Logistics, Warehousing and Transportation in China (Part 1)
China, the world’s second largest economy and third largest country by area, is experiencing insatiable demand for transportation and logistics services—so much so that dedicated service providers are struggling to keep up, causing some of China’s biggest retailers to strike out on their own with in-house logistics arms.
It is estimated that US$2.5 trillion will need to be invested in logistics development over the next 15 years to meet this demand, which would bring China’s per-capita logistics space up to just one-third that of the U.S.
It is certainly not for lack of infrastructure that China’s logistics industry is struggling to meet its potential—the country is number one in the world in terms of tonne-kilometers of freight, at 2917.4 billion, as well as inland water transportation, with 110,000 km of navigable waterways.
Nonetheless, shipping remains inordinately expensive in China. Heavy road tolls, levied to pay for China’s ongoing infrastructure upgrades, can account for 30 to 40 percent of transport costs for trucking companies. Not only does this cut into profits, but it also leads to dangerous practices such as logistics firms needing to overload their trucks just to break even.
Market — The logistics and transportation industry in China is best characterized as immature, owing to its high degree of fragmentation and intense competition. In 2012, the Executive Director of Global Logistic Properties (GLP) was quoted as saying, “There are literally nine million trucking companies in China, six million of which own exactly one truck.” Similarly, an A.T. Kearney survey found that companies in China use an average of 12 transportation providers and five warehousing providers. In this environment, switching transportation service providers is very common.
Currently, the industry can be divided into three types of enterprises: (1) state-owned giants like Sinotrans Group and China Post, and their offshoots such as EMS, China Air Express and China Rail Express, which dominate restricted sectors; (2) private domestic enterprises operating in less restricted sectors such as trucking, general logistics, and express delivery—the majority of which are SMEs with a local or regional market presence; and (3) foreign enterprises, focused largely on the international market and often undercut by local operators.
In a 2011 PwC survey of 250 logistics and purchasing managers in China, the country’s logistics service providers received mediocre grades in nearly every category of service, excepting shipment tracking, which performed better. Overall, it was found that businesses in China are willing to compromise on the issue of price in exchange for more reliable, flexible and comprehensive service.
Growth factors — The high demand for logistics and transportation services in China is attributable to a number of factors. Firstly, rapid growth in domestic consumption has created a need to deliver more goods to a greater number of destinations, as the Chinese government attempts to transition away from an export-driven economy. GLP has said that 80 percent of its total leased space in China in 2013 was used in connection with domestic consumption.
Second, improved infrastructure, particularly in the second and third-tier cities of China’s northern and western regions, has opened up new markets for retailers. Western China, for example, now supports over 710 billion tonne-kilometers of road freight. In time, this is expected to break up the concentration of transport and logistics companies around the Pearl River Delta, Yangtze River Delta and Bohai Rim.
Third, there has been increased interest in industrial property development in China against a declining outlook for commercial and residential properties. The situation is now such that every time a new logistics facility opens, space immediately sells out. Rents for logistics space have grown at an average of five to ten percent annually over the past several years. In 2012, Shanghai warehouse space was leasing at roughly RMB34 per square meter per month (or RMB1.1 per day).
E-commerce — More than any of the above growth factors, demand for logistics and transport services in China is the direct outcome of the unexpectedly strong performance of e-commerce in the country. GLP, for example, has seen its share of property leased in connection with e-commerce rise from four percent in 2010 to 22 percent in 2013.
The connection between e-commerce and warehousing demand should be obvious to anyone who has seen photos of Amazon’s massive fulfillment centers, which employ hundreds of employees and manage millions of daily transactions. Amazon’s dominance of international e-commerce is mirrored in China by Alibaba, which controls 80 percent of domestic online retail and delivered some 5 billion packages last year through its logistics partner.
Recently, the company announced plans to lead a group of investors in building a nationwide logistics company with an investment of US$16 billion. Meanwhile, Alibaba rival JD.com Inc. plans to invest up to US$1.2 billion into its warehousing and transportation operations over the next three years.
With such large investments, it is no wonder that the use of in-house distribution among e-commerce retailers is fast outstripping dedicated logistics service providers. Given the high costs of developing in-house logistics, however, outsourcing remains common among companies in China, with 61 percent opting to use third-party service providers, equally split between Chinese and international logistics firms.
In Part 2 of this article, we examine the state of foreign investment in China’s logistics industry, including the effect of the newly-launched Shanghai Free Trade Zone on overcoming certain barriers to expanded access. We also look ahead to the future of the industry and provide critical information for guiding the investment decisions of tomorrow.
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