Third Party Logistics Market in China

The Chinese economy’s rapid growth translates into an increasing demand for logistics and infrastructure facilities to support the movement of trade flows. China’s logistics industry has had an average annual growth rate of 20% over the last decade and the industry’s GDP is expected to reach USD$176 billion by 2010.

Currently, nearly all of the brand-name global third party logistics (3PLs) have at least a toehold in China’s logistics market. While many are following the migration of specific customers to the world’s factory, others simply find the market’s growth too compelling to resist. Moreover, 3PL penetration levels in China are still considered low. Of the 19 percent of China’s total GDP spending that is allocated to logistics, only around 5 percent goes to 3PLs, much lower than in the U.S. and Europe.

China’s logistics market is hungry for Western-style know-how. By some estimates, logistics accounts for 40 percent of the cost of goods sold and four-fifths of production-cycle time in China. This compares with around 10 percent of the cost of goods sold in the U.S. and underscores the tremendous opportunity for efficiency improvements. 3PL providers will be the central players in achieving better efficiency and meeting the future needs of China’s booming economy.

Importantly, the Chinese government also has recognized that logistics is vital to the country’s continued economic growth. That recognition, coupled with requirements of China’s entry into the World Trade Organization, has led to fewer restrictions on logistics companies entering the market. While still far from simple, foreign entrants now are allowed to operate wholly-owned subsidiaries in China, without a local partner, and the approval of foreign-invested commercial enterprise (FICE) licenses has been decentralized and moved to the provincial level, greatly expediting the process. The Chinese government’s efforts to improve the logistics environment go beyond licensing. The 10th Five-Year Plan called for deregulation and massive infrastructure improvements and the 11th Five-Year Plan (2006-2010) again gives high priority to logistics.

However, challenges remain for foreign 3PLs venturing into China. All 3PLs say their customers want them to provide Western-style logistics in China, but many issues make that level of service difficult to achieve. One of the biggest challenges is the logistics infrastructure. Both the transport infrastructure and storage facilities have a long way to go to be competitive with a country like the U.S.

Because many companies outsource manufacturing to China, 3PLs also are being asked to provide a service not common in the U.S, supplier management. Too often, customers placing orders with Chinese manufacturers or suppliers do not discover errors until the shipment is received at final destination. These services also often involve quality control of products or regular contact with the suppliers to ensure the shipment is going to meet the schedule.

All of these services give Western 3PLs an early advantage in the China marketplace, but that advantage may be hard to maintain. A new survey from UK-based Transport Intelligence of more than 230 senior managers who use or provide logistics services in China sees a bright future for logistics outsourcing, but warns that competition for this business will be fierce. In addition, domestic logistics companies are now increasingly seen as a viable alternative to Western and Japanese providers.