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One Belt, One Road: A bridge to the world

One Belt, One Road: A bridge to the world

The much spoken of ‘One Belt, One Road’ (OBOR) initiative, launched in 2013, is fast coming to fruition. In this piece we take a look at the major new routes of global trade.

 

 

The five major goals of the Belt and Road Initiative are: policy coordination, facilities connectivity, unimpeded trade, financial integration, and people-to-people bonds.

 

 

The Belt is an adaptation of China’s historic Silk Road, a land-based trade route linking East and West. In its modern incarnation, a land-based Silk Road Economic Belt starts at China’s Luoyang and ends at Port of Hamburg in Germany. It ties in with a maritime Silk ‘Road’, focusing on Chinese coastal ports, that begins at China’s Quanzhou and ends in Rotterdam in the Netherlands.

 

 

Export agencies in over 60 countries now support OBOR. This encompasses two-thirds of the world’s population with six clear channels to different markets:

 

 

(1) The Eurasia Land Bridge Economic Corridor – an international railway line running from Lianyungang in China’s Jiangsu province, through Alashankou in Xinjiang to Rotterdam in Holland. These new rail routes offer freight transport, as well as the convenience of ‘one declaration, one inspection, one cargo release’ for any cargo transported.

 

 

(2) The China-Mongolia-Russia Economic Corridor – the three heads of state agreed to bring together the building of China’s Silk Road Economic Belt, the renovation of Russia’s Eurasia Land Bridge and the proposed development of Mongolia’s Steppe Road. This will strengthen rail and highway connectivity and construction, advance customs clearance, promote cross-national cooperation, and help establish the China-Russia-Mongolia Economic Corridor.

 

 

(3) China-Central Asia-West Asia Economic Corridor – this runs from Xinjiang in China and exits the country to join the railway networks of Central Asia and West Asia and reaches the Mediterranean coast and the Arabian Peninsula.

 

 

(4) China-Indochina Peninsula Economic Corridor – this corridor will deepen the relations between China and the five countries in the Indochina Peninsula.

 

 

(5) China-Pakistan Economic Corridor – the two countries will proactively advance joint projects, including highways, a new international airport, a new economic zone, and the China-Pakistan cross-national optic fibre network.

 

 

(6) Bangladesh-China-India-Myanmar Economic Corridor - OBOR could be the bridge that restores relevance for both Britain and Europe to China; it will keep Britain in the European fold post-Brexit. Following the financial crash in 2007/08 the changes in world trade that had been developing were revealed. East to South and South/South trading patterns took predominance in driving the world economy and the old West to East paradigm was shattered.

 

 

China Cold Chain Logistics Outlook 2016

China Cold Chain Logistics Outlook 2016

China’s cold chain logistics industry, which now enjoys special status under the Chinese government’s macro economic control policy, will continue to strengthen and improve, while maintaining rapid operational growth. The industry was chosen as a favored industry because of its importance in maintaining public health and food security. At the same time, disposable incomes in China are rising, and food safety is becoming more of a concern for individual consumers.

 


Snapshot.
 

According to recent studies conducted by the International Cold Storage Association, only 15% of products requiring temperature control were handled correctly in China, and only 10% of vehicles that are used for perishable products are equipped with cold storage equipment, not just ice cubes or ice bricks. Most of the logistics systems do not have any temperature control at all. As a result, more than 30% of the agricultural products produced in China are wasted during transportation. Due to lack of proper handling, product quality of the remaining 70% is in question. Food safety is becoming more of a concern for consumers and a complete system for cold chain logistics is in demand.

 

 

In 2015, meat production in China exceeded 80 million tons, vegetable 700 million tons, fruit 260 million tons, dairy products 27 million tons and seafood 60 million tons. Besides, large amounts of meat and frozen food are produced every year in China too. Temperature fluctuation in cold storage and transport is one of the main reasons for food quality decline. To ensure those perishable foods' freshness and quality, cold chain logistics is needed.

 

 

At the end of 2014, China had a freezer capacity of about 120 million cubic meters and less than 60, 00 refrigerator vehicles, lagging far behind developed countries in per capital terms.

 

 

Outlook

 

As a high-end sub-industry of logistics, cold chain logistics will become the focus of many investors in the next few years. As e-business develops in China, e-business enterprises operating fresh food are springing up and the supporting cold chain infrastructure. Many e-business companies in China have got into the field of fresh food, for example, large e-business enterprises like Tmall and JD have published their own fresh food strategy. Besides, logistics enterprises like SF Best of SF Express are conducting e-business and a bunch of professional fresh food e-business enterprises like Too Too Organic Farm are developing fast too. According to CRI's estimation, the market size of fresh food e-business was about CNY 100-120 billion and CAGR during the period of 2016-2020 will exceed 50%.

 

 

Currently fresh food e-busines companies hardly invest in cold chain equipment but they indirectly force the construction of cold chain distribution networks.  Enterprises such as JD and Tmall are still weak in cold chain warehouse, logistics delivery system and door to door delivery where they mainly cooperate with a third party cold chain logistics companies.

 

 

The cold chain logistics network can be divided into two parts: cold chain home delivery and cold chain artery, the former belonging to express and less-than-carload logistics while the latter involving supply chain management and third party logistics. Cold chain logistics is a sub-industry of logistics, with the largest potential market despite its complex operation and high barrier to entry. Cold chain logistics will be one of the fastes growing sub-industries of logistics in China in the next few years.

 

 

With  sustained consumer growth, a fast increase in demand for food, drugs and cosmetics: the cold chain logistics industry in China will undergo a transformation enableling investment opportunities in China for cold chain equipment manufacturers and cold chain logistics enterprises.

 

 

Companies.

47 qualified companies  currently vie in the competition for refrigerated trucks. Among the top players including CIMC (Shandong), Zhengzhou Hongyu, Henan Bingxiong, Henan Frestec, Zhenjiang Speed Auto and KF Mobile, CIMC (Shandong) occupies the Shandong market, and seizes market share in Guangdong, Zhejiang, Hubei and other places; Henan Bingxiong performs outstandingly in Northeast China, Shanxi and Inner Mongolia; Zhenjiang Speed Auto and KF Mobile focus on East China and dominate the East refrigerated truck market. Zhengzhou Hongyu not only takes a favorable position via giants such as Shuanghui, Yurun, Topin, Sanquan and Synear in Henan, but also makes some achievements in Beijing, Hebei, Ningxia, Jiangsu and other markets.

 

 

 

 

Supply Chain Leaders: YTO Express.

Supply Chain Leaders: YTO Express.

Snapshot

Founded in 2000, China`s largest and fastest growing express delivery company, YTO now employs more than 180,000 workers in 20,000 delivery centers across China. YTO delivered 14 billion packages last year. It`s services cover warehousing, distribution and special transport.  In 2014 it launched it`s 90% owned subsidiary YTO Cargo Airlines which initially began operations, out of its Hangzhou hub.

 

 

Shanghai Yuan Tong Express Co., Ltd. (YTO Express) is now the largest express delivery business, by market share, in China after taking advantage of the booming domestic e-commerce industry. Yu Weijiao, YTO chairman, has turned the company into a market leader in China. With 84 centers in Beijing alone and 20,000 country-wide, the group is taking advantage of the government's decision to realign the economy from cheap, mass-produced exports toward more sustainable consumer-fuelled domestic growth.

 

 

In 2015 the company's revenue reached 204 billion yuan ($37.79 billion), up 42% compared to the same period in 2013, during a time of slowing economic activity, up to 19 billion yuan of which was indirectly generated by express delivery services, and that figure is expected to reach 60 billion yuan by 2020.

 

 

During the 2015 Singles' Day on Nov. 11th, the company received a record-breaking 53.28 million orders across China. The group handled more than 30.59 million packages, or roughly 21 percent of the industry's total.

 

 

Key to YTO's success has been expansion: from YTO's humble beginnings in 2000 when it started with a meager investment of 50,000 yuan and employed 17 staff the group now employs 180,000 staff and operates a network that covers about 93 percent of the counties across the country. In 2014, YTO delivered 2.1 billion packages, generating revenue of 24.6 billion yuan. The maximum number of parcels handled in a single day last year hit 25 million.

 

 

Outlook

With huge growth potential in the Express delivery sector amid strong competition from competing companies only the strongest companies are expected to survive, while smaller players are likely to link up with the leading companies such as YTO.

 

 

As the State Council approved a proposal to promote the development of the express delivery sector, which will be worth 800 billion yuan by 2020, the key is to increase international competitiveness and expanded air delivery capacity facilitating the rapid rise of cross boarder e-commerce.

 

 

YTO also plans to expand its air cargo operations as the company completed the maiden flight of its first aircraft in September 2014. It hopes to have a cargo fleet of 50 aircraft by 2020 and 100 in 2025.

 

 

Although YTO has plans to take the company public, a timetable has yet to be announced, as the company is aiming at building a highly competitive international network first: last year, the group set up an overseas business department and the company has registered its trademark in more than 100 countries.

 

 

They plan to establish about 20 overseas branches in countries including South Korea, Australia, the United States, Thailand, India, Russia and France.

 

 

Alibaba taking a lead on cross-border...

Alibaba taking a lead on cross-border e-commerce.

The global B2C cross-border e-commerce market will balloon in size to $1 trillion in 2020 from $230 billion in 2014, according to a report from global consulting firm Accenture and AliResearch. With this in mind it would appear to be Alibaba that is taking a lead in opening up new global markets.

 

   

 

In the report, “Cross-border B2C E-commerce Market Trends,” researchers forecast that this increasingly popular form of online shopping will see compound annual growth of 27.4 percent over the next five years. By 2020, more than 900 million people around the world will be international online shoppers, the report says, with their purchases accounting for nearly 30 percent of all global B2C transactions.

 

Cross-border online shopping is gaining popularity particularly in emerging markets, where consumers can find it hard to find affordable imported products in local shops. In many cases, the only alternative is shopping on websites in other countries or from marketplaces such as Alibaba Group's Tmall.com, a Chinese B2C website that hosts merchants from around the world.

 

While China is expected to drive much of the growth of cross-border e-commerce in coming years because of the country’s large and growing middle class AliExpress is making headway in selling goods from suppliers in China and other countries to online shoppers in Latin America.

 

Alibaba sells to consumers internationally through AliExpress.com, a site it launched in 2010, that sells goods in 40 categories directly to consumers in 200 countries, according to Alibaba. While Alibaba does not regularly disclose transaction volume on AliExpress.com, the company did report in advance of going public last September that the value of goods purchased on AliExpress.com exceeded $4.5 billion in the year ended June 30, 2014.

 

AliExpress has caught on in Russia, where Alibaba claims it’s the top e-retail site, and in Latin America. The company is now taking several steps to localize the site to better appeal to Latin American shoppers where is see good growth over the next few years.

 

Whilst Alibaba does not disclose its sales in Latin America web analytics company SimilarWeb estimates monthly visits from Brazil to AliExpress.com averaged 110 million during the first five months of 2015. 

 

Delivery remains the biggest challenge for e-commerce companies in Latin America, consumers must wait anywhere from 30-40 days to receive the products after he or she placed order. While it might take one to two weeks for a parcel to arrive from China to Brazil, the time for passing through Brazilian customs and delivery inside of country could easily double this delivery time.

 

Why do so many Brazilians shop on AliExpress if they have to wait a month to get their orders?  Providing a large product selection at much lower prices is the main draw.

 

To speed up delivery, Alibaba has collaborated since last year with the Brazilian postal service Correios to share parcel data. AliExpress also accepts many local payment options in the region, including OXXO in Mexico and Boleto in Brazil.    

  

Aliexpress.com launched a Spanish-language version of its site in 2014 to boost sales and also rolled out its first country-specific site, a Portuguese-language site targeting Brazilian consumers, at pt.aliexpress.com. The site enables merchants that sell on the web shopping mall to create customized promotions, such as deals based on local holidays.

 

The Spanish-language AliExpress.com also has sections that highlight suppliers Alibaba has authenticated, such as those from Chile and Peru, to increase consumer confidence in shopping on AliExpress.com. Those sections also enable local merchants to sign up to become authenticated on Alibaba’s sites. Besides Chile and Peru, there are similar sections of AliExpress.com highlighting merchants from Mexico, Colombia, Brazil and Argentina.

 

Global Customs Issues - China and the...

Global Customs Issues - China and the EU and the US Perspectives

Customs in China - The Facts

China Customs (the GACC) is a government agency that supervises and manages all arrivals in and departures from the customs territory of the People's Republic of China. It exercises a centralized management structure. It’s essential tasks are customs control, revenue collection, fighting smuggling and foreign trade statistics compilation. It shoulders such major responsibilities as duty collection, customs control, supervision and management of bonded operations, foreign trade statistics compilation, audit-based control, customs intellectual property rights protection, fighting smuggling, and port management.

 

Customs Valuation of goods entering into the European Union

Imports into any of the 28 countries of the European Union (EU) may attract a number of import taxes such as VAT, duty or anti-dumping duty. When due, it is important that the correct amount of these taxes is paid as the customs authorities in all EU countries have the power to impose various financial penalties against you, or even seize your goods. The question therefore is - how should importers calculate the value of the goods to ensure they do not fall foul of these penalties but also ensure they do not pay too much tax?

 

Dramatically and Legally Reducing Landed Costs for Your Exports in Multi-Tiered U.S./EU Import Transactions: The First Sale Rule

The “First Sale” rule is a collaborative and proper legal process available to U.S. and EU importers and global exporters to substantially reduce duties and taxes.  This rule has been the law of the land in the U.S. since Sandler, Travis & Rosenberg, PA (“ST&R”), won the seminal case establishing first sale as a viable option for valuation of merchandise in 1988.  ST&R has also successfully applied it to save significant duties for US and EU imports from over 512 global vendors.

Simply stated, the First Sale rule can be applied when there are two or more sales that give rise to an importation of merchandise. As long as all the rules substantiating first sale are met and documentation is established, the basis for dutiable value can be the first sale between the factory and the middleman/vendor, rather than the middleman/vendor and the importer.

 

To read the full articke form Klako Group please click here.

China Logistics Development Report

China Logistics Development Report

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:

????nbsp;   Macro-economy stabilized.

????nbsp;   Foreign trade began to resume growth.

????nbsp;   International transshipment centers of air express giants will play a great role.

????nbsp;   Uncertainties caused by the economic crisis and legacy policies do remain.

 

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.

 

For China, Logistics Improvements Would...

For China, Logistics Improvements Would Deliver Big

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.

 

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