The Logistics “Flow of Things” in China is Costly and Cumbersome

Two examples of the infrastructure that has helped make China a mighty trading power can be found on the outskirts of Shanghai: Yangshan, the world’s busiest container port, and Pudong airport, the world’s third-biggest handler of air cargo.

Radiating out across the country are more than 100,000km (62,000 miles) of expressways and a comparable length of railways.

Given all this new infrastructure, you might expect China to have a world-class logistics industry, too. It does not.

Logistics covers transportation, warehousing and the management of goods. Its Chinese translation, wu liu, literally means “the flow of things”.

But that flow within the country is costly and cumbersome. Much of the investment in infrastructure has gone to lubricate exports.

Now, as China’s government shifts its focus to consumption at home it is finding that the domestic logistics industry is woefully inefficient.

Logistics spending is roughly equivalent to 18% of GDP, higher than in other developing countries (India and South Africa spend 13-14% of GDP) and double the level seen in the developed world. Li Keqiang, the prime minister, recently echoed industry’s complaints that sending goods from Shanghai to Beijing can cost more than sending them to America.

Most warehouses are old and unmechanised. Goods are transferred up to a dozen times from vehicle to vehicle as they make their way across the country. There are no cargo hubs that help link freight from rail to road. The decrepit and overloaded lorries that ply the new highways are unable to find a return cargo on more than one third of their trips.

China has over 700,000 trucking operators, most of them one-man outfits. (America has about 7,000.) Scale is essential to the business, but the top 20 firms together make up barely 2% of the market. Nancy Qian of KXTX, a logistics firm, observes that companies compete so fiercely on price that most barely make any money, and so lack the funds needed to modernise or achieve economies of scale.

The industry is carved into niches, making it hard for integrated service providers to emerge. Sleepy state-owned enterprises such as Sinotrans and China Post control the markets for air freight and domestic post.

Foreign express-delivery firms are salivating over the market but FedEx and UPS, for example, have been granted only limited licences for domestic delivery. More importantly, foreign firms are burdened with high costs that make it hard to compete for frugal customers against lean local rivals.

For all firms, local or foreign, a tangle of regulations, local protectionism and corruption makes getting goods across China a problem. Logistics, broadly defined, falls under the authority of nine ministries and commissions. Local governments often levy taxes on operators and demand they obtain special licences to operate. There are also heavy tolls on China’s roads, and lorries are restricted from entering most urban areas so must transfer goods onto smaller vehicles.

The Road Ahead
The good news is that moves are afoot to improve the industry. The central government is concerned about its inefficiency and cost. At a meeting last month of the State Council, China’s cabinet, leaders approved a new plan for reform, though details are still being finalised. The goal is to lower costs and develop larger companies.

But the brighter hope for reform is coming from the private sector. Much money, including from private-equity funds, is now going into creating bigger logistics firms. Some four dozen deals have recently been done. Initiatives are also under way to organise data-sharing platforms so that trucking firms can match up with customers to reduce the number of empty return journeys.

E-commerce firms in particular are worried that a bottleneck in logistics could choke off their spectacular recent growth. Even more than industrial customers, consumers demand high levels of customer service at low prices. Fox Chu of Accenture, a consultancy, observes that the average purchase online in China is below 100 yuan ($16), but he reckons the delivery cost of the last leg alone could be 8-15 yuan.

Concerned about this, online retailers are taking matters into their own hands. JD, a leading e-commerce firm, is developing its own distribution network of warehouses, lorries and deliverymen. In this, it is inspired by the “asset heavy” approach taken by Amazon, an American e-commerce pioneer. Ye Lan, chief marketing officer of JD.com, said recently that the firm’s own logistics system can now reliably deliver goods either the same day or next day in some 300 cities across the country. Whether the firm can afford to expand its excellent logistics network to less populated areas remains to be seen.

Alibaba, China’s biggest e-commerce firm, prefers an “asset light” approach. Rather than owning its own delivery trucks, it has joined hands with a number of existing courier firms who plan to invest some 100 billion yuan to develop a “smart logistics” network relying on big data. Among other things, this coalition plans to analyse customer information so that resources can be deployed more efficiently. It has also recently entered into a strategic co-operation pact with China Post. By sharing warehouses, processing centres and delivery personnel, the firm hopes to be able to deliver online purchases within 24 hours even to small cities and villages.

The Future is Mechanized
To see where all this could be heading, visit a group of warehouses run by Global Logistic Properties (GLP) in Suzhou, not far from Shanghai. With over 500 warehouses in China, the Singaporean firm is the biggest foreign builder of logistics facilities in the country. It recently entered into a $2.5 billion partnership with several influential local firms. Jeffrey Schwartz, GLP’s boss, says that, whereas his clients were once focused on exports, most are now using his facilities to serve the local market. With warehouse space per person in China at less than a tenth the level in America, he believes growth will be “supercharged”.

GLP’s warehouse is large and well laid out, which helps clients organise their goods. With mechanisation, it can be run by just six people. Wireless scanners and bar codes enable inventory management to be digitised. A raised loading bay allows shipments, neatly stacked on palates, to be transferred by forklift truck into waiting lorries. Valuable goods such as integrated circuits are secured with electronic locks and tracked by GPS. If officials would just get out of the way, China’s domestic logistics system could yet take off.

Source: The Economist