3 Logistics obstacles China must overcome

October 21, 2015 Pieter Kinds

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Increased investment in transportation and logistics improvements are key to stabilizing China's economic growth, that is expected to drop below 7 percent for the first time since the global financial crisis. What are the 3 main areas's of concern?

Reducing Logistics costs and freight spend

Logistics costs in China are currently sky-high (18% as a proportion of GDP), compared with around 8.5% in the USA. Meanwhile, logistics has become without a doubt a critical asset to many businesses, putting the pressure on particularly retailers and manufacturers. The fact that the last group is widely moving to lower cost locations in the West of the country, and thereby sailing away from ‘logistics-friendly’ cities on the eastern or southern coastal regions, does not enhance the situation.

Improvement of (road) Infrastructure is key

Despite the fact that China’s physical infrastructure has developed rapidly over the years, the current transport groundwork is one of the main constraints to driving economic growth. This is however a general problem for the Asiatic region. But there is light at the end of the tunnel. China spends about 11% of GDP on infrastructure projects, against just 2% of GDP in the USA. The majority of this investment goes on roads, with the latest five-year plan committing to eight new highways focused on Beijing, nine more running north-south and 18 east-west. Earlier this week it was announced that China's top economic planner approved the construction of the eight infrastructure projects, with an estimated total investment of 95.3 billion yuan ($15 billion).

Review China's 12th & 13th (2016-2020) Five-Year Plan

As such, the Chinese government has worked and continues working hard to meet the rising transportation needs of manufacturers and retailers, but there are still some 'roadblocks' on the way. In many cases, road freight companies will not use the new highways as the high cost of tolls imposed make operating unsustainable. Instead, they will often use slower and cheaper local networks which not only are inefficient but also leave them open to municipal tolls which are often extorted by corrupt officials. "Keeping relatively high growth of infrastructure investment is key to stabilizing economic growth" since property and manufacturing investment remains weak, said Yu Bin, head of the micro economy research department at the State Council's Development Research Centre.

Increase Transportation Payment efficiency

In terms of freight audit and payment, the big bang is still ahead of us. Especially in terms of automated processes and the use of analytic data. Primarily, the problem starts with the proof of delivery documentation, that often still is delivered in paper-based. It consumes a lot of time for this paper trail to travel back up the supply chain, causing larger intervals and increasing time for final freight payment. According to the recent Transportation Challenges Across Asia Study, many transport operators in China find themselves having to extend 90-180 days credit (even more in some cases) by the time that all the data needed for an invoice is assembled and the usual customer payment terms are taken into account.

Did you know?

- Nine of the 50 largest container ports in the world are located in China
- Between 60-70% of Chinese companies outsource logistics operations
- Total logistics costs doubled between 2009 and 2004, up from RMB 3 trillion to RMB 6.1 trillion five years later
- China's fixed-asset investment increased 10.9 percent year on year in the first eight months, while investment in infrastructure jumped 18.4 percent, official data showed
- Many economists expect China to report that July-Sept economic growth dropped below 7 percent for the first time since the global financial crisis.

Source: Transportation Challenges Across Asia ti - oTMS, 2015
On the move in China The role of transport and logistics in a changing economy – KPMG, 2011

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