The modern logistics sector, and the potential profits that this industry could make are heating up a network fever in China. With the Middle Kingdom’s logistics enterprises still being at an embryonic stage, many foreign giants are beginning to show an interest in this market. Federal Express, DHL Worldwide Express and American President Lines Co. Ltd., have all expressed their intention to find a niche in China’s logistics industry.

According to World Bank estimates, the logistics cost makes up 16.7% of China’s GDP. Such estimates demonstrate the potential of the market. Looking at projected figures and allowing for the fact that China’s GDP in 2000 is RMB 8,900bn, the goods flow cost would be RMB 1,335bn if the cost is just taken at a cautious 15% of GDP. It could also potentially be as much as RMB 1,780bn if the value is derived from a more speculative 20% of GDP.

According to the 1999 survey by the China Warehousing Association the total spending on logistics by a third party is about 10% of their total costs. The survey cements the impression of opportunity and future fluidity which surrounds the logistics trade, highlighting that 45% of the 450 questioned enterprises would choose new goods distributors within one or two years and 75% will opt for new types of goods distributors instead of the original warehousing and transportation enterprises. Allied to this, on a contractual level, 60% of the enterprises would hire out integrated goods flow to new types of goods-distribution providers.

According to executive vice-president of the China Goods Flow and Procurement Federation Ding Junfa, China’s logistics industry will enter a period of rapid development because it is impossible for the national economy to realise a shift from extensive operation to intensive operation without development of the logistics market.

With WTO entry moving ever closer, the domestic challenges brought by foreign logistics giants are being increasingly felt. The following agreements between China and the US and EU have helped open the door and accelerate foreign investment with regards to goods flow:

* China has agreed for the first time to give foreign companies the authority to distribute goods here, and has cancelled the existing laws which previously stopped this. This lifting of restrictions will give foreign companies the right to undertake goods distribution, whereby international companies may distribute both imported products and products made in China within three years of the WTO entry. This will be executed in wholesale, transportation and service trades, in which there are currently the most stringent controls with regard to distribution.

* China promises that after an interim period, almost all the limitations on foreign stock rights of all the logistics service industries will be cancelled. China will lift all the restrictions on foreign service-providers and allow them to enter the current market, without any hindrances with regard to market access or market activities. This will allow all the service industries to step into the existing market and take part in its activities. Similar commitments have also been made in the auxiliary distribution service, such as leasing, express delivery, warehousing, goods cabin, technical analysis and packaging services. Restrictive measures in these areas will be lifted in 3-4 years. Consequently during the period, foreign service-providers may build wholly-owned subsidiaries or operational organisations.

This future challenge will come not only from foreign countries but also the domestic buyer market. It is, therefore, perceived as pragmatic for Chinese enterprises to lower logistics costs to improve their viability.

The impending fracture of the logistics market will also offer developmental opportunities for Chinese logistics enterprises. The prospect of having to interact in an international marketplace after China’s entry WTO will enhance motivational levels, product awareness and the tempo of construction.

From a structural angle, the intensification of competition will make Chinese ports become modern logistics centres. With the evolution of the modern logistics industry, the ports will have to increase transit goods centres, transportation and warehousing facilities to replace the traditional loading and unloading and stockpiling practices. Using the establishment of the ports to develop storage and logistics services can be regarded as one way to demonstrate the future ports’ competitive power.

WTO entry will of course be the foundational stimulus with the influx of foreign capital and the development of imports and exports nurturing logistical demand.

The first signs of progression can already been seen within the Chinese goods distribution industry. The Shanghai Custom house has already built an international express mail regulation centre at the Pudong international airport, which is the largest and most advanced in China, and has the ability to handle 7,500 pieces of express mail an hour. China’s EMS has also offered a series of new services. There is, however, still a long way to go before Chinese logistics enterprises are able to compete squarely with foreign giants.