How to enter the Chinese forwarding market
Since China joined the World Trade Organization (WTO) in 2001, many of the old Communist-era restrictions for setting up business have been removed.
For some logistics companies, the largest barriers to entry come not from Chinese red tape but from other Western competition. “Most of the big forwarders are already here,” said Gerhard Blumensaat, director of airfreight North/Central China, for forwarding firm DB Schenker, which has been in the country since the late 1970s. Other major foreign-owned forwarders include DHL, Kuehne + Nagel, UPS and Panalpina, just to name a few.
“You still have paperwork to fill out, plus technical advisors and lawyers to consult, but other bottlenecks have been cleared,” Blumensaat said.
German logistics group Dachser has ties with China that stretch back about 30 years. Today, Dachser has 150 offices across the country. “Growth has gone down a bit, but competing in China is still challenging,” said Thomas Reuter, the company’s COO, air and sea logistics. “We consider it complicated, but never a problem.”
What tends to trip people up today is lack of preparation. Crucially, a forwarder cannot expect to do business for very long in China remotely, Reuter said. There has to be a permanent presence in-country. “You have to remember that any business relationship in China is also a personal relationship. You have to go the last mile for the customer.”
Hong Kong-based Kerry Logistics operates 21 logistics centers and warehouses across Mainland China, including in Beijing and Shanghai, and also owns a fleet of more than 1,400 vehicles. “The Chinese market, with its burgeoning middle class, represents an exciting opportunity for foreign brands, but it comes with its own challenges,” said Emma Rowlands, U.K. sales director for Kerry Logistics, who does extensive business within China. “Companies that want to do business there need to do their homework.”
A million little pieces
One of the first lessons to be learned about Chinese-style forwarding is the intense competition and fragmentation in the market, both from locally based and foreign logistics service providers.
“It’s easy to consider Asia as one market, but in fact it is a collection of markets varying widely in maturity and complexity,” said Mark Millar, an Asian supply chain and logistics consultant and visiting lecturer at Hong Kong Polytechnic University.
The trucking industry in China offers a good example. Trucking companies, Millar said, account for around 78 percent of all domestic cargo movement. Within that market, there are an estimated 790,000 road haulers, but the top 20 trucking companies have just 2 percent of the total market. In logistics, as well, the top 50 companies – including Cosco, Sinotrans, CSC Holdings and China Shipping – have combined annual sales of about US$322 million, or less than 2 percent of total market share.
The concept of outsourcing to third-party logistics (3PL) firms is also a relatively new concept in China, Millar said. As of last year, only about 20 percent of transportation and warehousing activities were handled by 3PLs. Compare that to the 45 percent penetration rate for 3PLs in the United States, the nearly 50 percent rate among Western European countries and the 80 percent rate in Japan.
The low 3PL penetration rate and reliance on a vertically integrated market structure is one of the reasons why forwarders are so interested in the underdeveloped Chinese logistics sector. However, China’s logistics sector “remains hugely complex and brutally competitive,” Millar said.
To do business with this fragmented market, forwarders wishing to ship domestically must engage with countless trucking sub-contractors, “with the majority of them being owner-operators with just one or two trucks, rarely of good quality and with little, if any, modern technology,” Millar said.
On top of these concerns, the country has been experiencing more stringent regulations and tax increases in recent years. Road tolls alone, he added, now represent more than 30 percent of total transportation costs for most truckers in China.
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