Although it has been anticipated for some time that the domestic Chinese market could offer multi-national logistics companies opportunities dwarfing those presently provided by the export-driven international freight market, progress to date has been slow.
But there are now signs that the potential in China’s domestic market could be realized sooner than many originally thought. There seems to be a growing consensus that structural and regulatory changes are underway that will revolutionize the logistics industry.
Foreign logistics providers have, until recently, shied away from committing to an ‘asset-heavy’ development strategy due to the fierce competition from owner-drivers (where the driver also owns the vehicle). Most of the market is made up of owner drivers operating in the ‘gray’ market, where over-loading vehicles is endemic and often the only way they can turn a profit. This is one of the most obvious ways where the market is skewed against companies which play by the book.
However, industry observers suggest that the Chinese government has started to clamp down on this practice. Some possible changes include tolls calculated by weight rather than by distance, weighbridges placed on toll roads, and taxation levied in the form of fuel duty. These changes would rapidly transform the market. Fundamentally, they will mean that companies will have less incentive to overload.
In fact, in one area where these initiatives have been implemented, it is estimated that freight rates have surged by up to 20%. This will make foreign companies far more competitive, especially as many have plans to introduce tractor and trailer operations that will improve overall efficiency levels.
Leading United States trucking company Schneider National is just one of the companies lining up to invest in the market. In February it became the first non-Chinese company to win a road freight operators license, which allows it to offer trucking services within China. To begin with, Schneider is targeting Western-owned businesses and their Chinese suppliers in the region around Tianjin. However, it appears that the company will be looking to expand geographically and is basing its Chinese operations on future acquisitions.
YRC Worldwide, another huge US trucking company, has also announced plans to enter the Chinese market aggressively. It intends to make at least two acquisitions, one specifically a ground haulier, to expand its own operations in the country. Its strategy will be to leverage its existing relationships within its US customer base to generate what it hopes will be significant growth and profit in China.
Both Schneider and YRC Worldwide are focusing on providing services to Western manufacturers and retailers, who are prepared to pay a premium for a level of service and relationship that they could not get elsewhere. Their business strategies will be helped by changes to the regulatory regime in which domestic haulage companies operate.
Better days ahead
Transforming the Chinese road freight market will not happen overnight and some observers believe a timeframe of between three and five years is likely. However, such a short timescale just a few years ago would have been unthinkable. A transformed market will have far-reaching impact on the 730,000 logistics companies in China.
Possible regulatory changes are allied to a change in the government’s economic focus. Beijing appears to have become increasingly rattled by criticism from the US over its massive trade surplus. To help reduce the surplus, the Chinese government has made statements to the effect that it will increase efforts to stimulate domestic demand and imports. This will result in systemic changes to the logistics industry, which is currently focused on moving goods to ports and airports for eventual export. Increasing domestic demand will require very different patterns of distribution, further infrastructure investment and a supply side which can provide nationwide network operations.
There is a long way to go before all these attributes are in place. Although there is still considerable risk for many foreign multinationals, it is looking increasingly likely that their investment will be paid back many times over in the future.