Spare Parts

AALTO UNIVERSITY
School of Engineering
Department of Engineering Design and Production
Improving Availability of Spare Parts in China and the Nearby

Pacific Asia Region
Thesis submitted as a partial fulfillment of the requirements for the degree of Master of
Science in Technology
Espoo January 10th, 2014
Supervisor: Professor Kalevi Aaltonen

Instructor: Marko Kinnunen
Aalto University, P.O. BOX 11000, 00076 AALTO
www.aalto.fi
Abstract of Master's Thesis
Author Jermu Juntunen

Title of thesis Improving Availability of Spare Parts in China and the Nearby Pacific
Asia Region
Department Department of Engineering Design and Production
Major/minor Production Engineering Code of professorship
Kon-15
Thesis supervisor Professor Kalevi Aaltonen
Thesis advisor Marko Kinnunen, M.Sc. (Tech.)
Date 20.11.2014 Number of pages 83 Language
English
Abstract
The purpose of this thesis is to evaluate possibilities of improving availability of spare

parts in China and the nearby Pacific Asia region as the installed base is growing rapidly.
This study is done for the ABB Marine Spare Parts department located in Helsinki Finland.
To evaluate the possibilities we provide an understanding of the logistics environment in

the Pacific Asia region and present the fundamentals of spare parts supply chain
management. The data is gathered from recent literature, statistics, and conducted
interviews with industry professionals with experience working in the region.
Although the installed base is the largest in China, it is also the most challenging in terms
of logistics with the highest customs barriers and tariff rates. We propose a model where
a regional warehouse is set up in China where customs would not interfere with parts for
further re-export by utilizing free trade zones while still serving the domestic market in
the most cost and time efficient way. Finally, we compare this model with an alternative
solution where the regional warehouse is set up in a different location in Pacific Asia.
Keywords Spare Parts, Supply Chain Management, Logistics, China, Pacific Asia,
Warehouse
Aalto-yliopisto, PL 11000, 00076 AALTO
www.aalto.fi
Diplomityön tiivistelmä
Tekijä Jermu Juntunen

Työn nimi Varaosien saatavuuden parantaminen Kiinassa ja sen lähialueella
Laitos Konerakennustekniikan laitos
Pää-/sivuaine Tuotantotekniikka Professuurikoodi
Kon-15
Työn valvoja Professori Kalevi Aaltonen
Työn ohjaaja Diplomi-insinööri Marko Kinnunen
Päivämäärä 20.11.2014 Sivumäärä 83 Kieli
Enlglanti
Tiivistelmä
Tämän tutkimuksen tarkoitus on vertailla mahdollisuuksia parantaa varaosien saatavuutta

Kiinassa ja sen lähialueella Itä-Aasiassa laitakannan kasvaessa etenkin Kiinassa. Tämä
tutkimus on tehty ABB Marinen Varaosaosastolle.
Jotta voimme vertailla mahdollisuuksia saatavuuden parantamiseksi, selvitämme ensiksi

varaosien toimitusketjun tärkeimmät piirteet sekä esittelemme Itä-Aasian ja relevanttien
maiden logistiikkapiirteitä sekä –säädöksiä. Esitelty data perustuu aihetta käsittelevään
kirjallisuuteen, tilastoihin sekä haastatteluihin alan ammattilaisten kanssa, joilla on
työkokemusta ja osaamista Itä-Aasian alueelta.
Vaikka Kiinassa on alueen suurin laitekanta, on maa silti logistiikan saralla verrattuja
maita jäljessä. Hitaat tullimenettelyt ja korkeat tullaushinnat tekevät osien liikkumisesta
haastavaa ja kallista. Tässä tutkimuksessa ehdotamme mallia, jossa varasto sijoitetaan
Kiinaan vapaakauppa-alueelle, jotta edelleenvietävien sekä Kiinan sisäisille markkinoille
tarkoitettujen osien tullimenettelyt sekä tullausmaksut minimoidaan. Lisäksi vertaamme
mallia ratkaisuun, jossa varasto sijoitetaan johonkin muuhun Itä-Aasian valtioon.
Avainsanat Varaosat, Toimitusketju, Logistiikka, Kiina, Itä-Aasia, Varastot

Acknowledgements
First and foremost I would like to thank Marko Kinnunen, the instructor of this thesis, for
providing me the platform to write my thesis at ABB Marine and offering me his time to
support and help with the research. I am extremely grateful for the given opportunity to work
with ABB employees in Finland and China, which resulted in not only research material, but
also valuable experience and knowledge.
Additionally I would like to thank the entire ABB Marine team, especially the Spare Parts
department in Helsinki, Finland for helping me out during the entire process and also the
Propulsion Product Service team in China for welcoming me in their facilities. I would like
to give a special mention also to mister Fan Gui Wen from Valmet China for providing me
an extremely insightful interview about their Spare Parts operations. I also want to thank
Professor Kalevi Aaltonen for supervising the thesis and providing guidance and academic
support to achieve better results.
I want to also thank my family and friends for supporting me during my time of writing. Last
but not least I would like to thank my beloved girlfriend Ana Torres for her unconditional
support and understanding during the process. My two cats deserve also a mentioning for
providing me a stress-free environment after working hours.
Signature:
Jermu Juntunen
Espoo 16.12.2014
Table of Contents
1 Introduction .................................................................................................................................1
1.1 Thesis Background..............................................................................................................1
1.1.1 ABB Marine ..................................................................................................................1
1.2 Objectives.............................................................................................................................4
1.3 Problem defining..................................................................................................................4
1.4 Research methods ...............................................................................................................5
1.5 Structure ..............................................................................................................................6
2 Spare Parts Supply Chain Management .....................................................................................7
2.1 Spare Parts Logistics.............................................................................................................7
2.2 Part Categorization and Criticality .................................................................................... 10
2.3 Inventory Management .................................................................................................... 12
2.4 Demand Forecasting ......................................................................................................... 13
2.5 Spare Parts Business Planning .......................................................................................... 15
2.6 Spare Parts Supply Chain Framework ............................................................................... 16
2.7 Managing Growth of Spare Parts Business ....................................................................... 18
3 Logistic Performance and Characteristics in Pacific Asia ........................................................ 20
3.1 Country Specific Logistic Performance ............................................................................. 20
3.1.1 Country Score Cards .................................................................................................. 21
3.1.2 Domestic LPI.............................................................................................................. 23
3.1.3 Tariffs and Logistic Costs ........................................................................................... 26
3.1.4 Warehouse Price Levels ............................................................................................ 26
3.2 Logistics in China ............................................................................................................... 28
3.2.1 World Trade Organization......................................................................................... 28
3.2.2 Logistic Challenges and Development ............................................................................. 30
3.2.3 Import and Export ..................................................................................................... 33
3.2.4 Logistic Approaches .................................................................................................. 35
3.2.5 Special Economic Zones ........................................................................................... 37
3.2.6 Political and Legal Risks in China ............................................................................... 39
3.3 Service Operations in China .............................................................................................. 41
3.3.1 Cultural Characteristics ............................................................................................. 41
3.3.2 Managing Cultural Differences ................................................................................. 43
3.3.3 China-Japan ............................................................................................................... 44
4 Volume of Installed Base ......................................................................................................... 46
4.1 Installed Base Allocated to Local Offices .......................................................................... 46
4.2 Other Vessels Operating in the Region ............................................................................. 50
5 Availability Planning in Pacific Asia ......................................................................................... 52
5.1 Logistic Center in China..................................................................................................... 53
5.1.1 Conditions ................................................................................................................. 53
5.1.2 Current Facilities ....................................................................................................... 55
5.1.3 Warehouse Rental and Possibilities in China ............................................................ 58
5.1.4 Warehouse Solution Model ...................................................................................... 60
5.2 Comparison of Other Countries in the Region ........................................................................ 67
5.2.1 Comparison of the Models............................................................................................... 74
6 Conclusions ............................................................................................................................... 76
6.1 Essential Results and Observations .................................................................................. 76
6.2 Evaluation of Results ......................................................................................................... 77
7 Follow-Up Actions and Recommendations ............................................................................. 79
8 Summary ................................................................................................................................... 80
Works Cited ...................................................................................................................................... 81
1 Introduction
1.1 Thesis Background
The installed base volumes have grown exponentially in recent years in Asia, especially in
China. In addition to the newly-built vessels, American and European cruise lines are also
increasing their presence in the region as the cruising industry has been growing in Asia
recently. Also increasing gas transportation from Russia particularly to Japan is leading to
increasing amounts of installed base operating in the area.
As the amount of operating Azipod vessels increases in Pacific Asia, the planning of the
supply chain of spare parts is growing in importance to maintain a high global service rate
and customer satisfaction. This thesis will evaluate possibilities of ABB Marine to improve
the availability of spare parts in China and the nearby Pacific Asia region.
The author of this thesis has been working at ABB Marine Spare Parts since 2012 alongside
his studies at Aalto University. The author also spent one semester studying at the Fudan
University in Shanghai, China.
1.1.1 ABB Marine
The ABB Marine & Cranes unit in Helsinki, Finland develops electrification and automation
solutions for the marine industry. The unit’s cutting edge product is the Azipod electric
propulsion system that improves fuel and energy efficiency as well as the drivability of the
vessel. Azipods are installed on vessels such as cruise ships, icebreakers, tankers, wind
turbine installation vessels, ferries, offshore supply vessels and mega yachts. In addition
ABB Marine provides energy efficiency and advisory systems that minimize fuel costs,
maximize ship availability and improve safety. (ABB, June 2012)
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Figure 1. Example of the Azipod, an electric propulsion system. (ABB, June 2012)
The ABB Azipod, example seen in Figure 1, is and azimuthing electrical podded drive used
in diesel-electric vessels. The Azipod unit is fixed in a pod outside the ship and it combines
the functions of a propulsion motor, main propeller, rudder and stern thruster. A vessel
equipped with Azipod units can save fuel up to 20 percent compared to standard mechanical
propellers. The fuel savings are based on the smooth flow of water in the propellers. The 360
degree control of the Azipod allows better steerability to the ship and it is quieter and use of
space inside the ship is more effective. Compared to a conventional propeller system in a
typical Baltic ferry with car-carrying capability, the system can reduce carbon dioxide
emissions by around 10 000 tons per year. (ABB, June 2012)
The innovation was introduced for the first time in 1990, in a pilot installation for a Finnish
fairway maintenance vessel, and was later installed in few icebreakers and ice-going vessels.
The first cruise vessel installation was completed in 1998 on a Fantasy-class cruise ship
named Elation. Elation displayed remarkably positive results, including high efficiency and
excellent maneuverability compared to previous Fantasy-class vessels. In addition the new
technology provided ship designers greater freedom to optimize the ship’s general structure.
(ABB, June 2012)
2
There are different Azipod types in the product family depending on the operating conditions
and power range. The Azipod VO, XO and CO types are open water applications. The XO is
the new generation of open water applications, as the VO represents the older generation.
The target of the new generation Azipod has been to extend docking intervals and increase
the maintainability from the inside, as well as improving efficiency. These types operate in
the power region up to 20 + MW. The CO Azipod is a smaller compact Azipod for small and
medium size vessels and it operates on the power range of 1.3 to 4.5 MW. The Azipod VI is
an ice application for different in-ice operating vessels, such as icebreakers, on the power
range of 0.5 to 16 MW. Azipod XC is a contra rotating application for high speed vessels
with up to 100 MW total propulsion power. Azipod CZ for drilling rigs are open water
applications with thrust up to 60-84 tons/unit. With the power range of 3.3 to 4.5 MW the
CZ has a pushing propeller with a nozzle. Examples of the various Azipod types can be seen
in Figure 2. (ABB, June 2012)
Figure 2. Different types of Azipods. In the top left corner the Azipod CO, in the top right
corner the Azipod VI, in the bottom left corner the contra rotating Azipod XC and in the
bottom right corner the Azipod CZ. (ABB, June 2012), edited by J. Juntunen
3
1.2 Objectives
The objective of this thesis is to improve the availability of spare parts in China and the
nearby Pacific Asia region. In addition the target is to advance the knowledge about the
logistic and cultural characteristics in the region and develop a better understanding of the
possibilities and opportunities regarding logistic solutions.
The main focus will be on China’s logistics and the possibility of having a warehouse located
in China that could serve the entire Pacific Asia region. Furthermore we compare nearby
countries’ logistic and regulations with China and attempt to evaluate if a different location
would be better suited to serve the entire region than China. In addition we try to evaluate if
a centralized warehouse model is convenient for this area and try to assess contradictions for
this approach.
The results are intended to support future logistic strategy decisions made by the company,
by providing key logistic focal points of the region and raise issues that need to be addressed.
Furthermore the thesis seeks to provide out-of-the-box thinking regarding logistic solutions,
which attempt to provide further perspective for the company’s decisions making.
1.3 Problem defining
In this thesis we define availability as having critical spare parts ready for urgent shipments
in such way that the parts can reach the operating installed base immediately. This means
researching such focal aspects as how country borders and regulations interfere and trouble
the movement of goods and other relevant matters.
The location is evaluated through comparing overall logistic performance and regulations
between the countries rather than finding exact coordinates for a warehouse based on the
amount of customers and installed base.
The examined region for this thesis is the Pacific Asia region where installed base of ABB
Marine operates. More specific countries with ABB Marine sales offices and major ports are
4
examined and compared with China as possible locations for a central warehouse serving the
region. These countries are Singapore, Japan, Hong Kong and the Republic of Korea (known
as South Korea in the common language).
Even though Hong Kong is in principle not a country but a special administrative region, in
this thesis when we refer to countries of the defined region we include Hong Kong in this list
as an individual country as it has its own trading regulations and characteristics. This thesis
does not take any political stance what so ever, this simplification is rather to form the text
more simple to read.
1.4 Research methods
This research is primarily based on conducted interviews and data found in literature and
official statistics, which are compared with each other in the analysis part of the thesis.
Installed base and Azipod data is gathered from unclassified ABB material of whose
publishing will not provide any competitive advantage or disadvantage to competitors,
clients, or suppliers.
As for the interviews, ABB employees in China as well as employees in Finland who have
previously worked in China and the Pacific Asia region were interviewed. Data was gathered
also during development workshops between ABB China and ABB Finland. To give more
cross-cultural perspective an industry professional outside of ABB, a supply chain manager
from Valmet China, was interviewed.
5
1.5 Structure
After the introduction part the thesis is built into three parts as displayed in Figure 3:
Figure 3. Structure of the thesis.
The literature review part of this thesis is presented in chapters 2 and 3. Chapter 2, Spare
Parts Supply Chain Management, is a review on recent literature regarding spare parts
logistics and supply chain management. This chapter will give an overview on the challenges
and needs that need to be taken into account in building a successful logistic strategy for
spare parts. Chapter 3, Logistic Characteristics of Pacific Asia, provides knowledge and
statistics of the logistics environment in the defined countries for this thesis. Additionally in
this chapter we take a deeper look into the logistics in China and the basic cultural
characteristic of operating in China. The objective of these chapters is to give a foundation
for the analysis and raise important aspects that need to be taken into account.
Chapter 4 and 5 form the analysis part. Chapter 4, Volume of Installed Base, assesses the
volume of operating installed base in the region and analyses the variation of Azipod types.
Chapter 5, Availability Planning in Pacific Asia, is based on all of the previous chapters. In
this chapter we evaluate how to improve the availability of spare parts and compare the
different locations. The argumentation is based on the fundamentals and statistics provided
in the literature review, installed base volume analysis, and conducted interviews.
The conclusion part of the thesis consists of chapter 6 and 7. In chapter 6, Conclusions we
present the essential results and evaluate them. In chapter 7, Follow-Up Actions and
Recommendations we suggest further actions for the solutions to be taken into practice.
6
2 Spare Parts Supply Chain Management
Spare parts are parts and equipment that are completely interchangeable with like items and
can be used to replace items removed during maintenance and are only demanded after
primary products have been sold (Wagner, et al., 2012).
The characteristics of spare parts supply chain management differs from those of other
materials in several ways. First of all the demand for parts may be extremely sporadic which
leads to difficulties in estimating demand. In addition service requirements are higher as the
stock out costs may be financially remarkable. The number of part types is usually high and
the prices of individual parts may be extremely expensive. As a result, companies may keep
a large spare parts inventory, while the annual inventory may be very low. (Huiskonen, 2001)
In this chapter we take a closer look in literature regarding spare parts supply chain
management. The purpose is to provide an understanding of the business environment and
challenges needed to be taken into account in constructing logistic strategies for spare parts
operations.
2.1 Spare Parts Logistics
Companies with a well-aligned spare parts logistics strategy can add value for their customer
beyond primary product benefits, build long term customer loyalty and achieve high profit
margins. Companies across various industries recognize spare parts supply not only as an
obligation, but as a chance to increase profits in their primary product markets. (Wagner, et
al., 2012)
Wagner et al. define spare parts logistics as market-orientated planning, design, realization,
and control of the spare parts supply and distribution, along with associated information
flows within a firm and between the firm and its network partners (Wagner, et al., 2012).
Therefore spare parts logistics aims at a demand-driven, cost-minimal provision of the
7
required spare parts for the defective or preventive maintenance of primary products to ensure
an optimal level of availability or reliability of the product (Wagner, et al., 2012).
The challenges in spare parts logistics emerge mainly due to the combination of large service
networks and sporadic demand. Also rigid deadlines and customer heterogeneity generate
additional challenges. However, high revenue rates in service operations motivate companies
to invest in optimizing and improving service functions and operation models. (Jalil, et al.,
2011)
Gebauer et al. argue that spare parts logistics are influenced by the different requirements of
the service strategies described as after-sales service providers and customer support service
providers. (Gebauer, et al., 2011)
After-sales service providers react for example in the event of breakdown or failure as quick
as possible to solve the problem. From a logistics perspective, after-sales providers are
challenged with unpredictability and high customer expectations regarding delivery times. A
common way to meet availability requirements and shorten delivery times is to have
relatively high stock values. (Gebauer, et al., 2011)
Customer support providers on the other hand concentrate on preventing failures and
breakdowns from happening in the first place. Preventive maintenance contracts include pre-
defined spare parts, leading to predictable demand. (Gebauer, et al., 2011)
Wagner et al. offer a three-step model approach to spare parts logistics. The model is based
on nine key components and is illustrated in Figure 4:
8
• Spare parts market
Step 1: Identify the • Product characteristics
conditions • Maintenance strategy of the customer
• Spare parts obligations
Step 2: Anticipate • Primary product life cycle

future developments • Forecasting methods
Step 3: Align key • Goals of the spare parts business

components of a
• Supply options
business' spare parts
• Inventory options
logistics strategy
Figure 4. Three-step model for spare parts logistics strategy. (Wagner, et al., 2012), edited
by J. Juntunen
The first step, identifying conditions, consists of four components: Spare parts market,
product characteristics, maintenance strategy of the customer and spare parts obligations.
The high profitable business of spares is attracting competitors to the market. However the
distinctive specificities and varieties of each manufacturer’s parts keep the entry barriers
high. Wagner et al. argue that top performers are well informed about the portfolio and
market shares of competitors. Another condition is the variety of products. Products have
different requirements such as delivery time and demand. Better knowledge of the product
sets a better strategic alignment of spare parts logistics. Maintenance strategies have direct
influence on spares demand and therefore the knowledge of customer behavior is required to
establish more accurate understanding of the conditions. The last condition of Step 1 is the
spare parts obligations. Manufacturers may have legal obligations to deliver spares for
example through triggered contractual agreements or warranty obligations. (Wagner, et al.,
2012)
9
The second step in the model suggested by Wagner et al. is the anticipation of future
developments through knowledge of primary product life cycle and forecasting methods.
Understanding the product life cycle helps to improve the delivery service while decreasing
logistic costs. Forecasting methods on the other hand help estimating demand and planning
inventory. (Wagner, et al., 2012)
The final step of aligning key component consists of goals of the spare parts business, supply
options, and inventory options. The spare part business of different companies may have
different main goals or various goals. In addition to achieving revenues and profits companies
may pursue targets such as customer loyalty or differentiation from competitors. Supply
options are the strategic decisions of establishing distribution channels and networks.
Inventory options contain decisions that influence stock levels, warehouse locations, degree
of storage centrality and storage equipment. (Wagner, et al., 2012)
2.2 Part Categorization and Criticality
Huiskonen argues that spare parts should have a more specific categorization because of their
effects on the characteristics of the logistic system. Huiskonen suggests that the most relevant
characteristics are criticality, specificity, demand pattern, and value. (Huiskonen, 2001)
The criticality of an item is one of the main effects it has on the spare part chain. The
criticality of a part is related to the consequences caused by the failure or malfunction of the
individual part in case a replacement is not immediately available. The impact of a shortage
of a critical part may be a multiple of its commercial value. One approach is to relate
criticality to the time in which the failure has to be corrected: (1) The failure has to be
corrected immediately and the spare part should be available on that instant. (2) The failure
can be tolerated with temporary arrangements for a short time period, during which the spare
part can be delivered. (3) The failure is not critical for the operation and spare parts can be
supplied after a longer time period. (Huiskonen, 2001)
From the logistics and the availability point of view it is vital to know whether there is time
to operate after the failure of a part. This dictates the positioning and availability of parts if a
10
certain service rate is to be achieved. In case of immediate need, local safety stocks are a safe
approach to manage availability on that instant. With more time to operate companies may
prefer more centralized structures with direct deliveries. (Huiskonen, 2001)
The specificity of a part is another characteristic of spare parts. Companies may have a wide
spectrum of parts that can be divided into standard and more specific parts. Standard parts
can be used for the majority of the installed base meaning that the individual part is the same
model for many different users. In contrast more specific parts are tailored just for one
particular user or for a limited number of installed based applications. (Huiskonen, 2001)
The demand pattern of a spare part includes the aspects of volume and predictability. It is
typical that among the spare parts there is a large amount of different parts with low and
irregular demand, which makes supply chain control more difficult. This feature leads to
increasing the amount of safety stocks needed to cover unpredictable situations.
Predictability of demand is related to possibilities to estimate failures and replacement needs
of a single part. Parts can be divided into parts with random failures and parts with predictable
wearing patterns. (Huiskonen, 2001)
The value of a part is a common characteristic where high value makes stocking a non-
attractive solution. Furthermore with low price items the replenishment arrangements have
to be efficient so that administrative costs do not increase unreasonably in proportion to the
value of the parts themselves. (Gebauer, et al., 2011)
Cavalieri et al. provide a categorization based on the expected behavior of items. These four
categories are consumables and auxiliary materials, generic spare parts, specific spare parts,
and strategic spare parts. (Cavalieri, et al., 2008)
Consumables and auxiliary materials are items characterized by a steady and continuous
consumption as well as having a large amount of supplier base. Examples are items such as
filters and oils. Generic spare parts are items that can be mounted on more pieces of
equipment. They are often widely available and examples of generic spare parts are valves,
switches and hydraulic accessories. Specific spare parts are specific to a particular type of
equipment or available only through a specific supplier. Strategic spare parts are items
11
whose expected wear-out time is not foreseeable and are characterized by high supply
delivery times. (Cavalieri, et al., 2008)
2.3 Inventory Management
The materials held in storage to satisfy a future demand are called inventory. The location
where the inventory is held is most of the time stationary and these are defined as warehouses.
However inventories are sometimes held in the vehicles or on carriers of installed base such
as airplanes and marine vessels to provide emergency spare parts immediately.
(Goetschalckx, 2011) p431
Spare part inventories differ from other manufacturing inventories, such as work-in-process
(WIP) and final product inventories, in several ways. WIP inventories exist to smooth out
irregularities in production flow which can be caused for example by changes in product mix,
equipment breakdowns, material handling and differences in production rates between
different processes. Finished product inventories on the other hand exist to provide a source
of products for delivery and are designed to protect against irregularities in lead time demand,
differences in quality levels, schedule problems, differences in capacity and demand, labor
problems and other characteristic production problems. Spare parts however are not
intermediates of final products. Spare part inventories exist mainly to keep equipment in
installed base in operating condition. (Kennedy, et al., 2002)
Spare part inventories consist of items that are replacement parts for specific installed base
and serve as protection against prolonged downtimes and equipment failures. These
inventories tend to be relatively expensive compared to other manufacturing inventories as
demand is more difficult to forecast and since the items are to replace a part in the installed
base, they may just sit in the inventory if the part is not required to be replaced, meaning that
there is no alternative use for the items as they serve as insurance against system downtimes.
(Kennedy, et al., 2002)
Spare parts are usually stocked as it is often difficult to obtain the items from the suppliers
on short notice and some parts are critical for system operations leading to expensive system
12
downtimes. Therefore stocking levels are determined by balancing risk and cost impacts. In
addition the risk of obsolescence may be a problem for parts that are rarely needed compared
to parts whose use is directly related to repetitive maintenance and the short- and mid-term
usage is predictable. (Kennedy, et al., 2002)
One characteristic of spare part inventories is that maintenance policies dictate inventories
levels, rather than customer usage. For example one way of restoring system functionalities
is to repair a part instead of replacing it. For expensive major units repair is commonly
preferred to replacement if it is possible. (Kennedy, et al., 2002)
2.4 Demand Forecasting
Supply chain planning and design involves making decisions so that the supply chain
functions can be executed efficiently in the future. Therefore planning and design of the
supply chain requires data that describes the future conditions as accurately as possible.
Demand predictions and forecasts are crucial for establishing inventories that make supply
chains more efficient and profitable. (Goetschalckx, 2011) [ p.65-67]
For generating quality forecasts it is fundamental to understand the pattern of the demand.
Depending on the behavior over time, the pattern can be classified as regular or irregular. If
the pattern is regular, future values can be predicted based on historical data. Accurate
forecasts can be achieved by mathematical forecasting methods such as regression and time
series analysis. If the pattern is irregular, singular occurrence, intermittent, or highly variable,
accurate forecast are far more difficult to obtain with mathematical methods. (Goetschalckx,
2011)[ p.65-67]
Forecasting methods can also be classified as quantitative or qualitative. Qualitative

forecasting methods use experts, subjective judgment, intuition, or surveys to produce
estimates and predictions of future activity. The subjective nature of these methods makes it
difficult to validate the accuracy. Qualitative methods are primary used for a new product,
new areas, impact of a policy change or impact of new technology. Quantitative methods on
the other hand rely on models using historical values to predict future demand. To establish
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accurate quantitative forecasts sufficient historical data is required and the market
environment needs to be familiar. (Goetschalckx, 2011) p.65-67]
Spare parts demand can show different diversified patterns, depending of the type of the part
considered and the specific industry. Spare parts demand is often characterized as sporadic,
where demand sizes and demand intervals have great variability. Spare parts demand can be
forecasted with various methods and models. According to Altay and Litteral two primary
classes of techniques are:
1. Reliability based forecasting (RBF). Used when installed base and their technical
operating conditions are known.
2. Time series forecasting (TSF). Suitable when the only available data is related to time
series of the spare parts consumptions or repair records, while no information about
the reliability of the installed base is on hand. [ (Altay & Litteral, 2011) p.177-179]
RBF methods are based on data devoted to collect the failure rates of different items and their
typologies. The data is based on knowledge of the conditions of use and the required
performance and duty cycles of the item. Methods can also be based on the life data analysis
of items. Forecasts are based on statistical analysis of historical failure rates or reliability
tests. [ (Altay & Litteral, 2011) p.177-179]
Methods of TSF are based on the analysis of orders issued for spare parts, either the repair
orders of existent items or the supply orders of new spares. Demand patterns can be estimated
with analyzing distributions. [ (Altay & Litteral, 2011) p.177-179]
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2.5 Spare Parts Business Planning
Spare parts business faces a lot of challenges in forecasting demand, planning inventory and
distribution, and improving the agility of the supply chain. Deloitte suggests companies
building and developing spare parts business to first take action to define the spare parts
planning management structure, as demonstrated in Figure 5. The planning structure can be
divided into three main levels: tactical planning, operative planning, and planning execution.
(Deloitte, 2013)
Figure 5. Spare parts planning management structure. (Deloitte, 2013)
The tactical planning consists mainly of historical demand management, forecasting demand
and inventory planning management. This planning level is determining stocking or
destocking and inventory levels for each site of the distribution network. (Deloitte, 2013)
Operative planning is determining the real goods flow, including the flow from suppliers to
central warehouses and from central warehouses to regional distribution channels. Operation
planning can therefore be divided into three main aspects: procurement plan, deployment
plan and inventory balancing. (Deloitte, 2013)
Planning execution consists of procurement execution and stock transfer execution.

According to Deloitte the lead times of procurement and stock transfers are key inputs to
inventory planning. Short and stable lead times will reduce the inventory levels in the entire
network. (Deloitte, 2013)
15
2.6 Spare Parts Supply Chain Framework
Spare parts business can be a highly profitable source for manufacturing companies by
optimizing operations, careful planning, and continuous improvement of the supply chain
network. Deloitte suggests a spare parts supply chain management framework, which
consists of twelve key capabilities for spare parts management as illustrated in Figure 6.
These capabilities can be divided into four fundamentals: foundations, enablers, execution
processes, and results. (Deloitte, 2013)
Figure 6. Framework of 12 key capabilities for spare parts supply chain management.
(Deloitte, 2013)
The foundation consists of the organization, people, information systems, and data
management. Problems in these foundational elements lead to further problems in
successfully achieving upper layers of the framework. Enablers of the spare parts supply
chain are visibility, performance measurement and supplier and customer collaboration. The
16
capabilities can improve the supply chain execution process and strengthen its functionalities
through the entire network. The core execution processes are inventory management, order
management, distribution operations and transportation. These processes have a direct impact
on the results and performance of the overall spare parts supply chain. The top layer of the
spare parts supply chain pyramid represents the results which aim to create value for the
customer and stakeholders. This is the starting point of establishing supply chain strategy and
the final output of the spare parts supply chain. (Deloitte, 2013)
The suggested framework gives an understanding between correlations of the different

aspects and fundamentals of the spare parts supply chain. It is built to help companies to
achieve long-term optimizations in spare parts management and identify opportunities and
possible reforms in the current structure of the spare parts business. (Deloitte, 2013)
Cavalieri et al. suggest a decision-making framework for managing spare parts consisting of
five sequential steps: part coding, part classification, part demand forecasting, stock
management policy, and policy test and validation. The framework is presented in Figure 7.
Figure 7. The five decision making steps. (Cavalieri, et al., 2008)
17
The first phase, part coding, should provide a prompt understanding of the technical features,
the equipment tree it refers to, the involved supplier, and the physical location in the storage.
However the common modern ERP-systems provide the needed information of items. The
second phase indicates that items need proper classification as there is a high variety of
criticality, repair purposes and economical features. The third phase involves part demand
forecasting through quantitative and qualitative methods. The fourth phase of stock
management policy refers to decisions made considering inventory levels using approaches
such as EOQ or ROL. The last phase is the policy test and validation of the results achieved
after applying the earlier steps of the framework. (Cavalieri, et al., 2008)
2.7 Managing Growth of Spare Parts Business
For OEMs (Original Equipment Manufacturers) in more mature markets such as the US and
Europe spare part business has already become one of the most important sources of revenue.
According to global survey conducted by Deloitte, service and spare parts business account
for more than 35% of total revenues in vehicle sales (Deloitte, 2013). For third of the OEMs,
the revenue generated contributes even more than 50% of total revenue. In addition profit
margins for the spare part business are 76% higher than that of conventional finished
products. (Deloitte, 2013) According to the experiences of leading OEMs in mature markets,
the spare part business experiences three common stages: initial growth, rapid development,
and maturity. Aligned with these development stages, spare parts management has also
experienced transformation in three modes (illustrated in Figure 8): basic management mode,
network management mode, and integration management mode. (Deloitte, 2013)
18
Figure 8. Three stages of spare parts management capability.
(Deloitte, 2013), edited by J. Juntunen
In the initial stage the most important target is to guarantee the parts supply. Due to limited
business size supply chain operations cannot achieve economies of scale and on time delivery
is difficult to guarantee. The focus lies in building the basic operation structure. (Deloitte,
2013)
In the next stage of rapid development the client base expands and the spare part business is
undergoing exponential growth. The focus of this stage is the improvement of service quality
and customer satisfaction. The service level of the spare part business is stabilized through
the establishment of a distribution network. (Deloitte, 2013)
By reaching the mature stage, spare part business becomes one of the key sources of revenue
and profits. In this stage the main objectives become reducing operating costs and increasing
profits. The key tasks are improving the agility of the supply chain, increasing collaboration
of the entire supply chain and integration of a global distribution network. (Deloitte, 2013)
19
3 Logistic Characteristics of Pacific Asia
The purpose of this chapter is to provide an understanding of the logistics characteristics

and regulations of the defined region relevant for this thesis. This chapter displays the
logistic performance of the countries to give an overall view on the competence and
challenges of the different locations. Additionally we present levels of average rents and
salaries and furthermore take a look into customs procedures to display the barriers caused
by international borders.
We take a closer in depth look at the logistics and the logistics development of China as
one goal of the thesis is to evaluate the possibility of utilizing China as the regional
logistics hub. In addition we display common cultural characteristics to provide a better
knowledge of business conditions to manage cultural differences more efficiently.
3.1 Country Specific Logistic Performance
The World Bank has produced since 2007 every two years a Logistics Performance Index
(LPI), which measures logistics performance of individual countries, including 160 countries
in 2014. The aim is to help national leaders, key policy makers, and private sector traders to
understand the challenges they and their logistic partners face. The LPI provides a simple
global benchmark to measure logistics performance by providing comparisons between
countries. The LPI is built around surveys of logistic professionals and rates key issues such
as customs clearance efficiency, infrastructure quality, and the ability to track cargo.
In this chapter we present the logistics performances of countries relevant for this thesis. The
countries are China, Japan, Republic of Korea, Singapore and Hong Kong.
20
3.1.1 Country Score Cards
The international country specific scorecards are constructed using six key dimensions to
benchmark a country’s performance and display also the derived overall LPI index. The six
core components are:
1. The efficiency of customs and border management clearance

2. The quality of trade and transport infrastructure
3. The ease of arranging competitively priced shipments
4. The competence and quality of logistic services
5. The ability to track and trace consignments
6. The frequency with which shipments reach consignees within scheduled or expected
delivery times. (The World Bank, 2014)
The international LPI is based on surveys where its respondent rates eight overseas markets.
The eight markets are chosen based on the most important import and export markets of the
country where the respondent is located, neighboring countries that form part of the land
bridge connecting them with international markets, and on random selection. The method
used to select the group of countries rated by each respondent varies by the characteristics of
the country and takes also into account factors such as income of the country and if countries
are coastal or landlocked. The six key components are rated by the respondents from very
low (1) to very high (5). (The World Bank, 2014)
The overall LPI score is constructed by multiplying the normalized scores for each of the six
components with the component loadings, displayed in Table 1, and then summed together.
The component loadings represent the weight given for each of the components in
constructing the overall LPI. (The World Bank, 2014)
21
Table 1. Weight of the individual components on the overall logistics performance index.
(The World Bank, 2014)
The scorecards are presented in Figure 9 in a diamond diagram. The diamond is heptagon
shaped where the top corner represents the overall LPI score and the remaining six corners
represent the six key components. Table 2 displays the detailed values in each category. The
table is ranked from highest to lowest depending on the overall LPI score. Table 2 also
indicates the global ranking of compared countries. (The World Bank, 2014)
Figure 9. Diamond diagram of the logistics performance of the compared countries. (The
World Bank, 2014)
22
Table 2. Table with exact scores of the logistics performance of the compared countries.
As seen in Table 2 Singapore ranks best in the overall LPI score ranking globally fifth,
reaching highest scores in every category among countries selected for this thesis. Japan
ranks second over third ranked Hong Kong and fourth ranked Republic of Korea. China ranks
last among the selected countries and 28th globally. China scores worst in every category
except for international shipments where it scores 0.06 higher than the Republic of Korea.
3.1.2 Domestic LPI
In the survey for domestic LPI, respondents provide qualitative and quantitative data on the
logistics environment in the country they work. Table 3 displays the results of the research
for the countries relevant to this thesis:
23
Korea, Hong
China Japan Rep. Singapore Kong
Export time and cost / Port
or airport supply chain
Distance (kilometers) 198km 25km 300km 30km 36km
Lead time (days) 2 days 2 days 1 days 2 days 1 days
Cost (US$) 494US$ 500US$ 500US$ 323US$ 194US$
Export time and cost / Land
supply chain
Distance (kilometers) 248km N/A N/A 31km 43km
Lead time (days) 2 days N/A N/A 2 days 1 days
Cost (US$) 683US$ N/A N/A 909US$ 194US$
Import time and cost / Port
or airport supply chain
Distance (kilometers) 172km 25km 300km 25km 43km
Lead time (days) 3 days 2 days 1 days 2 days 1 days
Cost (US$) 683US$ 750US$ 500US$ 266US$ 211US$
Import time and cost / Land
supply chain
Distance (kilometers) 137km N/A N/A 31km 43km
Lead time (days) 2 days N/A N/A 2 days 1 days
Cost (US$) 514US$ N/A N/A 783US$ 194US$
Table 3. Comparison of lead times, average distances, and costs.

(The World Bank, 2014), edited by J. Juntunen
Table 3 distinguishes export and import and the supply of goods through ports and airports
or via land supply, hence the table is divided into four main categories: export time and cost
for port and airport supply chains, export time and cost for land supply chains, import time
and cost for port and airport supply chains, and import time and cost for land supply chains.
The four main categories are divided further into three subcategories: distance, lead time, and
cost. Export time and cost for port and airport supply chains refer to the goods movement
from origin, for example the seller’s factory, to the port of loading or equivalent, as the import
time and cost for port and airport supply chain refer to the movement of goods from the port
of discharge or equivalent to the buyer’s warehouse. Both the export and import time and
cost for land supply chains refer to the movement of goods from the point of origin to the
buyer’s warehouse. (The World Bank, 2014)
24
Country scores for distance are displayed in kilometers, lead time in days and costs in US
Dollars. Scores are produced by exponentiating the average of responses in logarithms across
all respondents for a given country. Japan and the Republic of Korea do not have any values
for land supply as Japan is not landlocked with any country and the Republic of Korea is only
landlocked with North Korea through which commercial goods of international trade are
generally not transported. (The World Bank, 2014)
Table 4 displays the shipment quality, customs clearance processes, and lead times:
Korea, Hong
China Japan Rep. Singapore Kong
Shipments meeting quality
75.68% 89.46% 97 % 92.47% 95.17%
criteria (%)
Number of agencies - exports 3 7 2 1 4
Number of agencies -
3 7 2 1 4
imports
Number of documents -
4 3 2 1 4
exports
Number of documents -
5 3 2 1 4
imports
Clearance time without
2 days 1 days 1 days 0 days 0 days
physical inspection (days)
Clearance time with physical
3 days 1 days 1 days 1 days 1 days
inspection (days)
Physical inspection (%) 6.72% 2.5% 18 % 4.82% 1%
Multiple inspections (%) 2.24% 1% 18 % 2.86% 1%
Table 4. Comparison of shipment quality, customs simplicity, customs clearance times, and
ratios of physical inspections of goods. (The World Bank, 2014), edited by J. Juntunen
The shipment meeting quality criteria row in Table 4 indicates how many percentages of the
shipments meet the required quality criteria. Table 4 displays also how many government
agencies are dealt with and how many documents are required for import and export on
average. The clearance time rows indicate how many days are taken between the submission
of an accepted customs declaration and notification of clearance with either physical
inspection or without physical inspection. Table 4 also displays the percentage of
experienced physical inspections of goods and percentage of goods going through multiple
inspections. (The World Bank, 2014)
25
3.1.3 Tariffs and Logistic Costs
The Global Enabling Trade Report 2014 published by the World Economic Forum
benchmarks trade and logistic competitiveness between 137 economies. Table 5 displays the
average tariff rates and all the costs associated with the procedures required to import and
export goods. These include costs for documents, administrative fees for customs clearance
and technical control, terminal handling charges and inland transport. The cost measure does
not include tariffs or trade taxes and only official costs are recorded. This indicator measures
the fees levied on a 20-foot container in US Dollars. (Hanouz, et al., 2014)
Cost to import Cost to export

Country Tariff rate (%)
(US $ per container) (US $ per container)
China 615 620 11,09
Hong Kong SAR 565 590 0,00
Japan 970 890 2,15
Korea, Rep. 695 670 8,50
Singapore 440 460 0,03
Table 5. Average cost for import and export of goods for a 20-foot container and average
tariff rate. (Hanouz, et al., 2014)
3.1.4 Warehouse Price Levels
In this chapter we take a look inside the average warehouse rentals and salaries. Table 6
displays the average rents per square meter in US Dollars per annum. As warehouses also
demand workforce, therefore Table 6 displays the average annual wages of the relevant
countries, to demonstrate the difference in income levels. The rents and salaries are
representing averages from country capitals except China, where the values represent
Shanghai’s average prices.
26
Country Rental (US$/sqm) Monthly wage (US$)
China 51 333.30
Hong Kong SAR 200 1688.00
Japan 215 2818.40
Korea 58 2388.40
Singapore 126 2487.10
Table 6. Average rental prices for warehouses and average monthly wages. (NAI Global,
2011) (Trading Economics, 2014)
Also researches by CBRE state the average rent prices in the logistic market. According to
CBRE Tokyo ranks the highest with the most expensive rents in 2012, Singapore third and
Hong Kong fifth. CBRE’s top 10 highest rent prices can be seen in Table 7:
Table 7. CBRE’s top 10 rent prices in the logistics market 2012. (CBRE, 2012)
27
3.2 Logistics in China
After 15 years as a candidate, China was accepted in 2001 as a member of the WTO (World
Trade Organization). Joining the WTO was a crucial event in Chinese economic history as it
opened up China’s markets for more international trade and investment, and opened the
world economy more for China’s exports. Before joining the WTO China was the world’s
seventh largest exporter and eighth largest importer of merchandise. By integrating fully into
the global economy China has become the largest exporter and the second largest economy
in the world. (Bhattasali, et al., 2004) (Qi, 2012)
To manage the logistic challenges and opportunities this chapter tries to provide the
significant aspects of China’s logistics characteristics. This chapter presents the development
in logistic to give a better understanding of the challenges still faced in the current logistic
environment. Additionally we display the fundamentals of importing and exporting in China,
logistic approaches presented in literature, and special economic regions that can be utilized
in building a logistic strategy.
3.2.1 World Trade Organization
The WTO was established in 1995 and its main functions are administering WTO trade
agreements and monitoring national trade policies. It also provides a forum for trade
negotiations and a platform for handling trade disputes. China was accepted as a member in
2001 through a lengthy process of negotiations and an agreement, Protocol on the Accession
of the People’s Republic of China, which included numerous provisions and requirements to
changes in the Chinese economy. In this chapter we take a closer look inside the effects of
China’s WTO membership especially in the field of international trade and logistics. (World
Trade Organization, 2011)
The accession agreement has opened China’s sales, service and distribution sectors to direct
foreign competition. China’s biggest commitments are that foreign companies can distribute
their products with their own warehousing and delivery facilities, the constraints on foreign
28
equity will be removed and logistic services such as local and international courier service,
freight forwarding and distribution will be opened to foreign companies. (Jiang & Prater,
2002)
The easing of regulations in the logistic sector is a critical factor of simplifying distribution
in China. It has required earlier owning multiple partners in different regions to establish a
large distribution network. In addition more competition has had a reducing effect on logistic
prices and puts pressure on improving efficiency. (Jiang & Prater, 2002) (Bhattasali, et al.,
2004)
The requirements in the Protocol on the Accession of the People’s Republic of China also
have a great impact on foreign trade. Special zones and provinces, which adapted favorable
trade policies to attract foreign capital, lost their privileges and they must carry out the same
uniform foreign trade policy as other regions throughout China. Another requirement was to
enlarge the market entry for foreign products by reducing customs duties and decreasing
import tariff levels. (Jiang & Prater, 2002) (Bhattasali, et al., 2004)
The development of the tariff rate from 1990 to the accession of WTO and few years beyond
can be seen in Figure 10. The average tariff rate in 1982 was 56% which was reduced to 43%
in 1985 and stayed constant at that level until 1992. During the 1990s the average tariff rate
declined steadily to 15% by the time of WTO accession. Figure 10 also illustrates the effect
of the market liberalization and WTO commitments on foreign trade. (Bhattasali, et al., 2004)
29
Figure 10. China’s average tariff rate and trade dependence percent from 1990 to 2004.
(Bhattasali, et al., 2004)
3.2.2 Logistic Challenges and Development
The first years of the 21st century have been characterized by the fast rapid construction of
infrastructure. During the five-year plan of 2001-2005 China made significant investments
in infrastructure including the building of 250,000 kilometers of highways and 24,400
kilometers of expressways. The next five year plan of 2006-2010 also invested in the
development of roads, ports, railroads and airports. Despite these recent efforts China faces
still a lot of challenges regarding logistics. In this chapter we take a look in the common
logistic challenges and characteristics presented in recent literature. (Zhang & Figliozzi,
2010)
Despite upgrades in transport infrastructure, China’s infrastructure still struggles to satisfy

the demand generated by its fast growing economy. Congestions and shipment delays are
common at Chinese ports due to capacity shortage. Also highway constructions and transport
bottlenecks create congestions problems in port areas. In addition adequate highway
networks connecting the more developed coastal regions to underdeveloped inland provinces
30
increase rail and river congestion, as more companies are moving inland to take advantage
of lesser labor costs. (Zhang & Figliozzi, 2010)
Regardless of a reduction in national level regulations since China’s entry to the WTO, local
governments still set up bureaucratic and political barriers to protect local businesses and
prevent the entry of outside competitors. This so called local protectionism is driven by the
desire to maximize local economic growth, employment, social stability and tax revenues,
and less by the concern about efficient use of regional resources or the creation of an
integrated national transport network. (Zhang & Figliozzi, 2010)
Railways cannot reduce highway congestions at the present moment. The capacity of Chinese
rail systems is insufficient and most of the capacity is used to transport bulk materials such
as coal, steel and iron. Trucking has been the dominant transport mode for fright due to its
reliability and flexibility compared to Chinese railway service however congestions around
port areas due to manufacturers moving inland have forced the Chinese government to plan
and invest in the development of railway infrastructure. (Zhang & Figliozzi, 2010)
Approximately 90% of China’s international trade volume is handled through maritime

transport. Large trade volumes, heavy investments in port infrastructure and intense
competition between ports have led to the emergence of highly efficient ports. Although port
productivity is not an issue, Chinese ports are affected by inadequate intermodal transport
connections, bureaucratic customs procedures, and in some cases low customer service.
Hence companies located closer to major ports are significantly less affected by the
transportation and logistical challenges and tend to have lower overall logistics costs. (Zhang
& Figliozzi, 2010)
In addition interior and mountainous areas still lack modern cable and satellite facilities.
Frequent blackouts and power outages hinder logistic development in some areas and many
companies lack modern corporate information technology (IT) systems. The absence of web-
enabled tools and know-how is affecting Chinese companies’ international competitiveness.
IT development is regarded as one of the top challenges in China’s logistic sector. (Zhang &
Figliozzi, 2010)
31
A study conducted by Zhang and Figliozzi indicate that managers operating in China
highlight the importance of good relationships with customs officials and local customs
agencies to ensure faster customs clearings and to avoid a high number of inspections.
Customs inspections cause not only delays but also increase changes of cargo damage and
losses. (Zhang & Figliozzi, 2010)
The World Bank Logistic Performance Index also demonstrates the development in Chinese
logistics. Figure 11 displays China’s LPI scores for the years 2007, 2010, 2012, and 2014.
The diagram is constructed in the same way as Figure 9. Table 8 displays the detailed scores
per each category. This table is constructed in the same manner as Table 2.
Figure 11. Diamond diagram of the logistics performance development of China between
the years 2007 and 2014. (The World Bank, 2014)
32
Table 8. Exact scores of the logistic performance development of China.
As seen in Table 8, the overall development has been progressive during the measured time
period although the global LPI ranking has been getting slightly worse since 2010. The
biggest development has been between the years 2007 and 2010 compared as recent
development has been more moderate. The biggest development has been established in
infrastructure.
3.2.3 Import and Export
The Chinese market has become more open for imported goods and this trend is encouraging
for European exporters. Still import to China remains regulated and requires familiarity with
procedures, certifications and regulations, a lot of administrative efforts, and patience. In this
chapter we provide the main guidelines for foreign trade regarding mechanical and electronic
equipment. (EU SME Center, 2012)
To import goods to China you have two basic options: you import them by yourself with
your own company or you use a qualified Chinese importer. The Chinese regulations require
that the importer has to be a foreign trade operator. To become a foreign trade operator, a
foreign company needs to establish a Foreign Invested Enterprise in China. (EU SME Center,
2012)
33
During the customs clearance procedure, the importer will have to complete the following
formalities:
1. Customs registration
2. Customs declaration
3. Document submissions
4. Examination
5. Payment of taxes and other fees
6. Release
7. Foreign exchange control. (EU SME Center, 2012)
Documents required for customs registration are as follows:
1. Business license
2. Registration form
3. Articles of association
4. Registration form of company applying for customs declaration and registration form
of managing staff of company applying for customs declaration
5. Organization code certificate
6. Tax registration certificate
7. Bank account
8. Customs declaration special seal
9. Other documents required for the registration. (EU SME Center, 2012)
In the case of mechanical and electric equipment, foreign enterprises need to pay the import
duty and the VAT (Value Added Tax) at the rate of 17%. The general tariff rate in China is
around the level of 9.5%. The average rate for industrial products is 8.9%. These rates are
applied to countries granted the most favoured nation (MFN) trading status. MFN countries
are required to receive equal treatment, including tariffs and import quotas, as the other
partners holding the same status. Members of the WTO agree to accord MFN status to each
other. (EU SME Center, 2012)
China also implements the Interim Import Duty Rate (IDR) system to further lower the MFN
duty rates to encourage importation of certain products such as advanced technological
34
equipment and key components and parts, energy products, environment-friendly products,
and medical products. Generally interim duty rates apply to the industry encouraged for
importation by the Chinese Central Government. New IDR are decided case-by-case, but
may be as low as 0% or 1%, and are effective for several years, providing customs duty
savings for an extended period of time. (PWC, 2013)
Temporary import goods are goods imported to China for a period of time without payment
of duty and VAT on the condition that they are re-exported within 6 months. Goods can be
imported or exported temporarily using ATA carnet (an international customs document that
permits the tax-free and duty-free temporary export and import of goods) or a temporary
import and export license. Once the goods have been approved by customs the declarer has
to pay a deposit equivalent of the duty customs. In case the temporary goods fail to leave
China within six months, the goods have to be formally imported into China according to the
customs formalities and duty payments. (EU SME Center, 2012)
3.2.4 Logistic Approaches
This chapter introduces logistic approaches to manage spare parts availability in China
presented in literature regarding the topic. The approaches are exporting spare parts directly
from Europe to the customer or setting up a local warehouse in China.
Importing & Exporting of Spares
This logistic approach involves exporting spare parts from Europe to China. The company
runs a centralized warehouse in Europe and exports the parts to China and delivers the parts
directly to a customer without having local warehouses in Asia. The inventory planning and
control are conducted from Europe.
The advantages of this approach are relatively low capital costs as resources regarding
inventory planning and control, storage systems, working force and ERP-systems for a local
35
warehouse are not needed. In addition a centralized warehouse has a high availability of spare
parts. (Gebauer, et al., 2011)
On the other hand the logistics costs for delivering spares are higher, especially for short
delivery time demanding parts, due to the need of express logistic services. In addition
delivery times are prolonged as customs clearance takes their time. Gebauer et al. argue that
direct exporting of spares is more suitable for more mature Asian markets such as Japan,
Republic of Korea, Taiwan, Hong Kong and Singapore. Various disadvantages arise in the
Chinese market. Delivery times for exported spares to China take significantly longer even
with express shipping services as the part is first delivered from Europe to China in 1-2 days,
the customs procedures can take up to five days, and an extra of 1-2 days is added from the
domestic delivery to the customer, leading to delivery times of easily over one week.
(Gebauer, et al., 2011)
It also has to be taken into account that until 2007 no international logistic service providers
were allowed to operate in the Chinese market. Companies had to set up interfaces between
international and national logistic operators leading to gaps in communications and trivial
challenges such as translations of delivery notes from English into Chinese. (Gebauer, et al.,
2011)
Another disadvantage of this approach lies in the repair process of spare parts. Regulations
prohibit re-exportations of spare parts from China to other countries. Once a new spare part
has been installed, regardless of whether or not the replaced part is repairable, it is prohibited
to export the part back to Europe. (Gebauer, et al., 2011)
Local Warehouse
Setting up a local warehouse in China is another logistics approach for managing distribution
in Asia. The local warehouse is replenished from the central warehouse and delivers spare
parts directly to the customer. This approach is complemented by direct export from Europe
if the part is not available locally. (Gebauer, et al., 2011)
36
The main advantage of this approach is that delivery times are significantly lower as the
customs clearances are already executed. In addition to shorter delivery times logistics costs
are lower. Shorter and simpler deliveries are required for the part to reach the customer from
the local warehouse and the replenishment of the local warehouse can be handled with
cheaper logistics options than single express deliveries. It is also notable that faster and more
predictable delivery times lead to better customer satisfaction in service operations.
Disadvantages of this approach are higher operating and working capital costs which have to
be taken into account by the company. Inventory and planning create higher operating costs
as an ERP-system is required for the local warehouse. International licenses are relatively
expensive and users having the skill to operate ERP-systems are harder to find in Asia and
require more salary. It is also worth mentioning that not all ERP-systems include Asian
characters and if included, it is more expensive and requires the given Asian language to be
available in Europe. Otherwise the information needs to be duplicated by the logistics
provider or local subsidiary, which leads to higher risk of failures and inconsistencies.
Such as the direct export approach Gebauer et al. argue that it is easier to implement a local
warehouse in more mature Asian markets such as Japan, Republic of Korea, Taiwan, Hong
Kong and Singapore. Respectively it is more challenging to implement this strategy in China
as more challenges and bottlenecks emerge due to more complicated regulations and
bureaucracy. (Gebauer, et al., 2011)
3.2.5 Special Economic Zones
For this thesis it is vital to know different possibilities of warehousing in China. Different
kinds of special zones and warehouses are treated differently by customs and regulations and
can be utilized to improve the logistics flexibility of a regional warehouse in China. This
chapter presents different types of warehousing possibilities that can be considered in the
logistic planning.
37
Even though special economic zones are located inside China, they are considered to be
outside the customs territory. Therefore these zones enjoy preferential treatment in terms of
customs duty and VAT. C.H. Robinson’s white paper offers different warehousing options
depending on the customs regime available in China. Table 9 displays the warehousing
options:
Table 9. Warehousing options in China. (C.H. Robinson, 2010)
The first option displayed in Table 9 is the Export Processing Zone. Export Processing Zones
are special zones designed for the purpose of processing export goods. No commercial retail,
general trade, or other business unrelated to the export processing zone can be conducted
within the EPZ. However, research and development, repairing, testing and bonded logistics
services are allowed. 70% of goods must be exported in China. (C.H. Robinson, 2010)
38
A FTZ (Free Trade Zone) is a bonded area where customs exercise supervision and control
over goods, transportation vehicles and articles carried by individuals entering or leaving the
bonded areas. On 29th of September 2013, China officially launched the China (Shanghai)
Pilot Free Trade Zone also known as the Shanghai FTZ. There are 15 free trade zones in
China which are all located along China’s coast. The Shanghai FTZ is the only zone which
allows foreign-only owned trade companies. The zone also does not have a time limit for
warehousing goods. (Deloitte, 2014)
A bonded warehouse can be both public and private. Public warehouses are warehouses
subject to government regulation where several different companies can store their goods.
Private bonded warehouses on the other hand are facilities approved by customs that are
privately owned. It is specifically used for storage of goods which are bonded from import
taxes and customs clearance and are under the direct or indirect supervision of customs
authorities. (C.H. Robinson, 2010) (Deloitte, 2014)
Bonded Logistic Parks are special administrative zones under customs supervision and
control that are established in the areas of FTZ or a port near an FTZ for the purpose of
developing logistics support between the FTZ and the port districts. (C.H. Robinson, 2010)
(Deloitte, 2014)
Bonded warehousing and zones are typically best suited for companies that import goods
with the intention of storing or processing them for re-export. It can also provide cash flow
advantage on delaying tax payments and imported stocks. (Deloitte, 2014)
3.2.6 Political and Legal Risks in China
Although countless market reforms and efforts on increasing transparency have been made
since joining the WTO, there are still various business risks in China. China’s rank as 96th
out of 189 countries in the World Bank Group’s Easiest To Do Business With-rankings
(World Bank Group, 2014) clearly states that the country is still facing a lot of challenges in
foreign trade. Risks and challenges arise from various sources such as political, legal and
39
market behavioral challenges and in this chapter we take a closer look in the common risks
in operating in China.
It has to be taken into account that every significant government position is filled with
members of the communist party, which has absolute control over legislations and economic
and cultural institutions. Despite the government’s striving for more transparency with the
agreements and protocols through the accession into the WTO, all rules and regulations are
not as transparent as in western economies. (Jayaraman, 2009)
Where in western economies strict laws and patents protect domestic and foreign businesses,
the legal system in China is more loosely defined, giving rise to various loopholes in the law.
China’s accession to the WTO has brought the country in the inclusion of international
business laws and patent right amendments, but it is still common to see technology and
innovation stolen. The Chinese laws can be often interpreted in many ways and wordings
may be vague. (Jayaraman, 2009)
China is among the fastest growing economies in the world and the risks of economic stability
cannot be excluded. These risks include change of fiscal policy, monetary policy, trade policy
and other macro-economic factors. China’s economy is mostly dependent on exports from
the manufacturing industry. Therefore China has tried to maintain a steady rate of the Yuan
against the US Dollar. Hence a big change in the Yuan can reduce the profitability of
businesses in China. Also labor costs have steadily increased over the last 10 years and the
government has increased the minimum wage level leading to higher operating costs.
(Jayaraman, 2009) (Cemat, 2014)
40
3.3 Service Operations in China
Existing literature regarding managing service operations in China and explaining problems
such as cultural differences is relatively limited. Establishing profitable service business in
China faces a lot of challenges varying from cultural differences to strong competition. The
main challenges for establishing a profitable service business in China stems from problems
associated with managing the service business in context of the Chinese culture. (Gebauer,
2007)
The aim of this chapter is to build a better understanding of the cultural characteristics and
possibilities of managing these differences. As a regional or local warehouse may be
established in China, it is vital that the company builds an understanding also of the cultural
conditions to improve the chances of a successfully executed project.
3.3.1 Cultural Characteristics
It is always difficult to describe cultural characteristics as there is never an absolute truth that
can be supported with raw facts and proven evidence. Descriptions are rather based on
experiences from various sources subjective opinions. Characteristics develop also from
generation to generation and the recent globalization tends to build the markets into a more
homogeneous environment. However there is literature trying to explain the fundamentals
and common characteristics regarding the business cultural characteristics in China. In this
chapter we take a review on the core characteristics and try to build an understanding around
the business environment.
Chinese culture is distinguished from the Western culture in various ways, including how
business is conducted and business relationships established. One of the main differences is
that Chinese prefer to deal with people they know and trust. On a broad scale this may seem
similar to the Western culture, but what it really means is that companies have to make
themselves known to Chinese companies before any business can take place. This is known
as guanxi (literally translated to interpersonal relationships or connections) which is
41
described as the lifeblood of business in China. Guanxi can be roughly translated as personal
relationships to secure resources or advantages when doing business. (Jiang & Prater, 2002)
(Shou, et al., 2011)
The dynamics of guanxi include renqing (favor) and mianzi (face). In Chinese culture renqing
can be seen from three different perspectives. First of all renqing is associated with emotional
responses confronted in daily life. A person who possesses renqing should be equipped with
empathy towards the emotions and feelings of the other one doing business with. Second of
all renqing refers to a resource that can be presented as a gift in social exchange processes. It
is common for Chinese people to offer or render a gift or assistance when their friends have
either happy occasions or difficulties. Third, renqing implies to a set of social norms and
rules, such as reciprocity and forgiveness, which a person should follow to get along in the
Chinese society. These social norms are described as the renqing rule where the goal is to
maintain interpersonal harmony. (Shou, et al., 2011)
Another fundamental component of guanxi is mianzi. Mianzi refers to a positive image of a

person in a relational context. This can be achieved through proactive impression
management or by performing a social role that others recognize. However a person can lose
face if they fail to meet the standards of their social role or are unable to deliver the promised
help. It is important not to lose face, but it is said to be even more important to “give face”
to others (Gebauer, 2007). In conclusion mianzi can be roughly translated as paying respect
and recognizing the status of a person in society and it is vital to enhance this status by
whatever means possible. (Gebauer, 2007) (Shou, et al., 2011)
Guanxi behavior refers to efforts of developing and maintaining guanxi relationships. Guanxi
behavior can be decomposed into “affect investment” and “saving face” (Shou, et al., 2011).
Affect investment is more related to an emotional dimension of the relationship where
through renqing the target is treated more as a friend. On the other hand saving faces refers
to behavior aiming to preserve the other person’s face such as avoiding criticizing others in
public or satisfying others requests. In addition it includes preserving own face by returning
favors. (Shou, et al., 2011)
42
In Chinese business conducting guanxi behavior may benefit from important favors such as
preferential treatment of orders in short supply or prolonged payment deadlines. However it
is arguable that guanxi behavior includes costs and risks. Offering favors may lead to
concerns about re-payments and developing friendship-like relationships involves costs and
risks of abuse. Therefore guanxi behavior requires trust. (Shou, et al., 2011)
To build a long guanxi relationship it is necessary that both parties view each other as
trustworthy. If a company always delivers on their promises, they are seen as trustworthy and
Chinese companies are more open to work with them again. Being reliable and dependable
in every situation strengthens the relationship and improves the possibilities to establish a
strong guanxi network in the Chinese business environment. (Jiang & Prater, 2002)
3.3.2 Managing Cultural Differences
In context of product-related service for installed base, the Chinese way of a consensus
approach to decision making limits the willingness of Chinese management to separate the
service from the product business. Service business is also separated by the long-term
orientation of Chinese managers. A strong focus is put into establishing binding long
relationships with customers where a separate service organization would disrupt the
customer relationships leading to two different customer contacts. One approach of managing
these challenges is to deploy account managers in the organizational structure to provide
product related service. The account managers communicate with the customers and illustrate
the benefits of the products and services, which enables the Chinese subsidiaries to establish
long-term relationships with the customer. (Gebauer, 2007)
In traditional Chinese business culture, there is a high power distance in the organizational
hierarchy system. This restricts the ability of service workers to take responsibility for selling
services leading the service manager responsible for the selling and pricing. Compared to
common European service unit structures the service manager coordinates the service
business and defines the pricing strategy where the product related service is done by several
service workers. Studies by Gebauer suggest that Chinese subsidiaries often consist of two
43
service managers: one to coordinate the daily business and the other to be responsible for
product-related sales. These studies suggest that, if the sales manager talks to the customer
about product related and customer support services, the customer is more willing to pay an
appropriate price for them. (Gebauer, 2007)
Studies by Gebauer indicate that Chinese service managers are also highly risk-averse in
context of pricing the availability of their machinery and equipment. In a pricing mechanism,
where the pricing of equipment availability is related to estimating the operating risk and
demand, profitability depends on how accurate the estimations of product failure risks are.
Service contracts regarding the availability of certain parts can be established between the
service provider and the customer but Gebauer’s studies suggest that Chinese service
managers are very reluctant to define specifications and enforce strict contracts between
customers. Building relationships between the customers are favored over establishing rigid
contractual agreements and pricing and specifications are rather based on personal
relationships. (Gebauer, 2007)
3.3.3 China-Japan
For this thesis it is relevant to understand the relations of China and the nearby countries in
Pacific Asia as one of the aims is to evaluate how a possible local storage in China could
support the region and vice versa. In understanding the dynamics of the region one of the
most important relation is the one between China and Japan, which both also contain the
most installed base volume wise in the Pacific Asia region.
The China-Japan relationship is one of the most important bilateral relationships in terms of
impact on economic welfare, security and peace in the Pacific Asia region and the world
more broadly (Armstrong, 2012). The economic relationship between the two countries has
seen large growth in recent decades. Starting from very low in the late 1970s by 2007 trade
between China and Japan was the world’s third largest trade relationship of merchandise in
terms of exports and imports together, only behind the United States-Canada and United
States-China trade relationships. (Armstrong, 2012)
44
In recent years the economic engagement has been important from Japan’s perspective for
the recovery from the economic downturn of the 1990s, as China has been a major factor in
Japan’s externally driven growth. From China's perspective the relationship has been
important in terms of “catching up” in the field of modern industrial technology and its
transition from a low to a higher income economy. The China-Japan relationship also has a
major impact on the rest of the region because of the large production networks in which
both countries are involved. (Armstrong, 2012)
Mutual antipathy is still present between the two nations. For many Chinese, Japan’s history
of military aggression against China is a persistent theme that emerges repeatedly. Even still,
in the year 2006 a poll conducted in China, 71 per cent of Chinese people surveyed responded
that Japan was not “a force of good”. Also anti-Chinese sentiment has grown in Japan
especially after the Tiananmen Square massacre in 1989. Anti-Chinese sentiment is also
growing as a result of social issues such as illegal Chinese immigrants and concerns about
tainted food imported from China. (Smith, 2009)
Growing trade between the countries has occurred despite the political tensions and historical
issues. Studies by Smith indicate that the economic relationship between China and Japan
are not diminished or disturbed largely by political tensions to any significant extent. (Smith,
2009)
45
4 Volume of Installed Base
4.1 Installed Base Allocated to Local Offices
For this thesis, it is relevant to take a look at the installed base in the examined region. As
the installed base consists of moving naval vessels, it is not possible to define fixed locations
for the installed base. Therefore to determine the installed base in the region we have to first
take a look at the different subsidiaries working in the area, hence the country’s ABB Marine
offices are responsible for the fleet indicated to them, meaning that spare parts are sold to
these vessels through their indicated country office. Table 10 displays the vessels allocated
to the office in China:
46
No. Of
Owner Vessel Delivery Pod type pods
Zhong Guo Hai Jing
China Coast Guard 3383 2005 CO0980L 2
Zhong Tie Bo Hai 1
Sinorail Bohai Train Ferry Hao 2006 CO1400L 2
Zhong Tie Bo Hai 2
Zhong Tie Bo Hai 3
China Oceanalogy Academic
Sciences Kexue 2012 CO0980L 2
Sinorail Bohai Train Ferry Spare Azipod 2012 CO1400L 1
Zhong Guo Hai Jing
Zhong Guo Hai Jing
Zhong Guo Hai Jing
China Coast Guard N/A 2014 CO0980L 2
Zhong Guo Hai Jing
Zhong Guo Hai Jing
Zhong Guo Hai Jing
Zhong Guo Hai Jing
Zhong Guo Hai Jing
Spare Pod 2014 CO0980L 1
China 3rd Institute of
Oceanography N/A 2016 CO0980L 2
China 1st Institute of
Oceanography N/A 2016 CO0980L 2
Guangzhou Salvage Bureau 2015 CO1400L 3
Zhong Guo Hai Jian
ZPMC Shipping ZPMC 2010 CZ1400S 4
Total 47
Table 10. Vessels allocated to the local Chinese office.
As seen in Table 10, with the current estimates there will be a total of 47 Azipods allocated
to the Chinese office by the year 2016. These vessels operate mainly in Chinese waters and
can be reached through ports in China. The installed base is also relatively homogeneous.
47
The majority of these Azipods are CO0980L types, which represent 31 Azipods of the fleet.
The second most represented type is the CO1400L type, which account for 10 Azipods. In
addition there are four CZ1400S and two CO1250L Azipods. It is notable that the entire fleet
consists of C-type Azipods. These C-types vary in size and power, but the overall
construction follows the same principles. However as the size of the Azipod varies, many
critical parts such as bearings differ also in size.
It is also notable that the installed base in China has risen exponentially in recent years as
seen in Figure 12. In 2010 there were only twelve Azipods, where as in 2014 there are already
36 Azipods. As the installed base affects the spare part business after the delivery the
increasing amount will be felt in the spare parts business in the coming years.
Azipods
50
45
40
35
30
25
Azipods
20
15
10
5
0
2005 2006 2008 2010 2012 2014 2015 2016
Figure 12. Development of the installed base in China.
Another notable fact is that 24 Azipods of this installed base are owned by the same party,
the Chinese Coast Guard. This enables possibilities for service contracts and building long
term business relationships, whose importance was highlighted in literature describing
Chinese business characteristics.
Table 11 displays the vessels, whose spare parts are sold through the Japanese office. The
installed base in Japan contains four Azipods that are divided into two types: VC2100 and
XC2100. There are two Azipods per type.
48
No. Of
Shin-Nihonkai Hamanasu 2004 VC2100 1
Shin-Nihonkai Akashia 2004 VC2100 1
Shin-Nihonkai Suzuran 2012 XC2100 1
Shin-Nihonkai Suisen 2012 XC2100 1
Total 4
Table 11. Vessels allocated to the office in Japan.
Table 12 represents the installed base allocated to the Korean office. As seen from the table
the Korean office has only one vessel with two CO1400L type Azipods. This type is the
second most common type present in the Chinese installed base.
No. Of
Sun Rise (ex-STX
STX Rose II) 2012 CO1400L 2
Total 2
Table 12. Vessel allocated to the office in the Republic of Korea.
Figure 13 represents the variety of the Azipod types in the defined region. As seen in the
figure, the majority are C-type pods. The most common individual type is the CO0980L type
which accounts for 31 of the installed base. The second most common type is the CO1400L
type which represents twelve Azipods of the installed base.
Figure 13. Variety of Azipod types in the Pacific Asia region.

49
4.2 Other Vessels Operating in the Region
In addition to the vessels allocated to the region’s local ABB offices, foreign cruise ships
also operate in the area. These cruise ships use various ports in the Pacific Asia region in
countries such as China, Australia, Singapore, Japan, Republic of Korea, and Hong Kong.
Vessels operating in the area can be seen in Table 13. This information is based on going
through the cruise schedules for the upcoming season 2014-2015.
Owner No. Of
Vessel Delivery Pod type pods
Royal Caribbean Explorer of the Seas 2000 VO2100 2+F
Royal Caribbean Mariner of the Seas 2003 VO2100 2+F
Royal Caribbean Voyager of the Seas 1999 VO2100 2+F
Royal Caribbean Quantum of the Seas 2014 XO2300 2
Costa Crociere Costa Luminosa 2009 VO2100 2
Total 13
Table 13. Cruise vessels operating in the Pacific Asia region in the next 12 months (season
2014/2015).
As displayed in Table 13, there are various vessels with Azipods operating in the area. For
the season 2014/2015 there is estimated to be 6 vessels with a total of 13 Azipods. The F in
the number of pods column represents fixed Azipods which do not contain a slewing system,
meaning that they are unable to turn. These cruise ships contain mainly larger open water
Azipods, 13 VO2100 types and two XO2300 types. Figure Q displays an example of a cruise
vessel’s route.
The cruise vessel’s route in Figure 14 is the route of Quantum of the Seas and it is an example
of cruise route possibilities. On this cruise the vessel travels from Shanghai to Fukuoka,
Japan, from where it heads to Busan in the Korean Republic. The final destination is back in
China at the port of Tianjin.
50
Figure 14. Route of the cruise vessel Quantum of the Seas. (Royal Caribbean, 2014)
In addition do to developments in the Russian gas exporting business LNG vessels are
operating in the Pacific Asia area. Russian LNG vessels transport gas to Japan and arrive
north from Russian waters to the coast of Japan. These vessels are allocated primarily to the
Russian ABB, but in case of critical failures in Pacific Asian waters availability of spares in
the nearby region has to be taken into consideration.
51
5 Availability Planning in Pacific Asia
In this chapter we consider different logistic approaches to improve the availability of spare
parts in China and the nearby region. We evaluate first the options of having a centralized
warehouse in China and divide this further into two options: using and enhancing current
facilities or setting up a logistic center from scratch by renting a warehouse. Additionally we
compare locating a warehouse in other countries of the region defined in this thesis.
To understand the evaluation we need to first take a look how the availability of spare parts
is built currently at ABB Marine. The availability is planned either two or three phased
depending on the destination of the customer. In the two phased model local offices sell spare
parts either provided through the main storage in Turku, Finland or in some cases purchased
locally. Additionally customers hold recommended critical parts on board of the vessels
hence the model is described as two phased, as parts are provided either through the main
storage or the on-board stock. In the three phased model Turku serves as the main storage,
another warehouse is located in the region serving as buffer warehouse, and the customer
holds again critical parts on board. In this chapter we focus on establishing a three-phased
model in Asia where a regional warehouse would be set up in the defined region.
We evaluate the possibilities by taking into account characteristics of the spare part business
provided in the literature review and compare country specific statistics provided in chapter
3. Issues and development points are addressed through conducted interviews and workshops
with either ABB personnel working currently in China or personnel who have experience
working in the defined region. In addition a Valmet employee working in Wuxi China was
interviewed to broaden the view on European based multi-global companies operating in
China, especially in the service field.
52
5.1 Logistic Center in China
In chapter 5.1 we consider the possibility of establishing a regional warehouse in China to

serve the entire Pacific Asia region with spare parts. First we highlight the market conditions
to be taken into consideration and consider either enhancing the current facilities or
establishing a new warehouse from scratch.
One of the challenges needed to be addressed are the delivery times. If a part is needed
urgently, the availability has to be built in a way that it will reach the vessel as soon as
possible. If a part is needed on a non-Chinese vessel it does not help that the part is located
geographically close if the part is delayed by Chinese customs for several days anyway. This
needs to be addressed also vice versa: if a Chinese vessel needs parts, it also has to be able
to reach the vessel urgently without unnecessary delays.
In addition the costs have to be taken into consideration. China’s tariff rates average around
8.9% and operation costs will increase if parts are first shipped to China and from there
exported further to another country with high tariffs.
5.1.1 Conditions
Regarding quality of suppliers, local vendors tend to produce quality standard products as
smaller suppliers see having global companies as a huge advantage. There may arise some
issues at the beginning of the supplier relationship but with cooperation these are easily
manageable. Bigger suppliers, global companies, produce the same quality they produce all
over the world as quality controls are similar globally. The myth of domestic manufactured
poor quality products is seen as long gone by interviewed professionals and the problems
they face in China with suppliers are comparable to the ones they are facing in western
countries also. By building long term relationships, demanding high quality, and cooperating
with the supplier local purchasing does not cause significant issues. (Korhonen, 2014) (Fan,
2014) (Laakkonen, 2014)
53
However the domestic logistics still need a lot of development. Transport regulations are
often neglected and the lack of following transporting instructions of products can lead to
damage of goods. Additionally safety instructions are often ignored. Even by using
international logistic providers the same issues arise as foreign logistic companies are
relatively new in China and their network is based on local operators. A product can be
transported very fast if urgently needed but the risk of damaging the product or risking safety
can be high. (Laakkonen, 2014) (Korhonen, 2014) (Fan, 2014)
It is also addressed that local help and work force is necessary for foreign companies. In
China negotiations play an important role in making business. The culture tends to be that
asking prices are extremely high, but are lowered by building relationships and negotiating.
It is also common that negotiations are not conducted in meeting rooms and office areas, but
rather at dinners at restaurants and other leisure venues. The Chinese also prefer to hold
business talks in Chinese where the help of locals is a must as they not only know the
language but the proper phrases and ways of stating themselves with business partners.
However the presence of foreign employees is also regarded as important as it sends a
credible image of a global company. (Korhonen, 2014) (Fan, 2014)
The culture of mianzi (loosing face) is still seen as being present. Local employees are often
exposed as hiding mistakes and rather not confronting others by admitting something has
gone wrong. However workers are skilled and motivated to learn, they just tend to need time
to get used to a foreign company’s working culture. (Korhonen, 2014) (Fan, 2014)
(Laakkonen, 2014)
As written in chapter 3 and confirmed by the interviews, Chinese customers still value long
term business relationships highly. Trust is built through active interaction and cooperation
with the customer. Customers are willing to buy spare parts that are more expensive than
domestically manufactured from long term business partners as they trust they will receive
more service and support through constant interaction. (Fan, 2014)
54
5.1.2 Current Facilities
Currently the local Chinese service office has rented warehousing space from the ABB
production facility in Shanghai. The rented space is dived into two parts: One space in the
warehouse part of the facility and the other space inside the production hall. In total the
warehousing area for service is 172 m2.
The space in the warehouse area is 140 m2 and has shelf space on one wall. This space is
currently used for a spare pod. The area is however located right next to the warehouse entry,
which is a large sliding door. This has the effect that the temperature in the service warehouse
area is strongly dependable of the outside temperature. The door is held often open as there
is also outside warehousing space for the production facility which is used frequently. This
means that the area gets in the winter time close to the outside temperature going near 0
degrees Celsius, however the space is getting also some warmth from the inside heating.
During summer time the area is extremely warm as the temperature in Shanghai frequently
exceeds 30 degrees. The large sliding door at the warehouse entry is also exposing the area
to air flows affecting the area.
The space rented inside the production hall is located in the central area of the hall and has a
surface area of 32 m2. This area is relatively small, but can be used efficiently for example
for small refurbishment tasks. The area is not affected by outside conditions and has also the
benefit that it is surrounded by the production facilities hence tools can be easily borrowed
if needed. Heavy items up to 35 tons can be lifted in the area with a production hall crane.
The space is currently used mainly for spare pods and some individual parts. It is operated
by ABB China’s Service, but cannot be classified as an efficient spare parts warehouse. The
facility is operated by individuals and there is no material management system or ERP
controlling any inventory levels or material movement. The warehouse however serves as a
small buffer for the current volumes of installed base in China and the overhauling area is
also used for small refurbishments. The production factory itself holds a buffer for propeller
bearings which could be used in cooperation with Service. The factory also holds some
consumables such as cables.
55
Location
Location wise the factory is not located in the same area as the service personnel. However,
the factory is in an ideal location to serve Asian and global shipbuilding markets, as it is on
the outskirts of Shanghai near the shore and very close to the Donghai Bridge. The bridge
connects the Port of Shanghai and the Yangshan Deep-Water Port, which is a port for
container ships in Hangzhou Bay. A connection with two major ports is a huge advantage as
operating vessels can be reached easily. As stated in chapter 3, the literature regarding
Chinese logistic challenges states that although Chinese ports have developed into being
highly efficient, the biggest challenges are the connections to the ports.
Advantages and Needs
Advantages Needs
Location of storage space
Geographical location
inside the facility
Lack of ERP or material
Overhauling facility
management systems
Storage space as installed
Production expertise nearby
base expands
Availability of tools
Table 14. Competitive advantages and needs of development.
Table 14 displays the basic competitive advantages and needs of development of current
facilities. The advantages are an optimal location to serve the regions market, the overhauling
area, having professional know-how about products at constant reach through production
personnel, and the possibility of loaning easily production tools for overhaul. The needs of
development are: the location inside the factory near the sliding door and being exposed to
temperature and humidity changes, lack of proper ERP or material management system, and
the amount of storage space as installed base grows.
The production factory has recently bought new storage space nearby the factory, which
could be seen as a possibility for enhancing the service storage. However the downside is
56
that as the production factory expands their needs are taken into account first, after which
wishes from the service side are being heard. This narrows the possibilities of fulfilling all
the requirements for an efficient spare part warehouse.
Serving as a Regional Warehouse for the Pacific Asia Region
Even though the facility is located in an ideal position, near to the Port of Shanghai and the
Donghai Bridge, and considering the amount of installed base in China, the storage space is
insufficient. The location inside the factory cannot serve as a proper regional warehouse if
more expensive parts would be stored at the facility. The risk of outside factors like weather
conditions affecting the parts is too high.
If the storage space would be moved inside the factory, there is only limited storage space
the production facility can offer. As China’s installed base is expanding exponentially the
space will be insufficient even only for the Chinese installed base.
In addition it has to be taken into account that the availability of spare parts and maintenance
is also a selling point for new-building projects and service contracts. If we imagine the
scenario that a client wishes to see how this aspect is taken care of, the current facilities added
with the fact that the storage is not operated with any material management IT-systems, it
does not give an impression of an efficient and reliable regional warehouse or logistic center.
In principle the current facilities might have potential serving as a logistic facility, however
the fundamentals of an efficient regional warehouse serving the entire Pacific Asia region
are severely lacking. If the facility had to provide for the entire region, and the installed base
in China keeps expanding the current storage base is clearly insufficient.
57
5.1.3 Warehouse Rental and Possibilities in China
Warehouse Rental
As Chinese laws prevent mostly foreign owned companies owning properties, the common
procedure is renting a warehouse or warehousing space. Renting is made simple with
competitive prices as local areas and provinces promote their region to earn more tax
revenues through established global companies setting up shop in the area. Chinese
developers build so called standard factories that can be obtained with a fast schedule. These
standard factories serve as facilities for new industrial companies entering the region and
contain all the basic needs for an industrial factory. These factories include a warehousing
area with standard lifting equipment and storage facilities which can be further developed. A
standard factory with a larger warehousing area could serve as a regional warehouse as the
remaining space could be used for overhauling.
In addition China offers a large amount of similar standard warehouses and warehousing
space for leasing. Property leasing webpages offer a large variety of different warehousing
options, with maximum loading weights, clearing heights and lifting gear possibilities
depending on the needs of the customer. Warehouses are often offered in specific areas
designed to serve as logistic regions which are located near airports or ports. It is notable
though that most warehouses are not offered with a starting price and the majority of the
rental ads indicate the price as negotiable. This highlights the importance of having local
knowledge and good relationships in the area.
New work force can be recruited with the help of ABB China. All the required bureaucracy
for the process can be dealt with the local HR. Also finding suitable work force is not seen
as an issue as established multi-global companies like ABB are seen as lucrative employers.
[Korhonen]
58
Special Economic Zones
To compare locating the warehouse in a special economic zone like a free trade zone or a
bonded warehouse with non-bonded solutions we create a table, Table 15, with the main
differences of the options and how they affect different scenarios that may occur in the spare
parts business. It has to be noted that regulations in detail can vary between FTZs
Free Trade
Non-Bonded solution
Zones/Bonded systems
Formalities:
Foreign owned companies and
More restrictions for foreign
joined ventures allowed in
investors. Warehouse would
Company registration Free Trade Zones. Bonded
have to be owned by ABB
warehouse could be owned by
China
ABB Finland
For goods imported into
China go through customs
clearance; and vice versa, the
Goods leaving for foreign
export customs clearance
Customs countries are free from duties,
shall be proceeded. Bonded
administration quotas or import/ export
systems are carried out for
permits.
state approved bonded
warehouses outside special
zones.
Scenarios:
Part has to go through
A part is needed
Chinese customs clearance Part can be directly sent to
urgently for Chinese
and shipment will be the vessel.
customers
prolonged.
Part can be sent immediately.
A part is needed Shipment may be delayed Part has to be exported
urgently for a customer depending on the receiving through Chinese customs
outside China party’s country specific clearances.
customs procedures.
Table 15. Main differences between bonded and non-bonded zones.

59
As seen in Table 15 the special economic zones give more freedom regarding ownership of
the facility as the regulations for foreign owned companies are strictly regulated in China. It
also provides the opportunity to export imported goods out of China without going through
customs clearance. However if parts are consumed in China, goods have to go through
customs clearance.
Regarding shipments it is dependent where the goods are being sent. If goods are needed
inside China urgently, the non-bonded solutions are faster as customs are avoided. If
something is needed outside of China, the bonded solution is faster. In the scenario where
goods are needed outside of China and goods are stored in a non-bonded warehouse, the
difference of the parts being sent straight from Finland to the desired location and parts being
sent from China does not differ that much as the biggest time waste in the shipment arises
from the customs and flights straight to Asia from Finland fly daily. If goods are needed
inside China and they are stored in a bonded area the gained advantage of having the part in
China is only the saved time in not having to fly the part from Finland as the biggest delay
arises again from the customs clearance in China.
5.1.4 Warehouse Solution Model
The Shanghai Free Trade Zone provides the opportunity to set up foreign owned or joined
ventures inside the zone and offers also the possibility to have a combination of a bonded
and a non-bonded storage. We propose a solution model of this hybrid type warehouse where
a warehouse is rented inside the free trade zone, and which would be owned partially by the
Finnish ABB and partially by the Chinese ABB. The storage space would be a combination
of a bonded area and a non-bonded area. The fundamentals are presented in Table 16.
60
Ownership and Control
Joint venture between ABB

Ownership Finland and ABB China or
Third-party
ABB China controls the non-
Control bonded area. ABB Finland the
bonded area.
Contains a customs supervised
Storage bonded area and a non-
bonded area
Table 16. Fundamentals of the warehouse solution.
The idea of this model is to create a joint venture between ABB Finland and ABB China
where the control and ownership of the parts would be clearly regulated: ABB Finland would
be controlling and owning the parts in the bonded area and ABB China the parts in the non-
bonded area. This would mean that ABB China would be in charge of parts meant
preliminary for Chinese customers and Finland for the parts that are preliminary meant for
re-export.
Parts that are meant for re-export can be imported and exported without customs clearance
and duties. The FTZ in Shanghai does not require the part to be processed further and it can
be re-exported in the same state as it was imported without customs duties. Parts imported to
the non-bonded area can be consumed in China without further customs clearances.
However the ABB regulations on owning facilities in other countries may create
contradiction. If the only possibility is that the warehouse and its belongings are ABB China
owned the bonded area could be arranged via consignment solutions or the warehouse could
be outsourced to a third-party. In the third party solution ABB China would pay for the
service of the non-bonded area and ABB Finland for the service in the bonded area leading
to same divisions of responsibilities as in the joint venture.
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Functioning Principle
The basic principle of this model can be seen in Figure 15. The arrows represent the goods
movement. Filled arrows represent movement where goods go through customs clearance
and tariffs have to be paid. The blank filled arrows represent movement which can be
executed without customs clearance and duties.
Figure 15. Functioning principle of the warehouse model
As seen in Figure 15, goods moved to the warehouse from Finland or other parts of Europe
can be performed in two ways. Parts planned to serve the rest of the region are delivered to
the bonded area and can be exported further to the final destination without customs
clearances. If parts are planned to serve the Chinese market they are imported to the non-
bonded area through customs clearance.
As the parts for the Chinese market are already imported they can serve the Chinese
customers immediately when needed without customs clearances. Parts sourced locally can
also be stored in the non-bonded area. Locally sourced parts can be brought to the non-
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bonded storage but if these are further exported or moved to the bonded storage, are they
exposed to customs clearances and duties.
Parts can be moved between the bonded and non-bonded areas but customs clearance has to
be performed between these storages. However if a part is needed for the other market
urgently smaller movements can be performed as so called sample shipments, which can get
faster through customs in individual cases. Also co-operation with customs officials can
benefit in getting the parts faster through clearance.
Separation of Parts
The separation of the parts to be stored at the proposed warehouse is relatively simple and
understandable by taking a look at the presented installed base volumes in chapter 4. China’s
installed base contains only C-type Azipods in contrast to the allocated Azipods for the rest
of the region. Additionally the cruise vessels operating in the area are mainly V- or X-types.
Only the Republic of Korea has an Azipod allocated to their office which has C-type Azipods,
but it is only one vessel with two pods.
This distribution of the installed base in the region means that only critical parts and wanted
consumables for C-type pods would be imported directly into the non-bonded area for
Chinese ownership and parts for larger pods would be stored in the bonded area. By owning
the parts for Chinese customers directly, ABB China would also have more freedom in
building availability agreements with customers.
Cost savings can also be made by the first filling of the warehouse. Parts imported to China,
which cannot be sourced locally and which are to be stored in the non-bonded area, must go
through customs clearance and duties and tariffs have to be paid. However ABB can apply
for the interim duty rate, as described in chapter 3.2.1, and reduce the duty rate of parts to
close to 0% for a temporary time. As the interim duty rate is approved by the government
and is granted mainly for technology encouraged by the government, it is in ABB’s case
well-reasoned as most of the installed base in China is government owned.
63
The inventory can be planned in Finland through the categorization of spares as presented in
chapter 2.2. The main storage would be still located in Finland where spares, whose failure
in installed base can tolerate a short time period without the part, are stored. The regional
warehouse should contain critical parts where failures may lead to system downtimes and
other risks. In addition the regional warehouse can contain basic consumables whose demand
is easier to predict and consumptions cycles are faster.
Location
The Shanghai FTZ is chosen because it is the only zone in the country where joint ventures
with foreign companies are allowed. Another important aspect is that there is no time limit
for the storage of goods in the Shanghai FTZ. As explained in chapter 2.3, spare part
inventories exist mainly to keep equipment in installed base in operating condition leading
to high inventory stock levels. It may therefore lead to cases where parts are stored for long
time periods as no breakdown of these parts occurs. The demand pattern is extremely difficult
to forecast and a time limit on storage time could cause challenges and additional work and
waste of resources as parts would have to be moved even though they are not consumed.
More specific we choose the Waigaoqiao FTZ that is part of the Shaghai FTZ. The proposed
area is located right next to the Waigaoqiao Container Port (second highest orange dot in
Figure 16) and is 20 kilometers from the Pudong International Airport and 28.8 kilometers
from the Hongqiao Airport. The zone has one of the lowest corporate import taxes at the rate
of 15%. Rents in the FTZ are around 1.13 RMB (0.18 US Dollars) per square meter a day.
64
Figure 16. Location of the FTZ in Shanghai.
The FTZ is located also geographically in an excellent position. It has great connections for
the domestic market, but also considering the Asian market with Tokyo, Hong Kong, and
the Republic of Korea locating within an 1800 kilometer radius. The close-by airports serve
all, and the fast access to the Donghai Bridge enables transport to other parts of China.
Benefits
The advantage of this model is that parts are not owned only by the Chinese ABB but also
by ABB Finland hence parts could also be seen in the Finnish material management systems.
Thereby operations can be better controlled and planned. Transactions and shipments with
non-Chinese customers can also be executed directly between Finland and the other countries
in the region needing the parts and China does not have to serve as a middle man leading to
65
lowering the risk of communication problems and misunderstandings. In the consignment
solution the parts would also be owned by ABB Finland and could be controlled with Finnish
material management systems.
If foreign ownership is restricted in company regulations the third-party solution would lead
to similar benefits as in the joint venture as the management and control of the different
storage sides is clearly defined. The third party solution would also opt to easier cost control
as there is a fixed price for the service and local knowledge could be utilized trough the
service provider.
The benefits of the separation of storage areas would be enormous in terms of shipment times
and it would also save money as unnecessary tariffs and customs duties are avoided. By
having the parts for Chinese customers in the non-bonded area, the customs clearance has
already been executed and parts can be shipped directly to the customer without waiting for
clearance. The parts for the rest of the region can also be sent directly to the desired
destination as they do not have to go through Chinese customs clearance when leaving the
bonded area and time is saved up to several days compared to having these parts in a non-
bonded warehouse in China.
ABB China can also still purchase parts locally as they can be transported and stored in the
non-bonded area. They can continue using their vendor network as they used to, since they
will own the parts for Chinese customers.
Logistic costs are also saved compared to having only a main storage in Finland. By proper
planning parts for filling the warehouse can be shipped via sea freight and other cheaper
options compared to express shipments directly to customers. Urgent shipments are also
lower as vessels are operating closer compared to shipping parts from Finland.
Customs supervised warehouses are strictly controlled by officials especially if a company

has combination of both bonded and non-bonded warehouses as proposed in this model. This
also has indirect effect as the area is strictly controlled the storage is kept safe from outside
intruders as the movement in the zones is constantly controlled.
66
As presented in chapter 3.2.4 re-exportation of used spare parts from China is prohibited,
thus it is fundamental to maintain a non-bonded area. If spare parts need to be refurbished
and the spare parts facilities are desired to be used for it, a non-bonded area is required as
refurbishments made in an only-bonded warehouse would require the exporting of the part.
Challenges
One of the biggest challenges of the proposed model is the entire establishing process. The
system requires detailed planning and strict control among the entire supply chain.
Bureaucratic procedures tend to be extremely difficult in China and require the knowledge
of local practices. It also has to be taken into account if ABB China is creating a joint venture
in a FTZ that nothing contradicts with any of their current licenses regarding trading.
In case the warehouse would be outsourced to a third party due to contradiction in owning
facilities abroad, it would complicate but not prevent the suggested model as described
previously. The outsourcing leads though to risks as the operations would be dependable on
the quality and skill of the service provider.
5.2 Comparison of Other Countries in the Region
In this chapter we compare the possibility of locating a regional warehouse in another country
in the region. We compare having the logistic center in one of the countries with ABB Marine
offices: Japan, Republic of Korea, or Singapore. In addition we add Hong Kong as it is one
of the leading financial centers in East Asia and also due to its close bound with China.
To compare the countries we choose relevant indicators to global spare parts logistic. These
key indicators are customs efficiency, logistics and investment costs, and overall logistic
performance. Additionally we evaluate these results and offer an alternative location for the
regional warehouse.
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Customs Efficiency
Customs efficiency is defined in this thesis as one of the key indicators as we have to consider
the possibility that a part is needed urgently and the shipment will be prolonged significantly
by customs. In Figure 17 we compare the customs clearance times in days, with data from
the World Bank LPI presented in chapter 3.1.2:
3,5
2,5
2
Clearance time without
1,5 Physical
1 Clearance time with

Physical
0,5
Figure 17. Comparison of average clearance times.
As seen in Figure 17 customs clearance wastes the most time in China, both in clearances
with and without physical inspection. Singapore and Hong Kong have the most efficient
customs procedures as clearance takes mostly under one day. Hong Kong is considered as a
free trade area and Singapore’s customs are highly efficient. Hence both are currently the
largest logistic and trading hubs in Asia.
Cost Comparison
In cost comparison we compare basic statistics like average warehouse rents, income, and
logistic costs. This has the purpose to give a general overview on the price levels of each
country. Figure 18 presents a comparison between the annual rent averages in US Dollars per
68
square meter per annum and the average monthly wages in US Dollars. The left Y-axis
represents the rent and the right the wages:
250 3000
2500
200
2000
150
1500 Annual rent
100 Monthly wages
1000
50
500
0 0
Japan Hong Kong Singapore Korea China
SAR
Figure 18. Comparison of average annual rents and monthly wages.
As seen in Figure 18 Japan and Hong Kong have the highest rent prices. Compared to China
with the lowest average rents, Japanese rents are almost four times higher. Although Hong
Kong has the second highest average rents, the annual wages are relatively low compared to
Japan, Singapore and the Republic of Korea which are the countries with the highest income.
The average monthly wage in Hong Kong is over 1000 US Dollars lower than in Japan and
around 700 -800 US Dollars lower than in Singapore and the Republic of Korea. China has
still by far the lowest average monthly wages with a little over 300 US Dollars per month.
69
1200
1000
800
600 Import Cost

Export Cost
400
200
0
China Hong Kong Japan Korea, Rep. Singapore
SAR
Figure 19. Comparison of average logistic costs in US Dollars for import and export.
As seen in Figure 19 the average costs for the import and export of a 20-foot container are
relatively similar. However between these countries Japan is once again the most expensive
with import costs being almost 1000 US Dollars and export costs around 900 US Dollars.
China and the Republic of Korea have costs around 600-700 US Dollars where as Hong
Kong’s costs are in the region between 550-600 US Dollars. Singapore has the lowest logistic
costs with import costs being 440 and export costs 460 US Dollars.
Installed base
The installed base is evaluated in Chapter 4. As seen ABB China has by far the most allocated
vessels with 47 Azipods and Japan the second most with 4 Azipods. Hence the demand for
spare parts is statistically the largest for Chinese customers.
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Overall Logistics and Trade Index
As seen in Chapter 3.1 Singapore ranks the highest in the World Banks report on logistic
performance among the compared locations. In addition according to the Global Enabling
Trade Report of 2014 Singapore (1st) and Hong Kong (2nd) rank globally highest in the
comparison of trade effectiveness in terms of market access, border administration,
infrastructure, and operating environment.
Evaluation and Alternative Model
The biggest challenge of the region is that China has the largest installed base but the most
difficult customs and border regulations. One solution is to separate this region into two parts:
China and the rest of the region. China would establish its own warehouse serving the
installed base in China and a regional warehouse in another country would serve the rest of
the region.
The regional warehouse should be established in the most efficient and cost effective location
of the region which is clearly either Singapore or Hong Kong. Both rank the highest in global
trading and logistic rankings. In addition Hong Kong is considered a free trade area and
Singapore has free trade agreements with all of the defined countries to reduce customs
barriers and tariffs.
Both Hong Kong and Singapore can provide spare parts urgently to the entire region except
China. Additionally Chinese spare parts are mainly purchased locally which also support the
solution of separating China from the rest of the region. Hence we suggest a model presented
in Figure 20 which is based on the logistic factors presented. The red dots in the figure
indicate the warehouse locations.
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Figure 20. Locations of the warehouses and principle of goods movement.
The principle would be that there would be two warehouses, one in Shanghai and another in
Singapore. The warehouse located in Shanghai would be owned by ABB China and parts for
the Chinese installed base would be stored there. This warehouse would be a non-bonded
solution and could be managed by the ABB China’s Service and supported by the C-type
Azipod production facility in Shanghai. Additionally parts could be continued to be
purchased mainly locally. A standard factory or warehouse presented in chapter 5.1.4 could
be established as the spare parts warehouse.
The benefit would be that Chinese customs barriers would hinder only in the rare cases where
parts are sent from the main storages in Finland. The challenging domestic logistic would
also not interfere with deliveries to other countries and would be easier to manage by the
local staff with knowledge and experience in the field.
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We suggest in this model to establish the regional warehouse in Singapore. Singapore ranks
the highest in logistic performance and it has the lowest average logistic costs. Singapore is
chosen over Hong Kong as there is already a strong foundation for ABB Marine in Singapore.
Expertise is closer by and the establishing could be done in cooperation with the local staff.
Additionally Singapore is a busy port for cruise vessels and the Sunshine projects will be
operating in the area.
Since cruise vessels operate in almost every country’s waters and ports the logistic efficiency
is highlighted. Singapore could provide the entire area urgently as customs are ranked the
most efficient and tariffs and trading fees are also extremely low. Singapore is additionally a
politically stable country with no affecting political tensions in the area.
In Singapore warehousing can be accomplished with bonded solutions. These are so called
zero-GST warehouses (zero Goods and Service Taxes warehouses) approved by the
Singaporean government which can be located anywhere in Singapore and enjoy the same
principles for re-exporting products as the FTZs presented in this thesis. (Singapore Customs,
2013)
The availability of spare parts could be further improved by having small buffers in countries
with installed base. In the case where gas is transported from Russia to Japan this fleet could
be supported with a critical spares buffer warehouse in either Japan or in the southeast coastal
area of Russia. Japan’s customs can be challenging and in extremely urgent cases with
downtimes of systems leading to extremely high losses the safest plan is to have availability
to some extent built in Japan.
The challenging part, similar to the case where a regional warehouse located in China, is the
ownership of the warehouse and the parts and thereby the inventory control of parts. An
effective way to improve global and regional availability would be to have all the ABB
offices have an integrated material management system. If local offices could directly see in
their system the inventory, the risk of communication problems and loss of time would be
lowered.
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5.2.1 Comparison of the Models
The benefits of having a regional warehouse centralized in China are first and foremost the
investment costs as China requires less investment and overall cost level is lower. One
centralized solutions can also be easier to manage than several warehouses. In addition ABB
Robotics recently opened up operations in the Shanghai FTZ area, hence knowledge and
experience could be utilized inside the company. Furthermore the ABB’s C-type Azipod
production facility is located in Shanghai which could be beneficial regarding technical
support.
On the other hand the model of establishing a regional warehouse in the most efficient
location Singapore minimizes the risks of issues with deliveries and customs. Average
logistic costs are in Singapore low and ABB Marine is already strongly represented which
would add additional technical support. Customs barriers are low in Singapore and
procedures efficient. Agreements with most countries in Pacific Asia to reduce customs
tariffs and barriers improve the trade efficiency further. However to cope with Chinese
vessels parts would have to be imported to China through Chinese customs, hence an
additional local storage for Chinese customers would be the most efficient way to improve
availability in the entire region.
Geographically Shanghai is better located to serve the East Asian market with Japan, Hong
Kong, and the Republic of Korea closer to where ferries, cargo and LNG vessels operate. On
the other hand Singapore has the advantage in the South East Asian area with also Australia
being closer by, both of which are popular routes for cruise vessels.
Singapore and China both offer the utilization of bonded warehousing which can be seen as
an advantage for re-exporting goods. China offers the solution of a hybrid model where the
separation of the parts is relatively simple due to the distribution of Azipod types in the
region. Singapore on the other hand could hold all parts in the bonded area as the installed
base is domestically low. However as the tariffs and customs barriers are low the bonded area
is not a necessity as managing and controlling it can require a lot of effort and high expertise.
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Dry dockings are increasing in Asia and both locations Singapore and Shanghai host
dockings. However as dry dockings can be planned further ahead this comparison is based
mainly on critical parts and urgent shipments. Of course dry dockings tend to need also urgent
shipments but these can be considered in this comparison as urgent individual spares
shipments as these shipments contain mainly only few parts.
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6 Conclusions
6.1 Essential Results and Observations
One of the essential results of this thesis is that the Pacific Asia region can still be roughly
divided into two regions: China and the nearby countries. This has the effect that whichever
solution is chosen China has to be managed individually or the other markets have to be
adjusted to China’s challenges.
Even though China has made significant developments since joining the WTO, regarding
overall logistics, infrastructure, simplicity of doing business, and political stability, China is
still behind Japan, Singapore, Hong Kong and the Republic of Korea. However recent
developments show that China is investing heavily in improving the needed infrastructure to
compete as a logistic hub in the region.
In terms of relevant factors for this thesis the biggest difference are the customs barriers,
which were highlighted also in the interviews. Importing and exporting is considerably
delayed by Chinese customs compared to the other countries in the defined region.
Furthermore China has the highest tariff rates although average rents and salaries are
significantly lower than in the compared locations.
Customs barriers can be lowered by utilizing free trade zones. The Shanghai FTZ provides
the opportunity to have bonded and non-bonded storage areas and goods can be stored
without a time limit. This solution enables the possibility of urgent deliveries into and out of
China without goods wasting delivery time from the customs clearance. By utilizing these
zones tariff rates can also be avoided for parts exported outside of China.
The Shanghai FTZ has been established in 2013 and regulations are not completely clear.
The zone has received critique for applying promised reforms slowly. The negative list is
still considered too long and regulations are speculated to be still unclear. On paper the FTZ
looks promising and fitting for the needs described in this thesis however it has received
criticism of difficult bureaucracy and slow implementations of promised regulations.
76
Considering doing business in China, the interviews confirmed the statements provided in
recent literature about personal relationships being extremely important. In a project such as
establishing a warehouse in China local knowledge is considered vital as negotiations and
relationship building can reduce costs in considerable amounts.
In terms of logistic costs, tariffs, delays, and quality, Singapore and Hong Kong provide the
best foundation to serve as a logistic hub for the East Asia region. The infrastructure and
delivery quality in Japan is considered also extremely high however Japan is investment wise
more expensive than Singapore and Hong Kong. Japan has higher tariffs, average logistic
costs, rents, and salary. The customs in Japan are also considered to be less efficient in terms
of clearance times and simplicity. Singapore was chosen for the alternative model due to its
most efficient logistics and strong ABB Marine presence.
6.2 Evaluation of Results
The results do not offer any significant surprise. The common consensus in the field seems
to be that China is behind the modern neighboring countries in terms of logistics competence
however it is making constant efforts in catching up by making policies more transparent and
opening up the markets. The rapid developments in China’s economy and policy changes
also make the reviewing challenging as improvements and new regulations are set up on a
fast pace.
The results of the interviews regarding cultural characteristic of Chinese business confirmed
that cultural differences are still relatively strong. Through globalization and multi-global
companies operating all over the world, it would be imaginable that business cultures move
into a more uniform way of handling business, however the interviews highlighted also that
local business knowledge is essential for succeeding in the Chinese market.
The interviews indicated also that the myth of Chinese vendors producing low quality
products is long gone. Of course in a country as big as China there is a possibility to confront
all kinds of issues, but the message of the interviews was that they were satisfied with Chinese
vendors. The growing economy in China puts more competitive pressure on the market and
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vendors, and especially smaller vendors see the possibility to work with multi-global
companies as a great opportunity. By co-operating with suppliers there is no problem in
reaching the desired quality requirements. The common opinion among the interviewees was
that in today’s market there is not much difference in the issues faced with Chinese vendors
compared to ones faced with European vendors.
The fact that the domestic logistics in China were highlighted as the biggest challenge is not
surprising as logistics investments and efforts of improvement are still relatively new. As
international operators were not allowed in China before the year 2007 it is clear that China
is behind modern criteria of basic logistic standards and requirements that European based
companies are used to.
The political stability and dynamics of the entire region raises still some questions which
were current topics during the thesis. Contra China protests in Hong Kong were beginning
to gather at the end period of the thesis writing which may affect the bilateral relationship in
the future. Also the heads of China and Japan met for the first time during their reign in the
APEC-meeting in November 2014. It seems that tensions are mostly political and history
related conflicts. Nevertheless, according to studies and interviews, the business between
international companies in the region is not affected by the tensions.
78
7 Follow-Up Actions and Recommendations
If a warehouse is established the inventories need to be well assessed and planned. This
requires making decisions on what service level is desired and how many consumables are
seen as added value in addition to the critical spares. At least an indication of the part volumes
is needed so that the required storage base can be assessed and as a result possible venues
and facilities suggested.
It would also benefit the cause if a more detailed knowledge would be gained about the
current state of critical spares on board of the vessels. These inventories are customer owned
and therefore not constantly up to date at ABB Marine. This information would benefit the
planning of the availability and the requirements for more detailed inventory levels.
To achieve a more systematic approach through the entire supply chain a more transparent
approach to material management systems between countries could be suggested. If
inventory levels could be seen in all systems the global availability planning between main
storages regional storages and buffer storages would be more simple and effective in the
bigger picture for ABB Marine Service. Strong country borders cause risk of
miscommunication however these are deeply built in the company culture and regulations,
which is a challenge that departments have to adjust to.
All in all, as the installed base in the region is still relatively small, it might be worth first
seeing the future developments. LNG vessels will be operating more in the Japan area and
additionally cruises are increasing in popularity in Asian countries. On the other hand, if
strategies are planned ahead and future growth is already taken into account compromise-
solutions caused by time pressure can be avoided.
However the Chinese installed base is growing rapidly and domestic availability should
already be planned. To bring the project further in China decisions have to be made: will the
FTZ be utilized in planning ahead for the future growth of the entire region, or is the domestic
market first seen as the only priority.
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8 Summary
Spare parts supply chain management differs from other manufacturing supply chains, such
as work-in-process and final products, in several ways. Spare part inventories exist mainly to
keep equipment in the installed base in operating condition hence demand for spare parts
may be extremely sporadic which leads to difficulties in estimating demand and planning
inventories. Additionally challenges in spare parts logistics emerge mainly due to the
combination of large service networks, rigid deadlines and customer heterogeneity.
The installed base in Pacific Asia is growing rapidly especially in China, which put pressure
on improving availability of spare parts in the region to maintain a high service level and
customer satisfaction. The region is logistic wise challenging because of the differences in
logistic efficiency and performance. The customs barriers in China are still the highest with
the slowest customs clearance times and highest tariffs however China has by far the largest
installed base volume. Regarding overall logistics Singapore and Hong Kong are the most
competitive with highly efficient customs, clear regulations, competitive logistic costs, and
good infrastructure.
Chinese customs barriers can be reduced by utilizing free trade zones. We propose a solution
model where a hybrid warehouse containing a bonded and a non-bonded storage area is set
up in the Shanghai FTZ. Spare parts meant for re-export to other countries in the region are
not exposed to Chinese customs tariffs and clearance as they are stored in the bonded area.
Parts for the domestic market in China are stored in the non-bonded storage leading to short
delivery times as parts are already cleared from customs. Additionally domestic purchased
parts can be stored in the non-bonded area without customs interference.
An alternative model would be to set up a regional warehouse in Singapore due to its highly
efficient overall logistic competence and strong ABB Marine presence. Other countries in
the region and foreign vessels operating in Pacific Asia can be easily accessed from
Singapore however the Chinese customs still delay the access to China. Therefore we suggest
this model to be two leveled, where a domestic warehouse in China would serve the Chinese
market and the regional warehouse in Singapore the rest of the region.
80
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AALTO UNIVERSITY

Improving Availability of Spare Parts in China and the Nearby

Supervisor: Professor Kalevi Aaltonen

Author Jermu Juntunen

The purpose of this thesis is to evaluate possibilities of improving availability of spare

To evaluate the possibilities we provide an understanding of the logistics environment in

Tekijä Jermu Juntunen

Tämän tutkimuksen tarkoitus on vertailla mahdollisuuksia parantaa varaosien saatavuutta

Jotta voimme vertailla mahdollisuuksia saatavuuden parantamiseksi, selvitämme ensiksi

Avainsanat Varaosat, Toimitusketju, Logistiikka, Kiina, Itä-Aasia, Varastot

1.1 Thesis Background

1.1.1 ABB Marine

1.3 Problem defining

1.4 Research methods

Figure 3. Structure of the thesis.

2.1 Spare Parts Logistics

Step 2: Anticipate • Primary product life cycle

Step 3: Align key • Goals of the spare parts business

2.2 Part Categorization and Criticality

2.3 Inventory Management

2.4 Demand Forecasting

Forecasting methods can also be classified as quantitative or qualitative. Qualitative

Figure 5. Spare parts planning management structure. (Deloitte, 2013)

Planning execution consists of procurement execution and stock transfer execution.

The suggested framework gives an understanding between correlations of the different

Figure 7. The five decision making steps. (Cavalieri, et al., 2008)

2.7 Managing Growth of Spare Parts Business

The purpose of this chapter is to provide an understanding of the logistics characteristics

3.1 Country Specific Logistic Performance

1. The efficiency of customs and border management clearance

3.1.2 Domestic LPI

Table 3. Comparison of lead times, average distances, and costs.

Cost to import Cost to export

3.1.4 Warehouse Price Levels

3.2.1 World Trade Organization

3.2.2 Logistic Challenges and Development

Despite upgrades in transport infrastructure, China’s infrastructure still struggles to satisfy

Approximately 90% of China’s international trade volume is handled through maritime

3.2.3 Import and Export

Documents required for customs registration are as follows:

3.2.4 Logistic Approaches

Importing & Exporting of Spares

3.2.5 Special Economic Zones

Table 9. Warehousing options in China. (C.H. Robinson, 2010)

3.2.6 Political and Legal Risks in China

3.3.1 Cultural Characteristics

Another fundamental component of guanxi is mianzi. Mianzi refers to a positive image of a

3.3.2 Managing Cultural Differences

4.1 Installed Base Allocated to Local Offices

Table 10. Vessels allocated to the local Chinese office.

Figure 12. Development of the installed base in China.

Table 11. Vessels allocated to the office in Japan.

Table 12. Vessel allocated to the office in the Republic of Korea.

Figure 13. Variety of Azipod types in the Pacific Asia region.

In chapter 5.1 we consider the possibility of establishing a regional warehouse in China to

Advantages and Needs

Table 14. Competitive advantages and needs of development.

Serving as a Regional Warehouse for the Pacific Asia Region

Table 15. Main differences between bonded and non-bonded zones.