It is estimated that US$2.5 trillion will need to be invested in logistics development over the next 15 years to meet this demand, which would bring China’s per-capita logistics space up to just one-third that of the U.S.
It is certainly not for lack of infrastructure that China’s logistics industry is struggling to meet its potential—the country is number one in the world in terms of tonne-kilometers of freight, at 2917.4 billion, as well as inland water transportation, with 110,000 km of navigable waterways.
Nonetheless, shipping remains inordinately expensive in China. Heavy road tolls, levied to pay for China’s ongoing infrastructure upgrades, can account for 30 to 40 percent of transport costs for trucking companies. Not only does this cut into profits, but it also leads to dangerous practices such as logistics firms needing to overload their trucks just to break even.
Market — The logistics and transportation industry in China is best characterized as immature, owing to its high degree of fragmentation and intense competition. In 2012, the Executive Director of Global Logistic Properties (GLP) was quoted as saying, “There are literally nine million trucking companies in China, six million of which own exactly one truck.” Similarly, an A.T. Kearney survey found that companies in China use an average of 12 transportation providers and five warehousing providers. In this environment, switching transportation service providers is very common.
In a 2011 PwC survey of 250 logistics and purchasing managers in China, the country’s logistics service providers received mediocre grades in nearly every category of service, excepting shipment tracking, which performed better. Overall, it was found that businesses in China are willing to compromise on the issue of price in exchange for more reliable, flexible and comprehensive service.
Currently, the industry can be divided into three types of enterprises: (1) state-owned giants like Sinotrans Group and China Post, and their offshoots such as EMS, China Air Express and China Rail Express, which dominate restricted sectors; (2) private domestic enterprises operating in less restricted sectors such as trucking, general logistics, and express delivery—the majority of which are SMEs with a local or regional market presence; and (3) foreign enterprises, focused largely on the international market and often undercut by local operators.
Growth factors — The high demand for logistics and transportation services in China is attributable to a number of factors. Firstly, rapid growth in domestic consumption has created a need to deliver more goods to a greater number of destinations, as the Chinese government attempts to transition away from an export-driven economy. GLP has said that 80 percent of its total leased space in China in 2013 was used in connection with domestic consumption.
Second, improved infrastructure, particularly in the second and third-tier cities of China’s northern and western regions, has opened up new markets for retailers. Western China, for example, now supports over 710 billion tonne-kilometers of road freight. In time, this is expected to break up the concentration of transport and logistics companies around the Pearl River Delta, Yangtze River Delta and Bohai Rim.
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