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China changs logistics challenge


   As domestic consumer markets take off and investment extends

  to new inland regions, China’s transport and logistics infrastructure

  faces fresh challenges and fresh scrutiny from businesses and

government planners.


  The contraction in demand for Chinese exports in 2009, in the wake of the global

  financial crisis, highlighted the risks of reliance on export markets and the need to

  further stimulate domestic demand; something articulated in the government’s

latest Five-Year Plan.


  Yet in the context of transport and logistics, the global economic downturn of

  2008-09 only hastened a number of trends that were already underway. The most

  pressing challenge is no longer moving goods out of the country as quickly as

  possible. After all, China has invested and put in place infrastructure around many

  of the ports and conurbations along its eastern coast. Rather, the challenge is for

  logistics to keep pace with industrial relocation within China and also with the

growth of domestic demand.


  Anyone doing business in China will admit that managing logistics continues to

  be not only a complex, but also a relatively costly, part of their operations. Moving

  goods within China remains particularly challenging. For example, road tolls, almost

  all of them imposed by provincial or city governments striving to recover the funds

  they invested in their highway networks, can account for between 30-40 percent

  of transport costs for trucking companies. 1High fees can encourage transport

companies to overload their trucks and breach safety measures.


  Performance can also be hampered by the availability of experienced staff, especially

  at a managerial level. With China’s economy continuing to expand strongly, wages

  and land are becoming more expensive, particularly in the leading cities.

  The government has also acknowledged that efficient transport and logistics are

  key for long-term development and it is committing huge funds to build airports, roll

  out a national expressway network and, expand and upgrade the country’s railway



  Geographically, the heavy investment in transport infrastructure has left almost

  every part of the country accessible by highway and most of it by rail. Airports dot

  every province, and transport capacity on the country’s most important rivers has

  doubled in the last few years. The Yangtze, for example, has seen container volumes

  rise from 4 million 20-foot equivalent units (TEUs) in 2007 to 9 million in 2010. In

  total, it carried more than 1.5 billion tons of cargo last year, twice the weight of that

shipped on all US waterways.


  The outcome of this investment is that the less-developed central and western

  regions are finally starting to become linked by reliable transport routes to the east



  Cities such as Chengdu and Xi’an have already made huge leaps in using airfreight

  links to develop high-technology industries producing high-value goods, which

  are then flown to their final destinations. More generally, companies — especially

  domestic ones — are now finding it possible to move beyond the regional or

  provincial limits that have held many of them back, penetrating third- and fourth-tier

cities across the country.


  Aside from the sheer scale of investment, the widely touted solution for many of

  the industry’s ills is consolidation leading to the creation of a smaller number of

  larger and more efficient companies. Mergers and acquisitions are taking place, but

  they show no sign of accelerating. There are several reasons for this. China’s many

  hundreds of lower tier cities remain best served by smaller local operators, which

  both know their immediate locality well and can offer low-price services. Financing

  for acquisitions is often hard to come by at a reasonable price, as are managers

with the right skills and experience to handle the integration of acquisitions.


  Consequently, organic growth is preferred by many companies. Given the

  fragmentation in the sector, many domestic companies — and some multinationals

  — prefer to keep their transport and logistics services in-house. DHL’s decision to

  divest from its domestic express joint venture seems to be an indication that the

  domestic delivery market will remain largely the preserve of local companies.

  China’s shift towards domestic private consumption is underway, but it will take

time. The logistics and transport sector will play a key role in making it happen.


  Indeed, the possibilities that a modern logistics sector can offer have been

  demonstrated over the past two years with the sudden emergence of online

  shopping as a major new business. From almost nothing in 2008, e-commerce

  involving private citizens has grown to a point where China’s biggest online

  business provider, the Hangzhou-based Alibaba Group, is planning to invest USD 4.5

billion to set up its own dedicated logistics firm.


  The government is now actively supporting such measures. In February 2009, in

  the aftermath of the global financial crisis, the government launched its Plan to

  Adjust and Rejuvenate the Logistics Industry.


Its objective was to rationalise the industry by encouraging such practical measures as establishing technological and other standards, accelerating the rate of mergers and acquisitions, supporting training schemes, and increasing the utilisation of information technology through investment in research and development and the application of new technologies relevant to the industry.


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