As the global economy continues to expand, the global logistics industry will continue to play a critical cross-functional role ensuring smooth transport of goods between industries during the production cycle and delivery of finished goods to consumers. The global logistics industry is vast, both in terms of market size and the numbers of people employed in the sector.
Similar to many industries at the dawn of the digital age, the logistics industry is confronting immense change: digital transformation, new market entrants and evolving business models and changing customer expectations.
With Asia Pacific emerging economies and specifically China continuing to report healthy economic growth, the Asia Pacific logistics market will also continue to expand.
The Asia Pacific logistics market grew at a CAGR of 5.9% from USD2.7 trillion in 2011 to USD3.6 trillion in 2016. The Europe logistics market grew at a CAGR of 1.3% from USD1.5 trillion in 2011 to USD1.6 trillion in 2016.
The Asia Pacific logistics market is forecast to grow at a CAGR of 5.8% from USD3.8 trillion in 2017 to USD4.5 trillion in 2020. In contrast, the European logistics industry is forecast to remain unchanged at USD1.6 trillion from 2017 to 2020.
China's logistics sector continues to grow
In June 2017, speaking at the “Global Smart Logistics Summit” the Chairman of the Chinese Federation of Logistics and Purchasing (CFLP), announced that the “total social logistics costs (TSLC) in 2016 for China exceeded RMB 11.1 trillion (USD 1.6 trillion)” making China the world’s largest logistics market.
Investment in infrastructure and the improvement of the regulatory environment by the Chinese State Council has supported the rapid growth of the logistics services industry in China. This can be traced back to policies outlined in the 11th Five-Year Plan in 2005, followed by the release of the "Plan for the Adjustment and Rejuvenation of the Logistics Industry" and the " Medium and Long-term Planning on Logistics Development (2014-2020)".
The revenue of the logistics services industry in China increased at a CAGR of 6.8% from RMB5.7 trillion in 2011 to RMB7.9 trillion in 2016. The logistics services market is forecast to grow at a CAGR of 5.0% from RMB8.3 trillion in 2017 to RMB9.6 trillion in 2020. The decrease in the growth rates from 9.1% in 2012 to 4.5% in 2015 was mainly due to the slowdown of China’s GDP growth from 9.5% in 2011 to 6.9% in 2015.
Value chain of the logistics services industry
The typical value chain of the logistics services industry includes services such as warehousing, transportation, freight forwarding and cargo consolidation, supply chain management services such as procurement, inventory management, packing and other value-added services and delivery to end customers, collateral management services, surface preparation of metal materials for corrosion control and container management services.
Third party logistics (3PL) refers to a business process through which companies outsource logistics and distribution functions to a logistics service provider that specialises in handling logistics functions such as transportation, warehousing, and freight and forwarding. As 3PL reduces the overall logistics costs related to the transportation and warehousing of goods and offers greater flexibility, as well as enables customers to focus on their core businesses, it is the most common business model in the logistics industry.
Key characteristics of Chinese logistics services industry
1.The road transportation segment is highly fragmented
The logistics services industry in China is highly fragmented. Low entry barriers are one of the main reasons for the fragmentation. This is especially the case in the road transportation segment where companies tend to compete on price. Advanced logistics services such as supply chain management, inventory management, logistics consulting and data analytic are still under-developed with the majority of the logistics services providers not capable of offering full supply chain management services. It is estimated that 3PL services providers in China still generate approximately 85% of their income from basic logistics services while value-added services such as information and financing services only account for approximately 15% of their income.
2.Policy support and the rise of e-commerce provide opportunities for industry development
China’s Belt and Road Initiative is also expected to invest heavily in the logistics services infrastructure, especially in the railway system between Europe and China. Trade agreements and infrastructure development along the Belt and Road Initiative corridor will significantly drive more trading activities among nations, and in turn, drive the demand for logistics services.
With increased consumption by urban and rural residents, the demand for specialized logistics services handling critical and time-sensitive items such as perishables, seafood and fresh cut flowers will continue to grow. Since the cold chain logistics sector in China is still under-developed, this will likely to provide additional growth opportunities for logistics services providers in the future.
China is facing over-capacity issues and companies will continue to outsource their logistics functions to 3PL services providers to reduce operating cost.
Continued development in e-commerce will drive demand for logistics services in areas such as inventory management and express delivery services. With the exception of the largest e-commerce companies, most companies will not invest and build their own logistics systems.
Consequently, the demand for 3PL service providers is expected to increase significantly, especially in 3rd to 6th tier cities where the demand for logistics services has been increasing.
3.Insufficient infrastructure, lack of talents and regulation are major challenges
The current infrastructure in China is insufficient to meet the demand for advanced logistics services. Warehouses in China operate with outdated equipment and many were remodeled from obsolete factories. The ground infrastructure in China currently does not efficiently connect to many of the logistics hubs, preventing the establishment of advanced intermodal logistics operations.
The development of the logistics services industry in China continues to lag behind many other developed countries as there are limited numbers of highly trained professionals available in the industry. The lack of logistics professionals with experience limits the pace of development of the industry.
The logistics services industry is governed by the National Development and Reform Commission, the Ministry of Transportation, the Ministry of Railways and the Ministry of Commerce, and various provinces and cities may also have their interpretation of national policies. Differences in policies among government authorities necessitate that logistics services providers employ additional administrative and management resources. As a result, regulatory discontinuity may limit the pace of development of the Chinese logistics services industry.
New player needs to focus on information systems and experienced team set up
Integrated logistics services providers rely heavily on information technology in areas such as transportation management, warehouse management, inventory management and other logistics processes. The capital and expertise required in order to build and operate effective integrated information systems are barriers for new entrants to the industry.
An experienced management team with strong expertise in logistics is necessary for companies to successfully compete within the logistics services industry. However, as there is a limited supply of experienced management in China’s logistics services industry, new entrants must provide considerable incentives to recruit experienced management individuals from established companies.
Integrated logistics services providers build their brand reputations over time through clients’ experience. New entrants’ lack of brand reputation makes them difficult to convince clients to trust their competence. Since logistics services can be highly integrated with clients’ operations from the sourcing of raw materials to inventory management and the delivery of final products, the risk for selecting a less well known logistics services provider can be very high.