An Ideas-Based Online Magazine of the Global Network for Advanced Management

In Chinese Supply Chains, a Shift toward Ecosystem Thinking

Working globally and encouraging students to do the same is a necessity at Renmin University of China Business School, a member school in the Global Network for Advanced Management. Renmin professor and associate dean Hua Song specializes in logistics and supply chain management, especially supply-chain performance evaluation and logistics cost management. He also serves as the director of the China Logistics Association. Song spoke to Global Network Perspectives about the evolution of his industry and adjusting to changing political and economic climates.

How is supply chain finance different in China than in the rest of the world?

In the Western world, supply chain finance is based mainly in the commercial banks. But in China, all the supply chain finance is now controlled by the companies. They just utilize the operations of the supply chain to finance SMEs—small and medium-sized enterprises. So that’s slightly different from how it works in other countries. This is a new phenomenon, especially with the development of the internet.

There are several ways the internet has changed things. For example, as I mentioned, in the West, the commercial banks finance the SMEs based on accounts receivable, inventory, and so on. But in China, SMEs must first create embedded networks in the supply chain and form corporations with a larger local firm. Then they mine big data to try to fund the credits of the SMEs, and then, based on that data, to finance them. It is a very newly developed process.

Also, of course, many SMEs run their businesses internationally, such as companies that focus on the mobile business to export to India and other countries. One of my companies, Shenzhen SJET Supply Company, establishes platforms for SMEs to coordinate with manufacturers.

What should businesspeople outside of China know about the logistics of Chinese business?

When we work with each other, three dimensions should be communicated. The first is context. If we want to understand global business, we should first understand the context of the particular industry. The second dimension is process—for example, how they run the business and coordinate with each other to organize its activities. Finally, knowing the particular elements or factors the company has been focused on will help foreigners understand how Chinese companies do business.

Has the relationship between buyers and suppliers changed over the years of your research?

Just over the past five years, the relationship between downstream and upstream has undergone several new developments. First, for example, 10 or 20 years ago, the richest tradeoff relationship was between the buyer and the suppliers. So, usually, the giant companies just exploited the benefits of their suppliers. That’s why most of the SMEs were in the weaker position in the business society overall. But now, as of just five years ago, the relationship between upstream and downstream went from those previous tradeoff relationships to an emphasis not just on the corporation, but on the whole ecosystem.

Is that unique to China, or is that true throughout Asia? What about the rest of the world?

Not only in China, but also in Southeast Asia and in the U.S. Now, more and more scholars in this field are emphasizing ecosystems—how to cooperate with your stakeholders; how to cooperate and organize; how to realize the benefits not just for your own business, but to create benefits for others. That is the way to measure effectiveness in these times.

What should business students know before entering the field?

It is essential to develop supply chain finance. In most countries, SMEs are big players in society. But they usually lack money, because in the weaker positions, there’s an asymmetry in the information they get, so they have lower income rates. So while students realize that supply chain finance is necessary, they also know that we must find innovative approaches to reduce these problems.

I teach a lot of cases, because I have relationships with, and have visited, a lot of companies like this. So how can these companies be taught innovative ways to find effective ways to receive financing while controlling the potential risks? It is crucial to utilize the innovative aspects of the internet—big data and IoT, for instance—to quickly get the right information to reduce these asymmetries of information. Many of my students are focused on these problems.

You mentioned ecosystems. I know you mean that in a business sense, but how do environmental changes and climate change concerns affect the supply chain business?

Especially during the past two years, these issues have been given a lot of attention. We take it very seriously in Beijing. Previously, most of the industry only emphasized the benefits—the economic benefits—without prioritizing environment protections.

Food safety is also a very serious concern, and is another track of my research. That’s one of our great challenges in today’s China. Applying supply-chain approaches to ensure the safety of food is very important. One of my research papers found that when companies only promote their food products in the domestic market, they usually neglect inter-supply chain management. They only focus on how to coordinate within the company, but neglect, for example, how to cooperate with the farmers, to maintain order in the organizations. All of this needs to be very well organized. So how to strengthen, how to solve these problems, is a great challenge, and one that can be improved by better supply chain management.

There are some government requirements for sustainability, but do business executives also see it as a priority?

There are regulations for most of the population to improve the climate. Especially in Beijing, because we have so many hazard days, but in most of the cities, it’s a requirement. But if we are really going to protect both the environment and the safety of the food, there must be two approaches. First, how do you educate the government to understand that the problem is crucial? Having the right information to change the regulations, and thus how to manage businesses in a new way, is very important.

The subject of one of my papers is that most of the local governments have subsidies for the food companies if they engage in environmentally responsible production. But my finding is that all these subsidies have no effect. Why? Because they only give subsidies based on the nature of the products themselves, not on the results, such as reduced carbon or packaging. They don’t really encourage greening supply chains. So that’s one of the things to be improved, to change the ways of government management.                                                                               

A second solution is to help educate the companies to change their methods. Most Chinese companies do really care about getting a green certificate—for example, ISO or solar PV. But they need to get more than a certificate. Implementing green practices from the very root, the origin point, is the most important.                                   

In terms of all of the political changes as a result of Donald Trump, the European elections, and elsewhere, do you see supply chain finance changing radically in China? Are people rethinking their relationship with the U.S. and other countries because of current politics?

That’s a very hot topic in today’s China. For example, since Trump won the election, a lot of the experts here argued that because he wants to bring manufacturing back to the U.S., the Chinese manufacturing sectors will face great challenges. Some said that the global supply chain will face major obstacles because of protectionism. But in my understanding, whether Trump or another person is the president, no one can prevent the flow of the global supply chain, because nowadays every country is interdependent with all the others. So I don’t worry about it, actually. Even with China and the U.S., the partnership or linkage can’t be cut.

Do you think most business owners in China feel the same way?

Yes. For example, as I mentioned, many companies specialize in in mobile and communication devices. Most of these businesses are exporting to other countries. Also, they import a lot of materials from overseas. So this interdependence won’t be changed. I visited some entrepreneurs recently, who agreed. But the problem is, how do you transform the structures of the Chinese companies to adapt to restrictions in trade that might arise? It’s a big challenge, because previously we were more focused on labor-intensive industries. Now, not only the companies, but also the government is concerned about if whether the higher-tech industries have the potential to lose in the new economy.