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China viewed as last bastion of hope

By Winny Wang | March 12, 2009, Thursday | Print Edition

XIAO Shen, an employee at a Shanghai logistics company, laments that his salary has halved since the global financial crisis started.

"We have had to reduce service fees to attract clients as the economic downturn undercut cargo volumes between Shanghai and Japan and the competition turned fiercer," he said.

He's just one of thousands reeling from the fallout as an economic storm sweeps through China's logistics industry, a sector dominated by smaller, often inefficient companies beset by rising fuel and labor costs, flagging demand and cutthroat competition.

"More than 40 percent of logistics companies reported lower profits and even losses last year, and some smaller companies have quit the market," said Wang Zuo, vice director of the China Logistics Association.

The State Council, China's Cabinet, last month unveiled a plan to increase support for logistics companies, the last in a series of sector-specific measures designed to help the nation's 10 top industries weather the financial downturn.

Under the plan the government encouraged mergers and restructuring in the logistics industry to form larger companies more able to compete with overseas rivals.

"It is good news for us that the country will encourage mergers in the industry as we are seeking to integrate sources and cut costs," said Shen Yan, president of Shanghai Xinyun International Transport Co Ltd, which reported 1.2 billion yuan (US$175 million) in revenue last year.

"However, the most effective measure would be the loosening of credit controls because money from the government's stimulus plan will be invested in infrastructure and we want to be able to take advantage of it," Shen said.

He Dengcai, an official at China Federation of Logistics & Purchasing, said it will require a long time for domestic logistics companies to gird up to compete against well-established overseas rivals.

"UPS owns more than 600 cargo planes, while all logistics firms in China own only 60 to 70 planes in total," He said.

China is the biggest economy in the world to have staved off recession so far, and overseas logistics giants are eyeing the nation as a last bastion of opportunity.

Deutsche Post AG's Chinese division is in talks with Chinese firm A Plus Express Co about a cooperative deal that is expected to be completed this year, and Dutch giant TNT has purchased Huayu Logistics to expand road delivery services. FedEx has spent 3 billion yuan to buy out its Chinese joint venture partner Tianjin Datian.

Wu Yue, a logistics analyst, said foreign logistics companies feeling the pangs of recession in Europe and North America have intensified their focus on China.

"The well-developed foreign ventures are better poised to grab opportunities created by the government's stimulus package," Wu said. "Private companies in China will face more challenges.''

The 4-trillion-yuan stimulus package is aimed at boosting demand, promoting logistics services in energy, mining, autos, agriculture and medicine and increasing investment in infrastructure.

The State Council has announced nine key targets for the industry, including enhancing cooperation between manufacturers and logistics companies, promoting logistics standards and technology and setting up a public information platform. No details have been released.

Lu Ming, an agent with Shanghai Ocean Shipping Agency Co, said he still feels pessimistic, stimulus program notwithstanding.

"The sharp decline in demand is a trend that even the stimulus package can't stanch. Demand at Shanghai port has declined 30 percent since the beginning of this year, and demand at the Ningbo port has slumped 50 percent," Lu said. "Only close cooperation between countries can help spur trade and help logistics companies survive. The stimulus package will mainly benefit large companies such as COSCO, rather than smaller ones.''

Economy is key

Shenyin & Wanguo Securities Co expects the government to issue more details about the plan for the industry, which may include tax cuts and the establishment of regional logistics centers.

TX Investment Consulting Co predicted that the details of the government's plan will include more financial support, including lower land prices and taxes.

Much will depend on the economy. In 2008, China's growth cooled to a seven-year low of 9 percent, breaking a five-year run of double-digit expansion.

In the last quarter alone, gross domestic product fell to 6.8 percent, the lowest in nine years.

Premier Wen Jiabao told the National People's Congress that the country is still on track for 8 percent economic growth this year.

The added value of China's logistics industry reached 2 trillion yuan last year, rising 15.4 percent from a year earlier, but the growth was 4.5 percentage points lower than 2007, according to the National Development and Reform Commission.

The NDRC attributed the lower growth to severe snowstorms, the devastating earthquake in Sichuan Province and the worldwide financial crisis.

The industry output rose 19.5 percent year on year to 89.9 trillion yuan last year. The growth rate was 6.7 percentage points lower than 2007.

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