If you ask any first-time visitor to China what impresses them most, the answer is always the same: the physical infrastructure. The country’s expressways, airports and seaports are world class – and that’s not to mention the gleaming new network of world-beating bullet trains.
China almost certainly has the best infrastructure of any country at a similar level of economic development. Its technocrat leaders emphasize investing in hardware above all else. This bias was only strengthened over the past two years as China’s massive stimulus program accelerated a number of long-term infrastructure projects. As a result, considerable rail capacity has been freed up for freight traffic, and once-isolated cities are now easily reachable by several modes of transport.
Why, then, is moving goods across the country still such a costly business? The Asian Development Bank estimates that China’s logistics costs are more than 18% of GDP, compared with just over 11% in multi-country Europe and 10% in the US. Around half of those costs are accounted for by transport.
Inefficient goods distribution matters because it takes a heavy toll on economic productivity. And if China’s economy is going to rebalance, improving the backward distribution sector is necessary to help unlock domestic consumption.
Good transport infrastructure is just a first step. A key problem is that supply chain management remains rudimentary. According to a supply chain manager at one of the big foreign hypermarkets, working in China’s logistics sector is like "turning the clock back 25 to 30 years."
China has an abundance of trucks and hundreds of thousands of "logistics" companies, but these mainly consist of a handful of truckers who pool their resources to buy a lorry. The vast majority of trucks used for domestic transit are open-loaded, without containers. Boxes are stacked several meters high and held in place with tarpaulin and rope, and it is no surprise to see plastic bags of rice cakes packed next to machinery parts or industrial cables.
Because few suppliers or retailers invest in pallets – wooden or plastic crates that allow goods to be moved by forklift truck – loading relies on muscle power. It takes around three hours to load a typical truck by hand, and another three hours to unload it. At peak times like Lunar New Year it is common to find truckers sleeping under their vehicles while they wait in line to unload.
One growing concern is over the transport of perishable foods. Fresh meat is often delivered in open-top trailers and so – aside from the obvious implications for food safety – mass spoilage of 30% of China’s annual perishable food harvest costs the economy an estimated US$6 billion.
It is not all bad news. Some companies, especially German wholesalers Metro (MEO.FWB) and British hypermarket chain Tesco (TSCO.LSE) are creating proper cold chains in China. As local competitors learn about the advantages of keeping perishable goods fresh – especially in light of the recent food safety scandals – they will follow. Big domestic supermarket operators like Wumart (8277.HK) and Bailian Group (600631.SH) are already investing in pallets.
But for the vast majority of Chinese suppliers, retailers and trucking companies, the cost of investing in better systems and equipment remains too great. Until labor costs rise, it will be cheaper to load trucks by hand. And until stricter food regulations are enforced, the meat on your plate will continue to be delivered in hot, open trucks.
