China: reforming the logistics industry is among Beijing’s priorities

Just like electronics, logistics is simultaneously an independent industry and a service for others.  In fact, it cuts across all productive enterprises.  In China it accomplishes a fundamental task: it renders available the products of the world’s factory.  For this reason it contributes to trends in the GDP and is, in turn, conditioned by it.  It is therefore not surprising that the industry has strongly affirmed itself in the past few years and enjoys growth prospects—albeit slow—and demonstrates critical problems at its core, the solutions to which cannot be delayed.  The entire industry grew 9.8% in 2012 and 12.3% in the preceding year (yoy); this represents 15.3% of the whole service sector and 6.8% of the Chinese GDP.  Clearly, huge numbers are involved, the importance of which have not been in line with the development of other sectors until now.  For example, the cost of logistics in relation to the value of products is almost double in comparison to industrialized economies.  This relationship was sustainable in the past thanks to the low cost of production factors.  Now, however, structural improvements are necessary due to competition from other Asian countries and rising costs in China.  China suffers from two principle defects: fragmentation and mediocre specialization.  They are general considerations that can be applied to the country’s industrial structure.  The first example can be found in the transport sector, which is worth more than half of the industry (the other two combined—storage and management—comprise 48%).  A worthy analysis by Li&Fung from Hong Kong notes that 790,000 road haulers operate in China, and the top 20 businesses don’t even reach 2% of the market; the notion that competition takes place in prices and over brief distances is immediate.  Only the big players can reach all the country’s corners.  The most famous distributors dominate international shipments, and have only recently been granted permits to operate over the entire Chinese territory.  Pressure on local competitors will be stronger and will force them to face issues that have been ignored until now: provision management, inventory efficiency, and delivery punctuality.  These challenges are mandatory for at least two developments that have emerged in the production-consumption cycle.  The delocalization of industry to internal zones is the most evident.  The Chinese coast is densely populated and frequently polluted, with high management costs.  The producers—especially those making consumer goods—have moved close to second- and third-tier cities in China’s interior, zones that are frequently still rural and more difficult to access.  From there, it’s necessary to ship products to Chinese consumers and especially container ships in an efficient manner.  The explosion of ecommerce represents the second challenge, where the brokerage between producer and consumer is more direct.  25 million orders were placed per day in 2012, 60% of which represent online sales.  The implications are obvious: innovation is necessary and central to maintaining corporate positions and ensuring a service to the whole market, further confirmation that a spontaneous and confused—albeit profitable—phase in logistics needs revision.  Skills, consolidation, and private initiatives among a transport industry governed by national politics are necessary.  If a sharp braking of the Chinese is hard to imagine, then reforming the logistics sector can be reasonably inserted at the top of Beijing’s priorities.  It’s an additional test for the administration,that seems to have discovered too late that distribution is equally important to production.