration of Industry and Commerce (SAIC), Customs, Tax, the State Administration of Foreign Exchange (SAFE), and Police and Traffic Bureaus.
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Full implementation of WTO commitments will take years of focused effort. In the interim, the government can take some specific steps to unleash some of the benefits of market reform, and help Shanghai achieve three of its top stated goals for 2002:
1. Become the city of choice for MNC’s to establish their Asia Regional HQ
2. Become a center for logistics and commerce in the East Asia Region
3. Reduce the administrative costs of doing business in Shanghai AmCham Shanghai recommendations fall into the following areas:
n n n n n Transportation Regulations n n n n
n Government favoritism in the Transport Sector
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n Entry and Exit of foreigner’s household items
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n Illogical Restrictions on Business Scope and Structure
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n Import/ Export Cycle Time and Cost
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n Practices at Shanghai’s Wai Gao Qiao Free Trade Zone
ISSUE 1: TRANSPORTATION REGULATIONS
China’s transport regulations lack the clarity and efficient enforcement needed for modern logistics. Areas for improvement include enforcement of commercial vehicle safety standards; reduction of restrictions on cross-provincial deliveries; clarity on transport of dangerous goods and safer cold-chain transport.
Safety standards must be fully enforced to pull old, slow, and unsafe trucks off the road. China should at minimum enforce all existing local safety standards, particularly in modern cities like Shanghai. This should include enforcing safe loading standards, such as permissible overhang and weight. Violators should be fined and impounded until loads are safe to continue. The government should also punish drivers who don’t use headlights at night, and enforce minimum speed on highways. Over time, the government should create and enforce safety standards on the new network of superhighways, and nationwide.
Today, old and unsafe trucks still haul goods, flouting China’s poorly enforced local regulations, creating a health and safety hazard and a burden on China’s roads. Because old trucks are generally fully depreciated, they also offer unfair competition for loads carried by both domestic and foreign modern logistics providers who seek to meet or exceed standards. Thus, poorly enforced regulations are a threat both the health and safety of China’s people, and to the future of the industry.
Cross-provincial transport should be open and unrestricted, the only way to encourage a strong national economy. Today, in many localities, out of province trucks are arbitrarily stopped at city borders and subjected to tolls that local trucks don’t pay, or to flat restrictions on completing delivery. In many cases this requires an entire truckload to be unloaded and reloaded onto a local truck. This costs both time and money, and also creates opportunities for local protectionism and corruption By allowing local protectionism in the trucking industry, and not demanding objective
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Position Current restrictions on Dangerous Goods (DG) transport prevent experienced MNC’s from handling their own DG, without providing a transparent set of rules for the selection of local companies who have this privilege. Rather, the new Dangerous Cargo Rules simply provide a list of certain local companies authorized to continue transporting such goods. Even foreign manufacturers with expertise in Dangerous Cargo handling were banned. Rather than arbitrary lists, China should create a transparent process for any trucking company to apply for the right to handle dangerous cargo, award licenses based on merit, and then enforce standards by inspecting hazardous loads and drivers for licenses and qualifications.
Arbitrary lists of authorized carriers do not give shippers the tools to distinguish between good and bad service providers. They also fail to provide incentives for improvement of DG handling capacity among authorized carriers. Upon implementation of WTO commitments, China will need to provide foreign logistics providers with equal access to dangerous goods licensing as is accorded to local carriers.
China lacks coherent regulations and enforcement for cold chain transportation, and literally 100’s of millions of urban Chinese frequently suffer from food poisoning as a result. China should establish and enforce rigorous food transportation safety standards, including temperature, packaging and code date standards, and bans against transporting frozen foods in open, non-refrigerated trucks. These standards must be rigorously enforced throughout the supply chain, including in the stores, using objective and frequent inspections designed to eliminate corruption. Traffic controls should also be consistently enforced, and structured so as to priority deliveries of food, especially during “special events”.
Clear, enforced cold chain transport regulations will provide a far safer food supply for China.
ISSUE 2: GOVERNMENT FAVORITISM IN THE TRANSPORT SECTOR
The Shanghai government seeks to stimulate new and promising businesses. While this is an understandable goal, the methods used have been unfortunate. Rather than simply creating a level playing field in which the best firms can win, the government has actually taken equity stakes in some favored firms, granted them special privileges or financial assistance, or provided free advertising for certain firms solely based on their friendships with the government. This diminishes transparency in Shanghai’s push to create a global purchasing center, as well as reducing the efficiency best bred through competition.
For instance, government protection within the air cargo handling business has created a “duopoly” of 2 companies favored with exclusive licenses to perform air cargo ground handling services at Pudong Airport. This protection from competition has led to high prices and poor performance relative to global standards, particularly since these 2 firms also have self-supervisory authority as authorized tally agents. There is no objective monitoring for reception discrepancies, and both players can avoid outside review.
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Position The Shanghai government should open ground handling services at Pudong Airport to greater competition, and otherwise stop investing in and giving special powers to “favored firms.” The government should ensure that objective regulators and third party players such as tally agents are held to the highest standards of transparency. Overall, the government should focus on simply providing a healthy and transparent environment where business can thrive, not on influencing which businesses win or lose.
Allowing regulators to favor (or even advertise for) certain businesses creates inefficiency in the market. It also breeds opportunity for corruption and conflict of interest.
ISSUE 3: ENTRY AND EXIT OF FOREIGNER’S HOUSEHOLD ITEMS
Shanghai law creates barriers to the free movement of expatriate household goods that are inconsistent with international practice, and that inhibit Shanghai’s growth toward being a desirable regional headquarters. For Shanghai to meet or exceed its growth goals, these barriers must be removed.
Shanghai regulations create barriers to the free movement of expatriates by:
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n Taxing household items brought by foreigners,
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n Requiring original passports (not copies) during export customs inspection, and
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n Requiring a current work permit to export household goods. All of these restrictions should be abolished.
Restrictions on the free movement of personal household goods by expatriate workers are extremely rare in world-class economies. Such restrictions discourage the free movement of people that is necessary for the regional or global headquarters of major multinational companies (MNCs).
In addition, these restrictions are unfair and/or unnecessary on their face. For instance, expatriates are taxed on their personal items that they have used for years, and would like to bring with them to China during the period of their assignment. It is costly, confusing, and disconcerting for foreign executives and their families to be faced with taxation upon entry for their “comfort items.” Meantime, Customs export inspection, which requires the client’s original passport, generally takes place 2-3 days after packing is completed, so the client is forced to remain in China longer than need be – and without the personal belongings they need to stay in a hotel or elsewhere. This increases the costs of expatriation and is a major scheduling inconvenience. Similarly, the requirement for current work permits to export household goods restricts freedom of movement. In many markets it is common for executives to move from one job to another while remaining in a given market. But changing jobs while remaining in Shanghai is complex, because an expatriate might be called to another assignment overseas while in between positions. In such a case, the expatriate would risk being unable to bring their household goods home, as they would be unable to obtain an export permit due to
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ISSUE 4: ILLOGICAL RESTRICTIONS ON BUSINESS & REGISTRATION STRUCTURE
Current restrictions on foreign investment prohibit wholly-owned foreign enterprises (WOFE’s) from performing 3rd party logistics outside a restricted chain of 15 bonded
zones, none of which are designed to handle efficient domestic logistics. Meantime, there is no effective Branch Structure available for distribution logistics service providers to assemble a branch network. This limits growth.
Shanghai should eliminate restrictions on WOFE’s in logistics services. As China struggles to develop a logistics infrastructure to support growth and meet the rising expectations of Chinese consumers, more foreign investment and expertise will be required to build nationwide logistic networks, which will ultimately lower prices while increasing margins for retailers and manufacturers.
Inefficiencies in the current logistics sector are costing Chinese businesses and their customers billions of RMB. Limitations on foreign investment in logistics not only limit FDI in this sector, but also discourage a far greater amount of FDI in manufacturing operations for both consumer or industrial products.
There is a need for a branch structure within Logistics and Distribution Licenses that allows companies to grow without having to apply for the full licensing process and registered capital requirements in each location. Currently, logistics service suppliers can, in theory, set up non-independent accounting branches of approved FIEs that enjoy the same business scope as the parent. However, in practice this rarely works. Local authorities often place limitations or new requirements, transport licenses are often restricted, and high registered capital requirements for distribution centers and freight forwarders to open up branch offices.
The government should enforce registered capital requirements for equally for foreign and local invested businesses. Utilize other means of audit and inspection to control fraud, not the registered capital system; this has not prevented poor behavior in the past. Instead, provide a credit rating system and complaint line that would enable suppliers and customers to keep abreast of the activities of potential business partners.
Registered capital requirements for branch offices of freight forwarders as committed in the China’s WTO accession far exceed necessary amount of working capital required for these operations, and are not effective measures to control fraud, and will not be equally applied to local freight agents. Distribution Centers will be ruled by minimum capital requirements, de facto, by decree of COFTECS and their local mechanisms.
ISSUE 5: DISPUTE SETTLEMENT
Shanghai currently provides no effective forum for dispute settlement with local service providers or agents.
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Having no effective legal or arbitration recourse means there is no way to receive fair damages from local freight agents who clearly deceive and intentionally fail to perform as agreed. For instance, some freight agents quote and collect fees for air freight, but send by truck instead, so goods arrive 5 days late. Shanghai should provide an efficient and effective small claims court for corporations to quickly achieve a ruling and collect damages.
Failure to punish deliberate mis-performance by certain freight agents creates an unhealthy market that will be unable to develop as rapidly as it should.
ISSUE 6: IMPORT / EXPORT CYCLE TIME AND COST
As discussed separately in the Business Infrastructure paper, China today has slower import/export cycle times than other advancing Asia Pacific Nations. For the vast majority of companies in China wishing to import products, Customs clearance is measured in 2-4 DAYS, whereas in other modern, developing markets such as Malaysia, the Philippines, and Mexico, clearance is completed in hours 2-5 HOURS. This works to China’s disadvantage in attracting investment and growing the economy.
Shanghai should shorten the clearance process and create rapid clearance for all companies. AmCham also makes the following recommendations specific to transport and logistics:
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n Requirements for licenses and bidding on many critical imports (such as replacement diesel engines) should be made less costly and more reliable, in order to reduce corruption and increase efficiency. Import licenses and quotas on electomechanical products should be abolished.
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n Customs rules are prone to frequent administrative or procedural changes without the consultation of a sufficient cross-section of business. Shanghai should require Customs to clearly state regulatory suggestions in advance of their enforcement date, and provide a clear forum for business to provide suggestions that will be reflected in the creation of the legislation.
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n Today, Chinese Customs practices risk avoidance, not risk management. Policies are created to block or control the gateway into the country, not facilitate trade or reward compliance. China has already committed to the APEC customs protocol and the Osaka convention. We support this decision, and strongly encourage more rapid adoption of convention commitments for a larger cross section of the importer community.
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n Regulatory barriers make it nearly impossible to import and sell refurbished or used trucks in China, regardless of the quality standards they can achieve. China should open the market for used and refurbished commercial vehicles that can meet accepted safety standards.
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n The process for issuing electromechanical licenses has gotten increasingly complex and costly. Whereas in the original system, a quota or license could have been purchased for up to a set amount, valid for one year regardless of the number of individual shipments that were received, now an individual license is required for each shipment. Standard turnaround time for licenses is 10 working days. Thus in order to protect a tariff revenue stream of 50+ RMB per item shipped into China, Customs is adding costs to the supply chain and
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Some of the above practices and requirements have been utilized as “non-tariff” barriers and do not benefit society. Local electromechanical bureaus, for instance, tend to be severely understaffed, and provide tremendous latitude for arbitrary decisions, and thus, corruption.
Others are simply inefficient. Effective use of risk management, for instance, will lower operating costs for business, as well as Customs. At the same time, Customs will be able to focus on tracking and prosecuting the offenders, not playing a game of catch-up to process every single shipment that enters China. If 20% of importers are potential offenders, Customs will only be 20% effective in finding them today. Using risk management, Customs could spend 80% of its time tracking the 20% of shipments that are high-risk.
Similarly, use of high-quality used trucks is an efficiency issue. One of the major inhibitors in growing Chinese logistics is the poor quality of China’s commercial hauling assets. Trucks both new and old are prone to breakdown, under-powered relative to their loads, and not fitted with critical safety features. Sheltered from competition, domestic producers do not have the same impetus to improve their product that we see in the increasingly competitive passenger car industry. There is a void in the market between the price point of domestic trucks and that of imported new trucks, which cost 3 times the price of a domestic truck. Given that a top brand commercial vehicle in the US effectively runs for over 10 years and 2 million Kms, there seems to be a strong potential to introduce 2-5 year old trucks to the local market. This would fill in the middle price point, and improve the asset base that burgeoning Chinese logistics companies require. In addition, this would assist the domestic truck industry to reform through competition.
Finally, the practice of issuing an electromechanical license is another costly anomaly, hindering the competitiveness of Chinese businesses that happen to use imported equipment.
ISSUE 7: TAXATION
AmCham members in the transport and logistics sectors agree with the issues on Taxation raised in the Business Infrastructure paper, and add the following positions specific to their industry:
Each local tax jurisdiction prints it own VAT invoices, creating a challenge for national distribution companies with multiple sales offices and warehouses. Faced with the difficulty of managing scores of different invoice forms, national distributors will typically just pick one or two jurisdictions to invoice from. Then local Tax bureaus attack distributors for cheating on local taxes in other areas. China should set a standard VAT invoice format and numbering system nationally.
This would enable efficient national distribution in China. Documentation and issues of cross-jursidictional tax collection can be solved separately over time. Grouping the two together creates undue strain on the national economy and government regulatory agencies
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Local tax bureaus are prone to assume that the movement of inventory into or through a warehouse in local jurisdiction must also indicate a change of title, requiring a national distribution entity to “ sell to itself “ cross jurisdiction before it final delivers goods to the customer. National Distribution companies should be able to hold and transfer inventory from distribution center to distribution center without the additional accounting burden of conducting an invoiced sale “across subsidiaries.”
The concept of all taxation being local, and only carried out on local entities, severely hampers the country’s economic development, in particular, the growth of the interior region of China. Local taxation can be determined by jurisdiction of the buyer, and need not be traced by jurisdiction of the seller.
As some duties have lowered, corresponding consumption taxes have immediately increased, providing the impression that consumption tax has become a proxy tariff. Example: spirits consumption tax increased from 10%-25%.
Consumption taxes should be guided by their own rationality, and not used as a replacement for WTO mandated cuts in duties.
Taxation on and applications for purchases of foreign software are unnecessarily onerous. Duty is charged based on the maximum license value of the software in the contract, regardless of whether the Chinese importing party is using all of the licenses upon import. In addition a special royalty tax of 10-15% must be paid to an Import Technology Department within MOFTEC. Furthermore, there needs to be a technology sharing agreement, translated into Chinese. If consulting services or modifications are performed over the web, the Chinese tax bureau will assess the Chinese product owner with an income tax on the minimum assessed income of the vendor. In addition, a business tax of 5% must be paid by the Chinese importer to the government.
Software purchases should not require special approvals, nor be double- or triple-taxed. Services provided by overseas providers over the web should not be subject to China income or business tax.
Special taxation rates on imported software hamper the development of China’s high-tech industries, the opposite of the goal of China’s government.
ISSUE 8: UNFAIR/INEFFICIENT PRACTICES ON SHANGHAI’S WAI GAO QIAO FREE TRADE ZONE (WGQ)
AmCham has concerns about several current practices at Wai Gao Qiao: Foreign-invested trading companies in WGQ are not allowed to keep blank VAT invoices in their offices, as local distribution firms are allowed to do. Instead, FIE firms must send a registered staff member to an invoicing center (a “bonded commodity market”) where the invoices are sold, one by one, based on a % of the value of the sale that trading company will make. This practice should be abolished immediately. Position Position Position Rationale Rationale
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Position FIE trading companies in WGQ are required to contract with a Chinese Import Export Company as “import agent” for each Customs clearance of product. The local firm provides no value-added services, but extracts a 1% charge on the value of the goods for use of their name on the import documents. As Shanghai seeks to lower the cost of doing business, eliminate non-value added procedures, and increase transparency, the role of the import/export agent should come under scrutiny. The WTO mandates that such a company will no longer be required in three years. AmCham suggests this be accelerated.
Continued mandated use of import-export firms will cease with WTO commitments legally, and is clearly in violation of their spirit. This practice hinders investment and trade and should cease.
Customs has severely restricted the number of trucking firms and trucks that can deliver cargo from ports into WGQ, resulting in an increase in freight pricing of 400-500%! Many FIE warehouses had been hauling their own Less Than Full Container Load (LCL) cargo from the port to the zone; now a firm must have at least 20 trucks to even apply for a bonded cargo license. Local firms given the privilege of hauling LCL claim that they do not have enough trucks to deal with the surge in business. The stated reason for the change (to lessen the probability that FIEs will smuggle goods during trucking between port and WGQ), contradicts WGQ’s primary rationale. Goods in WGQ are already stored in licensed warehouses which must show proof that the inbound products have been entered in the warehouse’s official customs journal, before goods can even leave the port bound for the FTZ. Customs could more effectively accomplish their objectives by allocating resources to audit specific “high risk” warehouses.
By continuously raising operating costs for FIEs using WGQ legally, Customs tempts companies to not use the FTZ, to smuggle, or to bend the law, by “paying off” privileged license holders.
Urgent parts, needed on hours’ notice, cannot be kept in WGQ because Customs clearance takes at least 2 days. Customs has piloted a system for a few companies to ship first and pay duties on a monthly basis, but the system has not been rolled out to other law abiding businesses, especially those “public-third party warehouses” who work on behalf of other clients. Customs should have a merit based system to roll out “ship first, clear customs later” privileges to a wider breadth of warehouses. Without such a system, overseas manufacturers do not see the benefit of using WGQ as a parts depot. Instead they simply ship express courier from Hong Kong or Singapore, which also takes 2-3 days.
Companies in WGQ have severe difficulties disposing of equipment originally brought into the FTZ “duty free” for self use. Many firms are willing to pay taxes and sell this product domestically, based on current value, but Customs will not process such transactions. Customs should provide efficient, transparent procedures for the valuation/import of used equipment belonging to firms in WGQ. Today there are no safe storage facilities in Bonded zones for dangerous or flammable cargo. WGQ should implement safety-first standards, allowing customers to store dangerous goods outside WGQ.
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