China’s logistics sector once focused on moving products from factories within China to the ocean ports for export to developed markets. Now the emphasis is just as much on moving goods within the domestic market to reach increasingly prosperous consumers, located all over this huge country. In particular, the residents of second- and third-tier cities in central, western and northeastern China are driving a new wave of domestic consumer demand.
Although logistics in China is the backbone of the supply chain, the industry itself remains complex, inefficient and fragmented, with the top 20 companies sharing just 7 percent of the total domestic logistics market.
Despite these issues, the domestic contract logistics industry grew at 18 percent during 2008 according to Transport Intelligence, who also predict that by 2013 China’s contract logistics industry will overtake Japan’s to become the largest in Asia Pacific.
Change and consolidation
For quite some time, one of the biggest questions to consider when outsourcing logistics in China to a Third-Party Logistics service provider (3PL) was whether to work with a local Chinese 3PL or an multi-national 3PL. Each category had their respective strengths and the options were reasonably clear.
Local Chinese 3PL companies had the on-the-ground knowledge, local connections and operated on a lower cost basis, whereas international 3PLs such as Exel Logistics (now DHL), TNT and UPS offered management expertise and sophisticated technology solutions, together with international best practice and sector specific expertise.
Today, the differences between these categories of logistics providers are becoming increasingly blurred – multinationals have extended their expertise and geographic reach in China, while local service providers have gained more international exposure and experience.
In recent years, a few privately owned Chinese 3PLs such as Guangzhou’s PG Logistics Group (PGL) and BEST Logistics Technology, headquartered in Hangzhou have grown to become nationwide service providers.
However, PGL and BEST are the exception rather than the rule. In the fragmented China logistics industry, servicing nationwide domestic distribution requirements typically involves several third party providers – in some cases shippers are using more than 20 different companies to distribute their goods throughout China.
Following China’s accession to the World Trade Organization (WTO) in 2005, foreign logistics companies were able to establish “wholly owned foreign enterprises” (WFOEs) for the first time. Some foreign 3PLs bought out of their existing joint venture (JV) arrangements, while others acquired their JV partner, as TNT did in 2006 when it acquired Hoau Logistics. More recently, in May 2009 Toll Holdings reached an agreement with China Merchants Group to acquire the remaining 49 percent shares in its joint venture – Shenzhen-based ST-Anda Logistics.
Clearly, this kind of consolidation among service providers will continue, in order for the industry to become more efficient and to meet the market demands. More local Chinese companies will group together to form stronger regional and national networks and we can expect more formal mergers between local Chinese companies. Meanwhile, the international 3PLs will continue to seek acquisitions as a means of expanding their network within China.
Government support
At the same time as these market-led factors are driving improvements in the China logistics industry, in March 2009 the State Council issued the “Plan for the Restructure and Revitalization of the Logistics Industry”.The plan is significant because it recognizes that logistics is a significant component of China’s overall economic prosperity, is an industry in its own right and is in need of modernization.
Writing in the International Freight Weekly, Lee Perkins of China Intelligence Online explained that while specific details have not been finalized “the proposed legislation aims to transform a regionally fragmented, under-agglomerated domestic industry into globally competitive, international logistics firms; to increase the role and scope of 3PLs; to achieve 10 percent growth in added value in the industry; and to substantively reduce logistics costs as a percentage of GDP in line with developed nations like the US”.
A shortage of skilled logistics personnel is consistently identified as one of the greatest challenges for businesses in China and the plan recognizes the importance of training and developing local expertise. To achieve results quickly, the government emphasizes the need for more skills training and certification, which will require increased cooperation with overseas research institutes and education providers offering international standard training courses.
The government’s support for greater 3PL outsourcing and consolidation will effectively encourage the industry’s own drive for consolidation. In the long term we can expect to see larger logistics companies with broader ranges of services and greater geographic reach, which will also reduce cross-boundary barriers resulting in more efficient and competitive companies.
For the customer these changes can only be good news. The service levels of the industry should come up, costs should come down and therefore customers will get better value. These are encouraging developments, which we will watch with great anticipation.
Mark Millar
Logistics industry veteran Mark Millar is Managing Director of M Power Associates – a specialist provider of industry-specific Marketing, Consulting and Education services that empower superior performance and enhance competitive advantage. Mark has recently been appointed as President of the China Chapter of the Logistics & Supply Chain Management Society and will lead the expansion of LSCMS China in promoting the professional development of Logistics and Supply Chain Management in the China market. Mark was named as one of the “2009 Providers Pros to Know” by Supply & Demand Chain Executive Magazine and can be contacted at mark@markmillar.com
This manual has been put together by The Logistics & Supply Chain Management Society (LSCMS) President, Mr Raymon Krishnan, to give companies a guide from an Asia-Pacific perspective, to help reduce the number and frequency of driving related accidents and fatalities and improve safety performance by reducing both the risk to which employees are exposed and the potential to harm other road users.
Global and regional markets are facing challenging times. Many companies are seeking ways to save money and some of our members face uncertain prospects in the next 12 – 18 months.
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One objective of L&SCMS is to bridge the gap between business and education in the field of Supply Chain Education & Training in Asia and we do this through a number of mediums.
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It was reported on the Transport and Logistics News website earlier today that DHL Express has announced it would exit its US domestic-only services by the end of January 2009, in a desperate attempt to restore its balance sheet in deepest red.
The restructuring of the company’s delivery business, will see all of its US ground hubs closing, dramatically slashing the number of stations from 412 to 103.
On top of some 5,400 jobs already cut since the beginning of this year, a further 9,500 US-based workers will find themselves jobless as the restructuring continues.
DHL Express global chief executive John Mullen said while the company had been progressively restructuring its US operations, the bleak market forced it to make “a difficult decision”.
“Given the current background of unprecedented uncertainty and risk in the global economy, we feel that it is critical and prudent to take additional measures to combat what we believe will be an extremely challenging 2009, and to do this ahead of time,” Mr Mullen said.
“Losses in US express revenue and volume were unsustainable. More had to be done to protect the interests of our customers and employees around the globe as well as our shareholders.
“It is the right move for our US express operations given the current economic climate and for the long run…we decided to focus on what we do best as a company, and that’s international shipping,” he said.
Here to stay, still
Despite the withdrawal, the company said it would remain committed to the US market as a continued US presence was essential to its entire global express network.
Nearly half of its top 200 business partners are based in the US, with US trade lanes representing half of its global volume.
“We are here to stay,” Mr Mullen said.
The remaining restructuring process will cost the company an additional $1.9 billion, bringing the total costs to $3.9 billion over two years.
By cutting its US domestic operating costs by 80 per cent to less than $1 billion, the company wants to keep losses from the market at $900 million, with the losses expected to taper down to $400 million by the end of 2009.
Stronger focus on international services
DHL’s operation overhaul will see the company dropping out of the US market race with UPS and FedEX the two key players set to take up almost 80 per cent of the market operations.
However, the company said the restructure would make its US international express service “extremely competitive”, with improved transit times.
The restructure is not expected to have impact on other US-based services such as global forwarding and freight, supply chain and customer information services.All international shipments into the US will still be delivered, while 99 per cent of the outbound shipments will be picked up.
Deutsche Post CEO Frank Appel said at a press conference in Bonn that stronger actions were needed to protect its delivery business from the economic storm.
“By taking a realistic view and defining clear actions towards reducing costs, I am confident we are now on the right track to secure the group’s long-term growth,” he said.
Deutsche Post posted results for the first nine months of the year. Its underlying earnings before tax from continuing operations slightly rose 1.3 per cent to 1.6 billion euros, with revenue in the period increasing by 2.3 per cent to 40.5 billion euros.
Published in Logistics Insight Asia, 1.Sep.2008
The retail landscape across Asia is transforming and bringing with it significant demand for logistics services.
This is an excerpt of an email one of our members sent us:
“Presently, I am a part-time student at NP.
My class will be graduating next year february and we are in the midst of planning our future.
We would like to hear your opinions on the universities that conducted logistics related degrees which you would recommend and why. And as well as the job opportunities so far in the market”
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