Doing Business in China - Making the most of the free trade agreement

In this section:

› Use local expertise
› Using third party logistics companies (3PL)
› Using e-logistics
› Future trends
› The state of China's transport system
› Further reading
› Useful websites

Use local expertise

The Economist Intelligence Unit says the key to successful distribution in China lies in partnerships with local operators.

Using third party logistics companies (3PL)

3PL providers are becoming key players in the Chinese logistics industry, though their share of the logistics market is still small.

They provide a full logistics service including customs clearance, warehousing, freight consolidation, inter-modal transportation and distribution. Many also offer "just-in-time" and "just-in-sequence" delivery services, inventory services and radio frequency identification tracking.

Basic transportation, warehousing and customs clearance services are the most common ones outsourced to 3PLs. It's estimated that nine out of 10 multinational companies in China outsource part of their logistics needs to 3PLs. But many are not particularly happy with the level of service they provide.

Using e-logistics

China faces a number of challenges when implementing e-commerce, notably economic and educational barriers, lack of ICT infrastructure, high telecommunications costs, lack of payment mechanisms and security and trust concerns.

These issues are compounded in e-logistics by the poor shape of the logistics sector.

Future trends

• improved service and lower costs with the marriage of multi-national expertise and low local labour costs, plus the effects of deregulation
• further entry by multi-national logistics companies
• consolidation - the logistics industry is undergoing a major overhaul and competition from foreign entrants which will see many smaller inefficient players fall by the wayside
• the transport infrastructure will continue to struggle to cope with economic growth despite investment
• skill shortages as the logistics sector grows.

The state of China's transport system

The Chinese Government is heavily committed to fixing the country's infrastructure and has a massive road, port, rail and airport construction programme underway.

• Road -The Federation of International Trade Associations says China's road network is often badly conceived and of poor quality.
  Current government efforts are concentrated on the implementation of the National Trunk Highway System, a system of inter-provincial toll motorways including 12 corridors on 35,000 kilometres. China will have a total of 85,000 expressways by 2020, up from 60,000 in 2008.
  
  This network, planned over 30 years, should connect 95 cities, each with more than 500,000 inhabitants.
• Rail - The main form of transportation under the old-style communist model was rail, but it has not adapted to the new-style Chinese economy, says Transport Intelligence. It is primarily geared to moving bulk commodities long distances.
  
  China's rail network suffers from a chronic lack of capacity and according to one estimate would need to double capacity just to cope with current demand.
  
  As end of 2007, China’s rail network traverses the length and breadth of the country, covering a total length of 78,000 kilometres, making only the rail networks in the United States and Russia larger in size. In October 2008, the Chinese State Council approved a new CNY 2 trillion (US$292 billion) railway investment plan to take it up to 2020. The scheme extends mainland China's previously announced railway building program, which was allocated CNY 1.25 trillion (US$ 182 billion) in the 11th five-year plan for 2006 to 2010. As a result of the increased investment, the country's railway network is expected to grow from 78,000 km at the end of 2007 to 100,000 km by the end of 2010 and ultimately 120,000 km by 2020. Growth in freight transport is thought to be one of the drivers behind the increased focus on rail, and the need to increase capacity to meet rising demand.
• Ports - There were 413 ports in China by the end of 2008, of which, there were 36 coastal ports with annual handling capacity of 10 million tonnes or above and 87 inland ports with annual handling capacity of 2 million tonnes.
  
  In 2006 alone more than 160 construction projects were launched in China's seaports and the handling capacity of China's ports is scheduled to hit 8 billion tonnes a year by 2010.
  
  River transportation and river ports have also been given priority in infrastructure development to meet China's growing trade.
• Air - China has the second-largest domestic airfreight market in the world after the USA, but the sector is constrained by inadequate infrastructure.
  Even so, annual growth of 10 to 15 percent is projected (assuming that road and rail services remain substandard), with much higher growth rates for services catering to high-value products such as electronics and pharmaceuticals.
  
  Airports in the Yangtze River Delta, the Pearl River Delta and Beijing are seeing the most rapid expansion.

Further reading

• The Federation of International Trade Associations - advice on distribution and transport in China.
• The Logistics Institute - Asia Pacific has China research and reports.
• Logistics Management report on logistics in China.

Useful websites

• News, reports and research by the China Supply Chain Council which represents leading manufacturers and retailers operating in or with China - and the service providers, solutions vendors and the consultants who serve them.
• China Federation of Logistics and Procurement website.