China’s convoluted logistics networks have long been a source of frustration for international courier companies. The tangled supply chain has created absurd situations, like when packages meant for domestic delivery are often exported to Hong Kong for processing before being imported back to the mainland and sent to its destination.
But the kinks in the supply chain are being smoothed out. Recent years have seen a marked increase in the breadth and sophistication of services from international logistics companies operating in China as deregulation and infrastructure investments kick in.
In September 2005, Atlanta-based UPS began offering domestic next-day service to 23 major metropolitan areas in China. FedEx recently announced that, starting at the end of this month, it would offer guaranteed delivery within one business day to 19 Chinese cities, while another 200-plus destinations would enjoy guaranteed deliveries within two business days. These express services mean couriers can serve industries with short life-cycle products, like fashion retailing, and specialized markets like pharmaceuticals and telecommunications.
Express services are now possible because China’s road and air links are vastly improved. China’s expressways, for example, have grown over 100-fold to 30,000 km from 310 km just 15 years ago. The target, according to the Ministry of Communications, is to build an addition 52,000 km by the end of next year.
The logistics industry is also being gradually deregulated. In the past, heavy state involvement – up to five government departments govern the sector – impeded the industry’s growth. Regulations were implemented to protect domestic and state-owned logistics companies, according to Srinath Manda, who leads the logistics and transportation group at consultancy Frost & Sullivan Asia Pacific. “The multinational logistics companies, which had all the abilities to offer advanced services, were denied access to domestic market,” he said.
Opening the door
Foreign logistics companies were unshackled in 2005, when China opened the logistics market to wholly foreign-owned enterprises as part of its WTO accession commitments and companies like UPS and Fedex quickly bought themselves out of existing joint ventures.
In March, the General Administration of Civil Aviation of China granted foreign carriers the right to pick up cargo on the Chinese mainland en route to other destinations. This gives them a valuable node in their global networks. According to Manda, this development will significantly impact how global cargo operations work in the region.
“Previously, due to the controls of moving cargo exclusively to and from China – especially the Special Economic Zones – the cargo companies had to bear the costs of vacant capacity or depend totally on the delivery commitments of the firms operating in those zones,” he said. “Developments such as these will benefit the country by turning certain industrial zones into regional hubs for the companies.”
Rapid expansion is in the cards for all the international couriers: FedEx currently operates in over 200 cities, and expects to increase that number by 50% over the next few years; DHL has a US$273 million, five-year plan for China, and eight new Boeing 747-400s will be added to the UPS freight fleet in June. FedEx is building a US$150 million Asia Pacific hub in Guangzhou – operations were previously based in the Philippines – with opening slated for December 2008. And DHL is considering using Shanghai Pudong International Airport as its North Asia hub, the same airport where UPS is also building an international air hub.
Compatible software
Increased participation from international firms is unleashing the industry’s growth potential. According to the China Federation of Logistics and Purchasing, logistics industry revenue is predicted to grow 15% to 20% a year through 2010.
Yet, while the situation is improving, says Eddy Chan, head of FedEx Express China, there is still much work ahead. “[Efficient logistics networks] rely on hardware in the form of physical infrastructure, such as airports and motorways,” he said. “But also on software in the form of regulations and procedures that govern the use of those assets and the flow of goods.”
Chan believes the industry’s “software” is where the battle lies. Bureaucratic red tape, while decreasing, still prevents the industry from reaching its potential. Licenses from Chinese customs and the Ministry of Commerce, for example, require approval from multiple offices of local governments. Thus, in order to operate in 100 cities, companies need approval from as many cities – and in several local departments of each.
Are foreign companies on a collision course with their local counterparts? Not in the short-term, Foster & Sullivan’s Manda said. “Competition within each group [domestic and international] will heat up rather than against each other,” he said. International and domestic companies have different network scopes and market focuses, but clashes could occur in the future. But foreign firms are already eyeing the domestic market.
“Up to 90% of our existing international customers have expressed interest in domestic freight forwarding services,” Fed Ex’s Chan said. “But beyond this, the potential of our domestic-only customer base is enormous and growing.”
Meanwhile, China’s consumers can look forward to reaping the benefits of the market-share tussle. “The logistics sector is becoming more sophisticated,” Wu Dongming, managing director of DHL-Sinotrans said. “The market is evolving and maturing, and benefits will be passed onto consumers.”
Unshackled growth
FedEx
Guaranteed one-day delivery to 19 Chinese cities starting May 28
Guaranteed two-day delivery for more than 200 other destinations in China
Opening a US$150 million Asia-Pacific hub at Guangzhou’s Baiyun airport in December 2008
DHL
Grown up to 45% annually in China in recent years, giving it the largest network among its competitors here.
Shortlisted Pudong International Airport as its new North Asia hub
Announced a five-year plan for China worth US$273 million
UPS
Building an international air hub at Pudong International Airport.
Bagged a sponsorship for the 2008 Beijing Olympics as the official logistics and express delivery firm.
Now offers domestic next-day service to 23 major metropolitan areas in China.
