Shippers need change of focus to prosper

The China Federation of Logistics and Purchasing is urging the industry to shift its focus from production-based logistics to consumption-driven logistics to cope with a slowdown in the world’s second-largest economy.

The value of items handled by the logistics sector expanded 9 percent in the first half, to 93 trillion yuan ($15.2 trillion), but the growth rate was 0.9 percentage point slower than in the same period of last year and 0.3 point slower than in the first quarter alone, the CFLP said.

The CFLP said the slowdown of the economy has led to weak demand for iron ore, coal and cement logistics services for the domestic and international markets. China’s coal, steel and other commodity producers are restructuring their operations and cutting output.

The slack international shipping market, which shows no sign of recovery, is another factor cutting the profit margins of Chinese logistics companies.

Zhou Zhicheng, deputy director of the research department of CFLP, said it’s time for China to move toward a more consumption-driven economy, combined with the improved accessibility of inland provinces.

China’s logistics industry has grown quickly to support the nation’s economic expansion over the past two decades. The physical infrastructure such as airports, railways, ports and highways has been enhanced. But the industry’s development hasn’t kept up with changing market realities.

“In comparison with the US and European markets, China’s logistics industry is still dominated by production or commoditybased transportation and warehousing services. This fails to meet the growing supply chain demand for a large number of commercial and manufacturing enterprises,” Zhou said.

Thanks to the fast growth of China’s e-commerce, pharmaceutical and cold chain logistics sectors, the majority of domestic logistics companies managed modest profit increases in the first half, though their growth slowed along with the economy.

“These emerging sectors have transformed the supply chain from being supply-led to demand-driven, which has a positive impact on the logistics business in terms of seeking new market growth points and staying competitive,” said Cui Zhongfu, vice-president of the CFLP.

The number of Chinese Internet users, for example, is forecast to exceed 700 million by 2015, from the present 500 million, making it the largest e-commerce market in the world, according to a report last year by the Institute of Industrial Economics of the Chinese Academy of Social Sciences .

Growth will also create challenges for logistics and e-commerce companies, as they will need to find new measures to make more efficient deliveries to the more than 220 million online shoppers in China to stay ahead.

Infrastructure constraints, rising gasoline prices, a lack of warehouse space and the shortage of “last-mile” delivery expertise often makes it difficult for logistics companies to provide efficient services in lower-tier cities and inland areas.

Shipping fees paid to logistics providers in China hit 4.5 trillion yuan in the first half, up 9 percent from a year earlier. However, the growth rate was down 0.9 percentage point from the first quarter and 2.8 percentage points from the first half of 2012.

Logistics fees, which constitute the industry’s revenue, still make up 18 percent of China’s GDP, indicating that the sector’s operating costs remain high, relative to current economic conditions.

The report said that to maintain cost-effective and sound growth, more rail freight operations will be used by China’s logistics sector.

“Rail freight, with its large volumes, longdistance capability and lower prices and carbon emissions, will form an unprecedented challenge to road transportation sooner or later,” Cui said.

China has a wide variety of economic activities scattered across a huge territory. It is still costly and cumbersome to send goods from the eastern coastal provinces to the vast western region, especially provinces such as Qinghai and Gansu.

Hou Hanping, a professor of logistics management at Beijing Jiaotong University, said as China continues to attract more foreign companies to invest and manufacture in its inland provinces, especially in the western part of the country, the government must recognize that these foreign companies are operating in an extremely competitive global environment.

“They must be able to react quickly to market changes and implement rapid manufacturing processes to keep costs down.

“Integrated logistics service and precise supply-chain management are vital components of these processes,” said Hou.