Ten key challenges for the Chinese logistics industry

China's logistics and express industry is enjoying a period of spectacular growth helped by economic development and the increased acceptance of out-sourcing by Chinese manufacturers and retailers. However, there are a number of challenges on the horizon ranging from deep seated structural problems to the unpalatable prospect of an economic "hard landing."

According to John Manners-Bell, a market analyst with U.K.-based Transport Intelligence, the Chinese logistics industry will expand with a compound annual growth rate of 33% up to 2007. This will be supported by the outsourcing of logistics functions as the practice gradually gains credibility and as more sophisticated logistics companies enter the market.

However, the outlook for the medium term is by no means as upbeat. China's economic growth has papered over major structural problems which need to be addressed if the development is to be continued. These include weak transport; information and communications infrastructure outside economic zones; a culture of regulation and bureaucracy; fundamental problems of energy supply; high transport and logistics costs; a poorly educated and badly trained work force as well as high regional imbalances of trade (both domestically and internationally).

Furthermore, the economy has yet to go through a major restructuring which will be needed to transform its many state owned enterprises into a thriving private sector. One problem for the country is that increased economic activity has led to rising labor costs (especially in key regions of manufacturing and logistics). This will increase pressure on over-manned, inefficient public sector companies and eventually lead to higher levels of unemployment with severe economic consequences. This will be compounded by foreign competitors entering the market in line with China's WTO commitments.

"If China's economy does have a 'hard landing' as many economists predict, there will be a major impact on air, sea, express and logistics companies which have over invested in capacity in the region." says Manners-Bell. "For the time being, though, the fragmented, low value-add nature of the Chinese transport market will still provide huge opportunities for foreign, and the more developed domestic players, to grab market share. There is no doubt that China will eventually become the world's industrial powerhouse. However, its transformation will not be as straightforward as many logistics companies would like to hope."

Following are the 10 key challenges for the Chinese logistics industry:

1. Poor infrastructure
One of the key challenges facing the Chinese logistics industry is the state of the country's transport infrastructure. At present, despite some large scale projects, companies in the region complain of insufficient integration of transport networks, information technology (IT), warehousing and distribution facilities. Outside of the main economic centers, the logistics sector tends to be of low quality, highly inefficient and with little technological competence.

2. Regulation
Although it is slowly opening up to outside competition, the Chinese transportation and logistics market is one of the most highly regulated in the world. Regulation exists at a number of different tiers, imposed by national, regional and local authorities. Regulations often differ from city to city, hindering the creation of national networks.

3. Bureaucracy & Culture
Getting the go ahead for any logistics project in China still relies heavily on the strength of contacts which companies have within Chinese bureaucracy. There are still high levels of "cronyism" which require companies to build links with members of the Chinese Communist Party at various levels. Many western companies also find it difficult to repatriate profits which have been generated in the country.

4. Poor training
Training in both the third party logistics sector and the manufacturing and retailing sectors is very weak both at a practical level, i.e., IT, driving and warehouse as well as at a higher strategic level. Many do not realize the benefits which best practice in logistics can bring to their companies and are therefore not interested in the opportunities of outsourcing or of supply chain management techniques. This has been compounded by the failure of the government and other regulatory authorities to promote logistics programs.

5. Information and communications technology
Outside of the main logistics centers, information and communications technology and infrastructure is unreliable. There are a lack of IT standards and poor systems integration and equipment. At a very basic level, the consistent supply of energy is also problematic leading to interruptions to communications through power outage.

6. Undeveloped domestic industry
The Chinese logistics sector is fragmented and dominated by commoditized and low quality transport and warehousing, providing little base on which to build a modern industry. This also makes it difficult to meet the growing supply chain demands for industrial and commercial enterprises.

7. High transport costs
Some estimates put the cost of transporting goods in China at up to 50% more than in developed regions such as Japan, Europe and North America. These costs are increased by high tolls on roads. Logistics costs (including warehousing, distribution, inventory holding, order processing, etc.) are estimated to be two to three times the norm and in excess of 20%.

8. Poor warehousing and storage
Poor facilities and management are to blame for high levels of loss, damage and deterioration of stock, especially in the perishables sector. For instance, it is estimated that 30% of China's fruit and vegetable harvest is damaged every year by the inability to store and move it appropriately costing $1 billion for this sector alone. Part of the problem is insufficient specialist equipment, ie proper refrigerated storage and containers, but it is also partly down to lack of training.

9. Regional imbalance
China's economy is characterized by wide variances in levels of economic activity and development. This is problematic in terms of distribution as there is a major imbalance of goods flows from the developed east of the country to the more undeveloped west. This has resulted in difficulties in finding backloads, leading to higher costs for Chinese haulage companies which are then passed on to their clients. Internationally these imbalances also exist between China and the rest of the world, leading to difficulties in re-positioning empty containers.

10. Domestic trade barriers
Although China's accession to the WTO has lowered trade barriers such as tariffs and quotas for international shipments, there are still problems related to moving goods around China itself. Goods can be subject to unofficial border tolls when moving between provinces. This is particularly evident when shipping from an inland manufacturing location to a port city or vice versa.

www.transportintelligence.com

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