Beneath the bluster

China’s logistics and supply chain sector has produced a steady stream of interesting deals over the last year. If the first few weeks of 2008 are anything to go by, we can expect more of the same going forward.  
So far we have heard of plans to turn yet another northern city into a mega logistics hub: the acquisition of a Shanghai transport firm by US firm Yellow Roadway and details of a possible US$2 billion listing by the logistics subsidiary of the state postal service.

Big deals indeed; but beneath the bluster, one has to wonder if these developments at the top of the industry are really yielding what they are ultimately supposed to yield: a better logistics operational environment in China.

The World Bank thinks the answer to this question is yes – well, more or less yes.

At the end of 2007, the organization released its first logistics performance index (LPI) and study, which tracks and ranks the logistics performance and development of 150 countries around the world. The study is significant in its acknowledgement that the quality of logistics plays a key role in directing foreign investment into developing countries, as well the investment flows within national borders.

At a broad level, the study confirms reports that the operational environment of China’s logistics sector is improving. More than three-quarters of respondents said the overall logistics business environment in China is better or much better than three years ago.

The road ahead

Much of this improvement is due to investments in the road network, ports and airports, as well as more foreign participation in the market.

Nevertheless, China still has a long way to go before it can match the services offered in the West. Logistics costs as a percentage of the total cost of goods – which varies according to region and product – is still thought to be roughly 10% higher than in developed logistics markets.

The fragmented nature of the industry in China is also important. Despite acquisitions by cash-rich foreign logistics service providers (LSPs), there are still more than 18,000 registered LSPs in China. None command more than a 2% market share, and they are unable to provide integrated, nationwide intermodal services.

The World Bank LPI places China 30th among 150 countries after aggregating scores in seven areas: customs, infrastructure, international shipments, logistics competence, tracking and tracing, logistics costs and timeliness. At 72, the country’s ranking for costs alone is worryingly low (China ranks no lower than 36th place in any of the other six categories). In addition, close to 21% of respondents to the survey said port and airport charges in China were now either high or very high.

Process innovation

However, improvements in import and export processes are likely to have a positive impact on costs. For example, up to two-thirds of China’s customs declarations are now submitted and processed electronically – which contributed to over 73% of respondents saying that customs clearance procedures had improved in the past three years.

But the connecting points between the state and logistics enterprises still require work. Only 44% of respondents to the survey described customs clearance as a “transparent” process, and 20% said they still experience major delays due to pre-shipment inspection.

Corruption also remains a problem, with less than half of respondents reporting any improvement in the situation. Over 13% said the solicitation of informal payments was still a constraint on their work. This figure may seem low given widespread anecdotal evidence of backhanders, but note that it does not represent actual incidents of informal payments, merely whether such payments are a constraint on work. This might imply that the practice is so widespread it is simply accepted as a cost of doing business.

Despite these and other problems, the prospects for continuing improvement in the country’s logistics environment are very good.

China’s 30th place in the rankings puts it behind only Hong Kong, Singapore, Korea, Japan and Malaysia in the Asia Pacific region, which reflects the importance Beijing now attaches to the sector. There is an appreciation of the link between strong logistics and investment inflows, as well as the social and economic dividends that can be drawn from spreading this investment more evenly.