MENTION logistics, and perhaps a busy port comes to mind. We may then recall how Rotter­dam was unarguably once the world’s busiest port, for 40 years. Yet, in just a few years this logistical crown was usurped by Singapore, among the most thriving of countries in Asia. How is the logistic industry going on in the Chinese market? Find out in Ruben’s latest article published on China Today “Day Breaks in China’s Logistics Industry”!

The term “logistics” was first coined in 1927 by U.S. scholar Ralph Borsodi. Yet logistics services actually originated in military usage, and logistics has since come to play a major role in today’s global supply chain. Among all types of logistic services, however, third-party logistics (TPL) first started in the 1980s in the United States. This business ex­panded by 20 percent each year over the following 20 years. And then TPL in the European countries swiftly came up from behind.

The world was, to a large extent, then soon surprised by the rapid develop­ment of the logistics industry in China. Though the industry was exposed to a negative economic environment from 2008 to 2009, during which the world suffered the financial crisis outbreak, it was somehow a wakeup call for inter­national logistic companies, to the fact that Asia, or more specifically China, is where the future of the industry lies.

What’s going on in the industry in Europe and the U.S.A., as compared to China’s current TPL development? There are apparently many differences.

Enormous Investment in an Emerging Industry

In terms of logistics infrastructure, since most business is done through ocean freight, differences may be il­lustrated by comparing the amount of investment in port infrastructure in China and Europe. After China officially became a WTO member in 2001, inter­national TPL rushed into the Chinese market. A huge investment in China’s TPL has since been evident. In the year 2002, there were only about 10,600 quay berths, yet by 2011-2012, they had almost tripled to 31,000 (2013-2017 Chi­na Port Logistic Industry Analysis and Prediction Report data). The amount of investment has continued to increase each year. For example, after gaining great rewards in 2011, the Logistics Management Department of Liaoning Province decided to invest RMB 20 bil­lion in port infrastructure in 2012.

Since Europe became involved in the logistics business earlier than Asian countries, as regards both infrastructure and operation of the logistics industry, European countries have achieved great­er maturity. Their investment should therefore not increase as rapidly as in China. However, through specific invest­ment in either channels or bridges to solve small problems, certain cities like Hamburg and Antwerp are still among their greatest ports in Europe. More­over, investment in further development never stops in Europe. Rotterdam, as the best port in Europe, absorbed €10 billion (about RMB 80 billion) in invest­ment from government and corporations from 2006 to 2013. And despite being the best in Europe, development of this port has never stopped.

Toward Lower GDP Costs

Observing the logistics costs in per­centage terms of GDP in China and in some developed countries, we see there is still much to improve in China’s logis­tic systems. Logistics costs refer to the costs of transporting and storing prod­ucts, as linked with charges for transpor­tation methods including train, truck, air and ocean transport. Other logistics costs include fuel, warehousing space, packaging, tariffs and duties.

In 2011-2012, logistics industry costs as percentage of GDP were: U.S.A. – 10.5 percent, UK – 10.6 percent, Neth­erlands – 11.3 percent, and Japan – 11.4 percent. In 2011-2012 in China, logistics industry costs as a percentage of GDP was about 18 percent – 8 percent higher than in developed countries (China Lo­gistics Club data). Further explanation is required here: lowering such costs as a percentage of GDP is more profitable for businesses. This is because logistics ser­vices do not add value to the process. To be specific, the faster and more efficient you are, the more money you make dur­ing the process. Unfortunately, an in­creasing number of logistics companies in China are still struggling for higher profits.

Yet, it is worth mentioning the case of Qingdao, a city doing so well in logis­tics that it sets a good example for other cities in China. In 2008, the cost of lo­gistics in Qingdao was only 9.8 percent of GDP, comparable to developed coun­tries. The city mainly developed its port, supplementing airfreight and rail trans­port. It has thus focused on its specialty – ocean freight. In this regard, reduction of logistics costs requires companies to specifically focus on an industry and of­fer proper logistics services at the same time.

Clear Norms and Standards Required

There is a famous saying among the Chinese, “Nothing is accomplished with­out norms and standards.” This works in the logistics industry, too. Logistics management standardization refers to national regulations and standards in the industry, the assortment of types and sizes of companies, the business process, and so forth. To manage an industry well, to a large extent, entails a well-established management system.

The United States was the first coun­try in the world to organize a national logistics management department – the National Council of Logistics Manage­ment (CLM). In the 1980s, rules and regulations (around 1,200 terms) were drafted for airways, waterways, railways and highways, which ensured the qual­ity of logistics services in the country. It is the same in Europe. DHL, Kuehne & Nagel, DSV, Panalpina, CEVA – all these companies are excellent performers in the market. The key reason is that peo­ple know what they are doing every day and why they do what they do. Everyone is clear about standards and norms.

As for Chinese logistics standards, of course companies must follow rules from the Ministry of Commerce, the Ministry of Transport, and the General Administration of Customs. However, these are all very general rules. And al­though there are local logistics organiza­tions in China, for example, the China International Freight Forwarders Asso­ciation being one of the biggest, such or­ganizations have yet to devise specific rules. There are thus no detailed rules and regulations for Chinese logistics companies to follow.

In this regard, I have two sets of ad­vice for Chinese logistic organizations. Firstly, I would recommend that Chinese logistics organizations, especially local ones, cooperate with each other by hold­ing events and networking activities. In this way, logistics organizational net­works would expand effectively. Through merging local logistics organizations toward a larger scale, amalgamation could approach the level of international logistics organizations. Another point is to increase standards for companies wishing to join logistics organizations. Normally companies who are members of the organization are given logistics certificates. I think if China divides the certification system into the three levels of basic, good and excellent, some truly fine logistic companies would be more willing to join such organizations.

Market Segmentation

As client needs may vary quite signifi­cantly, logistics services could be divided into many types: by industry, geographic region, product, clientele, time duration, service, and interest return. In freight forwarding, for example, the basic ser­vice is transport from port to port. Other companies offer added-value services – transport from door to door. The market is thus based on service type. Market segmentation among big international companies in Europe is fully developed. They offer services for ocean imports and exports, containers, contract logis­tics, and so forth. Customized services have become one of the core ideas for running businesses in today’s world. Moreover, there are logistics companies offering services to only one or a few select industries, such as in automotive and consumer products, or chemicals.

Development in China’s logistics mar­ket segmentation is still at entry level. At the beginning, a lot of logistic companies provide the same services. Problems ap­pear at a later stage when profits begin decreasing at a rapid rate. Companies, therefore, have to think about how to make the pie bigger before getting their slice. A few of the better logistic com­panies, such as COSCO Logistics and CNPL, are performing well through the market segmentation process, based on geographic region, industry type, as well as the size of client companies.

The point of comparing the industry in China to that in Western countries is not to let everyone down. Though there are disadvantages for China right now, with the above improvements, business will get better sooner or later. There is no doubt that, during the past decade, the development of the logistics industry has been amazing.

When the Netherlands was still king of the logistics industry, Asian ports and logistics companies were left far behind. China took but a few years to catch up, and then take the lead. With the coun­try’s rapid economic growth, I am con­fident that China will unleash a logistics industry gold-rush in the near future. RUBEN VAN DEN BOER is RMG Selection consultant.