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The past Chinese Spring Festival saw a huge
growth in retailing, but also a huge growth in complaints and reports of online shopping, mainly due to the delayed delivery service of those e-commerce enterprises. Those complaints of the logistics accounted for 40 percent of all the complaints during the festival, according to China News Agency.
Logistics plays a significant role in economic and trade. The logistics problem in the festival may be understandable considering that the couriers in the sector headed home for the holidays. When they are back to work, the problem can be easily solved.
However, China’s logistics is a far more complex matter. The fast-growing economy calls for highly efficient logistics. Though the logistics in China is still far from satisfactory, it is developing gradually in face of various challenges.
The complex logistics
Following the country’s economic expansion, China’s transport and logistics industry has been growing impressively in recent years. Data from the Hong Kong Logistics Association shows that total logistics costs in 2009 were RMB 6.1 trillion, up from RMB 3 trillion five years earlier.
The goods transported by China’s logistics firms are being carried on a rapidly expanding transport network. Since 2008 when the government launched a RMB 4 trillion stimulus program to counter the effects of the global financial crisis, China has seen a rapid growth in infrastructure construction including expressways, railways, and waterways, according to a recent report by KPMG.
However, the logistics costs in China are still very high. While there are significant variations by region, overall logistics costs amount to 18 percent of China’s gross domestic product, higher than many developed countries. The good news is this share is dropping, but slowly: in 2004, the figure was 18.8 percent. The main brunt of this high cost are users. For manufacturers, logistics costs can amount to as much as between 30-40 percent of production costs. For companies wanting to distribute goods, the challenge is having to deal with numerous small operators. Transportation companies also suffer from reduced efficiency and an inability to pass on their high operating costs to the user.
The report pointed out that one reason for China’s high logistics cost is the fragmented nature of the sector. Carrying goods around the country can involve a mixture of foreign, state-owned and domestic private businesses. The precise mix varies from sector to sector, depending on the respective degree of liberalization.
Transport and logistics companies are subject to a range of taxes and regulations. Currently transport businesses, for example, pay business tax at a 3 percent rate; warehousing and freight forwarding both have a business tax of 5 percent.
Companies that span different parts of the supply chain have to pay multiple taxes to different bodies at different rates. However, changes likely are on the way as the State Council has pledged to unify the different taxes applicable to the goods sector from the services sector by phasing out business tax and replacing it with a system where all companies pay VAT.
There are also tolls levied by provincial and city governments. For trucking companies, these can account for one-third of their total costs. All of this further compounds the challenges facing small operators by making it harder to establish standardized processes and effective management controls. In turn, it makes practices such as overloading more common.
China’s high rate of economic growth, while fuelling demand for logistics services, also creates challenges for operators. Wage costs are rising sharply, for example.
Part of the reason why logistics costs are high as a proportion of GDP is China’s manufacturing orientation: measured by value, moving industrial products accounts for around 90 percent of all goods moved; in developed countries, with their far greater reliance on services, logistics costs are certain to account for a far lower share of GDP, said the report.
Another part of the reason is that regulations governing the sector have remained fragmented. The transport and logistics sector is subject to oversight by a range of different bodies, with many jurisdictions overlapping, said the report. Attempts to overhaul the regulatory sector remain work in progress.
The report indicated that for companies looking to navigate China’s logistics industry either as an industry player or to move their goods around within the country, understanding the industry’s development will go a long way to explaining both its complex and contradictory structure. Reform is on its way, but it will take time to implement.
Challenges of the logistics
As domestic consumer market is burgeoning, China’s transport and logistics infrastructure faces fresh challenges and fresh scrutiny from businesses and government planners.
In the context of transport and logistics, the challenge is for logistics to keep pace with industrial relocation within China and also with the growth of domestic demand, the report said.
Anyone doing business in China will admit that managing logistics continues to be not only a complex, but also a relatively costly, part of their operations. Moving goods within China remains particularly challenging. High fees like road tolls, can encourage transport companies to overload their trucks and breach safety measures.
Performance can also be hampered by the availability of experienced staff, especially at a managerial level. With China’s economy continuing to expand strongly, wages and land are becoming more expensive, particularly in the leading cities.
The government has also acknowledged that efficient transport and logistics are key for long-term development and it is committing huge funds to build airports, roll out a national expressway network and, expand and upgrade the country’s railway system.
Geographically, the heavy investment in transport infrastructure has left almost every part of the country accessible by highway and most of it by rail. The outcome of this investment is that the less-developed central and western regions are finally starting to become linked by reliable transport routes to the east coast.
Aside from the sheer scale of investment, the widely touted solution for many of the industry’s ills is consolidation leading to the creation of a smaller number of larger and more efficient companies. Mergers and acquisitions are taking place, but they show no sign of accelerating.
China’s shift towards domestic private consumption is underway, but it will take time. The logistics and transport sector will play a key role in making it happen. Indeed, the possibilities that a modern logistics sector can offer have been demonstrated over the past two years with the sudden emergence of online shopping as a major new business.
The government is now actively supporting such measures. In February 2009, in the aftermath of the global financial crisis, the government launched its Plan to Adjust and Rejuvenate the Logistics Industry. Its objective was to rationalize the industry by encouraging such practical measures as establishing technological and other standards, accelerating the rate of mergers and acquisitions, supporting training schemes, and increasing the utilization of information technology through investment in research and development and the application of new technologies relevant to the industry.
The broad-brush strokes of the plan have since been supplemented by more concrete measures, most recently in a set of eight measures announced by the State Council in June 2011.
With these preferable policies, the logistics is to be upgraded over the coming decade, though most likely in an incremental fashion rather than through any single bold leap forward. Task for enterprises
The report pointed out that finding logistics businesses with a true single nationwide reach can be a demanding task for retailers and other companies wishing to sell goods nationwide. Companies are succeeding by exploiting niche opportunities and investing in their own systems and processes.
Some companies are developing in-house logistics capabilities. Those with big enough pockets have tended to overcome the challenges of China’s fragmented logistics industry by developing their own logistics arms. For instance, KFC, China’s biggest restaurant chain, with some 3,300 outlets in 700 cities, runs its own logistics network. Domestic companies such as Taobao and 360buy.com are also making massive investments in distribution centers across the country.
“To facilitate our trade, we have established warehousing centers and logistics team in six major cities in China,”Dixon Yuan, Chairman of Yesmywine, a leading online retail platform for imported wine, told China’s Foreign Trade.
Companies need to invest in systems and people. For companies that lack the means to handle logistics in-house, moving goods around the country can be a slow process, typically requiring multiple transfers between a host of operators, making it hard to keep track of shipments and offering many opportunities for wastage either by theft, breakage or carelessness. Leading operators are differentiating themselves by addressing these issues and focusing the consistency and reliability of their service.
This is something which requires a significant investment in systems, processes and human resources. Having committed to what can be a sizeable investment, establishing and embedding processes that effectively link people with systems and infrastructure is critical.
If companies can fully realize the return on their investment in systems, they have an opportunity to establish a competitive advantage; domestic players may be well placed if they can develop processes which employees feel comfortable with in the local context.
Moreover, China’s talent base is deepening, but attracting trained and experienced staff to the logistics sector is a challenge.
Companies also need to tap opportunities in express delivery and e-commerce. Fuelled by the exponential growth in its online shopping, China’s e-commerce industry is expanding rapidly. By 2015, the e-commerce market is expected to possibly surpass the size of the U.S. market, according to a survey by The Boston Consulting Group.
E-commerce in China was stymied by the lack of reliable payment systems for years. In 2008, express delivery companies started collecting payment when they dropped off goods — creating a new industry overnight. This business is set to continue growing rapidly.
One of the main reasons DHL and FedEx launched their domestic express services was to tap into China’s rising consumption. Running such businesses is clearly expensive. In a sector where low cost operators feel the pressure of high fuel costs and burdensome regulations, it could be the higher value services that are best-placed to thrive.
Outlook for the logistics
Chinese officials are now working on strengthening the operational environment to upgrade the logistics industry. The government’s 11th Five-Year Plan for the period 2006-2010, set out a number of initiatives to establish transportation and logistics markets in support of the development of service industries as well as the growth of the economy as a whole. Now, with the 12th Five-Year Plan, covering the period 2011-2015, the emphasis has switched towards broader encouragement of developing a more sustainable economy through higher technological standards and innovation, according to the report.
Encouraging greater private consumption and moving the Chinese industry up the value chain will help in this respect. As the country embraces more service and hightech industries, companies will need stronger logistics support to improve their efficiency. In turn, this will call for better management practices, a far more widespread use of information technology and systems that can integrate and monitor the movement of goods and materials both across the nation and in and out of the country.
Eight measures announced by the State Council in June 2011 further underline how the government is looking to help the development of the sector through reforming the environment in which it works rather than giving it explicit support.
One area that could see dramatic change is the tax regime. Currently, those parts of the logistics sector in the transport and communications category pay 3 percent of their turnover as business tax, while others, such as warehousing, because they are defined as services, pay 5 percent. With their margins already low, companies are lobbying hard for the rate for the entire industry to be unified at 3 percent.
While these rules in theory affect many types of businesses, China-based transport companies that move goods internationally are particularly vulnerable, with all the work they do outside the country potentially being subject to Chinese business tax.
The report showed that the officials are taking these issues seriously. The State Council has pledged to unify the different taxes applicable to the goods sector from the services sector by phasing out business tax and replacing it with a system where all companies pay VAT. This objective moved a step closer to fruition in late 2011, when the State Administration of Taxation and the Ministry of Finance finalized details for a pilot program in Shanghai. Transportation, logistics and modern services industries were the sectors marked for inclusion in this program. Replacing the varying rates now used would both be simpler, and therefore easier to oversee, and fairer.
Concerns about regulation largely centre on the weak or inconsistent enforcement of existing rules, rather than a need for any major overhaul. Also important would be a greater emphasis on uniform practices and standards for basic items such as pallets.
The challenge is that the best domestic transport companies will use their low-cost base as a foundation for out-maneouvering both other local and foreign companies. The best of these companies will of- fer formidable competition to the international companies, whose greater experience is offset by their higher costs.
Customs procedures could be improved. According to the World Bank’s logistics index, clearing customs takes an average of 3.4 days when there is a physical inspection involved, compared to 1.6 days in Germany and 2.2 days in the US. China inspects 9 percent of shipments that go through customs compared to 3 percent in the US and Germany and 2 percent in the UK.
However, all the companies interviewed for this report agree that further opportunities for them to grow their business can only emerge in China. The report believed that China’s logistics industry enjoys a promising future thanks to the following reasons:
First, the physical infrastructure is in place allowing huge and rapidly growing volumes of goods to be distributed between almost any two points in the country. Building a nationwide network may entail working with a host of local companies, but it can be done.
Second, there is a recognition centrally of the need to change – most obviously by eliminating overlapping taxation. If a simpler regulatory system can emerge from the creation of the Ministry of Transport, then a host of competing and conflicting standards may also be resolved. The transformation will not occur overnight, but the latest government proposals suggest there is recognition that change is necessary, while technology can be an enabler in comparatively simple ways, from streamlined transit procedures at toll stations to quicker approvals and payment systems.
Third, and perhaps most importantly, customers are demanding change. As other costs rise, manufacturers are looking to new points on their supply chain to drive efficiency. Logistics has become critical to many businesses’competitiveness.
Many international transport and logistics companies are focused on finding and serving customers willing to pay a premium price for quality and reliability of their services.
For domestic companies, the challenges are varied. Smaller and medium-sized private companies are looking for ways to raise standards without being squeezed out by less scrupulous competition. Others will need to secure finance in order to acquire complementary or competitor businesses. The companies which are best placed to succeed are those with a clear vision of their long-term goals and access to the financial resources necessary to be able to invest in people and systems.
All of the eight steps proposed by the government can in turn encourage the longer term goal of industry consolidation. Bigger, more efficient logistics companies would not only help manufacturers move their goods around more efficiently, it would also help farmers get both their inputs and their produce to markets as cheaply as possible, potentially helping to keeping a lid on food inflation.
As such, increasing the efficiency of China’s logistics sector would not only benefit business, but society as a whole. The biggest incentive to overcome the challenges facing China’s transport and logistics industry is the lure of the domestic market.
growth in retailing, but also a huge growth in complaints and reports of online shopping, mainly due to the delayed delivery service of those e-commerce enterprises. Those complaints of the logistics accounted for 40 percent of all the complaints during the festival, according to China News Agency.
Logistics plays a significant role in economic and trade. The logistics problem in the festival may be understandable considering that the couriers in the sector headed home for the holidays. When they are back to work, the problem can be easily solved.
However, China’s logistics is a far more complex matter. The fast-growing economy calls for highly efficient logistics. Though the logistics in China is still far from satisfactory, it is developing gradually in face of various challenges.
The complex logistics
Following the country’s economic expansion, China’s transport and logistics industry has been growing impressively in recent years. Data from the Hong Kong Logistics Association shows that total logistics costs in 2009 were RMB 6.1 trillion, up from RMB 3 trillion five years earlier.
The goods transported by China’s logistics firms are being carried on a rapidly expanding transport network. Since 2008 when the government launched a RMB 4 trillion stimulus program to counter the effects of the global financial crisis, China has seen a rapid growth in infrastructure construction including expressways, railways, and waterways, according to a recent report by KPMG.
However, the logistics costs in China are still very high. While there are significant variations by region, overall logistics costs amount to 18 percent of China’s gross domestic product, higher than many developed countries. The good news is this share is dropping, but slowly: in 2004, the figure was 18.8 percent. The main brunt of this high cost are users. For manufacturers, logistics costs can amount to as much as between 30-40 percent of production costs. For companies wanting to distribute goods, the challenge is having to deal with numerous small operators. Transportation companies also suffer from reduced efficiency and an inability to pass on their high operating costs to the user.
The report pointed out that one reason for China’s high logistics cost is the fragmented nature of the sector. Carrying goods around the country can involve a mixture of foreign, state-owned and domestic private businesses. The precise mix varies from sector to sector, depending on the respective degree of liberalization.
Transport and logistics companies are subject to a range of taxes and regulations. Currently transport businesses, for example, pay business tax at a 3 percent rate; warehousing and freight forwarding both have a business tax of 5 percent.
Companies that span different parts of the supply chain have to pay multiple taxes to different bodies at different rates. However, changes likely are on the way as the State Council has pledged to unify the different taxes applicable to the goods sector from the services sector by phasing out business tax and replacing it with a system where all companies pay VAT.
There are also tolls levied by provincial and city governments. For trucking companies, these can account for one-third of their total costs. All of this further compounds the challenges facing small operators by making it harder to establish standardized processes and effective management controls. In turn, it makes practices such as overloading more common.
China’s high rate of economic growth, while fuelling demand for logistics services, also creates challenges for operators. Wage costs are rising sharply, for example.
Part of the reason why logistics costs are high as a proportion of GDP is China’s manufacturing orientation: measured by value, moving industrial products accounts for around 90 percent of all goods moved; in developed countries, with their far greater reliance on services, logistics costs are certain to account for a far lower share of GDP, said the report.
Another part of the reason is that regulations governing the sector have remained fragmented. The transport and logistics sector is subject to oversight by a range of different bodies, with many jurisdictions overlapping, said the report. Attempts to overhaul the regulatory sector remain work in progress.
The report indicated that for companies looking to navigate China’s logistics industry either as an industry player or to move their goods around within the country, understanding the industry’s development will go a long way to explaining both its complex and contradictory structure. Reform is on its way, but it will take time to implement.
Challenges of the logistics
As domestic consumer market is burgeoning, China’s transport and logistics infrastructure faces fresh challenges and fresh scrutiny from businesses and government planners.
In the context of transport and logistics, the challenge is for logistics to keep pace with industrial relocation within China and also with the growth of domestic demand, the report said.
Anyone doing business in China will admit that managing logistics continues to be not only a complex, but also a relatively costly, part of their operations. Moving goods within China remains particularly challenging. High fees like road tolls, can encourage transport companies to overload their trucks and breach safety measures.
Performance can also be hampered by the availability of experienced staff, especially at a managerial level. With China’s economy continuing to expand strongly, wages and land are becoming more expensive, particularly in the leading cities.
The government has also acknowledged that efficient transport and logistics are key for long-term development and it is committing huge funds to build airports, roll out a national expressway network and, expand and upgrade the country’s railway system.
Geographically, the heavy investment in transport infrastructure has left almost every part of the country accessible by highway and most of it by rail. The outcome of this investment is that the less-developed central and western regions are finally starting to become linked by reliable transport routes to the east coast.
Aside from the sheer scale of investment, the widely touted solution for many of the industry’s ills is consolidation leading to the creation of a smaller number of larger and more efficient companies. Mergers and acquisitions are taking place, but they show no sign of accelerating.
China’s shift towards domestic private consumption is underway, but it will take time. The logistics and transport sector will play a key role in making it happen. Indeed, the possibilities that a modern logistics sector can offer have been demonstrated over the past two years with the sudden emergence of online shopping as a major new business.
The government is now actively supporting such measures. In February 2009, in the aftermath of the global financial crisis, the government launched its Plan to Adjust and Rejuvenate the Logistics Industry. Its objective was to rationalize the industry by encouraging such practical measures as establishing technological and other standards, accelerating the rate of mergers and acquisitions, supporting training schemes, and increasing the utilization of information technology through investment in research and development and the application of new technologies relevant to the industry.
The broad-brush strokes of the plan have since been supplemented by more concrete measures, most recently in a set of eight measures announced by the State Council in June 2011.
With these preferable policies, the logistics is to be upgraded over the coming decade, though most likely in an incremental fashion rather than through any single bold leap forward. Task for enterprises
The report pointed out that finding logistics businesses with a true single nationwide reach can be a demanding task for retailers and other companies wishing to sell goods nationwide. Companies are succeeding by exploiting niche opportunities and investing in their own systems and processes.
Some companies are developing in-house logistics capabilities. Those with big enough pockets have tended to overcome the challenges of China’s fragmented logistics industry by developing their own logistics arms. For instance, KFC, China’s biggest restaurant chain, with some 3,300 outlets in 700 cities, runs its own logistics network. Domestic companies such as Taobao and 360buy.com are also making massive investments in distribution centers across the country.
“To facilitate our trade, we have established warehousing centers and logistics team in six major cities in China,”Dixon Yuan, Chairman of Yesmywine, a leading online retail platform for imported wine, told China’s Foreign Trade.
Companies need to invest in systems and people. For companies that lack the means to handle logistics in-house, moving goods around the country can be a slow process, typically requiring multiple transfers between a host of operators, making it hard to keep track of shipments and offering many opportunities for wastage either by theft, breakage or carelessness. Leading operators are differentiating themselves by addressing these issues and focusing the consistency and reliability of their service.
This is something which requires a significant investment in systems, processes and human resources. Having committed to what can be a sizeable investment, establishing and embedding processes that effectively link people with systems and infrastructure is critical.
If companies can fully realize the return on their investment in systems, they have an opportunity to establish a competitive advantage; domestic players may be well placed if they can develop processes which employees feel comfortable with in the local context.
Moreover, China’s talent base is deepening, but attracting trained and experienced staff to the logistics sector is a challenge.
Companies also need to tap opportunities in express delivery and e-commerce. Fuelled by the exponential growth in its online shopping, China’s e-commerce industry is expanding rapidly. By 2015, the e-commerce market is expected to possibly surpass the size of the U.S. market, according to a survey by The Boston Consulting Group.
E-commerce in China was stymied by the lack of reliable payment systems for years. In 2008, express delivery companies started collecting payment when they dropped off goods — creating a new industry overnight. This business is set to continue growing rapidly.
One of the main reasons DHL and FedEx launched their domestic express services was to tap into China’s rising consumption. Running such businesses is clearly expensive. In a sector where low cost operators feel the pressure of high fuel costs and burdensome regulations, it could be the higher value services that are best-placed to thrive.
Outlook for the logistics
Chinese officials are now working on strengthening the operational environment to upgrade the logistics industry. The government’s 11th Five-Year Plan for the period 2006-2010, set out a number of initiatives to establish transportation and logistics markets in support of the development of service industries as well as the growth of the economy as a whole. Now, with the 12th Five-Year Plan, covering the period 2011-2015, the emphasis has switched towards broader encouragement of developing a more sustainable economy through higher technological standards and innovation, according to the report.
Encouraging greater private consumption and moving the Chinese industry up the value chain will help in this respect. As the country embraces more service and hightech industries, companies will need stronger logistics support to improve their efficiency. In turn, this will call for better management practices, a far more widespread use of information technology and systems that can integrate and monitor the movement of goods and materials both across the nation and in and out of the country.
Eight measures announced by the State Council in June 2011 further underline how the government is looking to help the development of the sector through reforming the environment in which it works rather than giving it explicit support.
One area that could see dramatic change is the tax regime. Currently, those parts of the logistics sector in the transport and communications category pay 3 percent of their turnover as business tax, while others, such as warehousing, because they are defined as services, pay 5 percent. With their margins already low, companies are lobbying hard for the rate for the entire industry to be unified at 3 percent.
While these rules in theory affect many types of businesses, China-based transport companies that move goods internationally are particularly vulnerable, with all the work they do outside the country potentially being subject to Chinese business tax.
The report showed that the officials are taking these issues seriously. The State Council has pledged to unify the different taxes applicable to the goods sector from the services sector by phasing out business tax and replacing it with a system where all companies pay VAT. This objective moved a step closer to fruition in late 2011, when the State Administration of Taxation and the Ministry of Finance finalized details for a pilot program in Shanghai. Transportation, logistics and modern services industries were the sectors marked for inclusion in this program. Replacing the varying rates now used would both be simpler, and therefore easier to oversee, and fairer.
Concerns about regulation largely centre on the weak or inconsistent enforcement of existing rules, rather than a need for any major overhaul. Also important would be a greater emphasis on uniform practices and standards for basic items such as pallets.
The challenge is that the best domestic transport companies will use their low-cost base as a foundation for out-maneouvering both other local and foreign companies. The best of these companies will of- fer formidable competition to the international companies, whose greater experience is offset by their higher costs.
Customs procedures could be improved. According to the World Bank’s logistics index, clearing customs takes an average of 3.4 days when there is a physical inspection involved, compared to 1.6 days in Germany and 2.2 days in the US. China inspects 9 percent of shipments that go through customs compared to 3 percent in the US and Germany and 2 percent in the UK.
However, all the companies interviewed for this report agree that further opportunities for them to grow their business can only emerge in China. The report believed that China’s logistics industry enjoys a promising future thanks to the following reasons:
First, the physical infrastructure is in place allowing huge and rapidly growing volumes of goods to be distributed between almost any two points in the country. Building a nationwide network may entail working with a host of local companies, but it can be done.
Second, there is a recognition centrally of the need to change – most obviously by eliminating overlapping taxation. If a simpler regulatory system can emerge from the creation of the Ministry of Transport, then a host of competing and conflicting standards may also be resolved. The transformation will not occur overnight, but the latest government proposals suggest there is recognition that change is necessary, while technology can be an enabler in comparatively simple ways, from streamlined transit procedures at toll stations to quicker approvals and payment systems.
Third, and perhaps most importantly, customers are demanding change. As other costs rise, manufacturers are looking to new points on their supply chain to drive efficiency. Logistics has become critical to many businesses’competitiveness.
Many international transport and logistics companies are focused on finding and serving customers willing to pay a premium price for quality and reliability of their services.
For domestic companies, the challenges are varied. Smaller and medium-sized private companies are looking for ways to raise standards without being squeezed out by less scrupulous competition. Others will need to secure finance in order to acquire complementary or competitor businesses. The companies which are best placed to succeed are those with a clear vision of their long-term goals and access to the financial resources necessary to be able to invest in people and systems.
All of the eight steps proposed by the government can in turn encourage the longer term goal of industry consolidation. Bigger, more efficient logistics companies would not only help manufacturers move their goods around more efficiently, it would also help farmers get both their inputs and their produce to markets as cheaply as possible, potentially helping to keeping a lid on food inflation.
As such, increasing the efficiency of China’s logistics sector would not only benefit business, but society as a whole. The biggest incentive to overcome the challenges facing China’s transport and logistics industry is the lure of the domestic market.