Domestic Transportation. In September, China became the world's largest net importer of petroleum. In recent years, China's fuel costs grew at approximately 20 percent. While it may drop to 15 percent this year, the government has a challenge to gain control of energy costs. In the long term, the government plans to allow competition by private firms for domestic oil production, but this will take time as the state-owned oil corporations try to maintain control.

During 2013, new markets opened up for foreign parcel service providers like UPS and FedEx, but because of price pressure from local providers, those additional markets did not generate much growth for them. There is some concern, among foreign companies in general, about the new administration's support of foreign invested enterprises. For 2014, it appears that growth will be, at best, slow and steady for foreign logistics providers.

Distribution. New models for distribution are rising out of the flurry of e-commerce development. As online retailers such as Alibaba, Jindong, and Tencent build their own delivery networks, third-party logistics providers (3PLs) are responding by doing the same. These new networks integrate last-mile delivery, fulfillment and warehousing.  Shunfeng, Deppon and Best Logistics are examples of 3PLs that are aggressively developing integrated networks that compete with online retailers.

For companies developing distribution networks, land availability will continue to be a problem. The national government recognizes the importance of encouraging logistics infrastructure growth, but is limited in the support it can garner at local levels where land is allocated. With extremely low vacancy rates"”as low as 3 percent in some markets like Beijing"”warehouse rent will continue growing 5 percent to 10 percent per year.

Import and Export. The Shanghai Free Trade Zone, which was launched September 29, 2013, will present new opportunities for both inbound and outbound trade. These new opportunities include:

"¢ International cargo may be transferred in Shanghai, rather than having to go to Incheon or other ports for transfer. 

"¢ Foreign vessels can ship domestically from Shanghai to other China ports. 

"¢ The administration process for customs is greatly simplified (e.g., allowing batch clearing of waybills). 

"¢ Distribution centers in the new zone are allowed to fill both domestic and international orders. This privilege is currently reserved for domestic companies, but could open up to foreign companies in the future.

Sourcing. As costs increase, some sourcing will move to lower-cost countries and non-coastal regions in China, but not in significant volume. Manufacturers in China are now looking to offer more than low-cost production as they seek to move up the value chain. They will do so by offering design, make-on-demand, and venturing into higher technology components.

                                                            The Outlook

China is struggling to morph into an economy that is driven by domestic consumption; however, the logistics infrastructure to enable this transformation is a major challenge. The government recognizes the issues and will continue to take measures such as controlling fuel cost, encouraging logistics development, and opening up trade. Domestic companies will continue to take aggressive steps such as building their own integrated logistics networks and moving up the value chain.