Not even the worst economic crisis in 80 years could halt the growth of China’s logistics industry. The world’s rising economic superpower still put up growth numbers that aroused the envy of the rest of the world. Beijing continued to invest enormous sums of money into massive infrastructure projects, building new airports, railway lines, expressways, and intermodal centres. China’s full-speed march into modernity appeared far less affected by the dire news emanating from other corners of the world than many of the more developed regions.
Logistics, the industry that greases the wheels of the great Chinese economy, continued to grow at a rapid pace. Yet to argue that the 2008-9 was a uniformly positive year for the industry would ignore several troubling signs. Port throughput growth fell nearly everywhere in China over the period; and no place suffered a steeper growth decline than the Pearl River Delta, China’s most developed economic region.
Furthermore, upon closer inspection China’s logistics industry still has significant structural problems that may undermine future development. Logistics still comprise over 18 percent of GDP, a figure more than double that in developed economies. The industry suffers from under-agglomeration, and many registered logistics companies operating in China lack professional standards and operational efficiency.
Despite tremendous government effort to spread China’s newfound prosperity to less-developed regions, the gap between China’s coastal area and its interior remains large - and growing. The country’s varied economic regions remain less integrated with each other than with various parts of the outside world. Bureaucratic hassles—such as fines levied upon inter-provincial trade—have prevented the massive Chinese economy from operating as a cohesive unit hindering the emergence of national brands able to compete on a global stage.
Aware that suboptimal logistics performance threatens to obstruct overall economic development, Beijing has expended enormous effort in rectifying these problems. Investment in transport infrastructure received a jolt by a CNY 586bn stimulus package, and the Chinese government confidently claims that a nationwide high-speed rail network will be in place by 2020. New airports, expressways, and container terminals will also affect the logistics landscape in coming years.
In addition, reforms such as the Fuel Tax Law have indicated a growing willingness for Beijing to consider green solutions in its logistics industry policy. The coming years are likely to witness an increased emphasis on environmentally-sound practices, a move that could lead to greater industry consolidation as smaller firms struggle to compete in a rapidly changing landscape.
Few observers expect the global economic slowdown to have reversed itself fully by the end of 2010, and correcting structural flaws in the logistics industry will require time, even by the standards of the Chinese government. The industry showed impressive resiliency in the wake of natural disaster in 2008, overcoming both the unseasonably cold weather in the winter and the tragic Sichuan earthquake in May.
Betting against its ability to overcome an economic slowdown would similarly be unwise – even though the World Bank now forecasts that a recovery independent of stimulus spending is likely to require a broad structural change in the composition of GDP growth drivers.
China’s Economic Geography
The Chinese economy is better understood not as a single unit but rather a decentralised collection of several regional economies that interact with one another less than one might expect. This arrangement— which differs from other large countries such as the United States—results from China’s transition from a command to a market economy.
Such fragmentation has resulted in the apparent lack of major, globally recognized companies emerging from China, particularly given the size of its economy. Larger Chinese firms have enormous difficulty managing their parent-subsidiary networks; companies under the same corporate umbrella often fail to cooperate and even work at cross-purposes.
Growth of Inter-Asian Trade
Within Asia, the PRC is the largest driver of regional exports, but its final demand accounts for only 6.4 percent of total Asian trade, which was only half the contribution from Japan and slightly below a quarter of the US. The results show that the G3 economies are still the main ultimate export destinations for finished goods leaving Asia, when taking into account the share of intermediate goods trade that is for assembly and production within the region, but that is eventually shipped out of the region.
Based on these data, CIO estimates that of the total volume of finished goods leaving Asian countries as exports, around 20 percent is destined for Asian markets with around 60 percent absorbed by G3 countries and the remainder headed for the rest of the world (ROW).
Air Freight
While most carriers, as well as shippers, appear confident that 2010 will represent a general stabilisation of overall demand—a return to 2008 volumes—most believe that this demand is likely to take the shape of mini-troughs and mini-peaks, due to the continued unpredictability of demand. This said however, given last year’s last minute scramble for capacity, it is unlikely that shippers will be prepared to run inventories as low as last year. In general, while most predict that 2010 will prove to be a much more positive year for the air freight market in China, it seems unlikely that carriers will be keen to reintroduce capacity back into the market straight away. Instead preferring a much more gradual approach as demand develops helping to hold up freight rates and limit liability in what remain uncertain times.
Future growth will however be dependent on several factors:
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China’s investment in airport infrastructure development will be enormous. According to a plan formulated in 2008, the country intends to spend more on airport infrastructure development over the next five years than the entirety of its airport investment program since the start of the reform era, a figure likely to approach USD 20bn by 2013.
Road Haulage
Some estimates indicating that up to 30-40 percent of China’s road haulage firms experiencing sever losses with many forced to withdraw from the market altogether. Given the high levels of fragmentation and lack of standardization and national registration in the sector it is extremely difficult to accurately gauge the real level of loss or indeed the number of companies forced to withdraw from the sector over the period. It is however possible to say that the vast bulk were only marginally profitable and were – especially given Beijing’s commitment to consolidate the sector – living on borrowed time. Perhaps the most significant trend—besides the global economic meltdown—facing road transport in China is the passage of a new fuel tax law, implemented on 1 January 2009.
Express Delivery and E-Commerce
Postal business achieved a total income of CNY 109.5bn in 2009, up 14 percent. In particular, the express delivery sector grew by 17.3 percent in terms of revenue and reached CNY 47.9bn; total volume increased by 22.8 percent to CNY 1.86bn pieces.
Beijing’s new Postal Law has made waves in the express delivery industry. More dire predictions estimate that up to 80 percent of private express delivery enterprises will be unable to compete and fold from the industry. In the long term though the express delivery market in China promises only to expand, buoyed by the phenomenal growth of the nascent e-commerce industry.
In 2009, as part of an industry wide trend the two largest state-owned express companies - China Post EMS and China Post Logistics Company - completed integration and hence formed a new company, China Postal & Express Logistics.
The number of Chinese netizens reached 383m in Q4 2009, including over 109m online buyers. The e-trading turnover of SMEs amounted to almost CNY 2 trillion, accounting for 1.5 percent of the nation’s GDP. China E- Commerce shopping market is estimated to grow by over 50 percent in 2010, which means a total delivery volume of about 1bn or so.
Looking ahead to the future, the MOT has highlighted tier-3 and tier-4 cities in the eastern region and tier-2 and tier-3 cities in the central and western regions as becoming new growth areas for the industry in coming years.
Port Sector
As 2009 drew to a close, China had 413 ports with a total of 31,050 productive berths—of which 1,416 berths were over 10,000 tons. Coastal ports registered 5,119 productive berths—1,157 over 10,000 tons— while inland ports had 25,931 productive berths, 259 over the 10,000-ton level.
Of berths over 10,000 tons, 665 were between 10,000 and 30,000 tons, 252 between 30,000 and 50,000 tons, 366 between 50,000 and 100,000 tons and 142 berths in excess of 100,000 tons.
The global slowdown had an immediate impact on China international container trade sector with ports in numerous regions reporting disappointing figures for the Chinese New Year period.
In general, the south of the country was hit hardest, with port further north faring much better. At least part of the reason for this is that ports further north depend less on the lower value exports that tend to be the mainstay of certainly Guangdongs economy. Tianjin, for example, was boosted by the fact that much of its exports originate in the Binhai Free-Trade Zone, which tend to produce higher-tech products and the fact that its portfolio of shipping routes is less dependant on China-Eurpoe or US routes.
Bulk
Despite the overall slowing of growth in 2009, three new ports joined the 100m ton club. The new ports to reach the mark were Jiangyin in Jiangsu Province, Xiamen in Fujian Province, Zhanjiang in Guangdong Province and Huzhou in Zhejiang Province. Jiangyin and Huzhou are both river ports.
Over the course of 2009, coal imports increased by almost 211 percent to 125.83m tons. Over the same period, China’s coal exports fell 50.7 percent year-on-year to 22.4m tons, with production up 12.7 percent to 2.96 bn tons; making China a net importer of coal on an annualised basis (China’s net coal import reached103.43 m tons in 2009).
Iron ore imports grew rapidly in 2009. Chinese imports of iron ore showed robust growth in 2009, increasing 42 percent to 628m tonnes. Crude steel production within the country also increased, from 500m tonnes in2008 to 568m in 2009.
However, uneven distribution iron ore terminals are unevenly distributed a cause of steel company distribution patterns in China and network inefficiency. According to adjustments in the steel plant distribution pattern, China will build 12 super-large iron ore vessels with a capacity of 400,000 tonnes, in turn triggering new changes in the ore terminal distribution pattern.
Growing importance of logistics industry
As part of the overall stimulus strategy announced in 2008 intending to help mediate the effects of the global slowdown, the State Council acknowledged the critical role logistics will play in the overarching strategy to maintain GDP growth levels at the 8 percent target deemed necessary to absorb an emergent labour force and facilitate the structural changes deemed necessary to fully reform the economy.
Indeed, whilst 8 percent has in fact been maintained for the bulk of this year thus far, it has been achieved through a substantial shift in the composition of GDP growth drivers as pertinently noted by the World Bank China Economy Update Q3 2009. The noted shift seems to indicate that expansionary policies enacted by Beijing have in fact taken up much of the slack drawn into the system by a reduction in export demand. The Bank further concedes that, as expansionary measures subside to make way for natural growth the resulting composition of GDP drivers will be structurally different from the pre-crash economy in that domestic demand will likely mitigate to some extent the longer term reductions in spending power by the three main global consumer blocks – namely Japan, the US and the EU25.
Within this overall framework of structural change the State Council acknowledged the importance of the logistics sector both as an engine of growth to facilitate an effective response to the financial crisis as well as the need to streamline performance to enhance competitiveness to help the industry adapt to these longer term structural shifts in global consumption; to help Chinese logistics providers compete in an increasingly fierce global market environment; and create new jobs supporting the growth of domestic consumption.