Increasing economic prosperity fuels demand for logistics in China

 In continuing its impressive development path of recent decades China has become two economic markets that are interconnected and converging: 

- its Global market which is driven by mass production for export to developed countries and 
- its Local market which revolves around rapidly expanding domestic consumption.
Multi-national companies first came to China to take advantage of abundant supply of low-cost labour and incentives to establish operations in Special Economic Zones. Nowadays they remain in China to sell products to Chinese consumers in the local market. Factories and shops are interconnected and converging – the workers have become the shoppers. One development has fuelled the other, increasing economic prosperity across the nation. The latest saying is that the foreign companies “came to China for the workers, now they stay in China for the shoppers”.
From the China logistics perspective, the emphasis is therefore no longer purely on transporting products from factories to the ocean ports on the eastern seaboard for export to the developed markets. 
Nowadays there is just as much emphasis on distributing goods within and throughout the domestic China market in order to reach the increasingly prosperous consumers located all over this vast country.  
Logistics Sector - the logistics industry has been a key part of China’s relentless economic growth. The latest report from the China Federation of Logistics and Purchasing (CFLP) says that China’s logistics industry was worth RMB 177.3trn in 2012, up 9.8% from 158.4 trn in 2011, mainly fuelled by the country imports of raw materials. The CFLP figures say that logistics costs increased by 11.4% to RMB 9.4 trn, equivalent to 18% of gross domestic product.
Transportation accounted for over 52% of China’s logistics costs with 78% of all domestic cargo being moved by road. Road transport companies account for the largest share of the logistics market in China with 790,000 road hauliers, but the top 20 trucking companies share less than 2% of the market.
As reported by Asia Maritime, China’s logistics sector remains hugely complex, brutally competitive and massively fragmented - even the top 50 logistics players, led by Cosco, Sinotrans & CSC Holdings and China Shipping, with combined sales revenues of more than RMB 2 billion, have less than 2% of the total market.
Li & Fung’s latest China Logistics report says that high road tolls, stringent regulations and increased taxes are some of the issues facing logistics companies in China, with road tolls now representing 33% of total transportation costs. “Excessive highway tolls, as well as price hikes of fuel and labour, have eaten into many logistics enterprises’ profits,” the report says.
Continuing economic development in both production and consumption sectors brings new challenges and opportunities for the logistics industry. Although logistics in China is the backbone of the domestic supply chain, the industry itself remains complex, inefficient and fragmented. 
Third party logistics (3PL) penetration – where transportation and warehousing activities are out-sourced to a third party - is around 20% in China. 
Contrast that to the USA where the penetration rate is around 45% and Western Europe where it’s almost 50%, whilst in Japan outsourcing reaches 80%. 
The low 3PL penetration rate in China is a function of it being early days for outsourcing – vertical integration is the traditional approach of Chinese companies. It also indicates the relative immaturity of the logistics sector - reflecting the developing market environment. 
Whilst we are seeing improvements in the quality of warehousing infrastructure – largely driven by property developers, the increasing presence of multi nationals and related investments – the domestic transportation sector remains massively fragmented and hugely challenging.
Providing transportation to service nationwide domestic distribution networks typically involves numerous trucking sub contractors – with the majority of them being owner-operators with just one or two trucks – rarely of good quality and with little, if any, modern technology. 
International logistics service providers are providing nationwide transportation solutions through tightly managed networks of pre-qualified sub-contractors, combined with adoption and deployment of technology for electronic track and trace.
As China’s economy continues to develop, the logistics sector will mature and outsourcing levels increase. The increasing presence of multinational companies in the domestic market, accelerates the deployment of international best practices in logistics, embracing multi modal transportation, structured distribution networks and efficient supply chain ecosystems.
More about the author
China based since 2002, Mark Millar delivers value for clients with informed and independent perspectives on their supply chain strategies in China and Asia.  
Mark serves as Far East Correspondent for Warehousing and Logistics International and is an International Advisor to the Shenzhen Logistics and Supply Chain Management Association (LSCMA), the organisers of the China International Logistics Fair (CILF) taking place in Shenzhen, China during 14-16 October 2014.
Whilst living in Shanghai he led sales and marketing for start-up joint venture Platinum Logistix and served as Honorary Chairman of the China Supply Chain Council.  He subsequently led business development initiatives in China for Exel Contract Logistics (now DHL Supply Chain) and across Asia for the Supply Chain Solutions division of UPS.
Mark has visited more than 30 Chinese cities, and is now based in Hong Kong, where he serves as Chair of the Logistics Committee at the British Chamber and Chair of International Relations Committee at the Hong Kong Logistics Association. A regular Speaker at industry events across Asia, including China, Hong Kong, Singapore, India, Thailand, Malaysia, Vietnam, Indonesia, Philippines and Myanmar, Clients have engaged Mark as Speaker, MC, Moderator or Conference Chairman at more than 300 events in 20 countries. 
The Global Institute of Logistics recognised him as “One of the most Progressive People in World Logistics” and London business publishing house Kogan Page have recently commissioned him to write the book “Global Supply Chain Ecosystems”.
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