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Logistics Infrastructure in China Is Under Pressure

Analyst Insight: Pressure is mounting on logistics infrastructure in China due to increasing domestic consumption. As Chinese consumers become more sophisticated, distribution networks will have to respond with greater accuracy, efficiency and speed. The same supply chain principles that have been tried and proven in the West will, out of necessity, become more accepted in China. - Jim Serstad, Managing Director, Asia, Tompkins International

With China being one of the few bright spots in the economy, it receives a lot of attention in global supply chains. Despite the 2012 slowdown in the China economy, the country is still expected to grow at nearly 8 percent in 2013, a percentage that most countries could only hope for in the best of times.

Growth is expected to come in the form of consumer spending, rather than through real estate development, as was the case in recent years. China's 12th Five-Year plan puts priority on domestic consumption, which means an increase in wages and more disposable income in the economy. The Chinese are still very cost-conscious, and most of the income growth is limited to the already wealthy. Nevertheless, consumers are expected to pull through and create the targeted growth.

This increase in consumer spending will put significant strain on an already inadequate logistics infrastructure. On top of that, e-commerce growth will continue to top 100 percent year on year. In fact, a number of the pure e-commerce providers have opted to build their own distribution networks so that they can provide same-day delivery in major metropolitan areas. Combining this same-day delivery with extreme promotion peaks tests the limits of the systems.

Inefficiencies are exacerbated by the high degree of fragmentation in the logistics industry. With hundreds of thousands of logistics enterprises in China, this fragmentation is a major contributor to the unusually high transportation costs in China. Logistics costs as a percentage of GDP are about 18 percent, which is much higher than the single-digit figures in most developed countries. This percentage also represents a major opportunity for gains in efficiency and is expected to drive consolidation in the industry in 2013.

State-owned third-party logistics providers, such as Sinotrans and COSCO, have the largest market share due to their strong government relations. But even they will need to improve their efficiency to keep pace with the more nimble local 3PLs. Foreign 3PLs that have been kept at bay in domestic distribution are also beginning to see new opportunities. With UPS and FedEx being granted licenses for limited domestic distribution, the door is opening. Foreign 3PLs will have to rely less on their local partners than they had in the past.

The Outlook

As China's domestic consumption grows, so will the pressure on the distribution infrastructure. The country will demand more efficient logistics, which will open doors for foreign logistics providers who bring logistics expertise. The government will also invest in infrastructure and provide policy support for logistics. And supply chain executives and professionals can expect greater consolidation of the highly fragmented logistics industry.Keywords: international trade, supply chain management, 3PL, third party logistics, logistics management, logistics & supply chain

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