Airline Logistics Management in China by rmi15865


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									Overview Logistics Sector in China 2005.

1.      General
In 2004 an extensive sector report on this subject was updated and is still available on the website. (Logistics, transport & harbour development, China 2004,
A Lighthouse China Consultants production).
This overview is not intended to repeat nor to update all the details and figures of mentioned
report, but to give a more general and brief overview of the present logistics sector
developments in China.

Logistics in China is presenting a hectic development due to China’s entry into the WTO and
the global economic integration. It provides employment for more than 11 million people.
Figures show that the amount of logistics in China reached 40 trillion yuan in 2004, surging
by 30 percent over 2003. Foreign investment in the logistics sector are increasing, expecting
the market will become more open in the coming years.

In 2004, a total of about 20bn tons of cargo were transported inside the country, 15bn tons of
cargo being transported by road, 2.5 bn tons of cargo transported by rail, while total cargo
shipments by waterways grew to 2bn tons. Some 2.5mn tons of cargo was transported by air in
2004. The total value of China's domestic logistics in 2004 reached RMB 35
trillion, corresponding with some 6 trillion tonkm transport.

Coastal ports like Shanghai Tianjin, Qingdao, Ningbo, Xiamen and Dalian, and big cities in
central and more western parts along the Yangtze river, such as Wuhan, Chengdu and
Chongqing are its major destinations in volumes of cargo.

There are still some problems in China’s logistics industry, the transportation cost is 3 times
that of western countries, accounting for over 30 percent of the total cost of goods, 10 percent
higher. The logistics expense has made up about 17 percent of the GNP, while it is only 10
percent in western countries. Although logistics industry is growing rapidly, it is still at the
primary stage and needs better integration of market and resources.

The Logistics sector covers a wide area, this report will be subdivided into the following

2.   Air transport and airports infrastructure
3.   Railways and metros infrastructure
4.   Roads and traffic
5.   Sea transport and sea ports
6.   Inland water transport
7.   Water infrastructure
8.   Energy infrastructure
9.   E-infrastructure and 3 PL services.

2.       Air transport and airports infrastructure

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   1
Transport and Water Attaché, Beijing.
Although China is purchasing most airplanes from Boeing and Airbus, the governement is
strongly investing in their own space and airplane building sector and also co-operating with
the EU and the private European and US airplane building industry:
Some examples are:
 China is the first non-European partner in the Galileo project, it will invest Euro 70
    Million in the co-operation and has agreed to co-operate on 7 new projects in the Galileo
 Boeing has signed a US$ 600 million contract with affiliated China Aviation Industry I
    and II (AVIC I and AVIC II) to build airplane components for the new Boeing 787
    dreamliner and following Boeing’s strategy to outsource on the 787, 777, 747 and 737
    airplane programs;
 Airbus has offered a 5% risk sharing partnership with China on its newly A350
    programme, China Aviation Industry Corporation (AVIC I) is planning to build a 150-200
    seats trunk-liner by 2020 and AVIC 1 predicts the need of 600-700 seats trunkliners in
    China in the near future;
 Both Boeing and Airbus are increasingly outsourcing airplane components in China, the
    first delivery of a Chinese wing for Airbus 320 aircraft by Xi'an Aircraft Company (XAC)
    was announced. Five Chinese companies are already involved in producing parts for
    Airbus and 30 Airbus engineers have been sent to China and Airbus plans to recruit 200
    Chinese engineers before 2008;

China's aviation industry is still dominated by three state-owned airlines: China Eastern
Airlines, China Southern Airlines and Air China. There are also about a dozen regional
airlines and three three privately-owned airlines: Tianjin-based Okay Airlines Co Ltd, China's
first privately-owned air carrier which launched its first flight in March; formerly state-owned
Shenzhen Airlines, which sold a 65 pct stake to two private investment firms and Spring
Since 2002 China allows private overseas investors to hold stakes of up to 49 pct in local
carriers, with the maximum stake by a single overseas investor capped at 25 pct. It has
repeatedly vowed to attract more private investment and has announced new measures, which
the sector has been awaiting for over a year. Private carriers are entering a still heavily
regulated market which makes it all the more difficult for them. It seems that the Chinese
market is not mature enough for low-cost airlines yet and it seems that government still wants
to protect its state-owned carriers from competition. The high fuel prices in 2005 is hurting
the established airline industry. China Eastern Airlines Ltd said its net profit fell significantly
and China Southern Airlines Co Ltd even booked a net loss. Private carriers will face many
challenges in the near-term and it seems to be difficult to become profitable and develop a
low-cost model.

Nevertheless in the past year, the 3 big Chinese mainland airlines China Southern, Air China
and China Eastern continue to grow fast, providing better quality and becoming more private
and more international, some examples are:
 Air China has refurbished their first class seats of 15 aircrafts for intercontinental flights to
   New York to provide better services for their top business clients;China;
 Eastern has acquired China’s Air Northwest and Air Yunnan and has now a fleet of 163
   aircrafts and is flying at 503 routes;
 China Southern, second largest Chinese carrier bought 45 Boeings 737’s to meet
   increasing travel demand;

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.    2
Transport and Water Attaché, Beijing.
But there is also more news about foreign investors about deregulation and the growth of
private companies, e.g.:
 Shanghai Kai Xuan Aviation Management Company is the first privately run aviation
    company that breaks into industry sectors that used to be state-controlled and
    monopolized. It is now focused on aviation management, research and development,
    providing security management to private airlines and airports, but it aims to offer
    comprehensive airline services;
 the Malaysian based discount airline, Air Asia is short of planes to meet rising demand for
    low-fare air travel and will replace all 24 B737 by A320’s and ordered 60 A320’s with
    options for another 40, it is largest low-price airline company in South East Asia and has
    been authorized by the Chinese government to operate six new flight services in Southern
    China. It started to provide flight service to China in April 2005. The Xiamen flight
    service is jointly operated by its subsidiary airline company Thai AirAsia and Thailand's
    Shin Corp.;
 CAAC signed agreements with Malaysia, India and Korea, liberalizing air cargo traffic.
    Jade Cargo International, a jv between Lufthansa and and Shenzhen Airlines from
    Guangdong province is in the final stage of establishment and will be put into operation in
    the second half of 2005;
 Private owned Okay negociates with Korean Sair about a joint venture to tap the local and
    international cargo business;

China’s airports are growing both in quantity and quality all over the country, some examples:
 Hong Kong International Airport (HKIA) received its AETRA 2004 "Best Airport
   Worldwide" Award on June 5, 2005, being an airport customer satisfaction benchmarking
   programme covering some of the largest and most progressive airports in the world;
 during holiday in first week of May 2005, Chinese airports handled 1 million passengers a
 Tianjin airport has selected a design team for a new 65,000-sq-meter terminal for its
   Binhai International Airport. The Netherlands Airport Consultants B.V., The Hague, with
   the London office of architect Kohn Pedersen Fox International, won the design
   competition. The project also will add a runway and create space for six million
   passengers a year with the first of three planned buildings, with roofs spanning up to 150
   m. Phase one is to open for the 2008 Olympics, the next two phases will raise passenger
   capacity to 40 million.
 Shuangliu Airport in Sichan province is expected to be listed in a bid to collect funds for
   further expansion with a second runway; Sichuan province now owns 51% stake, Chinese
   investors own the remainder; the shareholding company will be listed on a stock market in
   the US, Europe or Hong Kong;
 Beijing is building a high-speed railway line from the city centre to Beijing Capital
   International Airport and finish it by July 2008, in time for the Beijing Olympics in
   August 2008. The line will start at Dongzhimen station, in the city centre, and will run 28
   km through Maizidian West station to the airport. Also a luggage handling system will be
   built at Dongzhimen, allowing airline passengers to obtain their luggage straight in the city
   centre. The trains will cover the distance between Dongzhimen station and the airport in
   16 minutes. Initially, trains will run every eight minutes, but later on the frequency will be
   increased to two minutes.

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   3
Transport and Water Attaché, Beijing.
   Shanghai has already a high-speed airport rail service since the end of 2003. The 30 km
    line is the world's first magnetic (Maglev) line runs from Shanghai's eastern Pudong
    district to Pudong International Airport. The trains can develop a top speed of 430 km/h.
   The two Shanghai Airports are expected to handle 100 million air passengers and 7
    million tons of air cargo each year, when its overall aviation infrastructure will be
   Siemens will provide a RMB1.8 billion luggage handling system for Beijing Capital
    Airport before December 2007. The system is combined with a high-speed holder system
    and a transportation belt of 50 km long and be controlled by high technology smart
    luggage information technology automation system.

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   4
Transport and Water Attaché, Beijing.
3.      Railways and metros infrastructure.
The Ministry of Railways announced the Leap Foreward Plan, to expand the existing 74.000
km of railway to 100.000 km by 2020, the project will cost RMB 2000 billion (240 billion US
dollars). The project will speed up passenger trains to 180 km/hour, cargo trains to 110
km/hour, electrification from 23% to 46%, double tracks from 25% to 50% and includes 9
dedicated lines up to 350 km/hr.

China will allow US$ 250 billion private foreign investment in next 15 years for the railway
expansion. To attract capital, the ministry will invite bids for projects on passenger lines and
container stations which are profitable. Some RMB 100 billion per year is needed to expand
China's railway network, as yearly investment from government coffers only amounts to RMB
54 billion per year. Additionnally the ministry is also working on reorganizing some state-
owned railway companies to list them on the stock market. Experts, however, think that the
country is still not in place to attract investors' confidence that they will earn a profit, as the
existing rail charge system allows no price fluctuation in line with market changes. In recent
years, only less than one percent of non-state capital has been injected into the sector in recent

The State owned China Railway Engineering Corp Group (CREC) with 90.000 engineers and
240.000 employees is building the Qinghai-Tibet railway project, being the first railway
between Tibet Autonomous Region and other provinces of China, including the longest and
deepest tunnel in the nation; Qinghai-Tibet railway project. The railway is regarded by China
as a milestone in its go-west development campaign and is planning to connect the railway up
to Khasa via Lhasa and Shigatse. The railway will connect Lhasa by the end of 2005, it will
help both the countries in their trade and development. Construction of 800 km of the railway
has been completed in the first phase of the project. The Qinghai-Lhasa railway has a total
length of 2000 km. The railway is regarded by China as a milestone in its go-west
development campaign. China plans to connect the railway up to Khasa at the border with
Nepal via Lhasa and Shigatse.
Construction of nearly 800 km of the railway has been completed in the first phase of the
project. The Qinghai-Lhasa railway has a total length of 2000 km. The 1100 km section from
Golmud to Lhasa is currently under construction. However, the new railroad at Qinghai-Tibet
plateau (also source of 3 main Chinese rivers) will become in danger in next decades as frozen
subsoil will sink 30-40 cm due to 3.4 degrees C higher temperatures.

Some railway and metro news issues during 2005:
 During holiday in first week of May, Beijing Railway station handled 0.25 million
   passengers a day; The three current metro lines of 115 km length in Beijing carry 1.5
   million travellers every day, but new lines will come into operation, according to the city’s
   plan. By 2020, 19 lines of 570 km total will be ready, including the 26 km airport rail
   express way. After its completion the airport line will take travelers in 15 minutes from
   the city's centre to the airport and have a train depart every 5 minutes, carrying 3-4
   thousand passengers per hour;
 the huge air passenger flow in the Beijing/Tianjin area requires a balanced regional
   development, the US$ 1.5 billion transit project linking Beijing and Tianjin will shorten
   the 2 hours travel to some 40 minutes;
 a rail track collapsed and huge amounts of soil disappeared into large subsoil hole, it was a
   close call, but there were no casualties;

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.    5
Transport and Water Attaché, Beijing.
   Guangzhou is planning 9 new subway metro lines by 2010, total 255 km, for the Asia
   a new 290 km long railway between Longyan in Fujian Province and Ganzhou in East
    China started operating and was built at a cost of US$ 800 million;

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   6
Transport and Water Attaché, Beijing.
4.      Roads and traffic.
China's Ministry of Communications issued its development goals for highway and waterway
transportation in the next 15 years. China will build more highways, aiming to extend the
country's highway network to 3 million kilometers in 2020 and 85,000 kilometers of
expressways, according to the plan. By 2020, drivers should be able to complete a round trip
of 400 to 500 km and single trip of 800 to 1000 km in one day. The central government has
developed a major strategy to stimulate development in the West of China. Basic
infrastructure and inter-provincial communications is a key factor of the Western
Development strategy and a major proportion of central government funding will be devoted
to this purpose, next to other strategic logistics projects, such as the Greater Mekong Sub-
region Development Strategy and the Trans-national highway. The ministry will work to
reduce accidents in highway and waterway transportation in the next 15 years by providing
transportation information service and setting up a monitoring system as well as an emergency
mechanism. Land-saving and energy-saving are also included in the long-term plan for
China's transportation development in the next 15 years.

Liberalisation of the market in China should attract foreign firms to be the investor/operator in
certain sectors, mostly into joint venture arrangements with domestic logistics providers
and/or logistics users.

Some traffic, road and road infrastructure news issues in 2005:
 NDRC suggested Beijing municipal to move out to north or northwestern suburbs in order
   to ease pressure on transportation; Car driving in Beijing will become more expensive,
   Euro IV standards will go into effect in 2008, prices of gas, parking, insurance, taxes and
   tolls will increase; in 2005 taxi firms with a total of 70.000 registred taxis in Beijing get
   US$ 480 one-off payment for each old heavy air polluting taxi;
 a GPS device for 1600 trucks, carrying dangerous chemicials will monitor the travel
   activities of the vehicles and take quick action if accidents occur;
 in 2004 about 100.000 people or 300 per day died in traffic accidents, corresponding with
   9.2 per 10.000 vehicles;
 Five huge undersea tunnelplans will link the mainland with islands in next 20 years,
   including undersea railway Dalian-Yantai, undersea expressway Shanghai-Ningbo,
   undersea expressway mainland Fujian province to Taiwan. A road tunnel between
   Hongkong and Zhuhai and as well as a US 3 billion costing 29 km bridge between
   Hongkong, Guangdong and Macao, it will include a man-made island at Pearl River
 in 2004, 88 overseas funded projects in the transport market were approved by the
   Ministry of Communications, an increase of 44% over the previous year; mainly in road
   construction projects and the passenger transport market; producing in other countries is
   seen as an increasingly attractive option for Chinese automakers;
 Fujian Eastern Province linking Yangtze and Pearl River Delta with Taiwan has signed for
   a US$ 24 billion loan with China Development Bank for developing an industrial area
   with 600 km new expressway, new railway, ports, power facilities, cross Strait shipping
   links with Taiwan;
 a landslide was reported along one side of road, consisting of loess soil, buried 24 local
   people and 0.8 million m3 soil collapsed;

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   7
Transport and Water Attaché, Beijing.
5.       Sea transport and sea ports.
China will further develop its marine transportation, aiming to rank in the first five of the sector
worldwide in 2020. China Ocean Shipping (Group) Co. Ltd. (COSCO) and China Shipping Group
(CSG) lead the logistics industry. Recently COSCO offered shares at stock market, turnover in
2004 was US$ 3.9 billion and expected profit in 2005 is US$ 0.5 billion.

COSCO is a multinational company with more than 600 commercial vessels, ranking among
the largest in the world; while CSG has five fleets engaging in the handling of containers, oil,
other cargo and special goods, with an annual transport capacity of 270 million tons. It is
expected that China will maintain the fastest growth in cargo shipping in the coming 5-10
years. COSCO has recently invested also abroad in the port of Antwerp, it was mentioined as
a potential investor for the Euromax terminal in Rotterdam for their next 10.000 TEU vessels
and for the Lithuanian Klaipeda port, which serves as a transit point for the export of metals
from Russia and Ukraine. COSCO acquired in 2005 also China Ocean Shipping Tally
Company and has now an overall container shipping capacity of 0.8 million TEU.

The Chinese fleet of oil, coal and other bulk carriers grows much faster than the transport
volumes, orders for 2000 ships are scheduled, which will be added to present 10.000 ships and
will reduce both freight rates and share values;

It is rush hour for most ports in the world, North American and European ports have reached
their capacity as Chinese exports rose to US$ 593 billion in 2004, doubling the figures of
2000. China also aims to enhance its port handling capacity to 6.4 billion tons and container
capacity to 200 million TEU per year. The port throughput figures in 2004 were resp. for
Shanghai 379, Ningbo 226, Guangzhou 215, Tianjin 206, Qingdao 163, Qinhuangdao 150,
Dalian 145 and Shenzhen 135 million tons.
Major investors in local port construction are still State-owned enterprises (SOEs). Overseas
companies are not playing a leading role in funding harbour construction, let alone smaller
private investors in some specialized piers. The situation is in contrast to the scarce harbour
capacity confronting China as the nation's economy continues to grow. In 2004, the
transportation demand at coastal harbours was 2.7 billion tons in terms of capacity, while the
actual figure was 2.2 billion tons, according to statistics from the China Ports and Harbours
Association. The sector is also short of specialized ports infrastructure and facilities designed
to handle commodities such as coal, oil and raw mineral materials. Although the Harbour Law
that took effect in 2004, encouraging the entry of diverse investment, State capital still plays a
decisive role. Due to the high investment threshold, the right of actual management and
pricing of daily business operation, diversified investment sources is difficult. The
infrastructure part of harbour projects, such as fairways, anchorage and breakwaters, will
remain within the government's domain. Business facilities, such as logistics and storage
setups, will however be more suitable for social investment. NDRC is leading a commission
of 13 governmental departments to improve logistics in China, the market volume in 2004
was US$ 350 billion, a yearly increase of about 16%. But for the time being, SOE’s will
remain the major investors, while foreign and private investors can get involved with those
business projects. The central government used to subsidize the normal operation of important
harbours and the harbours used to be under the direct control of the central government. The
situation changed about three years ago, the regional governments now monitor harbours'
daily operations.

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.         8
Transport and Water Attaché, Beijing.
Environmental is also becoming an important issue. Large scale reclamation in coastal regions
need environmental mitigation measures; half of the mangrove swamp and 80% coral reefs
were destroyed and beach areas shrunk to 50%, Jiaozhou Bay. Also the outlet of the Yellow
River has shrunk by 35%, as land reclamation has become an important business for
developers of coastal properties by booming economies in coastal areas;

Port construction all along the coast of China is needed to cope with the growing import and
export of the mainland, some news issues are reported, as an example of the activities:

Pearl River Delta:
The Delta is the major hinterland and back up for the rapid development of Shenzhen,
Guangdong's strong export and import trade value grew at an annual rate of 24% in the past
27 years from 1978 to 2004. Shenzhen in Guangdong account for one-third of Guangdong's
total trade value, which has advantages over Hong Kong in port growth. Shenzhen is a major
challenge to Hong Kong, which was already surpassed by Singapore. Shenzhen is planning for
a handling capacity up to 24 million TEU’s in the next few years as the government has
approved the expansion project of Shenzhen Yantian III container port with a total investment
of RMB10 billion. There will be 15 berths in the Yantian III project after adding 6 new ones.
It will be able to handle 8 million to 9 million TEU’s. Another major port project, the Dachan
Bay project in which RMB7 billion will be invested, has already started. The Dachan Bay
project targets to lift container handling capacity up to 10 million TEU’s.

Weihei port:
The port of Weihai in Shandong Province has set off the third and fourth stages of its
construction project. Six deep-water berths of over 50,000 tons of handling capacity will be
built. Of the six deep-water berths, two berths will have a handling capacity of 50,000 tons,
two have a capacity of 70,000 tons and the other two 100,000 tons. The proposed amount of
investment amounts to RMB2 billion. It is expected that all construction work will be finished
by the end of 2007. By then, there will be a big advancement in the scale and handling
capacity of Weihai port. In the first four months of 2005, the port of Weihai completed a cargo
handling volume of over three million tons, which was 20% more than the same period of

Shanghai port:
The foreign trade handling capacity of Shanghai Port in 2004 reached 158 million tons, 22.1
percent higher than in 2003. Of the total foreign trade volume handled at Shanghai Port,
export trade volume increased by 25.8 percent compared with that of 2003. The officials
reviewed here yesterday the prosperous achievements the port made in 2004.
In 2004, Shanghai overran Rotterdam of the Netherlands and became the second largest port
in terms of cargo handling after Singapore. At the same time, Shanghai ranked the third
largest port in terms of standard container transportation by handling 14.554 million TEU’s
(twenty-foot equivalent unit), after Hong Kong and Singapore.

The Shanghai Port, one of the biggest ports in East China, exported mainly to the US and
Europe. In 2004, export trade handled at Shanghai Port on the US route was as much as 11.8
million tons, 35.2 percent higher than that of 2003. Trade on the European route reached 10.6
million tons, 19.1 percent higher than 2003. Among all the trade volume handled at the
Shanghai Port in 2004, the container trade volume reached 14.55 million TEU’s, a rise of 29
percent over 2003.

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   9
Transport and Water Attaché, Beijing.
Shanghai Port saw 33 international container sea routes newly open in 2004 including 21
ocean routes to Europe, North America, Middle East and Australia. So far, the Shanghai Port
has forged its business relations with more than 500 ports and harbours in more than 200
countries around the world. It has attracted more than 60 shipping companies both from home
and overseas to join in its shipping business with an average of 1700 regular ships departing
each month including about 800 from overseas.

Shanghai is building the Yangshan Deep-water Port to accommodate its booming container
business. The port’s first phase is expected to be put into service by the end of this year with
an annual handling capacity of 3 million TEU’s (twenty-foot equivalent units). The facility is
located on an island 27 km from the city, where the water is deep enough for big container
ships. The first phase of the Yangshan deep-water port is expected to put five berths in
operation at the end of this year. The lack of deep-water berths has been hindering Shanghai's
development on the world stage. The first phase of the project will offer a coastline of 1350
metres, with a water depth of 15 metres, which will enable container vessels of 8000 TEU’s to
call at and increase the city's handling capacity by 2.2 million TEU’s a year. The second phase
of the project is to be completed in 2006, providing four more berths. By 2010, a total of 19
berths will be finished as the city grows into a name-worthy international shipping centre. The
city has also worked out a plan for the development of its inland waterway transportation and
with government investment of over RMB 9 billion (US$1.09 billion), most of its rivers will
be rebuilt to allow in container vessels.

Shanghai Port Container Co Ltd, the city’s biggest container operator, will borrow up to RMB
2.5 billion yuan (US$301 million) to finance the Yangshan Deep-water Port project. Shanghai
Port Container, the subsidiary of Shanghai International Port (Group) Co Ltd, plans to apply
for a RMB 1.5 billion loan from the Shanghai branch of China Development Bank, the local-
listed company said in a recent statement to the Shanghai Stock Exchange. The company
approved a plan to borrow RMB 1 billion from a consortium of 18 foreign lenders led by the
local branch of US-based City Bank.
The three-year loan will be used to restructure the company’s existing loans, according to the
statement. Last year, Shanghai Port Container teamed up with parent SIPG, the city’s largest
port operator, to jointly set up Shanghai Yangshan to operate the five berths in the first phase
of Yangshan Deep-water Port. The new joint stock venture boasted total investment of RMB 5
Shanghai Port put in RMB 2.5 billion to gain a 51 percent stake, while SIPG took the
remainder by investing RMB 2.5 million.
Shanghai opened 33 routes for standard containers last year and now it has business relations
with more than 500 ports in over 200 countries and regions in the world.

Dalian port:
Dalian port in Northeast China's Liaoning Province, is becoming an international shipping hub
in Northeast Asia. The city's medium-term goal is to build a regional shipping hub by 2010,
the long-term goal is to build a global hub by 2020 for about 300 million tons of cargo and 15
million TEU. Also, the Dalian Zhoushuizi International Airport is estimated to serve 8 million
passengers and handle 200.000 tons of cargo annually by 2010. The city will build about 20
container terminals in the Dayaowan area, including deepwater terminals that can be used for
container vessels of 8000 TEU’s and a terminal for oil tankers of more than 300.000 tons. A
liquefied natural gas terminal will also be built. Dalian will create a better policy environment
to introduce and foster large-sized marine and air transportation enterprises. It encourages

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   10
Transport and Water Attaché, Beijing.
foreign players to make investment in port construction and operation of port infrastructure
and opening new air or marine shipping routes. Through asset restructuring and introducing
strategic investors, the city's port operators are expected to expand their operational scale.
The city will promote the integration of the Dalian Bonded Area and the Dayaowan Container
Terminal, aiming to build the areas into a free port or a free trade zone in the future. It also
plans to establish a shipping transaction centre, offering a venue of information exchange,
exhibition, transaction and settlement for port companies, transpiration enterprises, ship
owners, agents and cargo owners. Volkswagen and First Automotive Works Corp (FAW) will
start to build, on a 60-40 basis, an engine joint venture plant near the port of Dalian.

Qingdao port:
China's second largest port will build a US$60 million wharf to offload oil with Asia's largest
oil refiner, Sinopec Group, along with a container dock to be built with other partners.
Chinese Ningbo port is also investing US$650 million in container terminals as the port lacks
sufficient capacity is and looking for investments and expansion;
The container wharf of the Qingdao port, the world's largest and most advanced container
wharf has been put into operation.The Qingdao container wharf was designed for 7 berths, the
first four of which were put into operation in September, 2003. Construction of the No.5, 6
and 7 berths was completed in December,2004. Designers said that the three new berths,
together with the original four, will be able to handle seven 280-meter steamships at one time.
The container handling capability of the Qingdao port reached 5 million TEU in 2004 and is
expected to handle 6.5 million TEU in 2005.The new oil wharf will have a capacity of
300,000 tons a year, cost 500 million yuan (US$60 million) and be ready in 2006.

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   11
Transport and Water Attaché, Beijing.
6.     Inland water transport.
China has some 160 ports including 50 coastal ports and 110 inland river ports.

The Pearl River Delta, but in particular the Yangtze river between Shanghai to Chongqing is
navegable for the about 200.000 thousand smaller and bigger vessels available between the
ports of Shanghai, Nantong, Nanjing, Tongling, Wuhan and Chongqing.

The river transport sector is in hands of State-owned enterprises (SOEs) and small private
owners and the quality of service of both time and performance is below international
standard level. Overseas companies are not playing a leading role in inland tranport, let alone
smaller private investors in some specialized transport niches. The situation is in contrast to
the scarce service level confronting China as the nation's economy continues to grow.

The river ports are also short of specialized ports infrastructure and facilities designed to
handle commodities such as containers, coal, oil and raw mineral materials.

Although the jan.2004 new Harbour Law took effect, encouraging the entry of diverse
investment, State capital still plays a decisive role. Due to the high investment threshold, the
right of actual management and pricing of daily business operation, diversified investment
sources is difficult. Due to the different ministries on road transport, rail transport, aviation
and shipping, inter modal transport and door-to-door transport has still a far way to go,
although NDRC is working on a better co-ordination between the ministries and on the
liberalization of the sector.

Foreign participation in river transport remains very limited, the market is opening slightly
and it is expected that SOE’s will remain the major investors. The inland transport potentials
however are huge and could improve the quality of service level. It could reduce the transport
cost as well as the road and railway transport constraints, if inland transport would get the
opportunities and infrastructure needed.

As an example of a limited infrastructure investment, the US$ 1.2 million project to improve
the navigability of the Yangtze River, the lower reaches, downstream of Nanjing, the capital
of the Jiangsu Province can be mentoned. It will be dredged to allow the navigation of 50.000
DWT ocean going vessels and the Yangtze River Shipping Affairs Bureau in Wuhan is
responsible for the project;

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   12
Transport and Water Attaché, Beijing.
7      Water infrastructure
Water supply for both irrigation, industry and human consumption and water treatment are
very important issues for the Chinese government.

The 4700 km-long Yellow River and the 6300 km-long Yangtze River further south, have
been the cradles of Chinese civilisation for over three thousand years.

The Yellow River is still the major source of water for north-west and north China. It provides
water to over 12 per cent of China's population across 50 large and medium-sized cities before
emptying into the Bohai Sea in the east. For 3 years straight, starting in 1995, the river did not
reach the coast. In 1997, it reached up to Kaifeng City in Henan Province, about 800 km from
its mouth. The monsoons in 2002 and 2003 helped the Yellow River reach its delta once
again. The river's volume has shrunken by a third, and its speed has slowed by half, down to
less than 50 cubic metres per second.

That's happening all over China, where numerous water sources are running dry. Also the
water table beneath the North China plain, where most people live and where 40 per cent of
China's grain is produced, has fallen 4-8 feet in the last five years. After five years of drought.
Even airplanes, rocket shells and anti-aircraft guns are used to shoot cloud-seeding chemicals
into the air.
Though China currently has the fifth-largest water resources in the world, given its population
of 1.3 billion, the country's per capita water supply is only 2200 cubic metre, 25% of the
global average. Water supply is expected to fall to 1700 cubic metres per person by 2030.
During the same period, the demand for water is expected to grow from 120 billion tonnes a
year to 400 billion tonnes.

Four hundred of China's cities are suffering from water shortage and the quantitative fall in
China's water resources has also been accompanied by a fall in the country's water quality.
The World Bank says three-fourths of China's rivers are polluted, and over 700 million of
China's 1.3 billion people drink contaminated water.
As peasants unable to make a living off the land are migrating to cities and shrinking the local
tax base, local authorities are often raising taxes on those who remain. This then drives them
to leave. Many Chinese industries, particularly heavily water-dependent ones such as power
generation are concerned with maintaining their global competitiveness and growth in the face
of falling water supply, rising water prices and increased release of water to farming areas.

China’s response has been to launch the South to North project, one that will transfer 50
billion cubic metres of water from the Yangtze River in the south, to the drying Yellow River,
Huai and Hai rivers in the north every year. Some 80% of China's water lies south of the
Yangtze but this region has only 50% of the population and 36% of the farmland. It will join
China's Three Gorges Dam and the Qinghai-Tibet Railway as one of the world's largest, and
most controversial, public works projects.It is expected that the $25-billion project, which is
scheduled for fase 1 completion in 2009, will force over 250.000 people to be relocated and
damage delicate eco-systems.

One of the ministry's innovative measures has been to encourage government-funded
organisations, such as the China Women's Development Fund (CWDF), to take on grassroots
level water management projects.

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   13
Transport and Water Attaché, Beijing.
Steps are also being taken to arrest the rapid deforestation and soil erosion taking place across
the country. Hydropower, which creates large evaporating reservoirs, is increasingly being
complemented with wind power. But none of this is likely to be enough, and the consequences
of China's massive water problems are expected. Despite Beijing's attempts to keep water
flowing to its farmers in the middle and long run, the imperatives against doing this are just
too strong.

Water is extremely important in China and frequently news in the press, as an example:
 Severe drought since last summer in Hainan, affecting 550,000 people have difficulties
  with drinking water, reservoirs are empty, people are digging holes, lack of irrigation
  water and only 100 litres a day for those who are affected, investments of US$ 6 million;
 Yellow river ice threat for people and for property, 1124 km of the Yangtze have been
  frozen and ice has been building up during this cold winter, minor ice floods did already
  occur, flooding more than 867 ha of riverside land in Ningxia region;
 flushing toilets with salt water will be applied in Shenzhen, located close to sea in South
  China’s Guangdong province, UN lists China as one of 13 countries with worst water
  water shortages;
 Northeast province of Heilongjiang protects wetlands, 70% of the wetlands are now under
  governmental protection, reclamation since 1949 have made a lot of damage and reduced
  the wetland area from 4.43 m.ha to 1.56 m.ha;
 Reforestation in 2004: 2.5 billion trees, since 1982, 4 4 billion tress were planted in 53
  million hectares. Next years 0.5 million rural people will be pulled out from the vulnerable
  mountain areas near Beijing, a plan to reclaim desert, loans with subsidies available for 17
  million hectares until 2010;
 sediment build up in Yellow River has formed a 8000 sq. km. Yellow River Delta in
  Shandong province at convergence of Bohai Sea and Laizhou Gulf, housing 269
  categories of birds, 22 % of countries total, part of estuary is now under governmental
  protection, the estuary grows 2-3 km per year into Bohai sea;
 acid rain is not only damaging statue of the sitting Leshan Giant Buddha in Chengdu, but
  causes damages in Sichuan, worth US$ 0.8 billion per year;
 wetland fire in Zhalong Nature Reserve in Northeast China is believed to have been
  started by farmers, it will endanger the life of the rare species of red-crested cranes, main
  problem is water scarcity due to construction of dams projects;
 water saving will be more urgent than ever, the national per capita allocation of water is
  less than 2200 m3, only 25% of the world's average, in North China, this figure is only
  990 m3 pa and will become only 1750 m3 in 2030 when China will peak with 1.6 billion
  people. In 2030, country's total water consumption will reach 800 billlion m3 as an
  absolute maximum. By then, China may be plunged into a serious water crisis. Drought
  affected already more than 27 million hectares and a reduction in irrigated area and grain
  output, industrial output looses US$ 27 billion per year due to water shortage;
 East China's Shandong province has approved six natural protection areas along the
  coastline, which will protect the marine resources and the environment; companies
  polluting the sea will be fined; in 2003 and 2004 resp. 220 and 605 hectares were
  reclaimed at a very low cost, coastal areas will be better protected in the future;
 on April 18th the Yangtze River Forum fully adopted in the recommendations made by
  task Force on Integrated River Basin Management as presented during the general meeting
  of China Council for Int. Coop. and Dev. (CCICED) and the Chinese Academy of
  Sciences (CAS) in october 2004;

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   14
Transport and Water Attaché, Beijing.
   a multi billion dollar project includes a first stage of a "green" belt of 7.400 hectares of
    trees around the city of Beijing, expected to protect residents better against sandstorms and
    a second "green" belt, made up of several wedge shaped areas scattered around the
    suburbs, covering 165.000 hectares of land is expected to root out the sandstorms in
    Beijing by 2008;
   in China new water efficient dripping irrigation equipment was developed, consisting of a
    20 micron low cost thick film, which will fully degrade in a year; see newsletter
   a World Bank study financed by the WB-BNPP (Bank Netherlands Partnership Program)
    indicates China has to spend US$ 4.2 billion per year in water and sanitation to meet goals
    in 2015;
   floods ravage nationwide, affecting 5.7 million people, more than 200 killed, due to severe
    rainfall; in Anhui severe drought, due to 30% less rainfall;
   a huge pipeline project planned in Beijing as part of the Eastern part of the South-to North
    water diversion project; in 2007 Beijing will get water from the large scale reservoirs in
    Hebei Province;
   the Pearl River is seriously polluted with heavy metals, nitrogen, oil, ammonia and other
    chemicals, few fish can survive in that water; the Pearl River estuary is the most polluted

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   15
Transport and Water Attaché, Beijing.
8.       Energy infrastructure.

A separate sector report on energy is available at website, is this
report only some energy related infrastructure news will be mentioned. Especially coal and oil
products have a huge impact on import, export and inland road and railtransport infrastructure.

The energy prices have increased significantly world wide. China’s influence on the oil prices
however is limited, as its import accounts for around 7% of the world oil trade volumes.
China still produced 170 million tons and imported 120 million tons in 2004, coal still
accounts for 70% of the energy consumption mix and has still huge coal resources.

The petrochemical sector is witnessing a rapid expansion, crude oil turnover topped 15.3
million tons in January 2005 and companies like DOW Chemical and BASF have injected
more than US$ 15 billion in China, participation of foreign giants will advance the industry.

LNG is expected to become an increasingly important energy product, all over the country
investments take place in liquified natural gas plants for the growing LNG demand. Shell sold
11 bn tons LNG in 2004.

But also non-fossil energy sources, like wind, solar and thermal power will be encouraging
due to new Law on renewable energy, which will be effective in 2006, providing financial
incentives like funds and tax preferences. It will allow renewable manufacturing industry
above US$12 billion by 2020. Now on solar energy water heaters, China accounts for 76% of
world’s total, in solar energy US 120 million will be invested in production facilities, wind
energy equipment production and use still underdeveloped.

Energy efficiency is an important issue, the country’s aim is to stop the old practice of
persuing fast economic growth at the expense of resources. But the demand is increasing as
well and also five new nuclear energy power plants, of 1000 MW each, are planned for
construction by 2010. And 40 reactors with a total capacity of 40.000 MW will be built before
2020. Hydro power is also important in China and the Three Gorges Hydropower alone has
already generated 10 billion kwh in first four months of 2005. Now only 12 generators of the
total planned 26 units, of 700 MW each, have been installed.

A new office at vice-minister-level has replaced the earlier Energy Bureau of the National
Development and Reform Commission (NDRC) and will become the nation’s top authority of
the fragmented energy sector. China is looking for clean energy, rather than coal, the
Dhanghai Techn.& Science Commission is doing investigations on hydro cells, hydrogen
production and biomass electricity and French Altstrom got contract for US$ 100 million to
build 2 new 1000 MW Arabelle turbines in Shenzhen.

Solar and wind energy are still underdeveloped, it is only possible to make max. 0.75 MW
windmills and 82% of the wind power generators are still imported. Most foreign windmills
have a capacity of over 1.5 MW and are more efficient. Italy has a pact with China about
reduction of carbon dioxide, required by Kyoto Protocol. It will invest US 1.35 million in
Inner Mongolia in hectares of reforestation as compensation for own industry. China is
looking for more co-operation with other countries to have same kind of agreements;

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   16
Transport and Water Attaché, Beijing.
9      E-infrastructure and 3 PL services.
There still exists an information technology gap between China’s logistics industry and its
foreign competitors.

Until recently no major logistics in China had introduced integrated IT management systems,
or comprehensive IT freight tracking systems. But E-business in China is developing quickly,
where insufficient logistics distribution has been one of the main obstacles to E-business

As an example, China is also working on the implementation of the e-passport, including the
holder’s facial measurements, fingerprints, an iris scan and voice recording. China was the
relatively cash nature of the Chinese economy and poor logistics services, but with the rapid
development of the banking sector, logistics deregulation, growing disposable incomes, and
preferential government policies toward the sector substantial growth is expected.

There are also increasing opportunities offered to foreign firms by the e-business sector in
terms of 3PL provision, logistics management and tracking systems, and logistics IT.
Third-party logistics providers like TNT, DHL, UPS and Exel are becoming increasingly
important, now the China 3PL market is estimated at RMB 80bn. Most of the top 500
enterprises are invested heavily in manufacturing and service fields and are among the foreign
companies creating the rising need for 3PL services. A number of foreign high-tech and e-
business enterprises has been putting pressure on the established 3PL sector.
With the further opening of the sector and with China’s production growth in future, there
remains enormous potential for growth in this sector.

Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   17
Transport and Water Attaché, Beijing.
, Beijing.
Sector Report on Logistics in China, Royal Netherlands Embassy in Beijing, 22nd of July, 2005.   18
Transport and Water Attaché, Beijing.

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