As China is now one of the most important links in an increasingly globalised manufacturing supply chain, Chinese logistics companies also face an unprecedented opportunity to expand their operations not just within China, but around the world. At the same time, WTO commitments have meant that domestic third party logistics ("3PL") companies now face strong competition from multinational industry giants. Under these conditions, what steps should be taken to allow the Chinese domestic logistics industry to thrive?

Early days

Logistics is a relatively new field in China, and in many ways it is still in an early stage of development. Academics and industry analysts have identified a number of problems which could hold back the development of China's logistics industry.

First and foremost, logistics services are incredibly expensive in China. In developed first world countries, logistics costs generally account for around 10% of GDP; in China, this figure is somewhere between 20-30% of GDP, far above the international average. Although recent improvements in logistics infrastructure are helping to combat this problem, outmoded and inefficient service practices remain a concern, keeping logistics costs high. This has made life difficult for domestic manufacturers, weakening their ability to compete.

Perhaps as a result of this problem, Chinese companies have been slow to outsource logistics operations to third party providers. In a speech to the American Chamber of Commerce in 2003, the Director and President of the China Merchants Group, Dr. Fu Yuning, explained that at that point there were as many as 15,000 providers of 3PL services in China, with no single operator holding more than a 2% share in the market. He also pointed out that only 15% of local Chinese companies outsourced their logistics needs. Five years on, this situation has not changed dramatically: Sun Lei, Director of the China Federation of Logistics and Purchasing ("CFLP") International Cooperation Department, was quoted at the recent China 3PL Summit as saying that "in China, not many local companies want to use 3PLs and there is a lower concentration of such activities."

Another problem has been that the industry is relatively fragmented, with a large number of operators. Many of these companies only offer a limited range of logistics services, or even just a single function, such as transit or storage. Value added ancillary services, such as packing or processing, are still rare. As a result, few companies can offer a one-stop 3PL solution which manages the entire supply chain for their clients. Companies have also been slow both to adopt advanced technologies (such as GPS navigating and electronic data exchange) and to cultivate top-rate talent, particularly at the management level. Experts believe that outdated technologies and management practices have hindered the development of the domestic 3PL industry.

Overseas influence

One major factor that has been a double-edged sword for the domestic 3PL industry has been China's entry to the WTO. On the one hand, WTO commitments have meant that the market environment for logistics companies is far more open than it was before. Demand for outsourced supply-chain management has increased as domestic manufacturers have been forced to cut costs in order to compete. Moreover, the arrival of foreign companies such as UPS, DHL and FedEx has provided local companies with a template to study from, picking up advanced business and management practices which will help them to develop further.

At the same time, these foreign companies are providing stern competition for domestic 3PL suppliers in their own market. As the Director of the Logistics Standardisation Department at Beijing Jiaotong University Mr. Zhang Duo concedes, these foreign players have a lot of financial clout and now hold a dominant role in China's 3PL market. However, he still sees many positives for domestic firms. As he explains, Chinese industry giants such as COSCO, Sinotrans and China Shipping Logistics Co. already have extensive transportation and infrastructure networks within China, and enjoy a better knowledge of the local market, and also better relationships with local businesses and government officials. Mr. Zhang believes that this gives domestic firms a distinct advantage over foreign firms, who cannot build an integrated logistics network to cover the whole country overnight.

Government assistance

Aside from their WTO commitments, the Chinese government has long recognised the importance of developing the logistics industry in China and has taken a number of measures to aid this development. China's 10th Five Year Plan concentrated heavily on improving logistics in the country, expanding the road and rail networks, increasing the size and capacity of the nation's ports, and investing in logistics parks located in strategically important locations across the country. One example is the Mafang Logistics Park in Pinggu, Beijing. This new logistics park is strategically located at the intersection of Beijing and Tianjin Municipalities and Hebei Province, and covers an area of more than 1.3 million square metres. As well being an important cargo transfer station for imports/exports in transit between Beijing and Tianjin, the park serves an important role in promoting e-commerce between the two mainland cities and Hong Kong.

Preparations for the Olympic Games this year have furthered these improvements. Beyond this, a number of government departments, including the National Trade Commission and the National Bureau of Statistics, have stressed the need to focus on logistics development.

However, Mr. Zhang believes that at present, the government does not give enough support to upcoming 3PL companies in China. He has called for the government to coordinate the efforts of different departments and regions to promote logistics development, perhaps by establishing a dedicated agency similar to the Hong Kong Logistics Development Council. In a broader sense, he sees several other areas in which Hong Kong's wealth of experience in the field can benefit the mainland logistics industry. He suggests, for example, that municipal governments in cities like Shenzhen and Guangzhou could sign bilateral agreements on logistics cooperation with Hong Kong. He also sees Hong Kong, with its integral role in the global economy and its ability to help break language barriers, as an important stepping stone for mainland companies to expand their networks overseas. Doctor Chen Jijun, Director of the e-Commerce and Modern Logistics Research Centre at the Qinghua University Department of Planning and Director of the China e-Commerce Research Centre, agrees that Hong Kong logistics firms can provide guidance for companies in the mainland. He explains that Hong Kong enterprises have a great deal of international exposure, and can teach mainland companies essential management techniques for dealing with international business. He adds that e-commerce will also help to drive the mainland logistics industry, helping companies to achieve important strategic goals.

The international stage

The past few years have seen the rapid development of a logistics industry within China, and analysts predict that this industry will continue to grow at a staggering 20% p/a through to 2010. But what of Chinese logistics companies expanding abroad? It is true, and perhaps understandable, that Chinese logistics companies have yet to achieve the international success and renown that companies in the manufacturing, banking and communications sectors have done. However, as the domestic logistics market strengthens and demand for Chinese products the world over shows no real sign of slowing, the transition that Chinese logistics companies are making from the local to the global market looks set to continue.