Several Issues in China’s Logistics Industry

Due to positive policy factors such as the national “11th Five-Year Plan” to develop the logistics industry, government support for key areas and weak links in service industries, and emerging industries, China’s logistics industry has now entered into a rapid growth period. According to statistics, China’s overall logistics turnover value has amounted to US $7 trillion in the first 3 quarters, with a 25.5% growth pcp. Modern logistical demand from socio-economic developments keeps surging, with the ratio between GDP and total logistics value up from 2.9 in HY06 to 3.2 HY07, implying per GDP output unit in China needs to be supported by 3,2 units of logistical turnover.

However, behind this rapid development of China’s logistics industry, many practical problems have been hidden, among which the high cost of logistics is an obvious one. According to China’s Third Party Logistics Market Research co-produced by Mercer DHL express Consulting and China Federation of Logistics and Purchasing in 2001, China’s logistics costs amounted to 20% of GDP. Even in 2006, the logistics portion still remained 18.3% of GDP, almost doubled the 9.5%-10% level in developed countries.

Down to the detailed application level, such high logistical cost issue could be attributed to the following aspects:

First is the low value adding nature of logistics business in China. In 2005, China’s logistical unit (per ton cargo) income yielded less than $20, only 26% of their counterparts in US market. China’s logistics industry is still at a low and fragmented level, with few value adding services and few value adding businesses. It is yet to develop a multi-variety, high-frequency and low volume transportation pattern.

Second is the low level of logistical socialization. Legacies from the planned economy, such as “fragmentation”, “regional blockade,” and “industry monopoly” are still omnipresent. In such circumstance, relevant industries, departments and systems are still operating on their own, lacking cooperation between each other, and hindering the overall improvement of logistical efficiency.

Thirdly, the organization and management of logistics remain to be improved, and this is the main gap between China and countries like US and Japan. Low organisation and management expertise has led to high warehousing costs and management costs. At present, China’s logistical management cost to GDP ratio is high at 2.5%, compared to 0.4% in US. This is mainly due to constraints in the system and mechanism, as internal divisions, monopolies and blockades are still present. A competitive logistical market that is fair, just and open has yet been established, and there hasn’t been a controllable and freely operating logistical mechanism. But there have been some improvements, with management cost growth in the first half year, down 3% on the pcp and down 1.1% from the first quarter.

The fourth is the high stock keeping cost, which is mainly due to the high inventory level in Chinese industries. The ratio between social inventory level and GDP in US is about 3%, while it is as high as 20% in China. According to statistics, working capital turnover in large industrial companies in China is currently 2.1 times, and 2.8 times in key capital goods companies, far lower than the 10-20 times in developed countries. This means capital tied-up, low income and reduced in corporate competitiveness.

 

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