Third-party logistics

The development of third party logistics with advanced warehousing, distribution and inventory management systems has been slow, although there has been a steady increase in the demand for third party logistics over the past few years . According to surveys commissioned by the China Association of Warehousing and Storage in 1999, 2000 and 2001, the share of third-party logistics in the distribution of finished products by manufacturing enterprises increased from 9.1 per cent in 1999 to 16.1 per cent in 2000, and to 21 per cent in 2001. The abundant supply of cost-effective labour and a lack of sophisticated logistics technology has in part hindered the demand for outsourcing logistics to third parties. Another reason is that the vestiges of the planned economy in the form of a fully fledged enterprise structure and self-sufficiency, resulting in a reluctance to hand over to stand-alone logistics.

Although the process of forming a modern third- party logistics system is slow, a structure has begun to take shape. There are four basic categories of third-party logistics providers in the market:

Logistics companies that have evolved from the traditional state-owned warehousing and transport enterprises

These logistics companies have inherited the state- owned logistics resources, such as infrastructure, customer base, operating networks and facilities, all of which have given them advantages in making the transformation towards becoming third-party logistics providers. They are taking a dominant position in the third-party logistics market, although they are still learning to extend their services beyond physical movements of goods. Such companies include COSCO and Sinotrans, who are developing intermodal and integrated service offerings and investing in port and infrastructure improvements.

Newly established logistics providers that are state- owned enterprises or state-equity-controlled enterprises

These logistics providers are the offspring of enterprise reform towards a modern corporate system. They have relatively complete corporate governance and operate independently of their parent companies. One such company is China Shipping Logistics, which is a state- owned company and was established in 1997. This company is now providing third-party logistics services such as warehousing, transportation, distribution and customs clearance to a number of multinational companies. Another example is Tsingtao Beer Merchants Logistics, which has been spun off from its parent Tsingtao Beer Group and merged with China Merchants Logistics to become an independent third-party logistics provider.

Private logistics providers

Although many of these logistics providers are small in terms of size of operation, they have the advantages of being flexible in their operating mechanisms and low in overhead costs. Many of these private logistics providers are locally based and there have been a small number able to offer cross-region services. One successful logistics provider in this category is PG Logistics Group. This company started by contracting a rail freight transit station in 1992. In 1994, the company began to provide logistics services to Procter and Gamble. It has now developed into a leading third-party logistics provider, with over 40 branches or offices in key Chinese cities. There are over 40 multinationals in its customer base.

International third-party logistics providers

These companies have the advantage of advanced business concepts, well-established business models and quality services and provide extensive logistics services for their international customers. Typically, they provide services in China to those companies that they have already been servicing at home. An example of such a company is Japan's Kintetsu World Express Co Ltd, which chiefly provides logistics services to Japanese companies in China. These international logistics companies have ambitious plans to expand their services in China's post-WTO era. Maersk Logistics, for example, have established their own National Distribution Centre in Shanghai, the first of its kind in China. In the air- freight arena, the big names such as FedEx, UPS and DHL have all made ambitious moves to expand and diversify their China operations to capture the growth in third-party logistics.

Despite the fact that third-party logistics needs to be fleshed out by adopting modern logistics concepts and technologies, it has developed at a high rate over the past few years. According to the China Federation of Logistics and Purchasing, third-party logistics is growing at an annual rate of 30 per cent. In addition, a research survey carried out by the China Association of Warehousing and Storage on China's logistics market indicated that there was great potential demand for third- party logistics. Among the enterprises interviewed, 57 per cent of the manufacturing enterprises and 38 per cent of the commercial enterprises stated that they are looking for new logistics agents .

Most third-party logistics is taking place in the more dynamic areas of China, such as Guangdong province and the Shanghai-Zhejiang-Jiangsu cluster, where many manufacturing and export-oriented processing operations are concentrated. The relatively small sizes of those manufacturing and processing operations have in part determined the fragmented structure of third-party logistics in those areas. In addition, the logistics services are mostly limited to basic warehousing and transport. Few third-party logistics providers offer value-added services such as processing, packaging, consolidation, distribution management and order processing. These deficiencies in third-party logistics development leave substantial room for improvements, while at the same time offering great potential for growth. Industry experts forecast that third-party logistics will grow by 25-30 per cent over the next four or five years. As a general observation, it is interesting to see that China's railways and postal services, which are facing competitive attacks from various fronts, are planning to play a significant role in the third-party logistics market. Their existing networks bring obvious advantages, but winning bureaucratic administration over to modern logistics management concepts remains a challenge.