WTO Accession

WTO Entry Generates Greater Logistics Demand

According to forecasts, China's total import and export trade will reach US$400 billion and its domestic retail sales will total Rmb5 trillion this year. As the volume and scope of commodity circulation will further expand after China becomes a WTO member, China's fledgling logistics market has great development potential. The incentives granted by local governments at various levels will also provide great opportunities for foreign investors in the logistics sector.

Policy Support for Logistics and Distribution

In order to speed up the reform and modernisation of the circulation system and promote the development of chain operation, the Chinese government gives encouragement and support to logistics services and commodity distribution. The importance of distribution centres to the development of chain operation has been emphasised over and again by the State Council. Under the policy of opening the distribution sector to the outside world, foreign investors are encouraged to invest in logistics and distribution facilities in China.

In recent years, logistics and distribution services have seen rapid progress in China. Today, they have become important tools of enterprises for reducing costs and increasing their competitive edge. For example, many retail chains have established their own distribution centres to provide logistics services to their sales outlets. Some state-owned wholesalers and large retail enterprises such as the Beijing Yishang Group and Xidan Market are exploring the feasibility of collective logistics services. Foreign companies have also made swift headway in this connection. The Tianjin-Okaya Co, a Sino-Japanese joint venture logistics provider, offers services including distribution, processing, warehousing, consignment sales, leasing, repairs, exhibition and technical consultation. There are about 10 such joint-venture logistics companies in Beijing, Tianjin and Shanghai mainly providing distribution services to multinational companies with investments in China.

Most of the storage and transportation enterprises in China operate in the traditional mode. Large-scale modern logistics enterprises that make use of information technology are very rare. According to Xiang Xin, deputy director of trade and marketing department under the State Economic and Trade Commission, the Commission will strive to promote modern logistics management in Chinese enterprises, step up the training of logistics management personnel, and give support to logistics enterprises in improving their services through restructuring. It will also work out a general plan for logistics development and relevant policies governing foreign investment in the logistics sector. A number of enterprises will be chosen as pilots for the application and development of logistics technology.

At a recent briefing on marketing reform held by the State Internal Trade Bureau, it was pointed out that the bureau would focus on e-commerce, logistics services and franchising. In logistics services, efforts will be made to increase investment by raising funds through diverse channels; develop modern warehouses; and promote automated operation, containerised transportation, and logistics information management systems.

In the international arena, recently logistics has become associated with the concepts of "just-in-time delivery" and "zero inventory". The extensive application of computers and EDI has greatly enhanced management efficiency and made it possible to monitor and track the flow of commodities at any time or place. There is also an increasing trend of globalisation of logistics standards, particularly in documentation, legal procedures and management.

For foreign companies, the biggest obstacle to success in the Chinese mainland is distribution. China is a vast country. However, its logistics infrastructure, including transport and warehousing facilities, is underdeveloped. Against this background, foreign-invested enterprises (FIEs) have adopted the following strategies:

1. Establish warehouses and distribution centres. China's warehousing and transport facilities are scattered and backward and cannot meet the requirements of FIEs for modern logistics and distribution. Taking advantage of the preferential policies offered by the Chinese government to the warehousing and retail distribution sectors, FIEs have established their own warehouses and logistics centres. For example, Japan's Mitsubishi has built an integrated distribution centre in Guangdong. Situated close to Hong Kong and well-served by the Beijing-Guangzhou and Beijing-Kowloon railways as well as a number of newly-built superhighways, this centre is ideally located for the storage of goods for inter-regional distribution.
   
   
2. Set up transport teams. China's transport operators do not pay much attention to market forces and have poor safety and punctuality records. Some FIEs have thus built their own fleet of trucks to ensure prompt delivery of supplies. The best example is McDonald's. As the company needs to deliver buns, meat and other foodstuffs to warehouses throughout China everyday, it has established its own transportation company to ensure timely deliveries.
   
   
3. Make use of flexible logistics services. China lags far behind in urban transportation development. Both urban road construction and traffic control fail to meet the growth in traffic volume. Today, traffic congestion is a major bottleneck in urban logistics development in large cities like Beijing, Shanghai, Guangzhou and Shenyang. To overcome this problem, some FIEs make use of bicycles to deliver goods. For example, Coca-Cola employs hundreds of "neighbourhood committee" members to make deliveries on pushcarts and bicycles to areas not easily accessible by motor vehicles due to traffic congestion. These flexible distribution methods have proved to be immensely successful.

Following China's entry into the WTO, domestic sales restrictions on FIEs will be phased out and rules prohibiting foreign investment in logistics services will be gradually lifted. Thus, opportunities for foreign companies to invest in logistics facilities to meet their production needs or to directly invest in the establishment of logistics enterprises will greatly increase.

Opening of Distribution Sector Spurs Logistics Development

China will gradually open its distribution market within a given period following its entry into the WTO. After the transition, the market will be completely opened to the outside world which will in turn spur the development of logistics services.

WTO accession will certainly attract more foreign investment to China. While establishing their production bases in the mainland, some large enterprises and multinational companies will also build up their own distribution networks. And in the building of such networks, the establishment and smooth operation of a logistics system is indispensable. As China relaxes its restrictions on distribution, the demand for better logistics services is set to increase. It can be expected that further market opening will create a host of opportunities for logistics enterprises in China which are already supported by the necessary hardware such as warehouses, ports and transport facilities.

Retail and chain-store operation forms an important part in the opening of the distribution sector. Under the US-China bilateral WTO agreement, foreign companies will gradually be allowed to hold a controlling share in Sino-foreign joint-venture retail enterprises. China also agrees to open all provincial capitals to foreign investment, and remove geographical, quantitative, equity and incorporation restrictions. By the year 2005, there will be no more foreign majority ownership restrictions except for department stores with a floor area of over 20,000 sqm or chain stores with more than 30 outlets. Based on these commitments, foreign chain-store operators will be able to develop chain stores on a larger scale. What follows will be the development of their own logistics services in a bid to reduce costs and increase profit margin through centralised purchasing and distribution. The development of chain-store operation and increased demand for logistics services will bring about the emergence of enterprises specialising in third-party logistics services. The market potential for third-party logistics services in China is huge.

China's WTO entry will boost domestic and foreign trade and commerce. The swift development of e-commerce will also expedite the growth of modern logistics services. At present, most Internet companies rely on courier and postal services to make their deliveries, which simply cannot meet the demand of e-commerce for logistics services. The growth in e-commerce should open up vast room for the development of logistics services.

Difficulties in Logistics Development

The logistics industry first developed in the west in the 1950s and gradually improved in the 1960s. With the development of modern information technology and the rapid growth of the transportation industry, logistics services have become the mainstream of the transport sector in developed countries. It was not until the 1980s that China first came into contact with the concept of logistics. Logistics services lag behind other sectors in China due to its lop-sided emphasis in the past on production at the expense of circulation. The following are some of the problems facing China's logistics industry:

1. Uncoordinated management

While logistics services are becoming increasingly specialised, they are also moving towards integration. However, logistics management in China still follows the system of the planned economy. On the one hand, related services are managed by different departments such as railways, communications, civil aviation and internal trade, with little coordination. On the other hand, internal and external logistics are separated due to the long segregation of internal and external trade in China. Such a management system seriously hampers the overall rational planning for logistics services to meet the needs of a market economy.

2. Weak concept

The provision of logistics services is a new concept in China. The sector is generally viewed as a set of individual industries such as trucking, warehousing and freight forwarding, rather than one that is associated with efficient supply chain management, lower distribution costs, increased profits and enhanced competitiveness. As such, production enterprises tend to focus more on product development, marketing strategies and pricing policies than on the rationalisation of logistics. Also, most enterprises still prefer to operate their own logistics although they may use third-party logistics services such as transportation or warehousing on a one-off or temporary basis. This trend impedes the development of third-party logistics providers in China.

3. Poor management standards and capabilities

At present, the majority of third-party logistics providers in China still operate under the traditional system offering services such as warehousing, inventory control, delivery and trucking, with very few capable of providing integrated logistics services. In developed countries, the function of third-party logistics providers is to plan, manage and facilitate the flow of goods through the supply chain for their clients at the lowest costs by utilising their expertise and information technology. By contrast, logistics enterprises in China trail far behind their foreign counterparts in such areas as provision of efficient services at low costs; capability in information gathering, processing and utilisation; specialised knowledge in logistics; and ability in coordinated planning and management.

4. Backward infrastructure

Although China is not short of logistics infrastructure in quantitative terms, the facilities are old and obsolete. Moreover, management techniques are backward, handling capacity is low and productivity poor.

5. Lack of management personnel

Modern logistics goes hand in hand with the development of information technology and new logistics technology. China's logistics industry, which cannot keep pace with the latest development, is badly in need of specialised management skills and personnel. The shortage of personnel in this sector is the biggest hurdle to the development of logistics services in the mainland.

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