Flowing upstream

With its highly developed manufacturing sector, China’s east coast has rapidly become one of the largest logistics networks in the world. Moving from south to north, the expansion of its logistics facilities has flourished around eastern export powerhouses like Hong Kong, Shanghai and Qingdao, leaving the center-west in the dust, until recently.

Today, logistical service providers are looking to expand inland, despite or perhaps because of slowing external trade. China’s exports fell 21.7% year-on-year in the first half of 2009, according to customs statistics. For the logistics industry as a whole, the impact has been severe, with shipping line experts predicting a 10% drop in global shipping container volumes this year.

The Chinese government’s US$586 billion stimulus plan, for one, has identified logistics infrastructure as a key spending target. And while developing western regions is the next natural step to better cover China’s vast geography, progress is being pushed along by manufacturers increasingly turning to the domestic market to replace external demand.

"More export-oriented companies in China are turning to other revenue streams, such as local consumption," said Jens Drewes, managing director of logistics provider Kuehne + Nagel for central and north China. "In the west, there is a huge group of potential customers that is important for any company to consider. This is an opportunity for logistics as well."

Companies looking inland will require appropriate air, land and sea transportation infrastructure, as well as facilities such as logistics parks and distribution centers.

Go West!

Driven by the need to corner these new markets, Chinese firms have eschewed the familiar "wait and see" approach and are wholeheartedly targeting consumers in western cities. The pressure is on to meet the rising demand for logistical support that accompanies this roll-out. Kuehne + Nagel has been busy expanding its footprint in western China, opening offices in Chengdu, Xi’an, and most recently in Chongqing on July 1.

Robert Goble, regional director of central and northern China for Cargo-Partner Logistics, said that rising costs on the coast have led manufacturers to look west for cost reductions without losing market access. "With the necessary logistics facilities in place, [companies] still have access to the international markets as well as ready access to a sizeable domestic market."

According to Andrew Hatherley, executive director of Greater China industrial and logistics services for CB Richard Ellis, it is only recently that strong international demand has emerged for logistics warehouse space in central Chinese cities. But the growth rates already stand out in the national market. For example, logistics space rented in the first quarter this year saw increases of 0.8% in Chengdu and 0.3% in Chongqing over the last quarter in 2008, while in cities like Shanghai, Guangzhou and Shenzhen, rentals experienced negative growth.  

"Companies’ priorities were bigger in first-tier cities before, but now they’re moving or adding operations to central China," Hatherley said.

"We’re getting inquiries from international companies looking for space and international-grade logistics in places like Wuhan and Xi’an. And when big companies like Intel move from Shanghai to Chengdu, they expect that their suppliers with 3PL [third-party logistics] services will have the same level of service they’re used to."

It has given a commercial edge to what was originally a social and political project. Beijing earmarked funds for the expansion of roads, railways and airports in western and central China in order to  spread the economic wealth and raise local living standards. But now, with lower construction costs in terms of labor and materials, building additional infrastructure and logistics facilities in China has become an even better deal for private domestic and foreign investors.

Not so fast 

Some on the east coast hope firms take advantage sooner rather than later. Jeffrey Yu, investment cooperation bureau section chief of the Ningbo Meishan Free Trade Port Zone, said Meishan is very keen to connect with other facilities being developed along the Yangtze. The goal is to provide a robust logistical conduit linking the coast with the interior.

However, China’s logistics development is unlikely to turn too radically towards western markets. While consumers in the interior represent a large and still untapped base, the main coastal markets are still the most concentrated sources of domestic demand.

For example, according to government statistics, out of 31 provinces and four municipalities, Beijing, Shanghai, Tianjin, Jiangsu, Zhejiang and Guangdong together accounted for over 40% of China’s consumer retail sales in 2008. Furthermore, the high profile growth in some western cities is offset by the intransigent poverty of their surrounding areas; there is no statistical indicator of a looming upset in the established order.

Still, some believe that enhancing logistics in the west also serves the east, by providing Chinese firms a means to both outsource to cheaper provinces and simultaneously serve eastern consumer markets. For China, this is far preferable to outsourcing production to foreign countries in Southeast Asia and Africa.

The reorientation of logistical services toward domestic needs ultimately makes sense, and firms know it, Yu said. "Companies are changing. "