Logistics, Warehousing and Transportation in China (Part 2)
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.
In Part 1 of this article, we gave an overview of the logistics sector in China and its growth factors, including the catalytic role of e-commerce in the expansion of the industry. In this second installment, we expand our focus to foreign investment in China’s logistics and transportation industries, the special role of the Shanghai Free Trade Zone and the future course of the industry.
Foreign investment — Just as nature abhors a vacuum, so have global private equity firms been moving quickly to take advantage of the demand for logistics in China, such that the industry now receives 2.8 percent of all FDI into China. Since 2005, foreign investment has been permitted in most sectors of China’s logistics and transport services industry, excluding certain basic services such as mail. In 2013, total investment in warehouses and distribution centers in China rose 38.8 percent year-on-year to RMB 3.2 billion.
Global Logistic Properties Ltd (GLP), the biggest foreign builder of logistics facilities in China, has already spent US$1.2 billion to build an incredible 280 warehouses in China in 2014. Other major deals include Mapletree Investments (US$1.4 billion), Carlyle and The Townsend Group (US$200 million) and Warburg Pincus. The latter has been a major investor (US$200 million) in Chinese warehousing developer and operator e-Shang, which in December was approved for a US$120 million pre-IPO loan and currently owns over 1.5 million square meters of logistics space in China.
Barriers — Several factors are impeding the further expansion of logistics and transportation services in China, including difficulties acquiring land, outdated warehousing technology and regulatory complications. Hardly superficial inconveniences, these can make it twice as expensive to transport goods in China compared with the U.S., despite the difference in wages between the two, according to GLP.
Chief among the difficulties faced by private enterprises is acquiring land for logistics use. Because warehouses are typically sprawling, low-tax-revenue, low-employment properties, they have few points to recommend them to the local governments in charge of allocation.
A second class of problems concerns warehouses themselves. Less than 20 percent of China’s warehouses are classified as modern, which includes the use of fully computerized tracking systems and retail technology. Illustrating just how low-tech warehouse operations in China can be, loading trucks by hand remains common practice in the absence of raised loading bays.
Lastly, the transportation and logistics industry remains subject to certain restrictions on foreign investment and operations. This has made it necessary for foreign logistics companies to enter into domestic partnerships, such as GLP’s US$2.5 billion deal with Hopu Investment. Other restrictions apply to the use of transportation channels: on some lines of China’s extensive rail network, for example, only raw materials may be transported. These are also blamed for the alarmingly high rate of no-load journeys in the domestic trucking industry: some 37 percent of trucks are unable to find loads for their return trips.
Shanghai Free Trade Zone — It is noteworthy that several of the above-identified problems have been eliminated in the Shanghai Free Trade Zone (FTZ)—a 29 km2 area launched in late 2013 as a testing ground for relaxed economic policies and greater access to foreign investment. Logistics and freight forwarding were included among the 18 industries selected for liberalization in the FTZ, which allows easy access to Waigaoqiao Port, Yangshan Deepwater Port and Pudong International Airport. The zone also has in place a streamlined customs administration process, lowering the time required for bringing goods through customs to less than half that of elsewhere in China. Lastly, the FTZ’s general atmosphere of preferential policies includes a simplified corporate establishment procedure under which minimum registered capital is eliminated for enterprises.
Three months after the launch of the FTZ, some 3,633 enterprises had registered in the zone, and today there are an additional seven to eight-thousand waiting to do so. As a result of this surge, industrial property in the FTZ has become a bull market, with rental rates rising from RMB1.1 per square meter per day to twice that amount by January, 2014. This can be compared with average rates in Minhang of around RMB1.4 per square meter per day and in Nanhui of RMB0.7, during the same period.
Future prospects — In the coming years, the unimpeded expansion of chain retailers into more and more areas of China will keep up the demand for logistics space. As the logistics market matures and smaller firms are consolidated through M&As, we are likely to see service providers diversifying their product portfolios toward value-added services, including simple sourcing, warehousing, inventory management, distribution and delivery, product testing and secondary packaging. While breaking into lower tier cities may entail shouldering larger costs, the recent trend of large-scale investment into domestic logistics would seem to indicate that companies are ready and willing to do what it takes to create nationwide networks
Meanwhile, the course of the logistics industry in China will also depend on the industrial real estate market in experimental zones such as the Shanghai FTZ. Currently, speculators are betting that the FTZ’s preferential policies will be enough to entice enterprises to set up long-term operations in the zone. This situation is likely to continue until the implementation of further reforms in the FTZ is announced, by which time competing logistics zones may have caught up in terms of competitiveness.
Finally, the future of the logistics industry in China will unavoidably be affected by China’s growing focus on environmental sustainability. Although this will become clearer once details are announced regarding China’s environmental tax, mandatory emissions targets for vehicles are one reform likely to be introduced. The State Council has endorsed improving the efficiency of logistics and transport, and called for more streamlined and “greener” operations, as well as improved management of toxic chemicals, explosives and radioactive materials.
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