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Published in Logistics Insight Asia on 01-Nov-2009.

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

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