Focus: Logistics

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Logistics issues have been a constant challenge for businesses operating in China, and increasingly companies are seeking the help of expert service providers in order to control costs and to deal with new challenges such as thinner margins, and moves to inland provinces.

It has been reported that the value of the domestic logistics business in China in 2005 will increase by 24 percent over 2004, and could reach US$5.8 billion. Expectations are that this growth will continue. Logistics costs in China account for 21.3% of GDP (compared to 8.5% in the more service-oriented US), and for around 30 percent of the cost of goods. Much of the added costs result from inefficiencies – such as a 35-45 day storage turnover period (compared to under 10 days in developed countries), and that fact that many enterprises use their own transport services and have empty rates of over 37%.

Some of the inefficiency stems from historical protectionism of the domestic industry that dominates the sector McKinsey estimates that local firms still control about 80% of the logistics market (with more than half of these being state-owned enterprises). There are also complex regulation and licensing requirements that vary from province to province, and much of the industry remains fragmented and low-tech. At a recent Eye For Transport conference in Shanghai it was noted that road transport accounts for 74% of all transportation, with over 5.4 million trucks being operated by 2 million mostly small-scale truckers. To make matters worse, most lack GPS monitoring, and security is poor. Other major logistics challenges include quality of service, port capacity, and the quality of road and rail networks.

However In the past three years a lot of development has been seen, with 70 percent of logistics providers reporting growth of 30 percent a year, while the annual growth rate in the third-party logistics (3PL) market is estimated to have been 25 percent a year from 2002 to 2005. According to Ding Junfa, executive vice-president of the China Federation of Logistics & Management, businesses can reduce costs by 5% when using 3PL services, but savings can reach 10-20% if companies re-engineer their logistics processes to fully integrate 3PL into the supply chain.

Foreign companies have also helped in the development of the market since Chinas WTO entry, and two thirds of the worlds top 10 retailers now have purchasing centres there. Further improvements are likely as China is expected to introduce new rules and policies, and to reduce administrative and regional barriers to entry. As part of the process, thirteen central government departments, led by the National Development and Reform Commission, have established a working group on the development of a modern logistics system.

Current developments include a plan to build seven comprehensive transport hubs in the Yangtze River Delta, as well as significant investment in road and rail networks. But China is already a major centre for logistics projects. It is reported that it attracted 13 percent of worldwide projects in the 3 years to December 2004, including half of the top 10 projects and the biggest one, a US$1.5 billion logistics park in Kunshan by GSL Holdings of the US. Meanwhile, Shanghai is set to become the largest freight port in the world this year, overtaking Singapore with throughput of 443 million tons.

As the sector grows, there is intense competition among suppliers, and leading companies have been identified by the China Supply Chain & Logistics Awards for 2005, run by the China Supply Chain Council (CSCC), which were held in November with the aim of recognising outstanding performance among leading manufacturers, retailers, service providers and supply chain practitioners operating in China. Nominations and winners are listed below for reference:

    Best 3PL Supply Chain Provider in China:
    Nominations: Exel China; Linkstar Logistics; Sinotrans
    Winner: Sinotrans

    Best Supply Chain Consulting Partner in China:
    Nominations: Accenture; Deloitte; IBM
    Winner: Accenture

    Best IT Supply Chain Solution for China:
    Nominations: Manhattan Associates; Oracle; SAP
    Winner: Oracle

China Business Services can provide a full range of logistics services though our network of expert local service providers. Please contact us to discuss your requirements in confidence

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