Looking at China’s logistics sector as a whole, we are very likely to see a number of major structural shifts in the coming few years. The recent Canton Fair, seen by many as a barometer for China’s economy, could foretell stormy weather for many of China’s manufacturers in the coming months. Sales and contracts are being significantly affected by a contracting US economy, unexpected visa restrictions and a falling dollar.
But does this in itself mean that logistics providers need to be looking ahead at where the manufacturers are moving?
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Looking at the country’s major manufacturing bases, since January we have already witnessed the closure of thousands of factories across Guangdong province, particularly in Dongguan. A further 200 factories also closed their doors in the Suzhou-Hangzhou area.
While the vast majority of these factories were low-end, low-value producers – the type Beijing sees as expendable in its quest for higher quality and higher added-value – it does mean major global logistics providers need to keep a keen eye on where the cargo is moving. Capital flight and shifting production bases were undoubtedly responsible for the disappointing handling growth figures at the ports in Shanghai and Shenzhen towards the end of the first quarter.
Pushed out by rising inflation, spiralling rents and wages, and compounded by rising rural incomes, there is flight in all directions – north toward the Bohai Bay region, west, in line with the “Go West” strategy, and south to lower-cost economies like Vietnam.
Looking ahead to new growth areas, we are very likely to see major growth around the Beibu Bay area in Guangxi Zhuang autonomous region. One of the reasons for this is that relocating production facilities north, or conversely to Vietnam, is tricky, as many factory parts are still produced in Guangdong. These are hard to move, and the logistics costs of crossing the border into Vietnam are restrictive for many manufacturers.
Beibu has very close ties to Vietnam and Southeast Asia, lower rent and labor costs, as well as good access to the Gulf of Tonkin. A new rail line planned to link Guangdong and Guangxi means Beibu could very well be exactly what manufacturers are looking for. It is extremely important logistics providers ensure assets are in place to accommodate this shift.
The road haulage sector faces several challenges. Globally, oil prices have increased greatly in the last two years without any real adjustment in road haulage fees. The sector has been battered by spiralling costs, including road tolls, weight restriction fees, wages and rents. These costs have not been passed on to customers, and this has led to eroding profit margins across the sector.
While many companies generate enough revenue to keep operating in the short term, large parts of the domestic road haulage industry are going to face significant challenges in financing the cost of maintaining their fleets and upgrading equipment. This will result in a large market correction and major restructuring of the sector, ultimately causing a sharp increase in road haulage fees.
Furthermore, given the general levels of under-agglomeration and fragmentation already present, these conditions are likely to lead to a large and sustained period of merger and acquisition activity across the entire sector.
This represents a major opportunity for any global provider with financial clout to come in and mop up the failed industries. Whoever comes in would essentially be able to wrap up the sector, assuming a Chinese provider doesn’t beat them to it. One dark horse that could conceivably have the capital do something like this is Beijing Zhaijisong, which is looking to raise large levels of capital for expansion plans with its proposed Hong Kong listing later in the year.
Another major growth area in the future is likely to be cold chain, or the transportation network for refrigerated goods. China’s cold chain is, at present, still woefully underdeveloped. The volume of refrigerated rail transport has actually decreased over the past ten years.
On top of this, statistics indicate that China’s urban population will reach 1 billion by 2030. This factor, combined with a general shift toward more meat-based diets and a centralization and automation of meat processing facilities, means demand for cold chain transport and storage facilities is set to grow dramatically.
The shocking amount of produce China loses en route and the sheer scale of the task represent a major opportunity. However, only a consortium of global logistics suppliers would be able to muster the resources to build a nationwide chain.
Lee Perkins runs Transport Intelligence’s China Practice. Headquartered in the UK, Transport Intelligence is one of the world’s leading providers of expert research and analysis dedicated to the global logistics industry.