China's e-commerce companies may yet turn a logistical nightmare into a dream business opportunity.
Massive government investment in road, rail and air infrastructure means that China's transport network is approaching developed-world standards. But the cost of moving goods from A to B remains high. Logistics costs as a percentage of GDP are around 21%, compared with 10% in the U.S. and 13% in India.
Part of that gap is explained by China's focus on manufacturing. But beyond that, the country has a fragmented system, high tariffs for road transport and multiple providers piling on fees. Even outside the manufacturing sector costs are high. A Chinese government investigation found that two-thirds of the retail price of vegetables represents logistics costs.
And even though costs are high, service is often poor. Local logistics providers are famously slow and unreliable. Assuring end-to-end delivery of products across provincial boundaries is a real challenge. That's a particular problem for e-commerce companies such as Alibaba Group, 360buy and Joyo Amazon, which rely on guaranteeing delivery of goods from supplier to customer.
The central government says it is committed to the development of a modern, efficient logistics network. But ambitious goals set in Beijing are running up against a difficult reality at a local level. Provincial governments benefit from local firms that contribute tax revenue, even if they are less efficient than larger national players. State-owned firms often run their own in-house transport and distribution services, reducing the size of the market for specialist logistics firms.
For third-party logistics providers, working through the tangle of local regulation has proved difficult, if not impossible. Jeffery Wong of global advisory firm KPMG says even the bigger players remain mainly confined to provincial markets. But for e-commerce firms, the rapid growth in online sales is providing both motive and opportunity to get to grips with the problem.
For Amazon in the U.S., efficient distribution has been the key to keeping prices low and gaining market share. The aspiration for e-commerce firms in China is to do the same. Online retailer Alibaba has invested in its own system of warehouses and is working with existing logistics providers to stitch together a national system, and 360buy is partnering with Wal-Mart to build a network.
The rapid growth of e-commerce means that major players can take advantage of scale in their operations. On a single day in November 2010, Taobao Mall, the business-to-consumer arm of Alibaba's online empire, shipped 15 million packages. Building an efficient logistics system won't be easy, especially for e-commerce firms whose core competences lie elsewhere. But the Chinese market is wide open. For companies that can get it right, the solution to a business problem could turn into a driver of future profitability.