Logistics Industry in China August 2013
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Logistics Industry in China August 2013
Table of Contents
Introduction ......................................................................................................... 2
Industry overview ............................................................................................... 3
Logistics industry demonstrates robust growth ................................................ 4
Total logistics costs stay high........................................................................... 6
Logistics enterprises foresee favourable prospects .......................................... 7
Competitive landscape ...................................................................................... 9
Logistics concentration remains scattered ....................................................... 10
Leading logistics players scale up .................................................................... 12
Foreign expansion accelerates in most segments ............................................ 13
Market snapshots ............................................................................................... 14
Production logistics demand up in lower-tier cities ........................................... 15
Growth of online retail market and challenges on nationwide distribution go hand-in-hand ................................... 17
Express delivery firms step into online retail ..................................................... 21
Rail transport reform enhances logistics capabilities in China ........................... 23
Heavy taxes for some logistics companies ...................................................... 25
Government support for logistics development ................................................ 26
Challenges .......................................................................................................... 29
Warehousing management has room to grow ................................................. 30
Logistics burden of high toll fees...................................................................... 31
Stringent regulation hinders logistics growth .................................................... 31
Constraints on human resources ..................................................................... 32
Conclusions and Implications ........................................................................... 33
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Logistics Industry in China
Introduction
China’s economic growth has been accompanied by the ever-increasing demand for
logistics services. However, the country’s logistics capabilities still remain at an early
stage of development, with a number of unresolved challenges. That said, foreign and
local players continue to expand into the logistics market, and the government is pushing
to improve logistics capacity and efficiency. Accordingly, we believe the logistics sector is
set to maintain a steady and robust growth over the coming years.
In this report, we take an overview of China’s logistics sector and assess the competitive
landscape of the logistics market. We also review the industry’s latest developments and
major challenges.
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Industry overview
Logistics Industry in China
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Logistics industry demonstrates robust growth
Driven by the demanding industrial sector and widening domestic retail market, China’s
logistics industry registered robust growth in 2012. Total logistics value1 reached 177,300
billion yuan, up by 9.8% year-on-year (yoy) in real terms (see Exhibit 1).
Composition of total logistics value
The manufacturing sector remains key to China’s economic development. As a result, the
logistics value of industrial products accounted for an overwhelming 91.4% share of the
total value last year. Following up, the logistics value of agricultural products, imported
products, recycled materials and commercial and personal products in 2012 recorded
yoy growth of 4.5%, 7.8%, 10.2% and 23.5%, respectively.
Exhibit 1 China’s total logistics value by category
2011 2012
Billion yoy % Share Billion yoy % Share
yuan growth in total yuan growth in total
Total logistics value 158,400 12.3 100 177,300 9.8 100
Including:
- Agricultural products 2,600 4.5 1.6 2,900 4.5 1.6
- Industrial products 143,600 13.1 90.2 162,000 10.0 91.4
- Imported products 11,200 4.3 7.0 11,500 7.8 6.5
- Recycled materials 600 20.4 0.4 700 10.2 0.4
- Commercial and
personal products 200 18.3 0.1 200 23.5 0.1
Source: China Federation of Logistics & Purchasing
Logistics demand coefficient
The logistics demand coefficient, the logistics industry’s value-to-GDP ratio, was 3.4 last
year, up from 3.0 in 2008 (see Exhibit 2). Such evidence indicates a steady growth in
China’s logistics market.
1 According to China Federation of Logistics & Purchasing, total logistics value is defined as the total value of products being produced in or entering the country during the recorded period.
%
Exhibit 2 Logistics demand coefficient, 2008-2012
Source: China Federation of Logistics & Purchasing
Total value-added of the logistics industry
Total value-added of the logistics industry reflects the size of the market. The larger the
value-added, the larger is the market. In 2012, value-added of the logistics industry was
3,500 billion yuan, recording a yoy increase of 9.1% (see Exhibit 3). Also, both the share
of total value-added of the logistics industry in China’s tertiary sector and GDP in 2012,
remained stable at 15.3% and 6.8%, respectively.
Exhibit 3 The logistics industry’s total value added
Unit 2010 2011 2012
Total value-added billion yuan 2,700 3,200 3,500
% yoy growth % 13.1 13.9 9.1
Share in GDP % 6.9 6.8 6.8
Share in tertiary industry % 16.0 15.7 15.3
Source: China Federation of Logistics & Purchasing
Logistics Industry in China
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Total logistics costs stay high
China’s total logistics costs amounted to 9,400 billion yuan in 2012, up by 11.4% yoy.
Exhibit 4 shows the breakdown of total logistics costs from 2008 to 2012. Of this figure,
transport costs accounted for the largest share; however, the proportionate figure has
been decreasing over the past few years. On the other hand, the ratio of total logistics
costs to GDP was 18.0% in 2012, down from 18.1% in 2008 (see Exhibit 5). But the ratio
is still almost twice that observed in other developed countries.
Exhibit 4 Total logistics costs and composition, 2008-2012
Share in total logistics costs 2008 2009 2010 2011 2012
Management 12.7% 11.8% 12.7% 12.0% 12.8%
Inventory 34.7% 32.9% 33.8% 35.0% 35.1%
Transportation 52.6% 55.3% 53.5% 53.0% 52.1%
Source: China Federation of Logistics & Purchasing
Exhibit 5 Total logistics costs as a percentage of GDP, 2008-2012
Source: China Federation of Logistics & Purchasing
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Logistics enterprises foresee favourable prospects
The China Logistics Prosperity Index (LPI)2 is newly established and was launched by
the China Federation of Logistics and Purchasing (CFLP) in March 2013. The data is
compiled from survey responses by nationwide logistics enterprises regarding their
logistics activities and inventory levels of the current month, along with their business
expectations for the following three months.
Exhibit 6 shows the monthly results of the LPI and sub-indices. The LPI came in at 52.4
in July, remaining in expansionary zone for four consecutive months. The index indicates
steady growth in logistics activities3. Also, the business volume index was 56.9 in July, up
from 55.5 in June. The figure reflects a moderate demand for logistics services.
In addition, the investment in fixed asset index was 52.3 in July. The reading shows that
logistics enterprises have continued to increase their investment in fixed assets, implying
an optimistic business outlook. This is in line with the business expectations index, which
remained high at 57.2 in July, showing that many enterprises in the logistics industry still
foresaw good business over the following three months.
2 China Logistics Prosperity Index (LPI) is a newly established index providing an early indication each month of logistics activities in the Chinese logistics sector. The first LPI was launched in March 2013 by the China Federation of Logistics & Purchasing (CFLP). The Fung Business Intelligence Centre is responsible for drafting and disseminating the English LPI report. For more detail, visit the monthly LPI reports at http://www.funggroup.com/eng/knowledge/research.php?report=lpi_monthly
3 A LPI reading above 50 indicates overall expansion in the logistics sector; below 50, there is overall contraction.
Logistics Industry in China
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Exhibit 6 China logistics prosperity index, LPI (April – July, 2013)
LPI and sub-indices April May June July
LPI* 54.8 53.2 53.1 52.4
– Business volume 57.1 55.8 55.5 56.9
– New orders 54.9 53.1 54.6 52.3
– Average inventory 49.7 49.3 53.1 51.3
– Inventory turnover 51.6 50.9 49.8 48.3
– Cash flow 53.2 50.2 53.1 51.5
– Capacity utilisation 56.5 54.3 51.3 51.5
– Logistics services charges 52.7 49.9 49.9 48.1
– Operating profit 53.2 51.6 56.1 48.1
– Operating cost 62.9 58.3 58.1 61.7
– Investment in fixed asset 55.7 55.3 53.3 52.3
– Employment 52.1 50.2 51.0 49.7
– Business expectations 61.8 60.6 60.5 57.2
* The LPI is a composite index based on the diffusion indices for five indicators with varying weights: New orders: 30%; Business volume: 25%; Employment: 20%; Capacity utilisation: 15%; and Inventory turnover: 10%. (The diffusion index is the sum of the positive responses plus one half of those responding “the same”.)
Source: China Federation of Logistics & Purchasing and Fung Business Intelligence Centre
)
Competitive landscape
Logistics Industry in China
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Logistics concentration remains scattered
China’s logistics market is fragmented, with huge numbers of logistics enterprises of
various kinds4. Road transport enterprises account for the largest share of the logistics
market, in terms of the number of enterprises. According to the China Logistics
Development Report, published by the CFLP, there was an estimated 790,000 road
transport companies in the country last year. The top 20 road transport companies
accounted for less than 2% of the market share5.
Indeed, most transporters are small- and medium-sized enterprises and they tend to
operate in single or nearby cities. To find more business opportunities, they compete with
each other on price, instead of on service quality.
By contrast, many large-scale logistics service providers (LSPs) provide in-town
transportation services, but also offer all-round logistics services or provide sophisticated
logistics solutions. In general, they have substantial logistics resources, comprehensive
nationwide networks and refined relationships with the government.
Exhibit 7 lists the four significant types of large-scale LSPs in China, including state-
owned enterprises, privately-owned enterprises, spin-offs from large-scale manufacturing
and retailing enterprises, and foreign players.
4 According to the industrial classification by the National Development and Reform Commission, logistics enterprises in China include various kinds of transport companies (rail, road, water, air and pipeline), freight forwarders, warehouse operators, and postal and express delivery companies.
5 China General Chamber of Commerce, Newsletter on Economic and Commerce, Issue 14, 2013.
Exhibit 7 Four major types of large-scale logistics enterprises in China and selected examples
State-owned Private-owned Spin-offs Foreign-owned
Selected examples
Annto Agility COSCO Deppon (from Midea) Anji DB Schenker
Jiaji
(from SAIC
Sinotrans Motor) LF Logistics
Source: Compiled by Fung Business Intelligence Centre
In recent years, the express delivery sector, an emerging segment in the logistics industry,
has expanded quickly amid the boom within China’s online retail market. According to
the Economist Intelligence Unit6, there are more than 7,500 express delivery firms. Exhibit
8 displays the four major types of express delivery companies.
Exhibit 8 Four major types of express delivery companies in China and selected examples
State-owned Private-owned Spin-offs Foreign-owned
Selected examples
EMS SF Express Rufengda DHL
(from Vancl)
China Air Shentong FedEx
Express Express
TNT
China Rail YTO Express
Ozzo
Express (from Newegg) UPS
Source: Compiled by Fung Business Intelligence Centre
6 Economist Intelligence Unit, China Hand – Distribution, 2012
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Logistics Industry in China
Leading logistics players scale up
The CFLP released an annual list of “top 50 domestic logistics enterprises” (the top 50s)7.
In 2011, the total sales revenues of the top 50s reached 727.4 billion yuan, up by 17.5%
yoy. The top 50s registered annual sales revenues of over 2 billion yuan in 2011. Exhibit 9
shows the top 20 domestic logistics enterprises, ranked by sales revenues in 2011.
Exhibit 9 Top 20 domestic logistics enterprises by sales revenues
2011
Ranking Ranking (billion % yoy
in 2011 in 2010 Logistics enterprises yuan) growth
1 1 China Ocean Shipping (Group) Company 161.6 12.5
2 2 Sinotrans & CSC Holdings Co. Ltd 99.1 8.2
3 3 China Shipping (Group) Company 62.8 (2.2)
4 4 Xiamen Xiangyu Group Co. Ltd 33.9 31.9
5 5 China Railway Material Group Co., Ltd 26.7 17.8
6 6 China National Materials Storage and 26.3 17.8
Transportation Corporation
7 - Kailuan Group 22.6 -
8 - Tianjin Port Group 22.1 -
9 9 China Petroleum Transportation Corporation 21.5 47.4
10 8 Henan Coal and Chemical Industry 20.2 24.8
Group Co. Ltd.
11 10 S.F. Express (Group) Co., Ltd 15.2 33.1
12 - Lianyungang Port Logistics Co., Ltd 14.4 -
13 - Fujian Provincial Communication 12.7 -
Transportation Group Co., Ltd
14 11 China Railway Container Transport Co. Ltd 12.4 16.9
15 13 Shuohuang Railway Development Co. Ltd. 10.4 8.1
16 - Expeditors International Inc. 9.8 -
17 - Gaogang Port Integrated Logistics Park 8.6 -
18 - China Railway Material Company Limited 8.4 -
19 - China National Petroleum Corporation 8.2 -
20 16 China Railway Express Co. Ltd 8.1 5.3
Source: China Federation of Logistics & Purchasing
7 CFLP, China Logistics Development Report, 2012-2013
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Foreign expansion accelerates in most segments
Foreign LSPs possess sophisticated logistics technology, funding, professional expertise,
as well as a comprehensive international network. They have significant advantages
when providing international logistics and express delivery services. Also, they have the
capabilities to fulfill specific logistics demands, including automobile logistics and cold
chain logistics. As compared with local LSPs, foreign LSPs are superior in providing
value-added logistics services to meet international and local requirements of discerning
clients in China.
International express delivery services are an example. International companies, such as
DHL, FedEx, TNT and UPS, account for 80% of the market share in China’s international
express delivery market8. They have global network coverage, linking China with the
world, and provide reliable and efficient delivery services for high-value orders.
To further deepen their coverage and develop their local logistics business, UPS and
FedEx have obtained local express delivery services licenses as from September 2012.
It is expected that the moves will pose major challenges to the domestic, high-value
express delivery market in China.
Having said that, overseas players are not able to dominate all logistics market segments,
particularly highly-regulated rail cargo logistics and pharmaceutical logistics, and the
newly-emerging e-commerce logistics segments.
To a relative extent, China state-owned logistics enterprises have a comprehensive
network across the country and close contact with the state itself. They have advantages
in highly-regulated logistics segments. By contrast, domestic, private-owned logistics
enterprises can provide cheap and efficient delivery services that are acceptable to price-
sensitive clients. These firms dominate the domestic e-commerce logistics market9.
8 China Merchants Securities, Report of China’s Express Delivery Industry, 20129 http://www.kpmg.com/CN/zh/IssuesAndInsights/ArticlesPublications/Newsletters/KPMG-Industry-Updates/
Documents/Industry-Update-1303-02-c.pdf
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Logistics Industry in China
Market snapshots
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Production logistics demand up in lower-tier cities
Over recent years, the steep hike in labour and production costs in coastal areas has
prompted some manufacturing enterprises to migrate their factories from key cities in
coastal areas to inland, lower-tier cities. Many enterprises, such as Foxconn, Flextronics,
Dell, HP, and Pfizer10, have established new plants or relocated coastal facilities. As many
manufacturing plants are scattered across different cities and counties, relocation is
reshaping the industrial supply chain.
Many relocated manufacturing enterprises outsource their logistics activities to lower-tier
cities to regional LSPs, which possess local know-how and have closer ties with local
regulatory authorities and customs.
However, services quality and logistics capabilities may not always be up to standard;
very often, local LSPs fail to comply with expected requirements. Due to the mixed
performances of LSPs in lower-tier cities, many relocated manufacturing enterprises need
to reassess their inventory policies and schedule extra buffer times for production and
distribution (see Box 1).
Having said that, some regional LSPs, which are capable of fulfilling sophisticated
production logistics demands, have now emerged. A number are logistics spin-offs from
large-scale manufacturing groups, as outlined in the previous section.
For example, Annto Logistics in Anhui province and Zhongpin Logistics in Henan
province used to be logistics arms of an home appliance group and an agricultural food
processing corporation, respectively. They turned into independent logistics entities,
serving their group’s clients, and handling outside orders. This type of regional LSPs
provides nationwide logistics services and now plays an increasingly important role in the
production logistics segment.
10 http://www.joneslanglasalle.com.cn/China/EN-GB/Pages/NewsDetail.aspx?ItemID=20740
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Logistics Industry in China
Box 1: Outsourcing practices by industrial enterprises in China
Due to mixed performances by LSPs, many enterprises in China are reluctant to
outsource all their logistics activities to third parties. Hence, many LSPs handle only
some low-end logistics tasks for their principals. According to a survey conducted by
the National Development and Reform Commission (NDRC) and Nankai University in
2012(Note 1), traditional functions such as transport and distribution were the most popular
services outsourced by surveyed industrial enterprises. For those logistics functions
that required more sophisticated technique, such as inventory management, product
assembling and logistics system design, the outsourcing rates were less than 15%. The
figures reflect industrial enterprises’ reluctance to outsource high value-added logistics
services to LSPs.
Types of logistics services outsourced* 2009 2010 2011
Transport and distribution 80.9% 90.9% 86.7%
Packaging and processing 13.5% 14.6% 21.7%
Warehousing 15.5% 16.3% 20.8%
Logistics information management 15.6% 16.2% 18.0%
Sourcing management - - 15.7%
Logistics systems design 10.7% 11.5% 14.6%
Product assembly - - 13.3%
Inventory management 5.4% 5.9% 8.3%
* multiple responses allowed
The following table shows key concerns of surveyed industrial enterprises when making
their outsourcing decisions. LSPs’ poor service quality and high service charges were the
major concerns.
Major concerns on outsourcing Ranking
Service quality of the LSP 1
Service charges of the LSP 2
Loss of control in logistics management 3
Quality of human capital of the LSP 4
Warehouse system integration and maintenance 5
Differences in corporate culture and logistics systems 6
Staff reallocation of the principal 7
Note 1: The 10th National Survey on Logistics Market was conducted between January and May 2012 by the NDRC and Nankai University. Different sets of questionnaires were distributed to industrial and commercial enterprises (survey 1) and logistics enterprises (survey 2). A total of 865 valid responses were received (survey 1:287; survey 2:436)
Source: National Development and Reform Commission and Nankai University
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Growth of online retail market and challenges on nationwide distribution go hand-in-hand
Chinese consumers are increasingly taking to shopping online. As urban and rural
household incomes in lower-tier cities increase rapidly, the growth momentum of the
online retail markets in these cities are set to accelerate, even ahead of the growth in
higher-tier cities.
According to mainland online giant Taobao, the annual growth rate of online shoppers
in Anhui, Henan, Shanxi, Shaanxi and Xinjiang provinces exceeded 100% in 2011, while
the growth in some coastal areas, such as Shanghai, Zhejiang and Guangdong, was less
than 70% yoy11 (see Exhibit 10).
Shoppers in lower-tier cities spent an average of 5,628 yuan online in 2012, while their
counterparts in higher-tier cities spent 4,700 yuan during the same period12.
Exhibit 10: Annual growth of online shopping users by province (2011 compared to 2010)
Source: Taobao and CTR, compiled by Fung Business Intelligence Centre
11 http://finance.qq.com/a/20120410/007317.htm12 http://www.scmp.com/business/china-business/article/1293202/smaller-chinese-cities-lead-way- shift-
online-shopping
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Logistics Industry in China
Unlike key cities, many lower-tier cities and counties are remotely situated across
the country, with dispersed populations. So, for numerous online retailers, it is costly
to extend their distribution networks to lower-tier cities. Without economies of scale
and sufficient transaction volumes, many online retailers avoid investing heavily in
sophisticated logistics infrastructure in these remote areas. Also, delivery locations for
online orders are not limited to “points of sale”, further complicating the delivery process
and adding uncertainties to retailers’ investment decisions.
Take online purchases of electrical appliances as an example. Increasing numbers of
Chinese consumers enjoy the convenience of door-to-door delivery and so purchase
electrical appliances online. Some online shoppers in higher-tier cities not only purchase
goods for their own use, but also shop for their parents or relatives living in lower-tier
cities. Since points of sale and delivery locations may not be the same, the frequency of
the average online shopping exercise in a particular region may not truly reflect actual
retail demand and the need for local logistics support. Thus, inventory management
and product fulfillment spanning the country become great challenges for many online
retailers.
To fulfill orders across the country, online retailers commonly adopt a hybrid approach,
with their own logistics facilities and trucking teams serving key cities. As for more remote
areas, they outsource their logistics services to LSPs and express delivery companies (see
Box 2).
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Box 2: Logistics approaches by key online retailers; the China Smart Logistics
Network draws attention
China’s online retail market is rapidly expanding from coastal cities to lower-tier cities and
counties in inland areas. However, with fragmented logistics continuing to hinder online
retail development, some large online operators have developed their own nationwide
logistics plans, which they have recently revealed.
In May 2013, Jack Ma, founder of Alibaba group, together with some property
companies and logistics partners, developed the China Smart Logistics Network (CSN)
logistics system(Note1), aiming to support seamless information transfers between vendors,
online operators and LSPs. CSN now aims to provide nationwide 24-hour delivery within
the next five to eight years.
Another leading online retail operator, JD.com (previously known as 360buy), is also
aiming to build a nationwide logistics infrastructure network. The firm has six large
logistics centres and over 900 distribution stations nationwide. Since November 2012,
it has started to open up a warehouse management system for its vendors in phases1,
aiming to allow information synchronisation and streamline logistics processes between
stakeholders.
The table below summarises the latest logistics developments by key online retail
operators:
Online retail Logistics establishments and distribution services
operators
Taobao – Taobao has its own logistics system linking its central warehouse
system to those of its merchants and third party logistics partners
– All third party logistics partners must comply with Taobao’s logistics
requirements and standards
– Taobao does not provide a courier team but outsources delivery
services to third parties
JD.com – JD.com has set up warehouses in key cities in China, including Beijing,
(previously Shanghai, Guangzhou and Chengdu
known as – The firm expects to build between 50 and 60 warehouses across the
360Buy) country over the next three years and set up its own courier teams in
the coming three to five years
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Logistics Industry in China
Online retail Logistics establishments and distribution services
operators
Amazon.cn – Amazon.cn has 11 warehouses in major cities, including Beijing,
Suzhou, Guangzhou and Chengdu
– The firm has its own delivery teams serving 19 cities, but also partners
with third party couriers to cover the rest of China
Yihaodian – Yihaodian has logistics centres in Beijing, Shanghai, Guangzhou,
Wuhan and Chengdu. The firm has more than 130 delivery centres,
serving 34 cities
– Yihaodian’s In-house delivery team handles 70% of the products it
sells, while the rest are distributed by third party couriers
Newegg – Newegg has its own logistics company, Ozzo Logistics, to provide
services for itself and external customers
– Ozzo Logistics has 21 logistics centres in key cities in China, including
Beijing, Shanghai, Guangzhou, Wuhan and Chengdu
– Currently, Newegg provides delivery options to online shoppers,
including 24-hour delivery services in 10 major cities, and self pick-up
services
– Ozzo Logistics is to gradually outsource its distribution services to
LSPs and focus on logistics management
Mecox Lane – Mecox Lane has set up logistics centres in major cities, including
Beijing, Shanghai, Guangzhou and Chengdu
– The firm does not have its own delivery team but outsources delivery
services to more than 170 third party couriers, including EMS
Vancl – Vancl has its own logistics company, Rufengda
– Rufengda has set up a delivery network in 20 cities, including Beijing,
Shanghai, Guangzhou and Chengdu
– For the rest of China, Vancl outsources delivery services to third party
couriers
Note 1: The CSN project is managed by Cainiao Network Technology Co., Ltd. (Cainiao), a company formed by Alibaba Group, Intime Group, Fosun Group and five major Chinese courier companies, including S.F. Express, Shentong, Yuantong, Zhong Tong and Yunda. The project aims to set up warehouses across the country and build a database system tracking trade and delivery information; it is expected to be open to manufacturers, online sellers, delivery services and third party service providers to help build an end-to-end chain, allowing 24-hour deliveries across China.
Source: 1 http://big5.xinhuanet.com/gate/big5/news.xinhuanet.com/fortune/2013-06/23/c_116254667.htm,
Companies websites, Fung Business Intelligence Centre
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Express delivery firms step into online retail
Amid the rapid growth of e-commerce in China, demand for domestic express delivery
services has soared over the past decade. In 2012, express delivery companies handled
more than 25 million orders per day in China, of which around 60% was generated by
online retailing13. However, due to fierce competition and high operating cost in China,
express delivery companies have generally lower profit margins (see Box 3). Also, as
shown earlier, increasing numbers of online retail operators have set up their own logistics
infrastructure and networks, posing a greater challenge to express delivery companies.
As a result, some large-scale express delivery firms featuring nationwide coverage have
tried to diversify into online retailing.
Box 3: Profit margins of Chinese logistics enterprises
According to the previously mentioned survey by the NDRC and Nankai University, 43.9%
of surveyed logistics enterprises recorded profit margins of 5-10%, while 41.2% indicated
profit margins of 0-5% in 2011. The average profit margin was 5.59% in 2011, slightly
higher than the previous year. Overall, logistics enterprises’ profitability in China is still low.
A heavy tax burden, high toll fees, expensive fuel costs and rising wages are trimming the
profit margins of logistics enterprises.
Source: National Development and Reform Commission and Nankai University
13 Source: http://www.chinawuliu.com.cn/zixun/201303/12/213647.shtml
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Logistics Industry in China
For instance, Yuantong Express, S.F. Express and Shentong Express set up their own
online retail platforms in 2008, 2010 and 2012, respectively. However, their online
businesses were not sustainable even over a few months because they faced head-to-
head competition from existing online retail operators. Also, their failure was attributed to
low online traffic volumes, limited online orders, uncompetitive product offerings online,
and lack of clear market positioning.
To establish sustainable online retail businesses and differentiate themselves from online
competitors, express delivery companies need to invest in product sourcing, online retail
marketing and customer services, (see Box 4).
Box 4: The case of S.F. Express
Despite its failed attempt to become an online retail operator in 2010, S.F. Express
established another online retail platform, sfbest.com, in mid-2012. This targets the high-
end food market, selling foods for festival occasions, fresh and chilled foods, wine and
other drinks, and health foods. Its door-to-door cold chain delivery service is available
in Beijing while its “last mile” delivery services for non cold-chain goods cover Beijing,
Shanghai, Guangzhou, Shenzhen, Tianjin, Hangzhou, Suzhou, Nanjing and Wuhan.
The question is what motivated S.F. Express to re-enter the online retail market and focus
on the high-end food market. We believe the reasons are twofold:
– Growing demand for high-end food products
Food hygiene and safety issues in China have prompted consumers to seek better
quality foods from secure sources. The online food retail platform provides transparent
information with higher traceability.
In parallel, increasing numbers of Chinese consumers prefer a healthy diet. They
are willing to spend more on high-end and organic foods, so there is huge market
potential for selling such food products online.
– Hands-on experience providing door-to-door cold chain delivery
S.F. Express has specific experience handling cold chain products, while providing
door-to-door cold chain delivery services to other online retail operators. It has more
than 140 refrigerated trucks1 and cold storage facilities in Shanghai, Guangzhou and
Shenzhen. Most online merchants selling cold chain goods on Taobao are reportedly
using S.F. Express’ services2.
Source:1 http://www.chinawuliu.com.cn/zixun/201307/22/241755.shtml2 http://home.ebrun.com/blog-35826.html
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Rail transport reform enhances logistics capabilities in China
The State Council announced its plan in March 2013 to dismantle the Ministry of
Railways (MOR) to form administrative and commercial arms. As shown in Exhibit 11,
railway administration functions are to be supervised by the Ministry of Transport (MOT),
while the newly formed China Railway Corporation (CRC) is to be responsible for all
commercial activities.
Exhibit 11 Dismantling the Ministry of Railways
Source: Compiled by Fung Business Intelligence Centre
It is expected that restructuring will enhance China’s logistics capabilities, as rail, road,
water and air transport are managed and monitored under the same umbrella, the MOT.
Integration should remove barriers against developing inter-modal transport between rail
and other transport modes.
In terms of freight transport management, the MOR was previously responsible for bulk
cargo businesses, such as coal, minerals and grain. However, due to the economic
downturn and lower demand for coal, railway freight services also experienced shrinking
demand. In addition, complicated cargo-handling procedures and inefficient services
further slowed railway cargo demand. So, to boost the railway cargo business, the newly
formed CRC implemented a series of measures on 15 June 2013 (see Exhibit 12).
Immediately after the implementation of cargo reform, an increase in rail cargo traffic
in certain regions was evident. For instance, from 15 June to 9 July 2013, the CRC in
Guangzhou generated an increase of high-value product cargo volumes by 10% yoy14.
"#
14 Shipping Gazette, Daily Shipping News, 22 July 2013
Dismantling of
Ministry of
Railways
Ministry of
Transport
China
Railways
Corporation
Administrative arm
standards
railway project quality
Supervised by
Newly
established
Commercial arm
transport
management
Logistics Industry in China
Exhibit 12 Railway cargo reform in China
Simplifying – In the past, when customers applied for rail freight delivery slots, they
cargo handling were required to submit cargo plans to several divisions of the MOR
procedures and pay for handling charges to various departments at different
rates, resulting in complicated and lengthy application procedures
– Now, cargo plan is no longer required. Handling charges are
standardised. In addition, customers can arrange cargo delivery
through a hotline or online platform, in addition to counter services
Expanding – Aside from bulk cargo businesses, the CRC has also deployed more
business resources for handling high-value products and daily necessities
scope – The CRC has introduced rail courier services
– In the past, high-speed rail without passenger carriage was solely
used for daily systems checking. Now, the first non-passenger
train on selected l ines is used to transport small parcels,
accompanied by technical checks. Examples are the Harbin-
Dalian and Beijing-Shanghai lines
– The first intercity express service between Shanghai and Hefei
was launched in early July 2013, and the cargo handling time was
trimmed from 23 hours to nine
Launching – Formerly, only station-to-station services were available
door-to-door – Now, cargoes can be picked up at railway stations or delivered to
services designated points, subject to customer requests. In accordance with
their service pledges, station-to-station and door-to-door delivery
orders are fulfilled within two and three days, respectively
Source: http://cv.ce.cn/kcz/wlys/201307/01/t20130701_24528972.shtml & http://www.chinawuliu.com.cn/zixun/201307/16/240231.shtml
"$
Heavy taxes for some logistics companies
The Ministry of Finance and the State Administration of Taxation jointly issued a circular
in November 2011 outlining the implementation and transition rules of a pilot tax reform
– with Value-added Tax (VAT) to replace Business Tax (BT). The objective is to reduce
“double taxation” caused by separate VAT and BT charges and enable a fairer VAT input
deduction system. The reform is regarded as one of the key measures to promote the
development of China’s services sector.
The pilot programme was rolled out in Shanghai on 1 January, 2012. It focused primarily
on transportation, as well as six other modern services sectors (see Exhibit 13). VAT
rates for the transportation and logistics auxiliary services sectors are 11% and 6%,
respectively. By July 2012, the programme was subsequently extended to Beijing, Tianjin,
Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong provinces.
In April 2013, the State Council announced that the VAT pilot programme would extend
nationwide and cover further services sectors on 1 August 2013 (see Exhibit 13). With
the nationwide extension, the competitive advantage available to the nine pilot cities
and provinces were removed. A more level playing field should also benefit transport
and logistics industries. The State Council has indicated that the railways, post and
telecommunications industries will be covered by the VAT pilot programme in the near
future.
"%
Logistics Industry in China
Exhibit 13 VAT pilot programme
Transportation Modern services sectors
services sector
Effective from – Road transport – Research, development and technical
1 January 2012 – Water transport services
– Air transport – Information technology services
– Pipeline transport – Cultural creative services
– Logistics auxiliary services
– Certification and consulting services
– Tangible, movable property leasing
services
Effective from – Production, broadcast and publication
1 August 2013 of radio, films and television programmes
Source: Compiled by Fung Business Intelligence Centre
Whether or not tax reform is entirely beneficial to the logistics sector remains to be seen.
Despite a significant reduction of tax in the pilot cities and provinces concerned, some
transport and logistics companies actually report increases in their tax burden. This is
because transportation services do not offer many opportunities for companies to claim
input VAT credits. Take the following cases, for example:
– Salaries and toll fees are ineligible for input VAT credit;
– If a truck is refueled from the cities excluded from the VAT pilot programme, the fuel
costs are not eligible for input VAT credit;
– Input VAT credit can be claimed by reference to official VAT invoice. However, many
logistics companies failed to obtain the official invoices from small-sized companies.
Government support for logistics development
Realising that the logistics industry is critical to economic success, the government has
put in place a number of supportive policies in the past few years. Exhibit 14 shows some
major government initiatives that support the development of China’s logistics industry.
"&
"'
Exhibit 14 Major government policies related to the logistics sector
Date Launched by Name of Policy Key highlights
Tax Policy for Bulk Commodity 50% reduction of current urban land use tax Storage Facilities of Logistics will be applied to the land for bulk commodity Enterprises (關於物流企業大 storage facilities owned by logistics enterprises 宗商品倉儲設施用地城鎮土 (whether self-used or leased out) 地使用稅政策的通知 to the area of land for storage facilities exceeding 6,000 sqm
SPB Accelerating the Collaboration business environment for the collaboration and and Development of Express development of express delivery services and Delivery Services and Online online retailing. Retailing (關於促進快遞服務與 網絡零售協同發展的指導意見 ) – Support industrial collaboration and development, in terms of financial and taxation incentives, and supply of land and human capital – Promote seamless information sharing and standardisation among the two industries – Introduce a credit system to monitor the performances of express delivery companies and online retail operators – Encourage express delivery companies to establish logistics facilities and services in line with the needs of online retailing counterparts – Explore win-win strategies to strengthen business collaboration between the two industries, e.g. forming strategic alliances, mergers and acquisitions. – Enhance business security, e.g. track and trace delivery systems, establish emergency handling procedures for the two industries, strengthen information security systems to prevent information leakage – Promote information technology (IT) adoption, e.g. support the development of the Internet of Things, encourage the use of Radio Frequency Identification (RFID), personal digital assistants (PDAs) and global positioning systems (GPS).
Council on Further Reformation of the distribution system, reducing the ratio of total logistics Distribution Sector and costs to GDP, enhancing the competence of large- Acceleration of the Development sized distribution enterprises, adopting modern of the Distribution Sector information technologies, and improving the market (國務院關於深化流通體制 environment with policy and regulatory support. 改革加快流通產業發展的意見 – Strengthen the distribution network such as the urban-rural transport, in-town delivery – Optimise the design of supply chain network – Improve logistics facilities, e.g. large-sized distribution centre, agricultural cold chain facilities – Enhance the level of informatisation in the distribution sector, e.g. adopting the Internet of things, cloud computing, GPS and e-barcodes
the Industrial Upgrade of the services from performing traditional storage functions to Warehousing Sector (促進倉儲業 providing sophisticated warehouse management and 轉型升級的指導意見 ) operations
– Support the development of one-stop-shop warehousing services, covering inventory management, value-added services, and pick and pack
Logistics Industry in China
"(
Date Launched by Name of Policy Key highlights – Promote IT adoption, e.g. the Internet of Things, barcode and RFID – Align standardisation levels, in terms of warehouse layout design, services, equipment and evaluation criteria – Encourage collaboration of warehousing resources via mergers and acquisitions, strategic alliances, outsourcing and e-platforms – Renovate traditional cold storage facilities to suit the needs of modern cold chain logistics
and Information Technology on logistics, so as to improve the efficiency of logistics Accelerating Informatization on management and operation Logistics (工業和資訊化部關於推 進物流資訊化工作的指導意見 ) – Develop and standardise informatised logistics systems for various parties, e.g. government departments, logistics companies, industrial and commercial corporations and the army – Improve the level of logistics informatisation by various government departments, in terms of service standards and management – Improve the level of informatisation of logistics industry and logistics companies – Improve the level of informatisation of industrial and commercial companies, and the standard of supply chain management – Standardise informatisation systems in logistics – Accelerate cooperation of army-civilian informatisation systems in logistics, so as to improve the efficiency of emergency logistics – Promote and develop the innovative use of IT in logistics
Concerning the Regulation of the development and management of the express delivery Express Delivery Industry market (快遞市場管理辦法 protected by law
regard to business entities, delivery services, safety, control and management, and legal responsibilities
MOHRUD, Improving the Management of management of urban distribution by setting up a MOPS, MOT, Urban Distribution (關於加強和 comprehensive regulatory system, improving NDRC and SPB 改進城市配送管理工作的意見 ) infrastructure and facilities, enhancing transport management and traffic control, strictly enforcing the law, and promoting IT adoption
and the State Administration of levying value-added tax in lieu of business tax in Taxation on Pilot Plan for Levying Shanghai and eight other provinces in 2012, the pilot Value-Added Tax in Lieu of plan rolls out nationwide, effective from August 2013
Industry and Some Modern Services modern services sectors, the pilot industries also cover Industries across the country production, broadcast and publication industries for (關於在全國開展交通運輸業和部 radio, films and television programmes 分現代服務業營業稅改征增值稅試 點稅收政策的通知 )
Notes:
MIIT: The Ministry of Industry and Information Technology; MOF: The Ministry of Finance; MOFCOM: The Ministry of Commerce; MOHRUD: The Ministry of Housing and Rural-Urban Development; MOPS: The Ministry of Public Security; MOT: The Ministry of Transport; NDRC: The National Development and Reform Commission; SAT: The State Administration of Taxation; SPB: State Post Bureau
Source: Various government websites; compiled by Fung Business Intelligence Centre
")
Challenges
Logistics Industry in China
#*
Warehousing management has room to grow
Many warehouses owned by local LSPs in China are relatively sub-standard. Furthermore,
poor warehouse layout design and insufficient material handling equipment always affect
the efficiency of warehousing operations. Manual work is still common in small-sized
warehouses.
Poor warehousing and inventory management have led to long average inventory
periods. According to the survey mentioned earlier and conducted by the NDRC and
Nankai University in 2011, more than half the surveyed industrial enterprises and 49% of
commercial enterprises held their inventories for more than one month (see Exhibit 15).
In addition, some warehouse operators that do not adopt warehouse management
systems fail to synchronise inventory data with their stakeholders in a timely manner.
Without transparent information flows, warehouse operators cannot respond quickly
enough to their clients.
Exhibit 15 Average inventory period of industrial and commercial enterprises
Industrial enterprises Commercial enterprises
Average inventory period 2010 2011 2010 2011
<10 days 9.5% 9.0% 14.8% 15.0%
10 – 20 days 11.2% 9.5% 23.9% 19.0%
21 – 30 days 23.7% 23.0% 18.6% 17.0%
1 – 2 months 32.4% 32.5% 25.7% 29.0%
> 2 months 23.2% 26.0% 17.0% 20.0%
Average (days) 45.9 48.1 38.0 41.6
Source: National Development and Reform Commission and Nankai University
#!
Logistics burden of high toll fees
Today, road transport remains the major freight transport mode in China. In 2012,
around 78% of cargo was dispatched by road, in terms of tonnage (see Exhibit 16). It
is noteworthy that road tolls account for about one-third of transport costs in China15.
Excessive highway tolls, as well as price hikes of fuel and labour, have eaten into many
logistics enterprises’ profits.
Exhibit 16 Freight traffic in China (million tonnes)
2010 % of total 2011 % of total 2012 % of total
Road 24,481 75.5 28,201 76.3 31,885 77.8
Rail 3,643 11.2 3,933 10.6 3,904 9.5
Air 5.6 0.02 5.6 0.02 5.5 0.01
Water 3,789 11.7 4,260 11.5 4,587 11.2
Pipeline 500 1.5 571 1.5 612 1.5
Total 32,418 100 36,970 100 40,994 100
Source: National Bureau of Statistics of China
To reduce average transport costs, trucks are typically overloaded. Road accidents occur
easily and roads are often blocked for clearance. Severe traffic jams also undermine any
guarantee of on-time delivery and affect the service quality of logistics operators.
Stringent regulation hinders logistics growth
Although the government has promulgated a number of measures to support the
development of the logistics industry, policy execution sometimes hinders that growth.
Licensing applications comprise one example. Logistics companies have to apply various
types of operating licenses to set up nationwide businesses. However, licenses are
issued by different provincial governments, while application charges and procedures
vary from province to province. Due to the complexity in dealing with numerous parties,
some logistics companies lose their impetus when attempting to develop inter-regional
business.
15 http://www.chinairn.com/news/20130603/163442977.html
Logistics Industry in China
#"
In addition, many local governments impose specific requirements on logistics
operations. For instance, they adopt stringent rules over in-town trucking services, due
to considerations of city traffic control and environmental issues. Also, quota for the
number of in-town trucking licenses granted to trucking firms are fixed. Those logistics
operators who failed to get proper licenses could either have to pay higher costs to hire
licensed trucking firms to convey the goods, or operate without licences – with a risk of
being fined. Added to these, operational flexibility can be affected by restricted loading or
unloading zones, roadblocks and restrictions on the types of trucks allowed into towns.
Constraints on human resources
Insufficient supply of logistics manpower has long been a major concern in China,
despite the fact that the number of graduates in logistics and transport studies has
been increasing in recent years. Labour shortages also lead to higher turnover rates in a
competitive labour market.
Besides, many local practitioners lack understanding of modern management and the
skills to satisfy increasingly demanding clients. Many foreign companies have set up
their businesses in China and sought out LSPs with local experience. However, while
representatives of local firms usually have hands-on operational experience, many cannot
communicate with potential clients in foreign languages. Then again, some staff are well-
educated but lack the relevant experience and “soft” skills.
Conclusions and Implications
##
Logistics Industry in China
Without doubt, the logistics industry in China is robust in its growth. However, it still faces
many challenges. Numerous small-sized LSPs offer similar but limited services without
nationwide coverage, while the supply of logistics facilities in some districts are either
insufficient or redundant. Also, constraints on logistics facilities and human capital, as well
as expensive logistics costs, add further burdens to logistics users and operators.
Below are some tips for running logistics business in China.
#$
Logistics
Enterprises
in China
Select competent and reliable partners
Streamline operational
processes, so as to minimise logistics costs
Constantly upgrade facilities
Retain logistics talent
Follow government policies and
incentive schemes
Work closely with stakeholders via real time information
sharing
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