and that means foreign companies outsourcing manufacturing to China, creating a huge need in moving Chinese-made products to other markets. In addition, domestic retail volumes are also increasing at unprecedented rates, and domestic transport networks are in need of extra capacity and efficiency.
All the basic modes of transport in China are in need of improvement, limiting the growth of the nation's economy as a whole. Estimates show that logistics accounts for as much as 40% of total production costs and 90% of the total production cycle duration, rates many times higher than in developed countries. The government has identified logistics as a key area in need of modernization, but foreign participation levels remain low.
China's highway system is still young, but is already revolutionizing transport options with trucking suddenly becoming an alternative to rail freight, with the speed and flexibility it can provide. But trucking is still small compared to rail and water transport in terms of weight per distance utilization. Much of the trucking inventory is less than top standard, and only a fraction of freight trucks at this point are containerized, so damage to goods in transit is still a big problem.
Another drawback is regional fragmentation. Many areas impose regulations to protect local businesses, and logistics companies are not generally nationally organized. But the increasing number of larger expressways is helping to relieve the situation.
Before roads improved, rail and water transport were China's only options. The rail lines have been under chronic strain for decades. A less expensive option than trucks, rail freight is still China's dominant transport method. But the damage rate on rail freight is even higher than with trucking, and theft is common. Some manufacturers deploy private security guards to accompany their cargo. Rail transport is at present best suited to the transport of bulk commodities such as coal.
China's 2002-2007 national development plan calls for improvements to the rail system. A total of 16 new lines totaling 7,000km of track are planned or under construction, and foreign companies have been invited to participate in the upgrade process. A number of foreign companies are involved with rail cargo joint ventures, including freight tracking capability. Ocean shipping handles most of China' huge import and export volumes, and coastal and inland water shipping lines account for the movement of more than half of China's domestic cargo. Shanghai is Mainland China's largest port, and has embarked on a massive deepwater port construction project to the south of the city which will give Shanghai an annual capacity of 25m TEUs. The aim, quite simply, is to make Shanghai the top port in East Asia, overshadowing Hong Kong, Kaohsiung, Pusan and Yokohama.
China is now the top nation in terms of port throughput. The key ports are Shenzhen, Guangzhou, Zhongshan, together with Hong Kong in the Pearl River Delta region; Shanghai, Ningbo, Xiamen and Fuzhou along China's central coast; Tianjin, Qingdao and Dalian in the north.
Container throughput in 2004 totaled 61.5m TEUs, up 26.4% on 2003. But port capacity is still behind demand, and construction projects race to keep up, with 47 10,000-ton deep-water berths coming online in 2004. Container throughput is expected to hit 75m TEUs in 2005. Zhang Chunxian, minister of communications, said in late 2004 that enhancing transport ability would be a key focus for 2005.
Like rail, domestic water transport is cheap and best suited to bulk commodities without tight time constraints. China has 122,000km of navigable inland waterways. Efforts have been made to upgrade these channels, but equipment and facilities tend to be primitive and safety issues persist.
Construction of the Three Gorges Dam on the Yangtze River has increased safety and traffic capacity along China's longest navigable river. The dam's lock system will increase annual shipping capacity from 10m tons to 50m tons as far upstream as Chongqing as water levels rise behind the dam.
Most international airlines and companies specializing in express delivery service offer cargo services to or from China. Domestically, the air cargo market offers great potential for development. At the end of 2004, China only had 24 cargo aircraft. Deregulation to meet WTO targets is still underway and foreign cargo companies such as DHL, UPS, Fedex, and Lufthansa Cargo are expanding their operations as the regulations relax.
A future opportunity for foreign investors may exist in airport facilities construction. Major international hubs only exist in Shanghai, Beijing and Guangzhou, and only 13 other Chinese airports are classified as 'large.'
Following the global example, China's logistics sector has embarked on an integration trend. The role of third-party logistics providers is becoming more and more important. These companies specialize in satisfying client needs through the whole supply chain. Third-party providers currently comprise about 20% of the logistics market. Many Chinese companies have shown a tendency to shy away from outsourcing such services, but large multinationals such as McDonald's have successfully employed third-party logistics providers, setting an example to others.
One of the main challenges for the government is implementing nationally consistent regulatory policies to meet WTO commitments. From January 2004 Hong Kong companies were given a head start with virtually full access to the transport and logistics sector. Wholly foreign-owned enterprises were permitted in the road sub-sectors from the end of 2004, while rail cargo services will be opened in 2006. A 75% foreignmajority stake is allowed in freight forwarding and the sector will be fully opened up at end-2005.
Development of fixed-location facilities such as storage units, warehouses and distribution bases, opened to wholly-foreign investment in December 2004, is also a priority. Greater multi-modal efficiency is needed in port handling and general transfer processes from one means of conveyance to another to reduce bottlenecks in cargo channels.