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Logistics Industry in China August 2013

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Logistics Industry in China August 2013

Table of Contents

Introduction ......................................................................................................... 2

Industry overview ............................................................................................... 3

Logistics industry demonstrates robust growth ................................................ 4

Total logistics costs stay high........................................................................... 6

Logistics enterprises foresee favourable prospects .......................................... 7

Competitive landscape ...................................................................................... 9

Logistics concentration remains scattered ....................................................... 10

Leading logistics players scale up .................................................................... 12

Foreign expansion accelerates in most segments ............................................ 13

Market snapshots ............................................................................................... 14

Production logistics demand up in lower-tier cities ........................................... 15

Growth of online retail market and challenges on nationwide distribution go hand-in-hand ................................... 17

Express delivery firms step into online retail ..................................................... 21

Rail transport reform enhances logistics capabilities in China ........................... 23

Heavy taxes for some logistics companies ...................................................... 25

Government support for logistics development ................................................ 26

Challenges .......................................................................................................... 29

Warehousing management has room to grow ................................................. 30

Logistics burden of high toll fees...................................................................... 31

Stringent regulation hinders logistics growth .................................................... 31

Constraints on human resources ..................................................................... 32

Conclusions and Implications ........................................................................... 33

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Logistics Industry in China

Introduction

China’s economic growth has been accompanied by the ever-increasing demand for

logistics services. However, the country’s logistics capabilities still remain at an early

stage of development, with a number of unresolved challenges. That said, foreign and

local players continue to expand into the logistics market, and the government is pushing

to improve logistics capacity and efficiency. Accordingly, we believe the logistics sector is

set to maintain a steady and robust growth over the coming years.

In this report, we take an overview of China’s logistics sector and assess the competitive

landscape of the logistics market. We also review the industry’s latest developments and

major challenges.

"

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Industry overview


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Logistics industry demonstrates robust growth

Driven by the demanding industrial sector and widening domestic retail market, China’s

logistics industry registered robust growth in 2012. Total logistics value1 reached 177,300

billion yuan, up by 9.8% year-on-year (yoy) in real terms (see Exhibit 1).

Composition of total logistics value

The manufacturing sector remains key to China’s economic development. As a result, the

logistics value of industrial products accounted for an overwhelming 91.4% share of the

total value last year. Following up, the logistics value of agricultural products, imported

products, recycled materials and commercial and personal products in 2012 recorded

yoy growth of 4.5%, 7.8%, 10.2% and 23.5%, respectively.

Exhibit 1 China’s total logistics value by category

2011 2012

Billion yoy % Share Billion yoy % Share

yuan growth in total yuan growth in total

Total logistics value 158,400 12.3 100 177,300 9.8 100

Including:

- Agricultural products 2,600 4.5 1.6 2,900 4.5 1.6

- Industrial products 143,600 13.1 90.2 162,000 10.0 91.4

- Imported products 11,200 4.3 7.0 11,500 7.8 6.5

- Recycled materials 600 20.4 0.4 700 10.2 0.4

- Commercial and

personal products 200 18.3 0.1 200 23.5 0.1

Source: China Federation of Logistics & Purchasing

Logistics demand coefficient

The logistics demand coefficient, the logistics industry’s value-to-GDP ratio, was 3.4 last

year, up from 3.0 in 2008 (see Exhibit 2). Such evidence indicates a steady growth in

China’s logistics market.

1 According to China Federation of Logistics & Purchasing, total logistics value is defined as the total value of products being produced in or entering the country during the recorded period.

%

Exhibit 2 Logistics demand coefficient, 2008-2012


Total value-added of the logistics industry

Total value-added of the logistics industry reflects the size of the market. The larger the

value-added, the larger is the market. In 2012, value-added of the logistics industry was

3,500 billion yuan, recording a yoy increase of 9.1% (see Exhibit 3). Also, both the share

of total value-added of the logistics industry in China’s tertiary sector and GDP in 2012,

remained stable at 15.3% and 6.8%, respectively.

Exhibit 3 The logistics industry’s total value added

Unit 2010 2011 2012

Total value-added billion yuan 2,700 3,200 3,500

% yoy growth % 13.1 13.9 9.1

Share in GDP % 6.9 6.8 6.8

Share in tertiary industry % 16.0 15.7 15.3



&

Total logistics costs stay high

China’s total logistics costs amounted to 9,400 billion yuan in 2012, up by 11.4% yoy.

Exhibit 4 shows the breakdown of total logistics costs from 2008 to 2012. Of this figure,

transport costs accounted for the largest share; however, the proportionate figure has

been decreasing over the past few years. On the other hand, the ratio of total logistics

costs to GDP was 18.0% in 2012, down from 18.1% in 2008 (see Exhibit 5). But the ratio

is still almost twice that observed in other developed countries.

Exhibit 4 Total logistics costs and composition, 2008-2012

Share in total logistics costs 2008 2009 2010 2011 2012

Management 12.7% 11.8% 12.7% 12.0% 12.8%

Inventory 34.7% 32.9% 33.8% 35.0% 35.1%

Transportation 52.6% 55.3% 53.5% 53.0% 52.1%


Exhibit 5 Total logistics costs as a percentage of GDP, 2008-2012


'

Logistics enterprises foresee favourable prospects

The China Logistics Prosperity Index (LPI)2 is newly established and was launched by

the China Federation of Logistics and Purchasing (CFLP) in March 2013. The data is

compiled from survey responses by nationwide logistics enterprises regarding their

logistics activities and inventory levels of the current month, along with their business

expectations for the following three months.

Exhibit 6 shows the monthly results of the LPI and sub-indices. The LPI came in at 52.4

in July, remaining in expansionary zone for four consecutive months. The index indicates

steady growth in logistics activities3. Also, the business volume index was 56.9 in July, up

from 55.5 in June. The figure reflects a moderate demand for logistics services.

In addition, the investment in fixed asset index was 52.3 in July. The reading shows that

logistics enterprises have continued to increase their investment in fixed assets, implying

an optimistic business outlook. This is in line with the business expectations index, which

remained high at 57.2 in July, showing that many enterprises in the logistics industry still

foresaw good business over the following three months.

2 China Logistics Prosperity Index (LPI) is a newly established index providing an early indication each month of logistics activities in the Chinese logistics sector. The first LPI was launched in March 2013 by the China Federation of Logistics & Purchasing (CFLP). The Fung Business Intelligence Centre is responsible for drafting and disseminating the English LPI report. For more detail, visit the monthly LPI reports at http://www.funggroup.com/eng/knowledge/research.php?report=lpi_monthly

3 A LPI reading above 50 indicates overall expansion in the logistics sector; below 50, there is overall contraction.


(

Exhibit 6 China logistics prosperity index, LPI (April – July, 2013)

LPI and sub-indices April May June July

LPI* 54.8 53.2 53.1 52.4

– Business volume 57.1 55.8 55.5 56.9

– New orders 54.9 53.1 54.6 52.3

– Average inventory 49.7 49.3 53.1 51.3

– Inventory turnover 51.6 50.9 49.8 48.3

– Cash flow 53.2 50.2 53.1 51.5

– Capacity utilisation 56.5 54.3 51.3 51.5

– Logistics services charges 52.7 49.9 49.9 48.1

– Operating profit 53.2 51.6 56.1 48.1

– Operating cost 62.9 58.3 58.1 61.7

– Investment in fixed asset 55.7 55.3 53.3 52.3

– Employment 52.1 50.2 51.0 49.7

– Business expectations 61.8 60.6 60.5 57.2

* The LPI is a composite index based on the diffusion indices for five indicators with varying weights: New orders: 30%; Business volume: 25%; Employment: 20%; Capacity utilisation: 15%; and Inventory turnover: 10%. (The diffusion index is the sum of the positive responses plus one half of those responding “the same”.)

Source: China Federation of Logistics & Purchasing and Fung Business Intelligence Centre

)

Competitive landscape


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Logistics concentration remains scattered

China’s logistics market is fragmented, with huge numbers of logistics enterprises of

various kinds4. Road transport enterprises account for the largest share of the logistics

market, in terms of the number of enterprises. According to the China Logistics

Development Report, published by the CFLP, there was an estimated 790,000 road

transport companies in the country last year. The top 20 road transport companies

accounted for less than 2% of the market share5.

Indeed, most transporters are small- and medium-sized enterprises and they tend to

operate in single or nearby cities. To find more business opportunities, they compete with

each other on price, instead of on service quality.

By contrast, many large-scale logistics service providers (LSPs) provide in-town

transportation services, but also offer all-round logistics services or provide sophisticated

logistics solutions. In general, they have substantial logistics resources, comprehensive

nationwide networks and refined relationships with the government.

Exhibit 7 lists the four significant types of large-scale LSPs in China, including state-

owned enterprises, privately-owned enterprises, spin-offs from large-scale manufacturing

and retailing enterprises, and foreign players.

4 According to the industrial classification by the National Development and Reform Commission, logistics enterprises in China include various kinds of transport companies (rail, road, water, air and pipeline), freight forwarders, warehouse operators, and postal and express delivery companies.

5 China General Chamber of Commerce, Newsletter on Economic and Commerce, Issue 14, 2013.

Exhibit 7 Four major types of large-scale logistics enterprises in China and selected examples

State-owned Private-owned Spin-offs Foreign-owned

Selected examples

Annto Agility COSCO Deppon (from Midea) Anji DB Schenker

Jiaji

(from SAIC

Sinotrans Motor) LF Logistics

Source: Compiled by Fung Business Intelligence Centre

In recent years, the express delivery sector, an emerging segment in the logistics industry,

has expanded quickly amid the boom within China’s online retail market. According to

the Economist Intelligence Unit6, there are more than 7,500 express delivery firms. Exhibit

8 displays the four major types of express delivery companies.

Exhibit 8 Four major types of express delivery companies in China and selected examples

State-owned Private-owned Spin-offs Foreign-owned

Selected examples

EMS SF Express Rufengda DHL

(from Vancl)

China Air Shentong FedEx

Express Express

TNT

China Rail YTO Express

Ozzo

Express (from Newegg) UPS


6 Economist Intelligence Unit, China Hand – Distribution, 2012

!!


Leading logistics players scale up

The CFLP released an annual list of “top 50 domestic logistics enterprises” (the top 50s)7.

In 2011, the total sales revenues of the top 50s reached 727.4 billion yuan, up by 17.5%

yoy. The top 50s registered annual sales revenues of over 2 billion yuan in 2011. Exhibit 9

shows the top 20 domestic logistics enterprises, ranked by sales revenues in 2011.

Exhibit 9 Top 20 domestic logistics enterprises by sales revenues

2011

Ranking Ranking (billion % yoy

in 2011 in 2010 Logistics enterprises yuan) growth

1 1 China Ocean Shipping (Group) Company 161.6 12.5

2 2 Sinotrans & CSC Holdings Co. Ltd 99.1 8.2

3 3 China Shipping (Group) Company 62.8 (2.2)

4 4 Xiamen Xiangyu Group Co. Ltd 33.9 31.9

5 5 China Railway Material Group Co., Ltd 26.7 17.8

6 6 China National Materials Storage and 26.3 17.8

Transportation Corporation

7 - Kailuan Group 22.6 -

8 - Tianjin Port Group 22.1 -

9 9 China Petroleum Transportation Corporation 21.5 47.4

10 8 Henan Coal and Chemical Industry 20.2 24.8

Group Co. Ltd.

11 10 S.F. Express (Group) Co., Ltd 15.2 33.1

12 - Lianyungang Port Logistics Co., Ltd 14.4 -

13 - Fujian Provincial Communication 12.7 -

Transportation Group Co., Ltd

14 11 China Railway Container Transport Co. Ltd 12.4 16.9

15 13 Shuohuang Railway Development Co. Ltd. 10.4 8.1

16 - Expeditors International Inc. 9.8 -

17 - Gaogang Port Integrated Logistics Park 8.6 -

18 - China Railway Material Company Limited 8.4 -

19 - China National Petroleum Corporation 8.2 -

20 16 China Railway Express Co. Ltd 8.1 5.3


7 CFLP, China Logistics Development Report, 2012-2013

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Foreign expansion accelerates in most segments

Foreign LSPs possess sophisticated logistics technology, funding, professional expertise,

as well as a comprehensive international network. They have significant advantages

when providing international logistics and express delivery services. Also, they have the

capabilities to fulfill specific logistics demands, including automobile logistics and cold

chain logistics. As compared with local LSPs, foreign LSPs are superior in providing

value-added logistics services to meet international and local requirements of discerning

clients in China.

International express delivery services are an example. International companies, such as

DHL, FedEx, TNT and UPS, account for 80% of the market share in China’s international

express delivery market8. They have global network coverage, linking China with the

world, and provide reliable and efficient delivery services for high-value orders.

To further deepen their coverage and develop their local logistics business, UPS and

FedEx have obtained local express delivery services licenses as from September 2012.

It is expected that the moves will pose major challenges to the domestic, high-value

express delivery market in China.

Having said that, overseas players are not able to dominate all logistics market segments,

particularly highly-regulated rail cargo logistics and pharmaceutical logistics, and the

newly-emerging e-commerce logistics segments.

To a relative extent, China state-owned logistics enterprises have a comprehensive

network across the country and close contact with the state itself. They have advantages

in highly-regulated logistics segments. By contrast, domestic, private-owned logistics

enterprises can provide cheap and efficient delivery services that are acceptable to price-

sensitive clients. These firms dominate the domestic e-commerce logistics market9.

8 China Merchants Securities, Report of China’s Express Delivery Industry, 20129 http://www.kpmg.com/CN/zh/IssuesAndInsights/ArticlesPublications/Newsletters/KPMG-Industry-Updates/

Documents/Industry-Update-1303-02-c.pdf

!#


Market snapshots

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Production logistics demand up in lower-tier cities

Over recent years, the steep hike in labour and production costs in coastal areas has

prompted some manufacturing enterprises to migrate their factories from key cities in

coastal areas to inland, lower-tier cities. Many enterprises, such as Foxconn, Flextronics,

Dell, HP, and Pfizer10, have established new plants or relocated coastal facilities. As many

manufacturing plants are scattered across different cities and counties, relocation is

reshaping the industrial supply chain.

Many relocated manufacturing enterprises outsource their logistics activities to lower-tier

cities to regional LSPs, which possess local know-how and have closer ties with local

regulatory authorities and customs.

However, services quality and logistics capabilities may not always be up to standard;

very often, local LSPs fail to comply with expected requirements. Due to the mixed

performances of LSPs in lower-tier cities, many relocated manufacturing enterprises need

to reassess their inventory policies and schedule extra buffer times for production and

distribution (see Box 1).

Having said that, some regional LSPs, which are capable of fulfilling sophisticated

production logistics demands, have now emerged. A number are logistics spin-offs from

large-scale manufacturing groups, as outlined in the previous section.

For example, Annto Logistics in Anhui province and Zhongpin Logistics in Henan

province used to be logistics arms of an home appliance group and an agricultural food

processing corporation, respectively. They turned into independent logistics entities,

serving their group’s clients, and handling outside orders. This type of regional LSPs

provides nationwide logistics services and now plays an increasingly important role in the

production logistics segment.

10 http://www.joneslanglasalle.com.cn/China/EN-GB/Pages/NewsDetail.aspx?ItemID=20740

!%


Box 1: Outsourcing practices by industrial enterprises in China

Due to mixed performances by LSPs, many enterprises in China are reluctant to

outsource all their logistics activities to third parties. Hence, many LSPs handle only

some low-end logistics tasks for their principals. According to a survey conducted by

the National Development and Reform Commission (NDRC) and Nankai University in

2012(Note 1), traditional functions such as transport and distribution were the most popular

services outsourced by surveyed industrial enterprises. For those logistics functions

that required more sophisticated technique, such as inventory management, product

assembling and logistics system design, the outsourcing rates were less than 15%. The

figures reflect industrial enterprises’ reluctance to outsource high value-added logistics

services to LSPs.

Types of logistics services outsourced* 2009 2010 2011

Transport and distribution 80.9% 90.9% 86.7%

Packaging and processing 13.5% 14.6% 21.7%

Warehousing 15.5% 16.3% 20.8%

Logistics information management 15.6% 16.2% 18.0%

Sourcing management - - 15.7%

Logistics systems design 10.7% 11.5% 14.6%

Product assembly - - 13.3%

Inventory management 5.4% 5.9% 8.3%

* multiple responses allowed

The following table shows key concerns of surveyed industrial enterprises when making

their outsourcing decisions. LSPs’ poor service quality and high service charges were the

major concerns.

Major concerns on outsourcing Ranking

Service quality of the LSP 1

Service charges of the LSP 2

Loss of control in logistics management 3

Quality of human capital of the LSP 4

Warehouse system integration and maintenance 5

Differences in corporate culture and logistics systems 6

Staff reallocation of the principal 7

Note 1: The 10th National Survey on Logistics Market was conducted between January and May 2012 by the NDRC and Nankai University. Different sets of questionnaires were distributed to industrial and commercial enterprises (survey 1) and logistics enterprises (survey 2). A total of 865 valid responses were received (survey 1:287; survey 2:436)

Source: National Development and Reform Commission and Nankai University

!&

Growth of online retail market and challenges on nationwide distribution go hand-in-hand

Chinese consumers are increasingly taking to shopping online. As urban and rural

household incomes in lower-tier cities increase rapidly, the growth momentum of the

online retail markets in these cities are set to accelerate, even ahead of the growth in

higher-tier cities.

According to mainland online giant Taobao, the annual growth rate of online shoppers

in Anhui, Henan, Shanxi, Shaanxi and Xinjiang provinces exceeded 100% in 2011, while

the growth in some coastal areas, such as Shanghai, Zhejiang and Guangdong, was less

than 70% yoy11 (see Exhibit 10).

Shoppers in lower-tier cities spent an average of 5,628 yuan online in 2012, while their

counterparts in higher-tier cities spent 4,700 yuan during the same period12.

Exhibit 10: Annual growth of online shopping users by province (2011 compared to 2010)

Source: Taobao and CTR, compiled by Fung Business Intelligence Centre

11 http://finance.qq.com/a/20120410/007317.htm12 http://www.scmp.com/business/china-business/article/1293202/smaller-chinese-cities-lead-way- shift-

online-shopping

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Unlike key cities, many lower-tier cities and counties are remotely situated across

the country, with dispersed populations. So, for numerous online retailers, it is costly

to extend their distribution networks to lower-tier cities. Without economies of scale

and sufficient transaction volumes, many online retailers avoid investing heavily in

sophisticated logistics infrastructure in these remote areas. Also, delivery locations for

online orders are not limited to “points of sale”, further complicating the delivery process

and adding uncertainties to retailers’ investment decisions.

Take online purchases of electrical appliances as an example. Increasing numbers of

Chinese consumers enjoy the convenience of door-to-door delivery and so purchase

electrical appliances online. Some online shoppers in higher-tier cities not only purchase

goods for their own use, but also shop for their parents or relatives living in lower-tier

cities. Since points of sale and delivery locations may not be the same, the frequency of

the average online shopping exercise in a particular region may not truly reflect actual

retail demand and the need for local logistics support. Thus, inventory management

and product fulfillment spanning the country become great challenges for many online

retailers.

To fulfill orders across the country, online retailers commonly adopt a hybrid approach,

with their own logistics facilities and trucking teams serving key cities. As for more remote

areas, they outsource their logistics services to LSPs and express delivery companies (see

Box 2).

!(

Box 2: Logistics approaches by key online retailers; the China Smart Logistics

Network draws attention

China’s online retail market is rapidly expanding from coastal cities to lower-tier cities and

counties in inland areas. However, with fragmented logistics continuing to hinder online

retail development, some large online operators have developed their own nationwide

logistics plans, which they have recently revealed.

In May 2013, Jack Ma, founder of Alibaba group, together with some property

companies and logistics partners, developed the China Smart Logistics Network (CSN)

logistics system(Note1), aiming to support seamless information transfers between vendors,

online operators and LSPs. CSN now aims to provide nationwide 24-hour delivery within

the next five to eight years.

Another leading online retail operator, JD.com (previously known as 360buy), is also

aiming to build a nationwide logistics infrastructure network. The firm has six large

logistics centres and over 900 distribution stations nationwide. Since November 2012,

it has started to open up a warehouse management system for its vendors in phases1,

aiming to allow information synchronisation and streamline logistics processes between

stakeholders.

The table below summarises the latest logistics developments by key online retail

operators:

Online retail Logistics establishments and distribution services

operators

Taobao – Taobao has its own logistics system linking its central warehouse

system to those of its merchants and third party logistics partners

– All third party logistics partners must comply with Taobao’s logistics

requirements and standards

– Taobao does not provide a courier team but outsources delivery

services to third parties

JD.com – JD.com has set up warehouses in key cities in China, including Beijing,

(previously Shanghai, Guangzhou and Chengdu

known as – The firm expects to build between 50 and 60 warehouses across the

360Buy) country over the next three years and set up its own courier teams in

the coming three to five years

!)


Online retail Logistics establishments and distribution services

operators

Amazon.cn – Amazon.cn has 11 warehouses in major cities, including Beijing,

Suzhou, Guangzhou and Chengdu

– The firm has its own delivery teams serving 19 cities, but also partners

with third party couriers to cover the rest of China

Yihaodian – Yihaodian has logistics centres in Beijing, Shanghai, Guangzhou,

Wuhan and Chengdu. The firm has more than 130 delivery centres,

serving 34 cities

– Yihaodian’s In-house delivery team handles 70% of the products it

sells, while the rest are distributed by third party couriers

Newegg – Newegg has its own logistics company, Ozzo Logistics, to provide

services for itself and external customers

– Ozzo Logistics has 21 logistics centres in key cities in China, including

Beijing, Shanghai, Guangzhou, Wuhan and Chengdu

– Currently, Newegg provides delivery options to online shoppers,

including 24-hour delivery services in 10 major cities, and self pick-up

services

– Ozzo Logistics is to gradually outsource its distribution services to

LSPs and focus on logistics management

Mecox Lane – Mecox Lane has set up logistics centres in major cities, including

Beijing, Shanghai, Guangzhou and Chengdu

– The firm does not have its own delivery team but outsources delivery

services to more than 170 third party couriers, including EMS

Vancl – Vancl has its own logistics company, Rufengda

– Rufengda has set up a delivery network in 20 cities, including Beijing,

Shanghai, Guangzhou and Chengdu

– For the rest of China, Vancl outsources delivery services to third party

couriers

Note 1: The CSN project is managed by Cainiao Network Technology Co., Ltd. (Cainiao), a company formed by Alibaba Group, Intime Group, Fosun Group and five major Chinese courier companies, including S.F. Express, Shentong, Yuantong, Zhong Tong and Yunda. The project aims to set up warehouses across the country and build a database system tracking trade and delivery information; it is expected to be open to manufacturers, online sellers, delivery services and third party service providers to help build an end-to-end chain, allowing 24-hour deliveries across China.

Source: 1 http://big5.xinhuanet.com/gate/big5/news.xinhuanet.com/fortune/2013-06/23/c_116254667.htm,

Companies websites, Fung Business Intelligence Centre

"*

Express delivery firms step into online retail

Amid the rapid growth of e-commerce in China, demand for domestic express delivery

services has soared over the past decade. In 2012, express delivery companies handled

more than 25 million orders per day in China, of which around 60% was generated by

online retailing13. However, due to fierce competition and high operating cost in China,

express delivery companies have generally lower profit margins (see Box 3). Also, as

shown earlier, increasing numbers of online retail operators have set up their own logistics

infrastructure and networks, posing a greater challenge to express delivery companies.

As a result, some large-scale express delivery firms featuring nationwide coverage have

tried to diversify into online retailing.

Box 3: Profit margins of Chinese logistics enterprises

According to the previously mentioned survey by the NDRC and Nankai University, 43.9%

of surveyed logistics enterprises recorded profit margins of 5-10%, while 41.2% indicated

profit margins of 0-5% in 2011. The average profit margin was 5.59% in 2011, slightly

higher than the previous year. Overall, logistics enterprises’ profitability in China is still low.

A heavy tax burden, high toll fees, expensive fuel costs and rising wages are trimming the

profit margins of logistics enterprises.


13 Source: http://www.chinawuliu.com.cn/zixun/201303/12/213647.shtml

"!


For instance, Yuantong Express, S.F. Express and Shentong Express set up their own

online retail platforms in 2008, 2010 and 2012, respectively. However, their online

businesses were not sustainable even over a few months because they faced head-to-

head competition from existing online retail operators. Also, their failure was attributed to

low online traffic volumes, limited online orders, uncompetitive product offerings online,

and lack of clear market positioning.

To establish sustainable online retail businesses and differentiate themselves from online

competitors, express delivery companies need to invest in product sourcing, online retail

marketing and customer services, (see Box 4).

Box 4: The case of S.F. Express

Despite its failed attempt to become an online retail operator in 2010, S.F. Express

established another online retail platform, sfbest.com, in mid-2012. This targets the high-

end food market, selling foods for festival occasions, fresh and chilled foods, wine and

other drinks, and health foods. Its door-to-door cold chain delivery service is available

in Beijing while its “last mile” delivery services for non cold-chain goods cover Beijing,

Shanghai, Guangzhou, Shenzhen, Tianjin, Hangzhou, Suzhou, Nanjing and Wuhan.

The question is what motivated S.F. Express to re-enter the online retail market and focus

on the high-end food market. We believe the reasons are twofold:

– Growing demand for high-end food products

Food hygiene and safety issues in China have prompted consumers to seek better

quality foods from secure sources. The online food retail platform provides transparent

information with higher traceability.

In parallel, increasing numbers of Chinese consumers prefer a healthy diet. They

are willing to spend more on high-end and organic foods, so there is huge market

potential for selling such food products online.

– Hands-on experience providing door-to-door cold chain delivery

S.F. Express has specific experience handling cold chain products, while providing

door-to-door cold chain delivery services to other online retail operators. It has more

than 140 refrigerated trucks1 and cold storage facilities in Shanghai, Guangzhou and

Shenzhen. Most online merchants selling cold chain goods on Taobao are reportedly

using S.F. Express’ services2.

Source:1 http://www.chinawuliu.com.cn/zixun/201307/22/241755.shtml2 http://home.ebrun.com/blog-35826.html

""

Rail transport reform enhances logistics capabilities in China

The State Council announced its plan in March 2013 to dismantle the Ministry of

Railways (MOR) to form administrative and commercial arms. As shown in Exhibit 11,

railway administration functions are to be supervised by the Ministry of Transport (MOT),

while the newly formed China Railway Corporation (CRC) is to be responsible for all

commercial activities.

Exhibit 11 Dismantling the Ministry of Railways


It is expected that restructuring will enhance China’s logistics capabilities, as rail, road,

water and air transport are managed and monitored under the same umbrella, the MOT.

Integration should remove barriers against developing inter-modal transport between rail

and other transport modes.

In terms of freight transport management, the MOR was previously responsible for bulk

cargo businesses, such as coal, minerals and grain. However, due to the economic

downturn and lower demand for coal, railway freight services also experienced shrinking

demand. In addition, complicated cargo-handling procedures and inefficient services

further slowed railway cargo demand. So, to boost the railway cargo business, the newly

formed CRC implemented a series of measures on 15 June 2013 (see Exhibit 12).

Immediately after the implementation of cargo reform, an increase in rail cargo traffic

in certain regions was evident. For instance, from 15 June to 9 July 2013, the CRC in

Guangzhou generated an increase of high-value product cargo volumes by 10% yoy14.

"#

14 Shipping Gazette, Daily Shipping News, 22 July 2013

Dismantling of

Ministry of

Railways

Ministry of

Transport

China

Railways

Corporation

Administrative arm

standards

railway project quality

Supervised by

Newly

established

Commercial arm

transport

management


Exhibit 12 Railway cargo reform in China

Simplifying – In the past, when customers applied for rail freight delivery slots, they

cargo handling were required to submit cargo plans to several divisions of the MOR

procedures and pay for handling charges to various departments at different

rates, resulting in complicated and lengthy application procedures

– Now, cargo plan is no longer required. Handling charges are

standardised. In addition, customers can arrange cargo delivery

through a hotline or online platform, in addition to counter services

Expanding – Aside from bulk cargo businesses, the CRC has also deployed more

business resources for handling high-value products and daily necessities

scope – The CRC has introduced rail courier services

– In the past, high-speed rail without passenger carriage was solely

used for daily systems checking. Now, the first non-passenger

train on selected l ines is used to transport small parcels,

accompanied by technical checks. Examples are the Harbin-

Dalian and Beijing-Shanghai lines

– The first intercity express service between Shanghai and Hefei

was launched in early July 2013, and the cargo handling time was

trimmed from 23 hours to nine

Launching – Formerly, only station-to-station services were available

door-to-door – Now, cargoes can be picked up at railway stations or delivered to

services designated points, subject to customer requests. In accordance with

their service pledges, station-to-station and door-to-door delivery

orders are fulfilled within two and three days, respectively

Source: http://cv.ce.cn/kcz/wlys/201307/01/t20130701_24528972.shtml & http://www.chinawuliu.com.cn/zixun/201307/16/240231.shtml

"$

Heavy taxes for some logistics companies

The Ministry of Finance and the State Administration of Taxation jointly issued a circular

in November 2011 outlining the implementation and transition rules of a pilot tax reform

– with Value-added Tax (VAT) to replace Business Tax (BT). The objective is to reduce

“double taxation” caused by separate VAT and BT charges and enable a fairer VAT input

deduction system. The reform is regarded as one of the key measures to promote the

development of China’s services sector.

The pilot programme was rolled out in Shanghai on 1 January, 2012. It focused primarily

on transportation, as well as six other modern services sectors (see Exhibit 13). VAT

rates for the transportation and logistics auxiliary services sectors are 11% and 6%,

respectively. By July 2012, the programme was subsequently extended to Beijing, Tianjin,

Jiangsu, Zhejiang, Anhui, Fujian, Hubei and Guangdong provinces.

In April 2013, the State Council announced that the VAT pilot programme would extend

nationwide and cover further services sectors on 1 August 2013 (see Exhibit 13). With

the nationwide extension, the competitive advantage available to the nine pilot cities

and provinces were removed. A more level playing field should also benefit transport

and logistics industries. The State Council has indicated that the railways, post and

telecommunications industries will be covered by the VAT pilot programme in the near

future.

"%


Exhibit 13 VAT pilot programme

Transportation Modern services sectors

services sector

Effective from – Road transport – Research, development and technical

1 January 2012 – Water transport services

– Air transport – Information technology services

– Pipeline transport – Cultural creative services

– Logistics auxiliary services

– Certification and consulting services

– Tangible, movable property leasing

services

Effective from – Production, broadcast and publication

1 August 2013 of radio, films and television programmes


Whether or not tax reform is entirely beneficial to the logistics sector remains to be seen.

Despite a significant reduction of tax in the pilot cities and provinces concerned, some

transport and logistics companies actually report increases in their tax burden. This is

because transportation services do not offer many opportunities for companies to claim

input VAT credits. Take the following cases, for example:

– Salaries and toll fees are ineligible for input VAT credit;

– If a truck is refueled from the cities excluded from the VAT pilot programme, the fuel

costs are not eligible for input VAT credit;

– Input VAT credit can be claimed by reference to official VAT invoice. However, many

logistics companies failed to obtain the official invoices from small-sized companies.

Government support for logistics development

Realising that the logistics industry is critical to economic success, the government has

put in place a number of supportive policies in the past few years. Exhibit 14 shows some

major government initiatives that support the development of China’s logistics industry.

"&

"'

Exhibit 14 Major government policies related to the logistics sector

Date Launched by Name of Policy Key highlights

Tax Policy for Bulk Commodity 50% reduction of current urban land use tax Storage Facilities of Logistics will be applied to the land for bulk commodity Enterprises (關於物流企業大 storage facilities owned by logistics enterprises 宗商品倉儲設施用地城鎮土 (whether self-used or leased out) 地使用稅政策的通知 to the area of land for storage facilities exceeding 6,000 sqm

SPB Accelerating the Collaboration business environment for the collaboration and and Development of Express development of express delivery services and Delivery Services and Online online retailing. Retailing (關於促進快遞服務與網絡零售協同發展的指導意見 ) – Support industrial collaboration and development, in terms of financial and taxation incentives, and supply of land and human capital – Promote seamless information sharing and standardisation among the two industries – Introduce a credit system to monitor the performances of express delivery companies and online retail operators – Encourage express delivery companies to establish logistics facilities and services in line with the needs of online retailing counterparts – Explore win-win strategies to strengthen business collaboration between the two industries, e.g. forming strategic alliances, mergers and acquisitions. – Enhance business security, e.g. track and trace delivery systems, establish emergency handling procedures for the two industries, strengthen information security systems to prevent information leakage – Promote information technology (IT) adoption, e.g. support the development of the Internet of Things, encourage the use of Radio Frequency Identification (RFID), personal digital assistants (PDAs) and global positioning systems (GPS).

Council on Further Reformation of the distribution system, reducing the ratio of total logistics Distribution Sector and costs to GDP, enhancing the competence of large- Acceleration of the Development sized distribution enterprises, adopting modern of the Distribution Sector information technologies, and improving the market (國務院關於深化流通體制 environment with policy and regulatory support. 改革加快流通產業發展的意見 – Strengthen the distribution network such as the urban-rural transport, in-town delivery – Optimise the design of supply chain network – Improve logistics facilities, e.g. large-sized distribution centre, agricultural cold chain facilities – Enhance the level of informatisation in the distribution sector, e.g. adopting the Internet of things, cloud computing, GPS and e-barcodes

the Industrial Upgrade of the services from performing traditional storage functions to Warehousing Sector (促進倉儲業 providing sophisticated warehouse management and 轉型升級的指導意見 ) operations

– Support the development of one-stop-shop warehousing services, covering inventory management, value-added services, and pick and pack


"(

Date Launched by Name of Policy Key highlights – Promote IT adoption, e.g. the Internet of Things, barcode and RFID – Align standardisation levels, in terms of warehouse layout design, services, equipment and evaluation criteria – Encourage collaboration of warehousing resources via mergers and acquisitions, strategic alliances, outsourcing and e-platforms – Renovate traditional cold storage facilities to suit the needs of modern cold chain logistics

and Information Technology on logistics, so as to improve the efficiency of logistics Accelerating Informatization on management and operation Logistics (工業和資訊化部關於推進物流資訊化工作的指導意見 ) – Develop and standardise informatised logistics systems for various parties, e.g. government departments, logistics companies, industrial and commercial corporations and the army – Improve the level of logistics informatisation by various government departments, in terms of service standards and management – Improve the level of informatisation of logistics industry and logistics companies – Improve the level of informatisation of industrial and commercial companies, and the standard of supply chain management – Standardise informatisation systems in logistics – Accelerate cooperation of army-civilian informatisation systems in logistics, so as to improve the efficiency of emergency logistics – Promote and develop the innovative use of IT in logistics

Concerning the Regulation of the development and management of the express delivery Express Delivery Industry market (快遞市場管理辦法 protected by law

regard to business entities, delivery services, safety, control and management, and legal responsibilities

MOHRUD, Improving the Management of management of urban distribution by setting up a MOPS, MOT, Urban Distribution (關於加強和 comprehensive regulatory system, improving NDRC and SPB 改進城市配送管理工作的意見 ) infrastructure and facilities, enhancing transport management and traffic control, strictly enforcing the law, and promoting IT adoption

and the State Administration of levying value-added tax in lieu of business tax in Taxation on Pilot Plan for Levying Shanghai and eight other provinces in 2012, the pilot Value-Added Tax in Lieu of plan rolls out nationwide, effective from August 2013

Industry and Some Modern Services modern services sectors, the pilot industries also cover Industries across the country production, broadcast and publication industries for (關於在全國開展交通運輸業和部 radio, films and television programmes 分現代服務業營業稅改征增值稅試點稅收政策的通知 )

Notes:

MIIT: The Ministry of Industry and Information Technology; MOF: The Ministry of Finance; MOFCOM: The Ministry of Commerce; MOHRUD: The Ministry of Housing and Rural-Urban Development; MOPS: The Ministry of Public Security; MOT: The Ministry of Transport; NDRC: The National Development and Reform Commission; SAT: The State Administration of Taxation; SPB: State Post Bureau

Source: Various government websites; compiled by Fung Business Intelligence Centre

")

Challenges


#*

Warehousing management has room to grow

Many warehouses owned by local LSPs in China are relatively sub-standard. Furthermore,

poor warehouse layout design and insufficient material handling equipment always affect

the efficiency of warehousing operations. Manual work is still common in small-sized

warehouses.

Poor warehousing and inventory management have led to long average inventory

periods. According to the survey mentioned earlier and conducted by the NDRC and

Nankai University in 2011, more than half the surveyed industrial enterprises and 49% of

commercial enterprises held their inventories for more than one month (see Exhibit 15).

In addition, some warehouse operators that do not adopt warehouse management

systems fail to synchronise inventory data with their stakeholders in a timely manner.

Without transparent information flows, warehouse operators cannot respond quickly

enough to their clients.

Exhibit 15 Average inventory period of industrial and commercial enterprises

Industrial enterprises Commercial enterprises

Average inventory period 2010 2011 2010 2011

<10 days 9.5% 9.0% 14.8% 15.0%

10 – 20 days 11.2% 9.5% 23.9% 19.0%

21 – 30 days 23.7% 23.0% 18.6% 17.0%

1 – 2 months 32.4% 32.5% 25.7% 29.0%

> 2 months 23.2% 26.0% 17.0% 20.0%

Average (days) 45.9 48.1 38.0 41.6


#!

Logistics burden of high toll fees

Today, road transport remains the major freight transport mode in China. In 2012,

around 78% of cargo was dispatched by road, in terms of tonnage (see Exhibit 16). It

is noteworthy that road tolls account for about one-third of transport costs in China15.

Excessive highway tolls, as well as price hikes of fuel and labour, have eaten into many

logistics enterprises’ profits.

Exhibit 16 Freight traffic in China (million tonnes)

2010 % of total 2011 % of total 2012 % of total

Road 24,481 75.5 28,201 76.3 31,885 77.8

Rail 3,643 11.2 3,933 10.6 3,904 9.5

Air 5.6 0.02 5.6 0.02 5.5 0.01

Water 3,789 11.7 4,260 11.5 4,587 11.2

Pipeline 500 1.5 571 1.5 612 1.5

Total 32,418 100 36,970 100 40,994 100

Source: National Bureau of Statistics of China

To reduce average transport costs, trucks are typically overloaded. Road accidents occur

easily and roads are often blocked for clearance. Severe traffic jams also undermine any

guarantee of on-time delivery and affect the service quality of logistics operators.

Stringent regulation hinders logistics growth

Although the government has promulgated a number of measures to support the

development of the logistics industry, policy execution sometimes hinders that growth.

Licensing applications comprise one example. Logistics companies have to apply various

types of operating licenses to set up nationwide businesses. However, licenses are

issued by different provincial governments, while application charges and procedures

vary from province to province. Due to the complexity in dealing with numerous parties,

some logistics companies lose their impetus when attempting to develop inter-regional

business.

15 http://www.chinairn.com/news/20130603/163442977.html


#"

In addition, many local governments impose specific requirements on logistics

operations. For instance, they adopt stringent rules over in-town trucking services, due

to considerations of city traffic control and environmental issues. Also, quota for the

number of in-town trucking licenses granted to trucking firms are fixed. Those logistics

operators who failed to get proper licenses could either have to pay higher costs to hire

licensed trucking firms to convey the goods, or operate without licences – with a risk of

being fined. Added to these, operational flexibility can be affected by restricted loading or

unloading zones, roadblocks and restrictions on the types of trucks allowed into towns.

Constraints on human resources

Insufficient supply of logistics manpower has long been a major concern in China,

despite the fact that the number of graduates in logistics and transport studies has

been increasing in recent years. Labour shortages also lead to higher turnover rates in a

competitive labour market.

Besides, many local practitioners lack understanding of modern management and the

skills to satisfy increasingly demanding clients. Many foreign companies have set up

their businesses in China and sought out LSPs with local experience. However, while

representatives of local firms usually have hands-on operational experience, many cannot

communicate with potential clients in foreign languages. Then again, some staff are well-

educated but lack the relevant experience and “soft” skills.

Conclusions and Implications

##


Without doubt, the logistics industry in China is robust in its growth. However, it still faces

many challenges. Numerous small-sized LSPs offer similar but limited services without

nationwide coverage, while the supply of logistics facilities in some districts are either

insufficient or redundant. Also, constraints on logistics facilities and human capital, as well

as expensive logistics costs, add further burdens to logistics users and operators.

Below are some tips for running logistics business in China.

#$

Logistics

Enterprises

in China

Select competent and reliable partners

Streamline operational

processes, so as to minimise logistics costs

Constantly upgrade facilities

Retain logistics talent

Follow government policies and

incentive schemes

Work closely with stakeholders via real time information

sharing

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