Taking a toll

From taxes to highway tolls, logistics costs mount at a dizzying pace, as products are transported from China’s ports to its interior. A truck with a standard 20-foot container bound for Chengdu, for example, is hit by fees as soon as it picks up its non-bonded cargo in Hong Kong. Next come customs declarations, followed by consolidation costs in Guangdong province. 

And that’s just the beginning. Highway tolls mount as the cargo passes through Guangxi and Guizhou, where provincial border tariffs must be paid. The cargo must be further deconsolidated upon arrival in Chengdu, where local delivery fees are paid to the consignee. Once fuel costs are tacked on, transport costs have jumped by as much as 60%.

Hinterland blues
Logistics costs account for roughly 21% of a product’s value in China – about twice the cost in developed countries.

“As you go inland, the costs spike significantly,” said Stuart Ross, head of industrial property in China at Jones Lang LaSalle (JLL). “The development of rail and road infrastructure further from the coast is not there yet.”
Although companies moving to the interior are now tending to supply chain requirements, progress is severely hampered by logistics costs. This doesn’t reflect well on the government’s “Go West” initiative, which is what helped take the companies there in the first place.

“It’s not a failed policy, but it’s not capable of addressing why [more] foreign firms aren’t going to those places,” said Michael Kilbaner, JLL’s national director of strategic consulting.

Beijing’s unprecedented transport infrastructure investments may lighten the financial load for logistics companies. In the first three quarters of 2007, transport-related infrastructure investments rose 13% year-on-year to US$95 billion. This came a year after Beijing revealed plans to invest US$242 million on 28,000 kilometers of railway track by 2020, to close the development gap between north-south routes and those extending west from the coast.

“From the east coast to the northwest or southwest, the prices are higher because there is less track,” said Bill Liu, sales manager at DHL in Beijing.

Kilbaner says rail costs begin to mount for logistics firms in the ports, and he estimates that it could take up to a decade before the logistics sector starts to see any significant savings. Rail capacity in the Yangtze River Delta area, for example, can only handle 30-40% of demand because raw materials and passenger traffic are prioritized over other cargo.

China’s roads, the dominant transport option among logistics companies in China, are also getting overhauled. According to JLL data, the country built roughly 41,000 km of expressway between 1989 and 2006.

“Roads are good, but there aren’t many service providers that are well developed, particularly for long-haul trucking,” Kilbaner explained. “Then there are insurance and inter-provincial tax issues.”

As the country’s road network expands, however, so does its red tape. Fuel, tolls and taxes are the highest costs for most operators. Tolls are often unclear and vary throughout the country, while provincial border taxes and the regionally fragmented haulage sector also push up costs.

“The government has a ways to go with regards to operating efficiency, including laws on weight and driver safety,” said Jack Gross, senior vice president for Schneider Logistics.

A glut of domestic logistics operators, protectionist tendencies among provincial authorities and a web of often contradictory local and national regulations are limiting expansion in the road haul sector.

“The costs for government licenses are not always clear, but they affect a wide range of trucks,” said DHL’s Liu. “This means fewer trucks and higher costs, because the same volume needs to be transported.”

The combination of fewer trucks and large volume can lead to over-packing. With many domestic providers relying on long-haul truckers that overload their trucks, foreign players remain at a cost disadvantage.

“We can’t compete with guys who [cut corners],” said Gross. “We don’t want to break the law or do damage to roads, [so] we lose a lot of bids to lower-cost companies.”

China’s current tax structure also remains a costly barrier to expansion.

“Going west, the current tax structure ties tractors and trailers together, and that breeds inefficiency,” said Gross. “There ought to be a national tax. I’d advocate a fuel tax.”

Hope for the future
Yet, many in the industry believe that the establishment of the new Ministry of Transport in March, one of five so-called “super-ministries,” will help both streamline licensing procedures and boost regulatory enforcement.

Kilbaner is optimistic that the new ministry will be able to prioritize key projects more effectively. Centralized approval of licenses and permits, and the establishment of national benchmarks for fees, taxes and services should also lower costs. In addition, it is hoped the ministry may be more responsive to the lobbying efforts of different foreign interest groups.

“It will have a big effect in several years,” predicts Gross. “The government has become far more transparent.”