Chapter 1 Introduction to Logistics

                                       1.5 Logistics Industry in China

1.5.1 Current Status of Logistics Industry in China

The current status of logistics industry in China can be summarized as follows:

(1) Expanding logistics market

Ongoing urbanization and industrialization has supported the logistics market in China. The total logistics value was expanded by CAGR (known as Compound Annual Growth Rate) of 13.6% between 2008 and 2015. The total value of goods carried by China's logistics industry in 2015 had reached 220.0 trillion Yuan.

(2) Large volume of international trade

 7 of the top 10 world ports are located in China. The top 10 biggest ship ports in the world in 2011 in terms of handling capacity are as follows: Shanghai (China), Ningbo-Zhoushan (China), Singapore (Singapore), Rotterdam (The Netherlands), Tianjin (China), Guangzhou (China), Qingdao (China), Qinhuangdao Port (China), Hong Kong (China), and Busan (South Korea).

(3) Low outsourcing activities.

Third-party Logistics (3PL) only has 7% market share in China, much lower than the 10-14% levels in the developed world. 3PL in China remain at mainly providing elementary logistics services such as transportation and warehousing. Value-added services as processing, delivery and tailored services are still in the refining stage. 

(4) Logistics expenditure is disproportionally large

The total logistics cost as a percentage of GDP was 16.6% in 2014, which is still twice the ratios observed in other developed countries. In the United States and Japan, the ratio of logistics cost to their GDP was around 8 percent in 2013. It is reported that China aims to reduce the cost of its logistics sector to alleviate the burden on companies and improve their business environment. The country plans to reduce the proportion of logistics costs to the total value of goods carried by the sector by 0.5 percentage from the current 4.9 percent in the next three years. To achieve that, a slew of measures will be taken, including cutting highway tolls and removing illegal fees charged by airports, ports and railways.

1.5.2 Types of Logistics Enterprises in China

Current Chinese logistics enterprises can be classified into four types in terms of structure:

(1) Types 1 are those logistics companies restructured from traditional warehousing providers and transportation companies who own large market shares.

Typical are Sinotrans, COSCO, China Post, China Railway Express, CMST, China Container. Leveraging their former logistics infrastructure and advantages in network, facilities, scale, these traditional giants expand their services and strive to become modern logistics corporation. They all have rich professional experience, nationwide network, large operation scale and strong asset positions. Since they have to bear huge labor cost to support their grand scale, their prices are usually higher than those small-and-medium regional counterparts. Except COSCO, Sinotrans who have many years of experience dealing with outside, others lack genuine orientation.

(2) Type 2 is newly-formed state-run or state-owned logistics companies who are mainly commercial warehouse and transportation players in the region.

They have better management and faster expansion. Take China Shipping Logistics as an example, they emerged from a purveyor of warehouse services to an international recognized multi-national 3PL group providing such logistics service as warehousing, transportation, delivery and customs declaration.  They have their own fleet of trucks and former warehousing system to provide local elementary services. Prices are comparatively lower. They continue to upgrade their service to meet customer demands as competition gets intense. Individual few may stand out from the crowd owing to the past experience. The pitfalls include limited fixed assets, lack of funding for market expansion, and constrained by international management and company structure.

(3) Types 3 are foreign players including from Hong Kong.

They enter China to extend their service to their original customers – multi-national groups. At the same time they use their management concept, operation model and quality services to attract China companies and gradually tap into China market. They are Datong, KINTETSU, HAVI, Maersk, EAC, Hutchison and Whampoa, Inchape, Sea-Land, Huashang, Sankyu. Foreign players have distinctive advantages in capital, personnel, know-how, management, service and technology (IT in particular). They occupy a sizeable chunk of market in supplying logistics service to foreign companies in China. Currently, a lot of multi-national groups work with China logistics companies through partnership or acquisition of equity to establish professional logistic entities. They are actively seeking China partners now. Some already secured, such as DHL with Sinotrans, FedEx with DTW Logistics to expand network coverage together. However, a bundle of many are international express couriers at this stage. It is expected that there will be many more multi-national logistics companies looking for China counterparts with substantial footprint in the near future.

(4) Types 4 are emerging private entrants across the region

They are flexible, low cost, grow fast, most vibrant China 3PL logistics firms. Examples are: PG Logistics, Jiuchuan, Sunjet Logistics. As latecomers to the market, they usually position themselves to be professional 3PL service provider. Majority of them choose to be non-asset type of 3PL agent in order to avoid massive investment in logistics facilities and risk of long return period. Their services close to foreign logistics companies but broader reach, not limited to only large cities or coastal areas. They are more flexible and adaptable in local operation when compared with their foreign counterparts. Their service, management and IT applications are more advanced than their common peers.

1.5.3 Logistics Prosperity Index

China Logistics Prosperity Index (LPI) provides an early indication each month of logistics activities in the Chinese logistics sector. The LPI is useful as a fore-indicator of economic and business conditions in China. It is published by China Federation of Logistics & Purchasing (CFLP). And the Fung Business Intelligence Centre is responsible for drafting and disseminating the English LPI report. The first LPI was launched in March 2013.

Every month questionnaires are sent to over 300 logistics enterprises all over China. The data presented herein is compiled from the enterprises’ responses about their logistics activities and inventory situations. No data of individual enterprises should be disclosed. The LPI should be compared to other economic data sources when used in decision-making. Over 300 logistics enterprises in China are surveyed. The sampling of the enterprises involves the use of Probability Proportional to Size Sampling (PPS), which means the selection of enterprises surveyed is largely based on each sub-sector’s contribution to the operating revenue of logistics sector, and the representation of each geographical region.

Survey responses reflect the change of each indicator, if any, in the current month compared to the previous month. There are 12 indicators in the survey: Business Volume, New Orders, Average Inventory, Inventory Turnover, Cash Flow, Capacity Utilization, Logistics Service Charges, Operating Profit, Operating Cost, Investment in Fixed Asset, Employment and Business Expectations. For each of the indicators, this report shows the percentage of enterprises reporting each response, the difference between the percentage of responses in the positive economic direction and the negative economic direction, and the diffusion index.

 The diffusion index is the sum of the positive responses plus a half of those responding ‘the same’. Diffusion indices have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index reading above 50 indicates an overall positive change in that variable; below 50, an overall negative change. 

For example, the LPI for April 2016 came in at 54.2 percent. That's up 1.3 percentage points from March 2016. Analyzers further indicated that logistics activity in such sectors as chemistry, coal mining industries and home appliances all were active in the month. Viewing from the industries of the logistics sector, its orders and prices both picked up. Generally speaking, it's a reflection of a stabilizing macro economy in the logistics sector. On the other side, the stabilizing and growing logistics sector will also push the macro economy to develop positively.