With its entry into the World Trade Organization, China agreed to open up product and service markets that had been protected from global competition so far. China's 11th Five-year Plan (2006-2010) for the service industries states as two of its top priorities transportation and modern logistics development. It seems that politicians and managers have finally recognized the crucial role transportation and logistics play in modern markets due to its huge potential to spur economic growth.
For this reason, the government of China has made substantial investments in upgrading its transportation infrastructure over the past decade and will continue to do so in the future. Still, China's logistics infrastructure is characterized by fragmented supply and distribution systems, insufficient technology application and many bureaucratic obstacles. Moreover, rivalry among local governments creates trade barriers between provinces and adds to the complexity.
China's Logistics Industry — a Crucial Success Factor
Recently, the Chinese transportation and logistics market has been growing at an enormous rate. From 2002 to 2005, more than half of all logistics service providers have reported a yearly growth rate of more than 30 percent. This growth is promising, but the delivery performance is far from being efficient. In China, logistics often make up 20 to 40 percent of the cost of goods sold, compared to just about 10 percent in the United States.Viewed comparatively, China's logistics spending as a percent of gross domestic product (GDP) is twice that of the United States.
This inefficiency might be partly due to the fact that in China several hundred thousand logistics companies exist, compared to only about 7,000 in the United States. As a result, no logistics service provider offers nationwide distribution service or has more than about 2 percent market share.
The development of an integrated, nationwide logistics service provider industry is further hampered by two other problems. First, regulatory barriers prevent consolidation. Local governments frequently protect local transportation companies by erecting barriers to outside companies. In addition, the current licensing system for logistics companies is still complicated and costly. Second, logistics capabilities are limited and continue to lag behind other professional functions such as marketing of finance. China's long history of state ownership in this sector has left a legacy of poor management practices and an infrastructure geared toward the movement of bulk commodities. Therefore, the system is not ready to handle perishable or sensitive goods, track shipments or handle containerized shipments over land.
Good News — Bad News
This situation should be alarming to every company doing business in China. First, total cost advantages for exports could deteriorate if logistics costs cannot be decreased in the near future. Second, European and American logistics service providers should be prepared to master the coming supply chain challenges in China if they want to profit from the enormous growth rates.
The good news for supply chain managers in China is that they can expect to receive more recognition as the management of the overall supply chain becomes an even more critical factor to survive in China's tough competitive environment. The bad news is that the challenges to come cannot be mastered by highly professional Western supply chain managers with the usual support of some Chinese clerks. Instead, a new generation of Chinese supply chain managers needs to take over responsibility. Unless China studies become compulsory for Western SCM students, only well-educated local Chinese will have the required language skills, understanding of local conditions and necessary contact network to succeed.
Take Care of Your Chinese Supply Chain Managers — If You Can Find Them