Logistics in China
By Klaus Koehler, Managing Director, Klako Group


China's economy has been enjoying strong and stable growth in the past twenty years. Substantial foreign direct investment and increased globalization have multiplied the country's manufacturing capacity. Today, China is growing from a manufacturing powerhouse into the world's procurement center. Accordingly, the country's logistics service providers have experienced an average annual growth rate of 30 per cent over the past three years. Despite current achievements and an expected growth rate of more than 30 percent in the coming years, China's logistics market is still vastly underdeveloped. Logistics remains a minor industry in terms of scale, and its level of development and efficiency is comparatively low. The country's logistics cost - both outsourcing spending and corporate in-house logistics expenditures - are enormous due to the high costs associated with moving cargo in China. 20-40 percent of the aggregate costs of many commodities are spent on logistics. Each year, due to extensive inefficiencies, the country suffers losses amounting to about 15 billion yuan in packing, about 50 billion yuan in loading and unloading and transportation, and 3 billion yuan in storage.

China's Logistics Challenge

The total value of international procurement in China exceeded US$30 billion in 2002 and is likely to reach US$50 billion in 2005. However, fulfilling customer demands in China still remains a major challenge. Traditionally, distribution inland is fragmented among numerous small regional and local trucking enterprises, and typically distribution is not integrated across transportation modes, from truck to rail to air. During the planning and evaluation stages of new ventures in China, foreign investors should pay serious attention to distribution. Understanding China's logistics infrastructure is not an easy task, and making assumptions based on standard procedures used in other countries can prove costly when applied to China.

Presently there is a significant gap between China's logistics development and international logistics standards. The number of rail and road trunk lines linking different regions is insufficient and the major railway lines are over-loaded. The highway system connecting different provinces is not well networked and cannot meet the demand. Coordination between different modes of transportation requires significant planning and development and there are discrepancies within each mode. On the busy railway lines, passenger trains are combined with cargo trains, slowing down speed and hampering efficiency. In the air sector, trunk and feeder lines do not correspond, and the availability of large and small aircrafts is unbalanced. The Chinese government has accelerated construction of the national road network but the rural areas are still extremely underdeveloped. The level and quality of China's logistics services, technology, and equipment is generally very low and modern logistics facilities such as transshipment centers and public warehousing are scarce. In addition, there is a shortage of logistics professionals and well-trained workers. As a result, shippers face a high damage rate of 5 percent (compared to well below one percent in developed economies). The cost of product damage and loss can be significant.


Progress and Reforms

Since China joined the World Trade Organization (WTO) in 2001, the country 's logistics industry has reported significant progress. The industry has been given priority by the State Economic and Trade Commission. Due to the massive investment into logistics infrastructures and the rapid development of third party logistics efficiency and service quality has improved. As multinational corporations in China are integrating their global supply chains, international logistics corporations enter the Chinese market and global logistics and supply chain management are being extended to China.

The Chinese authorities have intensified efforts to remove industry bottlenecks and are cleaning up monopolies, excessive administrative intervention, and regional protectionism. In order to facilitate the development of the logistics industry and improve its efficiency, the government is planning to implement major tax reforms and a set of industrial standards and regulations. Under the new policies, the logistics sector will open wider to the outside world. The government is stepping up its efforts to cultivate large logistics corporations with strong international competitiveness and vast nationwide networks. Quantitative, geographic and shareholding restrictions on foreign merchandisers' operations will be abolished by the end of 2004, which will inevitably push the growth of overseas retailers' business operations in China. This will put pressure on the country's immature logistics industry, but will also stimulate the sector's progress both in terms of size and efficiency.


China's Third Party Logistics Business

Outsourced logistics services in China are reported to be growing by 25 percent per year, compared to an annual growth rate of 7.5 percent for overall logistics services. China leads both North America with a 10-15 percent annual growth rate in third party logistics services and the rest of the world with 5-10 percent growth. Key factors that are expected to fuel the growth of outsourcing include the ever-increasing activity of multinationals in China, as well as overall pressure to cut the to-market cost of goods, both domestically and for export. The Chinese authorities' efforts to expand the country's logistics infrastructure are also having a big impact. The government is committed to introduce greater liberalization in domestic logistics, including allowing foreign enterprises to operate wholly foreign owned third party logistics companies by December 2004. However, China's market for third party logistics services is still in its very early stages. There is a significant difference in outsourcing behavior between Chinese companies and multinationals. While 70 percent of multinational corporations outsource their logistics services, only 16 percent of Chinese shippers do so. Most traditional Chinese state owned enterprises have no intention to outsource logistics, as they normally have their own in-house assets and logistics staff. With no track record of their total logistics costs, Chinese state owned companies have difficulties understanding the value and cost savings third party logistics services providers can offer.

Multinational importers and manufacturers active in China are more likely to outsource their logistics services because they have sophisticated logistics needs and are used to utilizing high-quality subcontractors in other countries.

China's Ports

According to the Word Trade Organization, China accounts for about 4 percent of total world trade in terms of value. However, as the country emerges as a key manufacturing powerhouse, in terms of container traffic, China contributes 20-25 percent of global volumes, while for some products such as garment and toys, the country's market share is 50 to 60 percent. Both container traffic volumes from and to China and the number of the direct calls at China's Ports by ocean carriers have multiplied. Insufficient infrastructure capacity remains the major obstacle in the country's maritime logistics as pressure on Chinese port infrastructures increases. In general, the country's ports work at more than 120 percent of their planned capacity, while for some of the busiest ports this figure is over 150 percent.

China's major ports, from north to south, are Tianjin, Qingdao, Shanghai and Shenzhen. Tianjin Port, the largest port in northern China, focuses on collecting goods from the north and distributing them to the south. Qingdao Port ranks second in the country in terms of foreign trade and third among coastal ports. Shanghai Port is the fourth largest container port in the world after Hong Kong, Singapore and Pusan. The Shenzhen Port including Shekou, Yantiain, Chiwan, Mawan, Dongjiaotou, Fuyong, Xiadong, Shayuyong and Neihe has become the number one port in southern China.

China's Logistics Development: the Tenth Five Year plan

In late 2001, the Chinese government released its Tenth Five Year Plan. In this plan the Chinese government set out economic growth targets and predicted that China's GDP would double over the next ten years to reach US$2 trillion by 2010. The paper also called for greater efforts to develop the services sector and to open further to the outside world. The government listed logistics as one of the priority industries and planned to invest some US$ 85 billion to improve the country's transportation infrastructure in that five years period from 2001 to 2005. In order to encourage the growth of logistics business the government planned to deregulate the market, permit more foreign investments, develop logistics infrastructure, and facilitate the application of information technology and the standardization of logistics products and services. By the end of 2010, China intends to triple its current container ports throughput capacity and double its current expressway mileage.

If you require assistance with the above subject, please contact us at info@klako.com with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.