China Logistics - Overview of China Logistics, Transportatio

In June 1979, 'Logistics' as referenced the first time after China Members returned from attending an International Logistics Conference in Japan. During the 1950s and 1970s, people used 'Physical Distribution' to describe the physical movement of goods. The to Chinese characters stand for logistics are originated from Japan, hich China still adopted until today.

In 1985, US Logistics Management Association officially changed the name from 'Physical Distribution' to 'Logistics'. In order to differentiate the sequence of changes beteen these to concepts, 'Traditional Logistics' refers to former and 'Modern Logistics' means the latter hen translated into Chinese.

Logistics started to get popular 5 years ago. Logistics panies and logistics centers ere established one after the other. Logistics caught every attention as production, distribution and consumption of goods bee everyday life. 3PL (Third Party Logistics) as slipping its ay in in to vocabulary.

Hoever, there is a big gap hen describing the ratio of 3PL in China Logistics Industry:

Other vies contend that industry value of China Logistics exceed RMB 2 trillion (same as above), hile 3PL market share is beteen RMB 130 billion to RMB 150 billion.

There is no absolute right or rong in the above sayings, since the differences e from different statistics and concepts. We ould say RMB 60 billion is pretty close to the picture after many studies and parison. Our analysis ill start from this figure.

Industry Value: RMB 2 trillion and 60 billion, groing at an annual rate of 10%-15%.

Number of panies: around 730 000, starting from only 1 logistic pany in 1999 – PG LOGISTICS GROUP CO., LTD to currently more than 700 000 in China. Though China logistics industry has tremendous groth in the past, these 700 000 panies are actually 'small, scattered, eak'. A myriad of them are just truckers moving goods. Modern Logistics Company is catching nohere in their eyes. Even, there is no ay to determine ho are the 3PL out of these 700 000 plus logistics panies.

Development pace: 10%-15% and 25%-30%. It is estimated that China Logistics Industry is groing at an annual rate of 10-15%, ith 3PL at 25%-30%.

China is not only the factory of the orld, but also generates tremendous opportunities to a Global Logistics industry.

World Logistics Centers is in China. Many panies ould not have their objectives acplished ithout the development and groth from China economy. More and more multi-national panies already recognized that groing ith China is the key to fulfill objectives. For instance, US spending increases every year. US must buy from China, South East Asia or from India and South America in order to fill their gap. As long as Europe and America buy from China, trade ill definitely continue.

China is very petitive hen selling her goods. China merchandises are very petitive as ell. Buyers are still from US or Europe. China is of paramount importance. China still plays an important role in the next round of industry transformation. China ne prominence as a manufacturing poer ill definitely boil don to logistics.

Relevant statistics shoed that groth of global logistics as far behind China logistics. Current China 3PL supply and services already surpass the RMB 60 billion mentioned above. It is anticipated that China logistics ill have explosive groth in the next couple of years.

What are the ponents of this RMB 60 billion 3PL market?

From regional point of vie, Providers of China export logistics are mainly controlled by large foreign logistics panies located in Shanghai, Tianjin and Dalian.

Transport modes include rail, sea, air and roaday. Services offered include arehousing, international cargo transportation, China cargo transportation and consumables distribution, also small parcel and express delivery and third party logistics solutions.

Logistics suppliers can be classified into large multi-national service provider, like TNT, UPS ho are large logistics and express supplier and transportation panies. They entered China more than 10 years ago. Another thrust is logistics branches set up by shippers and state-run logistics provider, such as COSCO, Sinotrans. China massive groth in import and export since accession to WTO drives up the market needs of China logistics. It is estimated that China logistics market ill maintain a groth rate of 20% in the ing years.

China as a WTO member opens China logistics industry to outside and foster cooperation. Operation scale of China logistics ill keep abreast ith international. Third Party Logistics, Fourth Party Logistics ill be moved faster to bee professional, modernized logistics providers so that all societal logistics can be driven don in real terms.

Current China 3PL firms can be classified into 4 types in terms of structure:

Types 1 are those logistics panies restructured from traditional arehousing providers and transportation panies ho on large market shares. Typical are Sinotrans, COSCO, China Post, China Railay Express, CMST, China Container. Leveraging their former logistics infrastructure and advantages in netork, facilities, scale, these traditional giants expand their services and strive to bee modern logistics corporation. They all have rich professional experience, nationide netork, large operation scale and strong asset positions. Yet, their netork advantage is heavily restricted since a great number of their regional branches are all independently audited. Their branches across the country lack munications beteen each other despite of their national presence. In other ords, no co-operation and coordination during operations, resources are not effectively utilized. Customers are far from served ith prehensive logistics unless you are a huge one. In truth, their regional offices are scattered and not inter-connected.

Un-petitive prices: Since they have to bear huge labor cost to support their grand scale, their prices are usually higher than those small-and-medium regional counterparts.

Poor service quality. Except COSCO, Sinotrans ho have many years of experience dealing ith outside, others lack genuine orientation. Some of them remain at thinking themselves as industry godfather hich leads to inflexible and inefficient services.

Type 2 is nely-formed state-run or state-oned logistics panies ho are mainly mercial arehouse and transportation players in the region. They have better management and faster expansion. Take China Shipping Logistics as an example, they emerged from a purveyor of arehouse services to an international recognized multi-national 3PL group providing such logistics service as arehousing, transportation, delivery and customs declaration.

They have their on fleet of trucks and former arehousing system to provide local elementary services. Prices are paratively loer. They continue to upgrade their service to meet customer demands as petition gets intense. Individual fe may stand out from the crod oing to the past experience.

Pitfalls: regional coverage, dilapidated arehouse and facilities. Due to historic reasons, majority of them are overly burden. Their management and service mindset remain at elementary, traditional, dispersed and flat.

Type 3 are foreign players including from Hong Kong. They enter China to extend their service to their original customers – multi-national groups. At the same time they use their management concept, operation model and quality services to attract China panies and gradually tap into China market. They are Datong, KINTETSU, HAVI, Maersk, EAC, Hutchison and Whampoa, Inchape, Sea-Land, Huashang, Sankyu. Foreign players have distinctive advantages in capital, personnel, kno-ho, management, service and technology (IT in particular). They occupy a sizeable chunk of market in supplying logistics service to foreign panies in China. Currently, a lot of multi-national groups ork ith China logistics panies through partnership or acquisition of equity to establish professional logistic entities. They are actively seeking China partners no. Some already secured, such as DHL ith Sinotrans, FedEx ith DTW Logistics to expand netork coverage together. Hoever, a bundle of many are international express couriers at this stage. It is expected that there ill be many more multi-national logistics panies looking for China counterparts ith substantial footprint in the near future.

Type 4 are emerging private entrants across the region. They are flexible, lo cost, gro fast, most vibrant China 3PL logistics firms. Examples are: PG Logistics, Jiuchuan, Sunjet Logistics.

As lateers to the market, they usually position themselves to be professional 3PL service provider. Majority of them choose to be non-asset type of 3PL agent in order to avoid massive investment in logistics facilities and risk of long return period. Their services close to foreign logistics panies but broader reach, not limited to only large cities or coastal areas. They are more flexible and adaptable in local operation hen pared ith their foreign counterparts. Their service, management and IT applications are more advanced than their mon peers.

Their hurdles: Comparatively high prices, limited capital base, restricted in expansion of business scale and netork coverage. Fe experience in basic service operation as they are neophytes.

3PL in China remain at mainly providing elementary logistics services such as transportation and arehousing. Value-added services as processing, delivery and tailored services are still in the refining stage. Folloing charts are statistics from China Association of Warehouse and Storage shoing the outsourced logistics from Manufacturing Companies and Commercial Companies respectively.

From the above, both manufacturing and mercial panies choose to 'outsource to different parties', or assign different types of business to different types of panies. Proportion of packaged service offered by 3PL firms to customers are not much from the perspective of logistics supply.

Analysis shoed that annual groth rate of 3PL service providers in the first 10 years of this century ill be over 10%, ith 25% or above in the next 5 years.

As at end of 2004, DHL, TNT, UPS, Fedex are establishing their ne transshipment centers in Asia Pacific. These global express couriers or logistics giants may choose different locations for their centers, hether in Hong Kong, Shanghai or Guangzhou, nevertheless, it is obvious that their freight hubs and transportation infrastructure, business netork are heading into China.

In Nov 17, 2004, Federal Express set up China headquarters in Shanghai. This is another important measure taken by this renoned international courier since 12 ne air freight routes opened beteen US and China. Federal Express's first financial quarter in 2005 shoed that export freight increased nearly 52% in China market, a crucial factor successfully fuel pany ine from international priority courier services by 25%.

Federal Express netork already covered nearly 220 China cities. Their plan is to add 100 more to serve in the 4 to 5 years. Moreover, ith Shanghai already in place to serve for China, it seems natural to move its Asia Pacific headquarter into China as ell. This is regarded as a prelude to establish its on 'holly-oned' enterprise in China.

Compared to Federal Express, UPS intention is obviously 'going alone'. Its China partner – Sinotrans Airport Transportation Development Co. Ltd. announced earlier that UPS ill pay USD 100 million to acquire direct management rights on the express services represented by its China partner. Sinotrans Development and Sinotrans are currently the agency organization for UPS in China, offering delivery services for UPS in domestic China at a fee.

According to Agreement, UPS has direct control on the express services in Shanghai, Guangzhou, Shenzhen, Tianjin and Qingdao since January 1, 2005, and the right to independently open courier services in another 18 cities at the end of 2005. As a result, UPS staff in China ill reach nearly 1700.

Agreement of China accession to WTO stipulated that China ill further open the market of road freight, arehousing, ocean liner transport, shipping agency and express services, including road freight transport, cargo freight leasing, holesaling, retailing and its logistics delivery of general goods, restrictions lifted on the region and shares ratio for foreign investment in import/export of automotive transportation panies. Amongst, quite a number of sectors alloed foreign participants to open holly-oned enterprises.

Obviously, this is hat the foreign investors anted to see. They are gathering steam to expand into China market once China fulfills its promise. Announcement made by Sinotrans Development as mentioned above is an example. International logistics group no longer need to rely on JV or partnership once China Logistics market is fully opened.

Currently, there are already more than 250 000 foreign-funded panies operated in China. Foreign investment that China attracted in actual exceeds USD 550 billion. 450 out of 500 orld large multi-national groups already invested in China. More than 30 of them set up their regional headquarters in China.

Underdeveloped China logistics sector hobbled at the early stage and not standardized, a sharp contrast to the booming market on the flip side.

Information from Ministry of Commerce revealed that there are over 730 000 panies registered under the name 'logistics'. Apart from fe large Groups, most are simply cottage panies ith 'one truck and a driver'. These motley groups of 'professionals' are the culprits of the all-time high cost of China logistics. Statistical data shoed that ratio of China logistics cost to GDP is approximately 21%, hile this is only 10% in developed economies. 1 or 2 percentage points don in logistics cost can spell out nearly RMB 200 billion of social benefits. Hoever, majority of Chinese enterprises remain at cutting labor and ra material to control their costs. Their mindset not yet accustomed to the concept of scaling don logistics cost. Hence, industry insiders believed that China logistics is still a long ay to professional 'modern logistics'.

Logistics contributes to national economy be means of moving pany goods using the most optimal solution, professional technology and netork at minimum cost. Lo logistics cost bring don its eighting in national economy in order to provide better investment landscape. This kind of most optimal solution is achieved through utilization of idle societal resources. Yet, there are not many logistics panies in China ish to be professional. People still think logistics is only a bunch of panies trying to do everything.

China logistics has huge demand. Hoever, hat customers see logistics is only transportation. Fe Chinese enterprises have the vision to use professional logistics panies to integrate and revamp internal logistics system. On the other side, scores of neers sept up into the avese. They run in their on ay, no standard. Price ar and violations are mon. There is no need to put the blame on the influx of foreign players after China bee WTO member. All local logistics rushers are losing money if this kind of internal price ar continues.

Current status of China logistics is that lo cost in some individual panies at this stage is at the expense of expanding societal cost. This kind of superficial lo cost does not reflect the truth. A large share of the logistics cost should be undertaken by panies are actually covered by government and society.

3PL is catching attention from everybody since reform in the production of modern manufacturers and changes in external conditions of the market. In developed countries, logistics in advanced panies already move to 3PL or even 4PL.

Increased Logistics Outsourcing: When societal division of labor goes further, supply chain not only just includes supplier, distributor and retailer, but also 3PL service providers, ho gradually bee an indispensable member. Survey result shoed that proportion of outsourced logistics is on the rise. 3PL role in supply chain is increasingly important. Oing to the professionalism, lo cost and improved service, more and more panies are illing to outsource their logistics and specialized in its on core business.

In the first half-year of 2004, demand of societal logistics continues to be driven by the increased market scale under the rapid development of national economy, especially the accelerated progress of heavy chemical industry. Concurrently, imbalance of supply and demand of logistics aggravates. Logistics cost ill further climb up.

Data from China Logistics Association shoed the folloing characteristics of China logistics in the first half-year of 2004.

First and foremost, it's clear that logistics supply can't meet the demand. Economy asks for modern logistics. Beteen total logistics amount that reflect demand scale and the total freight volume that represent logistics supply is 17.3 percentage points. The difference clearly demonstrates supply falls short of demand even price factor is eliminated.

Second, logistics cost soar, ratio to GDP is bigger. This states that considerable increase in total cost arising from economic development stems from the increase in logistics cost.

Third, investment groth for logistics tends to go don hen pared ith the groth of logistics demand. In the first 6 months of 2004, investment groth of logistics fixed assets as 8.5 percentage points don hen pared to the total amount of societal logistics across the country in the same period, and 7.4 percentage points hen pared to the investment groth of fixed assets in cities and tons in the same timeframe. Investment fall short of the demand causes serious transport bottleneck. It is the main reason hy it's difficult to iron out logistics hurdles. It is also the major reason that causes the lo efficiency of China logistics and its high cost.

From: MBA CAREER DAYS