Analyst Insight

The Beijing Olympics will be the shining moment for China in 2008, symbolizing the country's rise to economic and political power.  But the country is also experiencing growing pains, especially in logistics.  Simply put, China's economic growth is significantly outpacing its logistics infrastructure and capabilities.  In many ways, China resembles the United States of 130 years ago: cities, factories, and trade along the east coast, farm lands and mountains to the west. Railroads opened up the frontier lands in the U.S. and they're doing the same in China. The biggest difference is the timescale. The Chinese are determined to make up for lost time, and they're accomplishing in years what took the U.S. many decades to complete.
-Adrian Gonzalez, director at ARC Advisory Group

China's gross domestic product reached $2.68tr in 2006, a 10.7 percent increase from 2005, the fastest rise in 11 years.  China's economic growth, however, is being threatened by several factors, including monetary policy, energy demands, and logistics constraints. Although the latter is less publicized, logistics is having a significant impact on the economy.



Logistics costs are currently over 20 percent of GDP, about double the cost in the United States. Every 1 percent reduction in logistics costs would add RMB130bn (about $17.5bn) to the Chinese economy. Therefore, China is moving quickly to improve its logistics infrastructure and to learn and implement best practices from the United States and Western Europe. The rise of China's retail industry, coupled with increased foreign investment in logistics, is helping this effort.

The Outlook

Foreign investment in logistics will grow significantly over the next few years. U.S. and European logistics service providers, who to date have focused primarily on freight forwarding services, will expand their contract logistics operations in China, either organically or through acquisitions. Foreign companies operating in China will lead the way in outsourcing their logistics operations, while domestic companies move slowly in this direction over time. In addition to infrastructure bottlenecks, China needs to overcome several other challenges to improve its logistics capabilities and performance, including poor collaboration between government ministries, lack of management expertise, and relatively poor information technology capabilities.