Warehousing: China winning on another front

By Jim Jubak

The next battle in the economic war called globalization? Warehouses.

Yep. Warehouses.

China and the rest of developing Asia are showing it's possible to cut costs even in the warehousing of goods intended for retail customers in the United States, Japan and Europe by shipping jobs to China. So, of course, that's what retailers from London to Tokyo are doing.

There's still a global logistics crisis, as I wrote in my Jan. 5 column, "A 15% raise? Try China or India." It's not easy -- and it is in many cases beyond the capacity of physical and electronic infrastructure -- to make sure that customers in Ohio and Osaka can tell designers in Taipei and Los Angeles what they want in a product in time for manufacturers in South Carolina and Shanghai to get parts to assemblers in Singapore and Austin in a way that lets retailers in Paris and Hong Kong have enough of the right stuff and none of the wrong stuff on their shelves.

But, increasingly, the solutions for moving vast amounts of goods from coast to consumers are coming from China, Singapore, South Korea and Japan. And it's the aging ports and other infrastructure of the United States and Europe that are failing the challenge.

The price of the failure of the countries of the developed world to meet this challenge will be paid -- once again -- in the jobs of workers in the United States and other advanced economies. So much for warehouse jobs as a safe, if often low-paying, haven from relentless globalization.

The U.S. won't roll over

It looks, however, like the developed world, especially the United States, is fighting back on this front. New ports under construction should help close the efficiency gap. And the United States still has a major edge on China in inland infrastructure -- roads, railroads, etc. China is determined to catch up there, however, and that part of the battle has barely begun.

For investors, that makes for exciting opportunities. First, there's a chance to make money from China's perhaps temporary leading position in global logistics. In this column I'll identify three companies, two based in Hong Kong and one in Japan, that are among the best positioned to profit from China's success in addressing the global logistics crisis.

Second, there's a chance to make money from the developed world's response to China on logistics and from the competition to build out inland infrastructure.

It used to be that goods from China's factories would be heaped into massive containers and then loaded on ships in Hong Kong's superefficient port and shipped to warehouses and distribution centers in Long Beach, Calif. (which with Los Angeles makes up the busiest port in the U.S.), or Rotterdam (the Dutch port is Europe's busiest) for sorting and redistribution into yet more warehouses for sorting and delivery to company distribution centers for ultimate delivery, after another sort, to individual stores.

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Now, more and more goods are sorted in China, loaded onto pallets in warehouses in Shanghai, shrink-wrapped, loaded onto container ships and then delivered still shrink wrapped on the original pallet directly to a superstore owned by Wal-Mart Stores (WMT, news, msgs) in the United States or Tesco (TSCDY, news, msgs) in Europe.

Thanks to increases in the amount of goods sourced from China, the availability of cheap labor to sort and re-sort shipments, and improvements in product tagging and in computerized systems that read and track the tags, more and more companies are sorting their goods in Chinese logistics depots for delivery either straight to individual stores or to company distribution centers.

Let's make one thing clear: Though an abundance of cheap labor to work in these distribution centers certainly doesn't hurt, the Chinese edge rests on sophisticated technologies that reach from warehouse to container port to ship. By applying those technologies on the vast scale made possible by China's role as workshop to the world, logistics companies in China can wring immense savings and time out of the distribution system.

For example, Hong Kong, the first port in the world to employ cranes that could lift three containers at once, is the world's most efficient port, but it's now being challenged by new Chinese port facilities in Shanghai, Shenzhen and Guangzhou.

In addition, China's deep-water ports are designed to handle the new, larger container ships that can handle up to 10,000 20-foot-long containers.

Two ways to win

I think that as an investor you can profit from this trend in two ways. First, you can buy shares in the companies that show signs of coming to dominate a still very fragmented logistics industry in China.

Continued: 3 companies to watch

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