Supplying strength

Long seen as the world’s workshop, China is increasingly churning out goods for its growing domestic market. Foreign trade remains strong, but the country’s manufacturing landscape is changing dramatically – especially as the 12th Five-Year Plan aims to increase domestic consumption rates by 2-3 percentage points by 2015.

This change is driving up demand for the delivery of goods across China, presenting a new era of opportunities for the transportation and logistics industry. But so far, the country’s relatively young and fragmented logistics sector is struggling to catch up.

The sector is fraught with intense competition among companies that offer similar – yet limited – services. According to management consulting firm AT Kearney, China has more than 18,000 contract logistics service providers. The country is also home to about 1 million trucking companies – many of which inefficiently operate fewer than 10 trucks.

The presence of so many small logistics providers in the market has inevitably led to an intense price war. Companies have focused on growing and winning more business, rather than strengthening services and expanding networks. Analysts argue that such operational inefficiencies have actually led to higher costs for the industry overall: In 2010, China’s logistics expenditures came to 17.8% of its total GDP, compared with less than 10% for most developed countries. Logistics costs in the US, for instance, were 8.3% of GDP last year. 

Some inefficiencies are already being smoothed out, for example through China’s rapid construction of a cross-country network of roads, rail and air routes. Services are being stepped up, with companies like Deppon Express and TNT introducing time-guaranteed road deliveries.  

But the next obstacle is to address inefficiencies among enterprises. Collaboration will only improve if the industry consolidates.

For regional players to become internationally-competitive logistics firms, horizontal integration – or cross-provincial mergers and acquisitions – will help reduce costs and boost companies’ competitiveness. One such example is Hong Kong-based firm Kerry Logistics, which has been actively targeting M&As to expand its presence on the mainland. The freight forwarder now has about 700 operating licenses, 300 customs brokers in major ports and an inland distribution network with a fleet of 2,000 self-owned and customs-supervised vehicles.

Such strategic acquisitions can help logistics firms acquire useful resources, including increased market share, new distribution channels and cost synergies. Expansion moves can also help logistics companies extend their reach into new regions or industries.

According to a survey by AT Kearney of 100 Chinese companies in 2009, 80% of respondents that engage in direct export were not satisfied with their ability to meet even the most basic customer supply chain requirements: punctual and accurate product delivery. This must change. It’s up to logistics companies to retreat from the price-lowering game – and focus on strengthening services to give their supply chain networks more muscle.