Guo Xiaolin (Xiaolin.firstname.lastname@example.org)
Wang Haipeng (email@example.com)
Zhou Haibo (firstname.lastname@example.org)
Graduates of the
Georgia Tech/National University of Singapore Dual
Logistics has become a booming industry in China especially after the country‘s
accession to the WTO. International corporations pay close attention to trends and
developments in this land of opportunities, but must also be prepared to face the
challenges of Byzantine regulations and fragmented operations. This report surveys the
logistics environment in China. It focuses on describing the major logistics players,
special challenges and current business strategies in Chinese Logistics. The report
concludes with a case study illustrating many of the issues.
This document is based on a report prepared in fulfillment of the requirements for the
Dual Master‘s degree at the Georgia Institute of Technology and The National University
Executive Summary .................................................................................................... 3
1 Geography and Demographics .............................................................................. 5
1.1 Geography ............................................................................................................ 6
1.2 Demography and Economy Distribution ............................................................. 9
2 Infrastructure........................................................................................................... 12
2.1 Road and Trucking............................................................................................. 12
2.2 Rail ..................................................................................................................... 14
2.3 Waterways ......................................................................................................... 16
2.4 Air ...................................................................................................................... 19
3 Logistics Policy & Organization Role .................................................................. 22
3.1 Organization Role .............................................................................................. 22
3.2 Logistics Policy.................................................................................................. 23
3.3 WTO Impact on policy ...................................................................................... 26
4 Logistics Players .................................................................................................... 28
4.1 Freight Forwarding ............................................................................................ 28
4.2 Ocean & Air Carrier .......................................................................................... 30
4.3 In-house Player .................................................................................................. 33
Haier Group (In-house Player) ............................................................................. 33
4.4 3PLs ................................................................................................................... 33
China Merchants Logistics Group Co., Ltd. ........................................................ 33
Shenzhen ST-Anda Logistics Co., Ltd................................................................. 35
APL Logistics China (Shanghai) (APLL) ............................................................ 33
Hutchison Tibbett & Britten Logistics (HTBL) ................................................... 37
5 Special Challenges ................................................................................................ 37
5.1 Policy ............................................................................................................. 37
5.2 Geography ...................................................................................................... 38
5.3 Transportation ................................................................................................ 39
5.4 Distribution Management .............................................................................. 40
5.5 More Difficulties in Logistics DevelopmentError! Bookmark not defined.45
6 Robust Business Model .................................... Error! Bookmark not defined.47
Case Study: China Spirits Bidding Year ................................................................ 41
1 Geography and Demographics
As China opened up in the late 1980‘s, many Western consumer goods manufacturers set
up plants or formed joint ventures there in an attempt to tap the huge market potential of
the country. By the 1990s, most Fortune 500 companies had branch offices in China.
Other manufacturers come to China for low cost labor and find the rapidly growing
internal market a secondary benefit. At the same time national manufacturers are working
to transform themselves from the old command economy and to compete on an
Today, with China‘s accession to WTO, MNCs are busy shifting their Asian headquarters
to China and new players everywhere are entering the fray in a scramble reminiscent of
the gold rushes of the Wild West. Some contend that China is poised for a renaissance
and will resume its crown as Asia‘s economic center. No one can deny that it is becoming
the manufacturing center of the world.
What is China‘s allure? Is it really an important market place for MNCs? Data from the
World Trade Organization point to the answers. Since 1978, China boasted a GDP
average growth rate close to 10% and its per capita income has quadrupled1. The value of
imports and exports as a share of GDP tripled from 1978 to 1995.2 In 2000, China‘s trade
in goods represented 43.9% of GDP3. The nation‘s economy is increasingly integrated
with world economy. Now, China is among the top five nations of the world in terms of
trade and direct investment. Foreign Direct Investment (FDI) soared from $2.3 billion in
1987 to $45.6 billion in 1999.4 In 2001, labor costs averaged $0.60/hr and GDP growth
was 7.3%. 5 The country‘s merchandise exports were $293.7bn and imports were
$266.5bn, creating a trade surplus of $27.2bn for the first 11 months of 2002 and FDI is
predicted to exceed 50 billion USD.6
Rapid, sustained economic growth has made China's economy the world's third largest
(based on the World Bank's purchasing power parity adjusted measures (PPP)).7 In 1998
China‘s GDP, measured at purchasing-power parity (PPP), was $3.8 trillion, according to
the World Bank‘s latest World Development Indicators. This makes it the second-biggest
economy in the world, ahead of Japan‘s $3.0 trillion. It stands poised to become the
world's second largest economy by 2015. The Chinese people have benefited from this
growth, which has put more money in their pockets. Nearly 50 million Chinese enjoy an
Economist Intelligence Unit and World Bank.
China Economic Information Center, Newsletter section. http://www.cei.gov.cn
The World Bank‘s China Data Profile http://www.worldbank.org/data/countrydata/countrydata.html
The Economist. http://www.economist.com/countries/China/
The Economist. http://www.economist.com/countries/China/
―Global Giant‖, May 11th 2000 From The Economist print edition.
annual income equivalent to at least $18,0008 adjusted for purchasing power; by 2003,
this number is expected to triple.9 Massive growth in international trade and domestic
economic activity has raised China to a prominent position in the strategic plans of nearly
every multinational firm. Many of these firms have already made China a substantial part
of their businesses. Nevertheless, as China races rapidly forward as a manufacturing base,
distribution in the country is still a challenge complicated by geography and outdated
infrastructure. This section focuses on China‘s geographic features, political divisions and
China covers roughly 9.7 million square kilometers making it slightly larger than the US.
Superimposing maps of the two countries demonstrates some interesting similarities.
Beijing and New York are roughly on the same latitude, as are other major cities like
Shanghai and Atlanta. However, a topographical map shows huge differences. The
geographical features change from west to east in three steps in China. While the US has
both east and west coasts, the west of China is filled with mountains, plateaus and deserts.
Mid-China is full of valleys, rivers and meadows. Fertile soil is mainly concentrated in
the east. ―Transportation between East and West China is like playing squash, while in
the US it is like golfing.‖10 In China, only one third of the land area is flat. As such,
distribution in China must be adapted to suit the needs of different regions. For instance,
in the case of Urumuqi, large shipment sizes (enough to cover demands for a few months)
during the summer are necessary as most roads into the region are usually covered by
snow and impassable during the winter.
In the US, the long coastline gives western cities wide access to the sea and blesses them
with oceanic weather. In contrast, the west of China abuts the Mid-Asia Mountains and
Plateaus. This region alternates between the dry monsoon and the cold Siberian winter.
Annual rainfall along the Mongolian border is below one inch, while areas along the
southeast coast like Guangdong and Zhejiang receive over 75 inches. Under Deng Xiao
Ping‘s policies, the east has developed over time into a relatively rich region with a strong
agriculture base and ports to support international trade, while the west has continued to
struggle with poverty and unemployment. Hence there is a wide discrepancy between the
prosperous east and the poor west in the goods transported.
After years of relative neglect, China‘s environment has improved over the last decade.
Energy per capita use in 1997 was equivalent to 903.3 kg of oil.11 Per capita electricity
use was 701 kwhs.12 In the past decade CO2 emissions have dropped, and the water
―China‘s Middle Class Expected Increase‖ LianHe ZaoBao, Singapore‘s Chinese Newspaper 2001.
China Daily.News asserted by Chinese Economist Hu Angang
Henry Ho, Chin Lim, Industry Overview of China Logistics, Oct 5, 2001
quality has improved. However, the cost of development in China is still higher than in
other countries larger than 7million km2. “Something you can do with USD$1 in common
situation and other places of this world will cost you USD$1.5 in China”.13
As a result of its geographic characteristics, logistics in China is a huge operational
challenge. Matching loads is difficult and vehicles often face an empty backhaul. Most
containerized goods move east to west, logged wood from northeast to southeast, and
coal, oil and minerals from west to east. For example, a multi-national corporation in the
food industry explored the possibility of selling its premium brand ice cream in Xinjiang
in the summer. While a normal truck would cost around Rmb9 ($1.10) per ton per km,
even at a premium charge of Rmb12 ($1.46), few truckers would undertake this long
journey. There is little produce that requires a refrigerated truck for the return journey
from Xinjiang. An integrated logistics service provider with large-scale operations should
be in a better position to exploit these imbalances.
Figure 1 China's Political Division (source: Economist14)
―China Sustained Development Strategy Report‖ published by China Society and Science Institution,
The Economist. http://www.economist.com/countries/china. This is also an excellent source of statistical
Figure 2 GDP Per Capita in China
(Data Source: China Economic Information Center http://ce.cei.gov.cn/)
China is a country of multiple, separate, self-reliant provinces. The majority of the 31
provinces deem self-reliance as the engine of prosperity, a legacy of the post-1949 Maoist
doctrine. Consequently, local governments have created redundant, but often
incompatible industrial, economic and political infrastructures; overcapacity in
manufacturing and distribution; minimal synergies among provinces; complex and
inefficient bureaucracies; and a highly unproductive emphasis on local protectionism. For
example, most Chinese wholesalers and distributors sell only in their regions. Informal
provincial barriers and protectionism can prevent local companies based in one province
from operating in another. As a consequence, the thousands of trucking companies and
hundreds of wholesalers make logistics coordination very difficult.
Trucks licensed in Beijing, for example, can operate in any province of China, but must
wait until midnight to make deliveries in Shanghai. Local governments and different local
administrations establish multiple toll collections. Besides highway toll stations, the local
management also collects other fees under different titles. The transportation time and
and background information on China and other countries.
cost from the north to the south are amplified by frequent tolls and fee collections.
China‘s local governments hold great power compared to their US peers and so the lack
of a coherent coordination logistics policy is likely to persist.
Twenty years ago, the newly ascendant Deng Xiaoping changed the course of China‘s
economy with a pair of simple observations. To get rich was glorious, he said, but not
everyone in China would manage to do it at once. Some people, and some regions, would
have to be allowed to get rich first. And some did. By virtue of their geographic
advantages and some beneficial government policies, China‘s eastern provinces have
enjoyed unparalleled economic development that has left the populous rural areas in the
west far behind. As a result, the distribution of wealth in modern China is imbalanced
(Figure 3 & Figure 4). Now, even as it commemorates the anniversary of Deng‘s reform
and celebrates its successes, China‘s government is struggling to mitigate these
China is the world‘s most populous nation with 1.3 billion people in 2001.15 This number
is still growing at a rate of 0.8%.16 About 0.8 billion or roughly 62% of the population
lives in rural areas mostly in the west and north of China. However, the country‘s demand
is mainly concentrated in the south, along the coastal provinces in the east and in the
major cities like Beijing, Shanghai and Guangzhou. Not surprisingly, these regions
contain China‘s major logistics facilities including ports, highways, and hubs. They also
have the nation‘s highest per capita income.
Initiatives to establish logistics networks in China‘s less developed north and west have
faced great challenges. Low per capita income, local protectionism, poor access and a
lack of infrastructure make doing business difficult. Most foreign companies have given
these regions low priority for the short term. The main population centers have always
been in the wheat-growing plains of northern China and the rice paddies along the
Yangtze River. However, corporations with household brands and a base capability in
eastern China are looking more closely at setting up operations in the western part of the
country. China‘s Ninth Five-Year Plan aimed to address the widening disparities in
wealth and income between the coast and the interior by concentrating investment, both
domestic and foreign, in the interior provinces, and the Tenth Plan, which began in 2001,
is continuing these efforts.
China Statistics Annual Book 2001
China Statistics Annual Book 2001
Figure 3 Population Distribution
Figure 4 Consumer-Product Expenditures by Region (hundreds million)
Sustained high growth will require strong demand, yet the incomes of most rural
residents (who account for 65%17 of the population) have been stagnant for the past four
years. China will benefit from continued inflows of foreign investment and a increased
China Statistics Annual Book 2001
exports as the global economy recovers. But given the country's size, the economy still
relies primarily on domestic engines of growth, which are sputtering. Migration to
urbanization centers has increased over the past five years. This may help resolve the
peasant problem, but has been the source of many intractable problems in other
developing economies around the world and has been rather closely controlled in China.
China is in the throes of a twofold industrial revolution. On the one hand, as with
industrial revolutions in other countries, there is a movement of people from the
countryside to the towns. On the other hand, to avoid the urban slums of other developing
countries, an industrial revolution is also being encouraged in the countryside. While the
majority of the labor force is still classified as rural (499m out of a labor force of 711.5m
in 200018), as many as 150m19, according to some estimates, have moved to cities in
search of employment or higher wages. Millions more who live in the countryside are not
employed on the land. An agricultural survey conducted in 1996 found that nearly
one-quarter of the rural labor force had taken employment in rural industry or services.
Including dependants, the true peasantry now numbers between 480m and 530m.20 The
"non-agricultural village population" included in 1999 about 127m employed in township
and village enterprises (TVEs).21
In the next section, we will look at the current state and expected development of the
infrastructure in China and what it means to MNCs.
―TVE development and Urbanization in China‖ by Liu HongQuan, China Rural Economy Research.
Issue 2, 2000. p134-p243.
China‘s infrastructure is not yet as broadly implemented or as fully developed as in the
highly industrialized nations. China's unprecedented economic growth has strained its
current logistics infrastructure to the limit. Challenges to the movement of goods abound:
a limited and unreliable highway system, antiquated roads and ports, over-stressed civil
aviation, a rapidly developing telecommunications network and limited warehousing
capacity and quality. As a result, companies entering the Chinese market have had to
develop new approaches to supply chain management. Currently, China‘s most common
transport method is road, followed by rail, air, and ocean or waterways.
2.1 Roads and Trucking
China‘s road transport has a long way to go. The road infrastructure is seriously
inadequate in many places. Although it covers 600,000 miles, it is mainly composed of
two-lane roads with side paths for bicycles. At the end of 2000, China possessed around
16,000 kilometers of expressway nationwide,22 though this number is in question, and
the World Bank's analysis of road coverage relative to area and population places China
far behind most other countries. A team of two drivers, working a 16-hour day, can cover
some 310 miles — an average of less than 20 miles per hour.
Acknowledging these problems, China is accelerating the construction of highways and
roads. The principal mission is to connect China‘s main economic zones with four
leading state and trunk roads along the coast, the Yangtze River, and from Lanzhou to
Lianyungang, and Beijng to Guangzhou. At the end of 2000, China had a road
transportation network of 1.68 million kilometers, 804,00023 kilometers longer than
reported in the first national highway survey in 1979. At the end of 2001, the figure had
climbed to some 1.7 million kilometers; the second largest road network in the world.24
In limited areas, highway construction has improved road conditions, and major projects
are underway. Princeton-educated Hong Kong developer Gordon Wu built China‘s first
superhighway, a toll road reportedly modeled after the New Jersey Turnpike. It connects
Hong Kong and Guangzhou, with planned further links to Zhuhai, adjacent to Macau. In
addition, motorways have been opened between Shanghai and Nanjing and between
Tianjin, Tangshan and Beijing.
China Economic Information Center, newsreport 2002
China Economic Information Center, newsreport 2002
China Economic Information Center, newsreport 2002
The road transport industry in China is extremely fragmented, with 5.4 million trucks
registered to more than 2 million separate trucking providers (an average of 2.7 trucks per
company)25. Among all providers, Sinotrans has the largest fleet (3000 trucks).
Nevertheless, there is no true national trucking network: Regional, provincial and local
fleets - managed by an eclectic mix of local entrepreneurs and local government-affiliated
providers – dominate the market, primarily with inefficient, aging or inappropriate
The overloading, poor service, insufficient preventative maintenance, widespread
inefficiencies, minimal quality control, excessive damage caused by bad road conditions
and poor equipments are common in this industry. Empty miles average about 50 percent,
with resulting annual losses of US$8 billion. Comparatively little financing is available
for upgrading equipment and investing in technology.
Only 187,000 trucks are registered heavy – duty vehicles and a mere 20 percent of them
are containerized26. The containerized volume, 2.4 million TEUs in 1993,27 remains a
small fraction of the total. The impact of the low containerization is that goods are
frequently damaged in open-back vehicles. Foreign and domestic providers have begun to
use container-capable line-haul trucks, which also facilitate inter-modal operations.
Road bandits, unauthorized "tolls" and increasing traffic congestion have become
pervasive. Some provinces levy extra tolls on out-of-province trucks. Local authorities
have even been known to detain and fine out-of-town trucks. The power of local logistics
authorities in China should not be underestimated. For example, many cities will not
allow trucks to enter without licensing, which can take hours to obtain. Some provinces
make it so onerous for outside trucking to secure licenses that shipments must be
interlined to the next jurisdiction‘s trucks. Other provinces regulate operating hours for
visiting trucks. In some cases, trucks are restricted to one-way haulage, or are simply
refused a license. Road tolls represent 15-20% of trucking cost, proportionately 9 times
higher than in Europe. Because of these inefficiencies, electronics and food products cost
40-50% more to ship in China than in the US.28
Although costs are generally higher than rail and water, road transport is still the
preferred option for moving packaged finished goods in China.
China Logistics and Procurement Association. http://www.chinawuliu.com.cn
―China Transportation‖ Issue 3 2001 March.
MMC Viewpoint ―China Logistics Obstacle and Opportunity‖ by Laurence H. Alberts, Hugh L.Randall
and A.Guy Ashby.htm
The Joint Survey Result published by Mercer Consultancy and China Logistics and Procurement
The Ministry of Railways of China (MOR) is one of the world‘s two largest railway
passenger carriers (measured by passenger-kilometers) and is second only to the entire
US railway system in freight traffic (measured by ton-kilometers). MOR‘s labor force
(3.3 million in total, about 1.5 million transport-related employees29) is about twice that
of India and is ten times larger than the US railroad workforce. In physical productivity
terms, the density of traffic over the MOR network (measured in ton-km and
passenger-km per km of line) is about twice as high as the next highest railway system
(India) and is nearly three times the density in the US, while the annual output per
locomotive, per freight wagon and per passenger coach are among the highest in the
world. In comparison to its historical role as the backbone of the transport network, rail is
still the predominant shipping mode for the strategic commodities as well as other bulk
materials today, such as chemicals. However, transporting commercial freight by rail
generally has been a low priority; there have always been severe capacity shortages and a
poor service mentality.
Some surveys indicate that between 25 percent and 30 percent of the country‘s demand
for cargo space on railroads cannot be met, and that approximately 2,00030 towns are
inaccessible by rail. It is also estimated that China is laying new double and electrified
track faster than any other country in the world. As of by October 2000, China had
6,8000 km of railway tracks.31 The system is heavily used. Top priority is given to
passengers and those commodities from agriculture and extraction industries controlled
by state planning committees.
Figure 5 Comparison in Tons Originating between US rail companies and Chinese Rail
Administration (data source: MOR China )
Ministry Annual Report, China Ministry of Railways, Oct, 2000.
Ministry Annual Report, China Ministry of Railways, Oct, 2000.
China Economic Information Center, Newsreport 2001 on transportation section
Under the existing 14 administration units, China‘s rail freight carriage is clearly
threatened with fragmented service requiring many transactions. Chronic under-capacity
means that bookings for less frequently used routes like Xinjiang generally need to be
made as much as 30 to 40 days in advance. A survey by the China Communication and
Transportation Association indicates that there is no notification of arrival at rail stations (the
consignee or agent has to check frequently for arrival of goods), there is little integration
of information technology between the provincial railways, and refrigeration is often lost
during changeovers when reconfiguring the compartments. Moreover, to retain control
over their key equipment, each of the Ministry of Railway's 12 Regional Divisions
prohibits its locomotives from crossing divisional boundaries. The resulting interlining
between different provincial administrations increases costs and significantly degrades
service quality. Trip times from Shanghai to a northeastern province average 15-45 days.
(Delivery windows generally are measured in weeks rather days.) In addition cargo often
ends up at the wrong destination or is simply lost in some rail yard.
Some companies prefer to use trucks over rail because the railway containers are not
compatible with maritime containers, or because there is no inter-modal link or
convenient rail siding. In these cases, goods must be double handled, increasing the
damage rates. (the damage rate for rail is estimated to be three times that of road
transport). It is said that HAVI Food Service, which handles distribution for McDonald‘s,
uses truck rather than rail, simply because there is no reliable refrigerated service line at a
competitive price in the market.32
In the next 5 years, an east-west high-speed railway artery will appear along the Yangtze
River, linking Shanghai with major cities of Sichuan Province. The new railway is to run
through seven cities and provinces: Shanghai, Jiangsu, Anhui, Jiangxi, Hubei, Chongqing
and Sichuan, with a full length of 2024km. Both the GNP and grain production along the
reaches of Yangtze River accounts for over one third of the national total and nearly forty
percent of cities and population of China are located there. The new railway would help
speed development of the regional economy by transporting natural resources from west
to east and foreign capital and technologies from east to west. The major North-South
railways:―JingJiu‖ and ―JingHu‖, which connect Beijing and Hong Kong, Beijing and
Shanghai respectively, run through major industrial cities and agriculture bases in China.
China‘s Rail industry is controlled by the Ministry of Railways (MOR); in some sense a
pricing cartel. Rumors suggest that the MOR will be eliminated and replaced by more
efficient corporations with responsibility for freight, passenger and express services
China Storage Association.
Inland Water Ways (IWW)
China has 5,800 rivers navigable for 110,200 km, 15 rivers over 1,000 km long and 12
lakes with an area greater than 1,000 km2.33 Nevertheless, the major IWW consist of
only four rivers and one canal, which carry 80%34 of the total IWW traffic. The Yangtze
River system is by far the country‘s largest IWW. China has a long history of using this
extensive waterway network of rivers, lakes and canals since the excavation of the Grand
Canal, connecting river tributaries, was started in about 480 BC. However, the
infrastructure and floating equipment have deteriorated badly. The size of the navigable
network reduced from 172,000 km in 1960 to 148,400 km in 1970 and to 109,700 km in
199335. The Yangtze River‘s 55,300 kilometers of waterway account for half of the
country‘s total river course. The total cargo volume is expected to be 300 million tons by
2010.36 Inland water transport for domestic distribution of goods is inexpensive, but it
often is underutilized for a variety of reasons. For example, most ports lack the ability to
process and manage cargo at international standards of efficiency. Shipping schedules are
often inflexible. Delivery reliability is low and inter-modal operations often require
multiple crane moves. Bureaucracy-related delays in customs processing occur routinely.
Many ports cannot accommodate larger cargo vessels above 10,000 tonnages.
Over the past 10 years the IWW transport sector operations have gradually shifted from
fully state-controlled operations (planning, infrastructure, cargo allocation, fleet
operations, port operations) to a mixture of state-controlled activities, incorporated
state-owned but commercially and financially independent operations, and an increasing
private sector involvement (fleet operators).
IWW sector may negotiate the transport and port handling tariffs within a margin of
+/-20% of standard tariffs set by the Provincial and/or Local Price Bureaus; a tariff
variation of more than 20% requires approval of the Provincial and/or Local Governments.
The shipping companies are financially and commercially independent, especially since
the 1989 commercialization reform; they pay taxes to the provincial and central
government; are entitled to plan their own investments within limits and fund their
development from profits.
Free competition between the shipping companies has already been instated, although the
fleet composition and performance show that the state-owned companies carry
comparatively more cargo over longer distances in larger barges. It is therefore good to
know the ongoing gradual incorporation of the state-owned shipping companies. All
China Communications and Transportation Association(CCTA), newsletter 2001.
World Bank Project Summary of Inland WaterWay Upgrading Project in China 2000
World Bank, China Inland WaterWay Project 2000.
China Economic Information Center. Newsreport on transportation sector 2001.
shipping companies have free access to resources such as labor, fuel, equipment and
materials. Tariffs are still set by the Provincial Price Bureau, although a variation of
+/-20% is free to negotiate. Credit lines are expected to open up to the private investor,
creating potential for private ownership and further liberalizing the tariffs.
In Hunan, Guangxi and Zhejiang, night navigation is practiced.
Like most strategic components of China's post-1949 economy, China's ports were
developed with the Cold War objective of achieving local self- sufficiency. This led to
the evolution of many small ports, often little more than 100 miles apart. Today, these
same ports compete fiercely with one another for hub status.
To date, unfortunately, opportunities regional cooperation has been largely ignored and
much money has been invested in white elephants. More than $8 billion has been spent
since 1988 on new container-handling capacity, with another $6 billion committed
through 2000 on ports and waterways from Qinhuangdao in the north to Yantian in the
south. Additionally, foreign participation options are growing, ranging from port
development to shipping. Both joint venture and wholly owned foreign enterprises have
become involved in port and wharf construction and operation projects. A limited number
of foreign transport operators have been authorized to deliver freight inland and offer
door-to-door service, which can include use of the main river network.
Shanghai, Ningbo and Guangzhou ports have the highest holding capacity in China.
Qinhuangdao, Tianjin, Dalian and Qingdao follow.
Tianjin Port, in north China, will invest Rmb1.5billion this year to increase its capacity.
The money will be used to build and upgrade infrastructure, including the second-phase
construction of a navigational channel for large vessels with a capacity of 100,000 tons.
In 2001, the port handled 113.69 million tons of cargo, up 18.8percent year-on-year, to
become the largest of its kind in north China.
Qingdao Port handled 100.08 million tons of goods in the year 2001, with nearly 70
percent of the goods either imported products or Chinese products for export. The port,
ranked third among the major ports in China, handles 2.6 million containers in 2001.
Shanghai, China's largest seaport, has ambitious development plans with significant
inland implications. Work has begun on a 10-year, $900 million dredging project to
deepen the mouth of the Yangtze River. When completed, this will enable ocean-going
vessels of up to 1,000 TEUs to sail up the Yangtze as far as Wuhan (725 km), the major
transportation hub of central China. Further, if the controversial Three Gorges dam
project is completed, similar vessels could navigate the length of the Yangtze up to
Chongqing (2,400 km). In anticipation of these developments, surrounding river ports are
enhancing their facilities to take advantage of the new traffic. Shanghai was the world's
third largest port and fifth largest container port in 2001. Shanghai handled a record 8
million containers during 2002, ranking fourth in the world.
Other major port developments in the south have transformed the Pearl River delta into a
major gateway with potential to become a long-term competitor to Hong Kong. Shenzhen
Port in south China's Guangdong Province handled 5.08 million TEUs of containers in
2001, taking the 8th place in the world. The Yantian port near the Shenzhen border with
Hong Kong has emerged as a deep-water alternative to Hong Kong. Three berths opened
at Yantian in 1995, and at least 10 more are scheduled for construction. Meanwhile, the
Shekou port is evolving into a major container-handling facility for the Shenzhen Special
Economic Zone. Shenzhen‘s growth has been astounding. It ranked only No.21 in 1997
among the world‘s container ports. Despite these developments, Hong Kong's Kwai
Chung port, the world's busiest, continues its expansion with Terminal 9 due to open this
China's domestic waterways—encompassing more than 38,000 navigable miles—carry
nearly 1 billion tons of cargo, though containerized traffic remains a tiny fraction (less
than 3 percent) of the total. Development priorities are aimed at increasing domestic
containerization and improving access to the Yangtze River.
The responsibility for inland waterway port operations has been transferred to the
Provincial Communication Departments. In some cases specific port companies or
corporations have been established to assume responsibility for the operation and further
development of certain port facilities.
Ocean Shipping has been among the most open and advanced sectors in China logistics.
With accession to WTO, China‘s exports are expected to increase with cargo destined for
international markets expected to rise to 650-700 million tones by 2005, from only 400
million tones in 1999. Container ports like Shanghai and ShenZhen are predicted to join
the ranks of the top 5 biggest container ports of the world in terms of throughput.
Container volumes are predicted to rise above 40 million TEUs by 2005.
China recently invested US$1.7 billion in inland water transportation, with the goal of
developing an international standard container network with inter-modal capabilities. The
largest three Chinese carriers – COSCO, China Shipping Group and Sinotrans – will
benefit from WTO entry. Some of them are already ranked among the top carriers in the
In general, ocean and inland water transport is not suitable for moving high-value
finished goods and time-sensitive freight.. Because of its low cost and low pilferage and
damage rates, shipping and inland barges can be a good solution for bulk commodities
transportation. However, this mode is severely underutilized for lack of required
Airfreight in China is predicted to grow considerably over the long term, but current air
cargo activities are fraught with problems. Alternatives are limited: domestic air routes
are circuitous and flights to some areas infrequent; prices are high; routes are fragmented;
information exchange between airlines and forwarders is limited. As most major Chinese
airlines focus on building their passenger business, cargo capacity is often inadequate.
Moreover, domestic freight forwarders rarely provide the kind of basic, value-added
services that are the norm in the United States and Europe. Some do not even provide
support services, such as local pickup and delivery. Despite these limitations, foreign
service-providers have been restricted from expanding. With China‘s entry to WTO, the
picture of freight forwarding industry will change dramatically. International freight
forwarders will join the competition and raise the service standards. After two years‘
operation in joint ventures, they will be permitted to expand and after four years to
operate wholly owned subsidiaries in China. Furthermore, China‘s Civil Air industry is
undergoing a reform, merging into three big air transportation corporations, which will
strengthen their competency and help regulate the industry.
Figure 6 Container Port Ranking by Throughput in China (2002)
Figure 7 Container Port Ranking by Throughput in China (2002), from www.bbsland.com
Air Express, the most profitable segment, has been a challenge in China. For domestic
parcel and express services particularly, short hours and unexpected closures of relevant
departments at cargo terminals interrupt normal operations. Same-day outbound services
often are problematic unless goods are picked up from customers early in the morning.
The segment's tax burden is also higher than the rest of the transportation industry. A
single overstretched supplier, China Post, dominates the market.37 Now, with the
accession into WTO, foreign companies are allowed to compete in the market for certain
Henry Ho, Chin Lim, Industry Overview of China Logistics, Oct 5, 2001
UPS was granted permission for direct flights to China in 1997 and since then, the
number of daily flights has tripled. Fedex, allied with the Tianjin-based company DaTian,
developed their national network in order to compete with EMS. DHL has been in the
Chinese Express industry for over 10 years. They already own a wide spread national
network and enjoy a long established friendship with Sinotrans, an important domestic
partner. China post commands a 40% market share in Air Express in China and maintain
exclusive control of some post services in China.
Airports and Airlines
Decentralization of the China Administration of Civil Aviation (CAAC), previously the
sole national carrier, has spawned a dramatic increase in the number of airlines—from
one to 35 in the past five years. Nevertheless, the air network is fairly sophisticated with
CAAC managing long haul and the regional carriers operating domestic flights. 38
Passenger airlines mainly cover the emerging airfreight and air express services. While
the air freight industry is still in its infancy, demand is expected to exceed supply in the
Rapid growth in air cargo volume has strained the capacity of China‘s airports. Several
airports are under construction or expansion nationwide, most notably in the south, where
new airport capacity in Zhuhai, Shenzhen and Guangzhou will challenge Hong Kong's
new Chep Lak Kok airport for air cargo handling. Over the next 10 to 15 years, China
plans to spend billions of dollars on airport construction, including an air cargo super-hub
at Guangzhou that will rival Hong Kong's airport. One billion dollars has been invested in
applying Mag-Lev express train service between Shanghai‘s Pudong international airport
and its business center area, the first civil application of Mag-Lev trains which can reach
speeds of over 400 km/hr.
Currently, however, door- to-door delivery times are the same as those for express road
freight, and the international mail service takes more than 10 days from the US to China.
By 2010, China's total airfreight volume is expected reach 30 billion ton-kilometers. It is
also estimated that 140 million passengers and 4.7 million tons of cargo and mail will be
carried annually. Air transport's share in the country's overall transport system would be
considerably boosted, as would the proportion of China's air traffic in the world civil
China National Information Center, from the department of Transportation Carriers.
Table 1 China Soft Environment and Infrastructure DataSource: The World Bank Country Profile.
Source: World Development Indicators database, April 2002
3 Logistics Policy & Organization
Policy Restrictions are the main challenge for foreign companies providing logistics
services in China. The Chinese term for logistics is wu liu -"flow of goods," is new and
unfamiliar to many government officials, etc. In many ways, wu liu is still being defined
in China. Naturally, it is difficult to issue a license for a service that is not well defined.
3.1 Governmental Organization
The logistics industry in China is regulated by many government ministries and
departments including: China Customs, Ministry of Foreign Trade and Economic
Cooperation (MOFTEC), Ministry of Communications, Ministry of Railways, Civil
Aviation Administration of China (CAAC) and Ministry of Internal Trade. Figure 1
shows the structure of these government organizations.
Figure 3.1 Chinese Central Government Organizations involved in Logistics
CAAC Ministry of Ministry of Ministry of Foreign Trade Ministry of Internal
Communicaitons Railways and Economic Cooperation Trade
Airlines Road Water Rail Transport Foreign Investment Wholesaling & Retailing
In addition, local authorities promulgate regulations controlling the flow of goods within
their jurisdictions. Figure 2 shows the organization of provincial government
departments regulating the logistics sector.
Traffic Office Foreign Trade and Bureau of Internal Trade Municipal Finance Building Regulations
Economy Committee and Trade Office
Figure 3.2 Chinese Provincial Government Organization involved in Logistics
The diverse and several governmental bodies regulating the industry lead to complex
regulations that vary widely across jurisdictions. Consequently, government officials
regulating in logistics sector can appear arbitrary and guanxi or social connections
involving business associates, families, and acquaintances in complex networks of social
support and sentiment can be invaluable. For example, a truck licensed in Beijing must
obtain a license from the local Shanghai Traffic Bureau to make deliveries in that city.
Often local government officials are motivated to protect local companies transforming a
small nuisance into a major barrier.
Regulatory Framework for Sub-sectors with Foreign Participation
Foreign Participation Related Authority for
Sub-sector Encouraged / Regulated Licence approval
International freight forwarder Regulated MOFTEC
Air freight forwarder Regulated CAAC, MOFTEC
Logistics centre Encouraged MoC, MOFTEC
Domestic trucking Regulated MoC, MOFTEC
Consolidation Regulated MoC, MOFTEC
Warehousing Encouraged MoC, MOFTEC
Customs brokerages Heavily regulated CGA, MOFTEC
Shipping line Regulated MoC, MOFTEC
Airline Heavily regulated CAAC, MOFTEC
Figure 3.3 Regulatory Constraints in China Logistics Service: Source Hong Kong Trade
Development Council (HKTDC)
There are several related industrial associations in China, including the China Transport
and Communications Association, China Storage Association and China Logistics and
Purchasing Association. The influence of these organizations is less immediate and direct.
3.2 Logistics Policy
Foreign Joint Venture Registration
International freight forwarders are regulated by the ―Regulations of the People‘s
Republic of China on Management of International Freight Forwarders‖ promulgated by
Decree No. 5 of the MOFTEC on the 29th of June 19951. Licenses for domestic logistics
service providers with foreign participation and licenses for international freight
The MOFTEC‘s Documentation http://www.moftec.gov.cn
Ministry of Foreign Trade and Economic
Commission of Foreign Trade and
Economic Cooperation (COFTEC)
The responsible Provincial/Municipal
authorities of sub-sectors
Application for Application for Acceptance of PRC
Application for approval of the approval of the application for
approval of the feasibility study contract and Foreign Investment
project suggestion report regulation Enterprise
Administrative Bureau of
Industry and Commerce
Figure 3.4 Foreign JV approval procedure for Freight Forwarding and domestic logistics
services with foreign participation. Source: Hong Kong Trade Development Council
forwarding must be approved by MOFTEC in accordance with the prescribed
procedure. Licenses are only valid for three years, and applications for renewal must be
submitted 30 days before the expiry date. Moreover, licensees must submit annual
reports to the Commission of Foreign Trade and Economic Cooperation.
Currently, logistics providers must form joint ventures (JV) with Chinese companies
to obtain a license. After finding a suitable JV partner, the application procedure
involves approvals by several government authorities and can be rather long and
drawn out. Figure 3.4 outlines the approval process for freight forwarding joint
Customs clearance can be a painful experience for logistics managers. Customs agents
can be un-cooperative and are sometimes corrupt. Foreign importers and exporters
complain of long clearance times and inconsistent practices at customs. Current
Chinese Customs Law subject all import and export goods to customs examination.
During the examination, the consignee in the case of imported goods or the consignor in
the case of goods for export must be present and is responsible for moving opening and
re-packaging the goods. Customs officers are entitled to examine or re-examine goods
or take samples as they see fit.
Although it is a federal bureau, China Customs is separately administered in each
province. Customs officials are given wide powers to enforce administrative law and
implement anti-smuggling policy and some provinces have complicated the customs
clearance process. In fact, cargo must pass through customs even in crossing from one
province to another.
In the past guanxi and out right corruption played a too important role in Chinese
customs. The Chinese government has taken action to fight corruption. In July 2000, a
new chapter under the title of ―Law Enforcement Supervision‖ was added to the
Customs Law. Under the amended legislation, discipline inspectors and supervisors
oversee all customs offices. Moreover, China‘s customs authority is making substantial
reforms to cope with the increased trade flow accompanied by WTO membership. A
unified electronic customs clearance system is being built in Shanghai, Beijing, Tianjin
and Guangzhou on a trial basis. In September 2002, 500 firms began trials of the new
system in Shanghai (China Daily 200239).
Free Trade Zones
To date, 15 Free Trade Zones (FTZ) have been established in China:
1. Dalian Free Trade Zone http://www.dlftz.gov.cn/
2. Fuzhou Free Trade Zone http://www.fdz.com.cn/
3. Guangzhou Free Trade Zone http://www.getdd.com.cn/
4. Haikou Free Trade Zone http://www.hkftz.gov.cn/
5. Ningbo Free Trade Zone http://www.nftz.gov.cn/
6. Qingdao Free Trade Zone http://www.qdftz.com/
7. Shanghai Waigaoqiao Free Trade Zone http://www.china-ftz.com
8. Shantou Free Trade Zone http://www.stftz.gov.cn/
9. Shatoujiao Free Trade Zone
10. Shenzhen Futian Free Trade Zone
11. Shenzhen Yantian Free Trade Zone http://www.yantian.com.cn
12. Tianjin Port Free Trade Zone http://www.tjftz.gov.cn/
13. Xiamen Xiangyu Free Trade Zone http://www.shinyco.com/new/english/info.htm
14. Zhangjiagang Free Trade Zone http://www.zjgftz.gov.cn/
15. Zhuhai Free Trade Zone http://www.zhfreetradezone.org/
No quotas or licenses for import and export are required in the FTZ. The warehousing
enterprises in the FTZ can store goods demanded in the domestic and international
markets, with the exception of those prohibited by law. There is no time limit for the
storage of goods for transit, and the transit goods may undergo processing, grading,
and repackaging in the FTZ. The Zhuhai FTZ (2001) claims to connect in-zone
enterprises and the customs office by a computer system that supports Electronic Data
3.3 WTO Impacts on Policy
To comply with the rules of the WTO and its commitments in bilateral agreements, the
Chinese government is committed to implement measures to further open the market
for trade in goods and services. In particular:
In December 2000, MOFTEC issued a notice canceling the examination and
approval regulations for the establishment of branches by international freight
forwarding enterprises in areas for which business operations have already been
approved. The notice introduced a registration system to replace the examination
and approval system.
In January 2001, MOFTEC issued a notice opening up China‘s railway freight
market to foreign investors. Foreign companies are allowed to establish
joint-venture railway freight service companies with Chinese partners. The foreign
investors must be financially strong, have no less than 10 years of operational
experience in the railway freight service industry, and have a good performance
record. Moreover, the Chinese partner must hold greater than 50 percent of the
shares in the joint venture, and the joint venture must have over US$25 million in
In June 2002, The MOFTEC has issued a circular allowing the establishment of
foreign invested logistics enterprise in eight certain pilot locations. These pilot
locations include Juangsu, Zhejiang, Guangdong, Beijing, Tianjin, Shanghai,
Shenzhen and Chongqing. The allowable business scope of the logistics
companies includes international logistics business and third-party logistics
business. The companies may be formed as joint ventures with foreign investors‘
shares not exceeding 50%. International logistics business includes:
Import/export (‗I/E‘) and relevant services, including I/E on its own account or I/E
agency services, export agency services for export processing enterprises,
international transportation agency services for I/E of commodity by sea, air and
land. Third-party logistics business includes: general land commodity
transportation, warehousing, loading and unloading, processing, packaging,
distribution and relevant information processing as well as consulting; domestic
freight forwarding.3 4
Under Section II of the US-China WTO Market Access Agreement on Services
Commitments, China agreed to grant distribution rights to foreign exporters and
manufacturers for both agricultural and industrial goods. According to those
commitments, the following changes are to be implemented within a few years after
Storage and warehousing services Foreign operators will be permitted to
establish joint ventures to provide warehousing services as minority equity
shareholders upon accession. The foreign operators can then become majority
shareholder within one year, and be free of all restrictions within three years.
Freight forwarding services Foreign companies operating in China should have
at least three consecutive years of experience. Majority ownership in
freight-forwarding joint ventures will be allowed one year after accession. The
minimum registered capital of a joint venture must be at least $1 million and the
length of operation must not exceed 20 years. After one year of operation in China,
a joint venture may set up a branch if it adds $120,000 to the original registered
capital for each branch established. Wholly owned subsidiaries can be set up four
years after accession. All restrictions will be eliminated within four years.
Distribution of products In the first year after China's entry, foreign-invested
中国入世承诺 http://www.chinalogistics.com.cn/sy/rscn.asp -->中国入世承诺.html
companies may distribute products made in China and imported products.
Majority ownership in Wholesaling and Retailing joint ventures are allowed two
years after accession. Foreign investment wholesaling and retailing companies are
allowed to provide services and set their own distribution channels free of land
restriction within three year of accession.
Freight transportation Currently, international maritime carriers are not allowed
to offer inland distribution services. Under the new WTO regime, within a year of
accession, foreign shipping companies can establish joint ventures with domestic
companies to offer inland transport for international containers and establish
domestic distribution networks. All restrictions to establishment will be phased out
within four years. Majority ownership in Road Transportation joint ventures will be
allowed one year after accession. Wholly owned subsidiaries can be set up three
years after accession. Majority ownership in Rail Transportation joint ventures will
be allowed three years after accession. Wholly owned subsidiaries can be set up six
years after accession.
Courier services The commitments cover land-based international courier
services and all services related to international shipments handled by an express
carrier. Foreign companies will be able to establish joint ventures upon accession,
hold majority equity shares within one year, and be free of restrictions within four
4 Logistics Players
4.1 Freight Forwarding
There are over 1,500 licensed International Freight Forwarding operators in China. Of
these around 450 are Sino-foreign joint ventures. Of the 450 foreign-invested freight
forwarders in China, about 100 are the offices of Hong Kong companies. Many of
them set up offices in the coastal areas such as Shanghai and cities in the Guangdong
International Freight Forwarders are mainly responsible for the international aspects
of freight management. Domestic freight forwarders, usually sub-contracted by
international freight forwarders, currently handle inland transportation within China.
Felix W.H. Chan, Logistics Management in China: Barrier-hurdling and the Outlook for Legal
Solutions, UNEAC Asia Papers No. 5 2002
This picture will change in the future when foreign-invested freight forwarders are
allowed to conduct domestic business. There is little integration in the provision of
freight forwarding logistics service in China. Most companies participate in only a
few of the sub-sectors, rather than providing a total service for the entire market.
Foreign involvement in China's freight forwarding market is already substantial even
though most foreign companies are only authorized to engage in international freight
forwarding. International forwarders may also appoint a Chinese forwarder and set up
a local representative office. An important reason for foreign Freight Forwarding
companies' entry into the China market is to serve their international customers –
multinational manufacturers who have established production plants in China.
However, as the economy has developed, domestic firms have created a demand for
freight forwarding services all their own.
After accession to WTO, demand for both international and domestic freight
forwarding services is projected to grow. Exports are expected to rise by an additional
2.4% per year over the first five years of accession, while the effect on imports could
be higher. On the domestic front, restrictions on distribution of most products will be
phased out over the next few years. Foreign firms will be able to distribute imported
products as well as those made in China. Most multinational forwarding companies
have already established a presence in China in anticipation of the growing demand.
Sinotrans is the largest Freight Forwarding Company in China with Rmb24 billion in
assets and 64,000 employees, combining 47 domestic subsidiaries, 263 joint ventures
throughout the country, eight representative offices and 29 enterprises overseas.
Sinotrans was founded in 1950 as China‘s first foreign trade transportation company.
As a state-owned enterprise, Sinotrans has long enjoyed the privileges of its monopoly
position at both the national and provincial level in 1980s and early 1990s. During this
period, Sinotrans grew to be the country‘s largest sea freight forwarder, second largest
shipping agent, third largest shipping company, earliest partner of the most profitable
joint-venture express companies and a leading airfreight forwarder and trucking
operator. The company is in an unparalleled position to provide freight forwarding,
ocean shipping, ship agency, air transportation, air courier, truck and railway
transportation, multi-model transportation as well as storage and warehousing services.
Figure 4.1 demonstrates the segmented logistics market share and customer base of
Sinotrans‘ website http://www.sinotrans.com/About-Us/Our-Story/index.shtml
Figure4.1 Market Share and Customer Base of Sinotrans
Sinotrans is a leader among domestic players in terms of IT adoption. The company
offers EDI, worldwide online cargo tracing, booking and information retrieval. Its road
vehicles are equipped with GPS and OmniTrac. Its warehouses are equipped with MK
Logistics warehouse management system.
Sinotrans has both Chinese and multinational clients in telecommunications, consumer
electronics and food & beverage. For example, Sinotrans offers e-commerce
distribution for Stone (a Chinese domestic .com IT company), and distribution for
Price-Smart (a US based Grocery Chain Store). For Motorola, Sinotrans even has a
team stationed in its Tianjin manufacturing factory as part of the client‘s supply chain.
Sinotrans is the earliest partner In China of global express giants DHL, UPS, TNT and
OCS. The company participates in joint ventures with Danzas and Exel in China.
4.2 Ocean & Air Carriers
Cosco‘s President, Wei Jiafu, reported that ocean shipping accounts for 87% of
China‘s total import & export volume. It is estimated that after WTO, the ocean
shipping market will increase annually by 8-10%. By 2005, China‘s total ocean
shipping volume is expected to grow to 6.56 billion tons per year. Imports are
expected to grow more quickly than exports. There are over 200 licensed international
ocean carriers operating in China. Of these around 20 are wholly owned foreign
shipping companies and 60 are subsidiaries of foreign carriers. Since 1986, foreign
investors also have participated in 60 ports infrastructure projects. Currently world top
20 ocean carriers have substantially involved in China‘s market. 8
For example, early in 1984, Maersk Sealand established a representative office in
Guangzhou. As the first foreign carrier in China, Maersk Sealand received shipping license
No. 001 from the Chinese Government. Since then, the company has invested heavily in
building a wide network of offices with dedicated staff at key locations. In 1994, it
established a wholly owned agent for Maersk Sealand in China, Maersk (China) Shipping
Co., Ltd. Today, Maersk Sealand is the largest foreign carrier in China with direct services
to Yantian, Ningbo, Xiamen and Shanghai and with dedicated feeder services covering
other key ports. The Maersk Group is actively involved in the development of container
terminals in Dalian and Yantian. In addition, through its subsidiary, Maersk Logistics
(China) Co. Ltd, the company provides services such as supply chain management,
warehousing and distribution, air- and sea- freight forwarding, customs brokerage and other
value added services. Through the joint venture Shanghai Tie Yang Multi Modal
Transportation Co. Ltd. (TMT) between the Ministry of Railways and the A.P.
Moller-Maersk Group, the company provides containerized railways transportation services
from a large number of cities in China's interior provinces9.
Cosco, founded in 1961, is China‘s largest ocean carrier with Rmb500 billion in assets
and 600 ships of 17 million tons capacity. It is one of world‘s top 10 ocean carriers.
As a state-owned enterprise, Cosco long enjoyed its monopoly position at both the
national and provincial level and substantial support from the Chinese government. The
company‘s services have expanded to include: freight forwarding, ocean shipping, ship
agency, air agency, multi-model transportation, ship maintenance and repair, real estate
as well as storage and warehousing. Cosco is ranked the 7th largest ocean container line
operating over 118 container ships with a total capacity of nearly 195,000 TEUs. Figure
4.2 describes the company‘s shipping capacity11. It has initiated restructuring plans to
provide specialized integrated logistics service through the establishment of Cosco
Logistics Co. Ltd. To strengthen the ability of inland transport, Cosco Logistics has
launched a new containerized railways liner delivery service through collaboration with
<1000TEU 1000~1999TEU 2000~2999TEU 3000~3999TEU >4000TEU
Total Number Total Number Total Number Total TEUs Number Total Number
TEUs TEUs TEUs TEUs
29,141 52 44,663 30 39,305 16 50,332 14 31,450 6
COSCO’s container shipping capacity. Source: www.rycbgcgs.com/cbll/0616.htm
COSCO‘s Chinese website www.cosco.com.cn and MOC‘s website www.moc.gov.cn
Maersk Sealand‘s website http://www2.maersksealand.com/china/
国 际 班 轮 箱 运 市 场 谁 主 沉 浮 — — 国 际 主 要 班 轮 箱 运 公 司 实 力 分 析
The ―Big three‖: Air China, China Eastern Airline and China Southern Airline are the
dominant air carriers in China. Air China, based in Beijing, for many years a classic
monopoly international operator and the only national flag carrier, is the country's
largest air Carrier with Rmb35.9 billion in assets. China Eastern Airline is based
primarily in Shanghai, while China Southern Airline is headquartered in Guangzhou.
The ―Big three‖ primarily operate as passenger carriers, with about 80% of revenue
coming from this segment.
The government of China encourages merger and consolidation among the domestic
carriers to help create a domestic industry capable of meeting the international
competition after WTO. In March 2002, the Civil Aviation Administration of China
(CAAC) announced more definite plans to consolidate the industry, following the first
across-the-board annual financial loss for 20 years. This may reduce the existing 30 or
so airlines to less than 10 major entities. Externally, the forces of industry
concentration are almost as strong. Each of the major global airline alliances is
courting the ‗big three' carriers. To date, they have entered various bilateral code share
and other marketing relationships.
In Oct 2002, Air China was formed from the merger of China Southwest Airline and
China Northern Airline. Air China has a total of 118 airplanes, including 18 B747s, 7
B777s, 10 B767s, 26 B737s and 4 B747-200 freighters. It operates 307 routes,
including 43 international routes. With annual revenue Rmb250 billion, it operates
more than 3000 scheduled flights a week, serving 29 cities in 19 countries and most of
the provincial capitals, major cities and tourist attractions in China. Air China has two
branches in Tianjin and Inner Mongolia. It has 36 overseas representative offices and
20 domestic ones including: Shanghai, Guangzhou, Shenzhen, Xiamen, Xi'an, Dalian,
Qingdao, Harbin, Chengdu, Nanjing, Fuzhou, Kunming, etc. The airline has bilateral
code share agreements, SPA and other marketing relationships with Lufthansa and
Northwest Airlines. In the air cargo market, Unlike China Southern Airline, Air China
offers both combination and dedicated cargo carriage. It is the largest of the ―Big
Three‖ in terms of pure freighter operations. Air China is planning to expand its cargo
handling terminals at its base hub -- Beijing Capital Airport.11
China Southern Airline (CSA) flies to 65 domestic cities and Hong Kong, as well as 23
international destinations. Its expansion plan in 2002 is to double its freighter
operations as it takes delivery of its own freighter aircraft12. CSA is also marketing
higher-value added services as it expands into branded express products beyond
airport-to-airport heavy airfreight and mail. CSA is also planning to expand its own
cargo handling terminals at its primary cargo hub in Shenzhen and at the new
Air China website http://www.airchina.com.cn/ index_en.html
China Southern Airline website http://www.cs-air.com/en/nhsj/index.htm
4.3 In-house Player
Haier Group (In-house Player)
Haier Group was incorporated in 1984. Over the past 17 years, Haier has witnessed an
annual sales increase of 78% and made significant achievements with a wide range of
household electrical appliances made in 86 categories and 13,000 specifications.
Haier generated total sales revenue of USD7.28 billion in 2001 with an export value
of USD420 million to the US and 160 other countries.
Logistics Operation & Facilities
Haier has 1600 container trucks, 42 distribution centers, 3 million square meter
warehouses, and all the facilities are linked with SAP LES logistics execution system
to achieve 24-hour delivery in regional cities.
Haier intends to expand its logistics business to offer third party logistics services
leveraging its current advantage of huge goods flow and powerful infrastructure. The
company transformed its in-house distribution unit into an independent logistics
services company. The new alliance with China Post will give Haier access to that
organization‘s network and transportation assets. Haier‘s long term strategy calls for
continued growth internationally and in its logistics services.
China Merchants Logistics Group Co., Ltd.
Founded in 1872, China Merchants was the first truly commercial Chinese company.
It became the first wholly PRC invested company to be based in Hong Kong in 1950,
and the first to be listed on the Hong Kong Stock Exchange in 1979. Also in 1979,
China Merchants established China's first Industrial Free Zone, which greatly
contributed to the opening up and reforms of China. Today China Merchants
diversifies itself in industrial zone development, logistics, infrastructure and finance
with total assets of US$6 billion. As a leading player in logistics in China, China
Merchants Logistics (CML) has emerged through an amalgamation of the Company's
transport, shipping, warehousing and forwarding businesses. Additionally it
established 3PL joint ventures (JVs) with Singapore (Sembcorp and PSA) and UK
(Tibbett and Britten) in the mid-90‘s.
Shenzhen Anda Cargo Transportation Co., Ltd.
Shenzhen Anda Container Transportation Co., Ltd.
Shenzhen Anda Passenger Transportation Co., Ltd.
China Merchants Kin Swiss Transportation Co., Ltd.
China Merchants Shipping & Enterprises Co., Ltd.
China Merchants Petrochemical Co., Ltd.
Shenzhen Xunlong Shipping Co., Ltd.
China Ocean Shipping Tally Corporation Shekou Branch
China Ocean Shipping Agency Shenzhen
China Merchants Marin & Trans (Shekou) Co., Ltd.
China Merchants International Freight & Forwarding Co., Ltd. (Beijing,
Shenzhen St-Anda Logistics Co., Ltd.
Shenzhen Tibbett & Britten-Anda Logistics Co., Ltd.
China Merchants-PSA Logistics Network Co., Ltd.
Qingdao Beer Merchants Logistics Co., Ltd.
Liaoning Chenda Merchants Logistics Co., Ltd.
China Merchants has 20 logistics-related subsidiaries covering 3pl, transport,
warehousing, freight forwarding, tally, customs declaration and other businesses. The
companies assets valued at RMB 2.2 billion include:
41 various vessels with capacity of 3.8 million tons including 3 LPG vessels
Shekou Port, Chiwan Port, and Mawan Port with container yard of 100,000 m2 in
the west vicinity of Shenzhen
Over 200,000 m2 of storage space, 90,000 m3 of oil tanks, 7 oil & LPG wharves
with total capacity of 9,000 tons
300 container trucks among which 200 trucks and 100 oil/LPG tankers
463 taxies making it the second largest taxi company in Shenzhen
Logistics Service & Strategy
CML provides domestic distribution, coastal shipping, port operation, dangerous
goods delivery, logistics software, freight forwarding, etc. These services are
currently provides by independent subsidiaries, but CML intends to consolidate
common operations like IT, transportation, customer brokerage and warehouse
management as it moves toward fully integrated supply chain management
One distinguished service of CML is dangerous goods distribution such as LPG,
diesel and gasoline. Operating through 11 major hubs, CML‘s distribution network
covers procurement, warehousing, distribution and sales of petrochemicals in south,
middle and eastern China.
CML focuses on three regions: The Pearl River Delta, the Yangtse River region and
the Bohai Basin.
Shenzhen ST-Anda Logistics Co., Ltd.
ST-Anda is a joint venture formed in December 1995 between Sembcorp Logistics
(SCL) of Singapore and China-Merchants Logistics Co., Ltd. SCL holds 51% stake in
the JV – a unique position for a foreign logistics company in China that was approved
by the Ministry of Communication, Guangdong Provincial Government and Shenzhen
Municipal Government. As an early entrant in China, ST-Anda has a nation-wide
license to provide third party logistics services consisting of warehousing, general
haulage, distribution of goods, and information technology services.
ST-Anda is a non-asset third party logistics player that operates a national
transportation network including 20 distribution centers and 9 forward DCs with a
combined warehousing space of 145,000 square meters serving more than 600 cities
in China. It claims to be able to deliver goods to 50% of these cities within 48 hours.
ST-Anda‘s core services include warehouse management, transportation management,
inventory management, fulfillment, inbound logistics, retail supply chain management,
cross-dock management and customs brokering. The company‘s value-added services
include kitting, assembly and cable cutting and drumming. It is in the process of
developing a credit and collections business and is enhancing its capabilities in
reverse logistics operations. The company operates a Call Center to offer pipeline
inventory tracking information and resolve service problem. In June 2002, ST-Anda
became ISO9001 certified.
ST-Anda‘s main customer segment is fast-moving commodity producers such as
Colgate Palmolive, Johnson & Johnson, Pepsi, Kraft Foods, L‘Oreal, and CPC Best
Food. Another segment is pharmaceutical enterprises like Xi‘an Janssen. The
company also provides distribution services for chemical producers like Exxon and
APL Logistics China (Shanghai) (APLL)
APL Logistics, in conjunction with its sister company, container shipping line APL,
has had a presence in China for more than 130 years. The two organizations have
more than 40 offices and 750 employees in China. APL Logistics and APL are wholly
owned subsidiaries of Singapore-based NOL Group, which is engaged in
supply-chain management and global transportation. Currently APLL has 10 branch
offices and 29 representative offices in China
APLL is licensed for logistics activities in almost all major key markets in China. In
1990 APLL established strategic alliance with United Development Company who is
engaged in construction, property management, import and export, domestic retailing
and wholesale, bonded warehousing and investment consultation in Shanghai
Waigaoqiao Free Trade Zone. In 2001 APL Logistics signed working agreements with
two of China's leading road and rail companies — the Eastern China Railway Express
(ECRE) and the Shenyang Transportation Group (STG). In June 2002 APLL Logistics
set up a joint venture with Legend Group Holdings to provide supply chain services
for China‘s IT businesses including Import/Export, Customs Clearance, International
and Domestic Air/Ocean Forwarding, Domestic transportation and door-to-door
delivery. One month later APL Logistics and three other parties formed a JV named
CMWAL Co., Ltd. who focuses on inbound and outbound logistics services for
automakers in Chongquing, southwest of China including Ford and Suzuki.
APLL is licensed to engage directly in any or all of the following businesses in China:
Book cargo/freight space
Sign and issue cargo receipts
Collect freight and other charges for authorized services
Repair and maintain containers and other handling equipment
Negotiate contracts with warehousing or trucking companies
Arrange inland transit
APLL built its own warehouse in the Waigaoqiao FTZ in Shanghai and is permitted to
direct the following activities:
Warehousing & Logistics Services
Agency for international entrepot and FTZ inter-enterprise trade
Trade with non-FTZ enterprises through domestic agencies authorized to
Business consulting services
APLL mainly focuses on the retail, auto, chemical and IT industries.
Hutchison Tibbett & Britten Logistics (HTBL)
Tibbett & Britten Group (TB) of the UK is one of the world's largest third party
logistics companies, operating retail logistics service in 33 countries. In the mid 90‘s,
TB formed Tibbett & Britten Anda Logistics in Shenzhen with China-Merchants
TB established Hutchison Tibbett & Britten Logistics (HTBL) with Hutchison
Whampoa, a Hong Kong company focused on property, retail and wholesale, hotels,
communications and port management. HTBL is a logistics service provider for the
HTBL focuses on the following services:
IT system solution
Warehouse maintenance & management
Value added services (packaging, packaging recovery, recycling, labeling, etc)
Import & export consolidation
Supply Chain Management
HTBL customers in China include: P&G, Warner Lambert, Jian Hypermarket, Wu
Mart, Park‘n Shop, etc.
5 Special Challenges
Policy has always played an important role in the development of logistics. Before
2001 foreign investment was highly regulated in the field of transportation, DC setup,
brokerage, courier delivery, etc. China's accession to the WTO will also bring a
decisive change to the regulatory regime on foreign investment in this sector. In
freight forwarding, majority ownership in joint ventures will be allowed one year after
accession, while wholly foreign-owned subsidiaries will be allowed within four years
of accession. Foreign companies will no longer be restricted to international freight
forwarding activities. In most logistics sub-sectors, including storage and
warehousing, express delivery and ground transportation, majority-owned joint
ventures will be allowed one to two years after accession, while wholly-owned
enterprises will be allowed in three to six years. Railways will be gradually
deregulated in the next six years.
Retail and chain stores constitute an important segment in the opening of the
distribution sector. In China foreign companies will gradually be allowed to hold a
controlling share in Sino-foreign joint-venture retail enterprises. China will open all
provincial capitals to foreign investment, and remove geographical, quantitative,
equity and incorporation restrictions. By the year 2005, the only foreign majority
ownership restrictions will affect department stores with a floor area of over 20,000
sqm and chain stores with more than 30 outlets. Based on these commitments, foreign
chain-store operators will be able to develop on a larger scale. In fact Wal-Mart
opened its Beijing Mart immediately following China‘s entry into WTO and intends
to open 10 additional markets the next two years.
On June 20, 2002 the Ministry of Foreign Trade and Economic Cooperation
(MOFTEC) announced ―Notification of Setup of Foreign Investment Logistics
Enterprises (FILEs)‖, identifying eight regions selected to enjoy more favorable and
flexible logistics policy for MNCs. The eight regions are Juangsu, Zhejiang,
Guangdong, Beijing, Tianjin, Shanghai and Shenzhen. The new FILEs must have a
registered capital no less than 5 million US dollars and less than 50% foreign
ownership. FILEs are allowed to engage in an integrated logistics services combining
transportation, warehousing, valued-added processes, import & and export, etc. The
permitted activity includes international logistics and third party logistics.
In the west of China, drivers must be cautious to navigate the steep-slopes around the
mountains. The terrain restricts vehicles to speeds of 10 miles/hour for long periods.
Only very skilled drivers can ship bulky products in this way. In fact, drivers from the
east often employ local drivers to help them over the mountain roads.
In the north, the main challenge is the very cold winter. Currently there are two routes
to this region: one is by land from Beijing by truck or -- a distance of more than 1000
kilometers; the other is by ferry from the Bohai Gulf overnight from Yantai on the
Shandong Peninsula to Dalin and then by truck. For many commodities, the hot sales
season is just before the Spring Festival. During this period, both routes operate at
capacity and producers are hard pressed to deliver products to the region at this peak
period. Rail delivery usually takes one or two weeks to this region because of frequent
interlining, and the thick-snow and ice in road slows truck travel to tortoise pace.
Ferry delivery, storm is subject to the volatile winter weather around the gulf and
ferry capacity is limited.
A famous beer manufacturer in China typically relies on rail, getting its products to
the northeast region in 5 or 6 train components of 300 tons per shipment. During the
peak Spring Festival, all products are immediately shipped out once they reach the
end of production line. Sometimes the manufacturer resorts to ferry and truck
The development of road infrastructure had promoted the development of private
fleets. Even state-owned transportation corporations have sold vehicles to individuals
in response to market pressures. As a consequence, transportation brokerage has
evolved. The intermediaries play an important role in the domestic transportation
market. They are in charge of market development, shipping schedules, shipment
consolidation, just like freight forwarding companies, but generally on a very small
scale. The drivers find backhauls on their own because most brokerages are local and
do not have access to loads at the destination unless they have partners there.
To make a living, drivers accept loads far in excess of the truck‘s capacity. The annual
fees local transportation bureau levy for a truck are based on the registered capacity of
the engine, not the weight of the loads it hauls. Similarly, local tolls, which can
account for 15%~25% or even 30% of total transportation cost are based on rated
engine capacity. It is common for 20 ton trucks to haul more than 30 or even 40 tons.
Over-loading the vehicle can reduce these charges, but sometimes leads to penalties or
fines. This makes rating a challenging business.
Over the road the Ministry of Communication administers transportation, while the
Ministry of Railway administers the railroads. This sometimes leads to a painful
absence of coordination and integration. For example, the dimensions of road
containers are not compatible with those for railways. Consequently
container-on-flatcar intermodal operations are not available in China. Road containers
are compatible with ocean containers.
Unlike the US, a tractor and its trailer are licensed as a unit in China and so cannot be
operated independently. The MOC is currently exploring the situation.
5.4 Distribution Management
The transportation and logistics sector has historically been under the control of state
monopolies and its liberalization will be a complex process as it involves the
coordination of inter-modal transport both at the provincial and national level. The
fact that various logistics sub-sectors are under the control of many different
government bodies does not facilitate the transition. At present, there is little
integration in the provision of logistics services in China. Most companies participate
in one or a few of the sub-sectors, rather than provide truly integrated services.
The Chinese government encourages and supports logistics services and commodity
distribution in order to speed the reform and modernization of the logistics industry.
The policy for opening the distribution sector to the outside world encourages and
even requires foreign investors to invest in logistics and distribution facilities. Some
corporations have already established their own distribution centers that offer
value-added services. For example, Japan's Mitsubishi has built an integrated
distribution center in Guangdong. Situated close to Hong Kong and well-served by
the Beijing-Guangzhou and Beijing-Kowloon railways as well as a number of
newly-built superhighways, this center is ideally located to support inter-regional
Some foreign corporations have also built their own fleets of trucks. Perhaps the best
example is McDonald's. The company delivers buns, meat and other foodstuffs to
warehouses throughout China everyday and has established its own transportation
company to ensure timely deliveries.
Congestion in urban streets cannot be overlooked. Although urban transportation
infrastructure has developed rapidly, neither urban road construction nor traffic
control are able to keep pace with the growth in traffic volume. Today, traffic
congestion is a major bottleneck for urban delivery in big cities like Beijing, Shanghai,
Guangzhou and Shenyang. To overcome this problem, some foreign corporations use
bicycles to deliver goods. For example, Coca-Cola employs hundreds of
"neighborhood committee" members to make deliveries on pushcarts and bicycles to
areas not easily accessible by motor vehicles due to traffic congestion. These flexible
distribution methods have proved to be immensely successful.
Currently 80% of 3PLs in China are losing money due to price competition. Based on
ST-Anda Logistics estimates of logistics cost (transportation & warehouse excluding
inventory carrying cost) as a percent of total revenues in various industries are
illustrated in Table 5.1.
FMCG manufacture 2 to 5%
Pharmaceutical 0.5 to 1%
Beer and soft drink 7 to 9%
Chemical 3 to 5%
Hi-Tech 2 to 4 %
Retail 1.3 to 3 %
Table 5.1: Logistics costs as a percentage of total revenues for various industries.
(Source: ST-Anda Logistics)
Case Study: China Spirits40 Bidding Year
Established by a well-known overseas Chinese merchant with a long history in the
business years, China Spirits is one of the first industrialized wineries in China and
one of Asia‘s largest winemaking enterprises. In 1997, China Spirits arouse out of the
merger of several subsidiaries and was listed on the Shenzhen Stock Exchange. The
company mainly produces brandy, wine, champagne and health wines.
There are few barriers to entry in the wine industry and so with time competition has
intensified. By 2000, China Spirits recognized that although its revenues continued to
rise, it was losing market share. In response, top management encouraged the sales
department to improve sales in the low season. This coincided with the next around of
transportation bidding, and the logistics manager Peter invited a 3PL to participate.
The 3PL‘s investigation of China Spirits‘ operations and distribution system revealed
that different Vice Presidents managed different departments with little coordination.
Peter, for example, was especially sensitive to the fact that sales often accepted small
orders under unfavorable delivery terms.
Currently China Spirits maintains forward storage in all 17 primary sales regions from
north to south. In each location sales leases space in a warehouse and pays all storage
costs. The company centrally manages the maximum inventory budget in each
location as illustrated in Table B1 and ensures that no location exceeds its maximum
allowed inventory level. Additionally packaging differs from region to region so
sales cannot sell products across regions.
China Spirits sells more than 40,000 tons per year and the annual total transportation
costs are around 30 million RMB. Top management has asked Peter to reduce total
―China Spirits‖ is a fictitious name
transportation costs by 10% next year. The evaluation of the bidding is solely based
on the transportation rate charged by the fleet, which is fixed for the entire year and
does not depend order size. Winners are allocated different regions. Once a contract is
signed, the winner should submit its guarantee capital, which will not be refunded if it
breaks the contract.
Maximum inventory cost
(million RMBYuan) Transportation
Beijing 10 7 Road
Shanghai 10 7 Road
Guangzhou 20 10 Ocean
Cities in north east 3 1 Road
Cities in south 5~7 2~3 Road
Cities in mid China 3 1 Road
TOTAL(all regions) 170 120
China Spirits Logistics Challenges
Experts in the 3PL described Peter‘s complaints one day:
- An order of 10 boxes of wine has been shipped out eight days ago and has not
arrived in Beijing yet. Normally it takes 2 or 3 days. (It is obvious that the
driver defers the shipment for consolidation because such a small order cannot
be justified at the agreed transportation rate.)
- He received a call from Guangzhou Port who urged him to collect the
containers that have been sitting at the port for six days. Usually Containers
are allowed to remain three days free of charge. Sales in Guangzhou was
reluctant to collect them.
- To remain within the allowed inventory limits, sales in each region tend to
place small frequent orders and frequently complain that the orders do not
arrive on time.
- Regions in the south, east and north of China are allocated to different fleets.
The different order sizes and frequencies in those regions incur different
transportation costs. After one year‘s operation, some fleets declined to
participate in the bidding because they were hard pressed to make any money.
- Peter will have dinner with a local ocean carrier to help ensure that products
shipped out on schedule for the important Mid-Autumn Festival and National
- Poor forecasts and the prohibition against selling across regions mean that
some products sit in storage in market regions for more than one year. This
further complicates sales challenge of keeping stocked with fast moving items
while respecting the inventory limits.
- If Peter strictly enforces the bidding contract, no fleet will be refunded its
guarantee capital at the end of the year. But then, who will ship goods for the
company next year?
Lean Distribution — Consolidation is the key
The 3PL recommends China Spirits stop bidding and modify sales regulations to
enhance distribution efficiency. They suggest that three distribution centers be
stocked with respect to transportation mode, market demand, geographical factors and
service levels. The solution is based on the following strategy:
Service level is evaluated in time-windows and classified according to regional
Inventory pooling is based on sales revenue of products under the principal of
Facility location needs to be close to market regarding trade-off between
transportation cost and inventory cost constrained by service level;
Market Region Fraction of Total Revenue
Plant region 12%
North (Beijing, Tianjin, Hebei,etc) 16%
East (Shanghai, Suzhou, Zhejiang,etc.) 30%
South (Guangdong, Fujian,etc.) 32%
Northeast (Helongjiang, Jilin and Liaoning) 6%
West China 4%
Product Fraction of Total Revenue
Dry Red Wine 40%
Common Red Wine 18%
Health Wine 20%
As illustrated in Figure B1, the three distribution centers recommended are: Tianjin,
Shanghai and Guangzhou to serve regions in the North, East and South respectively.
The 3PL sets a very high service level of 2 days delivery in these regions
considering the associated high contribution to the annual revenue. Because regions in
the west and northeast can only generate 4% and 6% of revenue respectively, the 3PL
does not set a high service level in terms of transportation mode and delivery time.
Inventory level is determined under ABC principle. Generally speaking, Dry Red
Wine is in A class, Health Wine, Brandy and Common Red Wine in B class, and
Champagne in C class. In terms of possible sales changing in the near future, a
dynamic review of inventory level is necessary. For example, sales of Health Wine, a
new fashion in China, are booming in the south and east, and so may quickly move to
Tianjian and Shanghai are replenished daily in the peak season and week delivery in
the low season. Once replenished, products are sorted and distributed simultaneously,
and therefore a high service level is ensured without high inventory costs. The
mixed-order of replenishment initiated from each DC is determined by the associated
inventory level and capacity of TL shipment.
Truck North Region
Truck/Rail Northest Region
(Helongj, Jilin, Liaoning)
Ocean Truck South Region
FC 1~2 days
1~2 days (Zhejiang, Jiangsu)
Total inventory costs can be reduced by at least 30% without reducing service
Eliminate the prohibition against sales across regions and promote inventory
Transportation costs are already very low. Under the new system, distribution
costs in the second stage from DC to retail outlets will increase more than
expected as the orders become smaller and delivery distances shorter.
The target 10% reduction in annual transportation cost neither be justified nor
 Henry Ho, Chin Lim, Industry Overview of China Logistics, Oct 5, 2001
 Felix W.H. Chan, Logistics Management in China: Barrier-hurdling and the
Outlook for Legal Solutions, UNEAC Asia Papers No. 5 2002
 The McKinsey Quarterly Freight
 MMC Viewpoint ―China Logistics Obstacle and Opportunity‖ by Laurence H.
Alberts, Hugh L.Randall and A.Guy Ashby.htm
 On the Edge: The Changing Face of Supply Chain Management in China By
Robert J. Easton, Accenture Viewpoint issue 3, 2001, Supply Chain Management.
 World Development Indicators database, April 2002. www. Worldbank.org/data