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A. Rail Transport

Logistics and distribution managers in Shanghai agree that rail is a good option for moving non-perishable goods.  However, for consumer foods and other temperature-sensitive products, rail is a poor choice.  Although heavy subsidization has ensured that rail remains the cheapest form of overland transport, several serious shortcomings make the rail industry incapable of meeting the demands of an increasingly competitive logistics industry. 

First, handling practices in the rail industry are extremely poor.  Goods shipped by rail are much more likely to be damaged than those shipped by road.  Damage usually occurs during handling when goods are transferred between rail cars and local truck transport.  Across the board, distribution and transportation workers are often not adequately trained in handling sensitive goods.  At best, poor handling compromises the quality of the end product. 

Second, representatives from Shanghai-based Dazhong Transportation Group report that cargo has a low priority in the rail system relative to passenger traffic, which leads to delays and unpredictable delivery times.  These reports are confirmed by representatives of oil crushing mills in North China, who prefer imported to domestic soybeans in part due to the unreliability of domestic rail transportation.  These mills also report that extra payments may be demanded by local rail line operators to make box cars available or to give priority to a cargo during high traffic periods.  Bureaucracy, poor scheduling and low speed rail lines also cause delays.  According to the EIU’s China Hand, shipments on less congested routes work within a one-week arrival window, whereas for congested lines, the arrival window stretches up to four weeks.  Some cross-country deliveries can take up to 60 days.  For perishable products such as meat, dairy, frozen foods and produce, shipment by rail is simply too slow and unpredictable. 

A third problem is that goods shipped by rail must be shipped in bulk.  A minimum ten-ton requirement is usually attached to most shipment orders.  The cargo sizes for many small and mid-sized distributors are often not large enough to be shipped in such high volume.

Fourth, theft of rail freight is an endemic problem.  Security measures can be strenuous and sometimes even require the manufacturer to employ its own security guards on trains to safeguard its goods.  Poor circulation of information also means that goods shipped by rail are almost impossible to track.

In light of these shortcomings, the Ministry of Railroads (MOR) is taking steps to improve the rail system and coordinate operations with foreign shipping firms.  The 7,000 km track construction scheme mandated in the Tenth Five-Year Plan, dubbed as the “eight verticals and eight horizontals,” constitutes 16 lines that cover a wide expanse of China’s geography.  The MOR is consulting with overseas logistics firms in an effort to streamline China’s movement of cargo and resolve inefficiencies.  For instance, many Chinese railway containers are still incompatible with those used by overseas shippers, requiring the unloading and reloading of cargo.  In addition to upgrading the infrastructure, the MOR is modifying stations to handle foreign containers. 

The government continues to promote foreign investment in rail construction as a means of financing its gargantuan infrastructure plans.  At present, MOR claims that over 100 joint-venture railway lines are running across the country.  WTO commitments are also encouraging foreign investors to enter into the sector.  By 2004, foreign majority shares in rail freight JVs will be allowed, while the entire domestic rail cargo sector will by fully opened to foreign investment by 2006.  Currently, Maersk of Denmark, Orient Overseas Container Lines of Hong Kong, U-Freight of the U.S. and German-run DHL operate trial joint ventures with state-owned companies.  JV rail services allow for improved tracking of goods and faster customs clearance times.  Additionally, foreign rail operators can offer specialized services and technology, such as refrigerated container services. 

While a foreign presence in the goods transport chain helps minimize some of the pitfalls common to shipping by rail, inherent shortcomings in the infrastructure mean that rail is still an undependable option for the distribution of perishable and time-sensitive goods. 

B. Road Transport

Heavy government spending since the mid-1990s and the unreliability of the rail system have positioned road transport as foreign and domestic companies’ most popular choice for the distribution of goods, especially consumer food products.  But because the trucking industry is extremely fragmented and has never been organized on a national basis, no single trucking firm can offer truly national coverage. 

As China’s entry into the WTO stimulates ever greater volumes of trade each year, the road transport sector has struggled to keep up with higher demand.  Logistics managers and road transport providers have identified several issues common to trucking.  First, from a provider’s standpoint, truck prices are rising due to more stringent emissions standards and the need for more sophisticated technology.  Higher capital costs equal even greater financial barriers for local companies trying to upgrade their equipment.  Second, truck maintenance is sub-standard.  Although trucking companies are technically required to undergo inspections on a regular basis, in practice they rarely do.  Only one-fifth of China’s freight trucks are containerized, which means that the majority of cargo is vulnerable to damaged as it sits unprotected on flatbed, open-backed vehicles.  Third, overloading of goods is a typical way through which companies try to cut costs.  Transporters are known to haul some 50% in excess of their legal payload, sometimes even higher.  A recent increase in police checks and fines is encouraging companies to heed capacity limits, however, overloading is still rampant and often results in delays and higher costs.  A fourth problem with trucking stems from city authorities’ inclination to protect local businesses:  Non-local trucking firms are often prevented from entering city limits during the day.  In Shanghai, for example, trucks greater than 1.5 tons are permitted to enter downtown areas only between 7 pm and 7 am, and only on even or odd days, depending on their license plate numbers. 

Despite these shortcomings, the construction of several new expressways has expedited run time, especially on longer-haul routes, and therefore has increased competition.  Long-distance truckers are less vulnerable to local government regulations on these expressways, enabling them to operate inter-city routes.  The emergence of hundreds of state-owned and private long-distance trucking companies has led to competitive prices and higher incentives to deliver goods more quickly, especially along the busy east coast corridor.  Thanks to the newly constructed expressways, the trip from Shanghai to Guangzhou can be completed in as little as 36 hours with two drivers, whereas it used to take three to five days. 

Newly constructed roads are also changing the nature of the rural economy.  In rural areas where refrigerated freight is still lacking, speed of delivery is vital.  With the rise of new expressways connecting rural provinces to coastal regions such as Shanghai, farmers are now able to ship their crops directly to urban markets in a much shorter time.  This has allowed them to diversify into more perishable but higher-value products such as fruits and vegetables, which are in high demand in China’s coastal cities.  Notwithstanding the Hong Kong ‘gray channel’ and other means of transporting imported fruit and other agricultural products into the country, the growing road network is helping domestic farmers by linking scattered Chinese production to urban markets and ports, thereby raising rural incomes. 

An estimated 2.7 million trucking providers offer services across the country, transporting roughly 10 billion tons of goods annually.  Sinotrans, China’s largest provider, has a registered fleet of 3,000 trucks and specializes in long-distance service, while local operators can offer cost-effective short-distance service.  In major cities, consolidation in the form of joint ventures is a growing trend.  Sinotrans, for instance, has roughly 50 subsidiaries and nearly 270 joint ventures.  Firms also are increasingly expanding from traditional freight forwarding to comprehensive logistics services, offering warehousing facilities, ships, railway storage areas and/or port terminals. 

C. Water Transport

Shipping, both coastal and inland, has been used in China for thousands of years and today accounts for over half of all domestic freight traffic.  Barge costs are generally low, and bookings are easy to obtain.  Shipping by vessel is best suited for moving bulk commodities rather than distributing final products; about two-thirds of local barge traffic is comprised of commodities for industry and agriculture, such as coal and grain. 

According to the MOC, navigable inland waterways total 122,000 km in length.  With over 18,000 km of coast, China also has three major rivers that provide access to inland regions.  The Yangtze River (or Chang Jiang) is China’s longest navigable river, at 6,300 km.  Shipping by barge is cheap, comparatively safe from pilferage, and the industry is dominated by large local companies with cross-border operations. 

Although China’s vast collection of inland waterways has allowed it to use water transport for centuries, lack of investment has contributed to a growing list of shortcomings.  Outdated equipment, inadequate IT systems and obsolete inland port infrastructure place barge transport at a disadvantage with newer competitors such as road and rail.

As with other forms of inter-modal transport, China’s port infrastructure suffers from several shortcomings in terms of efficiency and service.  First, mainland wharves average between 22 and 27 crane moves per hour, compared to 30 per hour in Hong Kong.  Second, bottlenecks are common as containers are slow to transfer from port to trains or trucks, often requiring at least two crane movements per connection.  Bureaucracy serves as a third and familiar problem that hampers efficiency.  Shipping companies must obtain regulatory permission from Customs; the State Administration of Quality Supervision, Inspection and Quarantine; the State Administration of Foreign Exchange and various other government bodies.  Fourth, cargo losses are higher in China than in Hong Kong or Singapore, due to theft and damage.  Finally, shipping is still a relatively restricted sector, with foreign companies allowed to hold only a minority stake in Chinese port facilities.

Since neither a lack of barge capacity nor waterway congestion present major problems, the government is keen to upgrade the infrastructure for water transport.  According to the MOC, China’s principal ports handled more than 26.5 million TEUs in 2001, up 20% from 18.7 TEUs in 2000.  Currently, China has more than 1,200 ports offering berths for 33,000 vessels, including 800 deepwater berths capable of handling 10,000 ton vessels.  Major increases in containerized handling capacity are planned for 2005.  Despite restrictions, foreign companies are making inroads into the industry.  The MOC and other government agencies have entered into talks with international shipping companies and have committed themselves to developing regulations that require shipping lines to file freight rates.  All of these are signs of increasing transparency in the industry. 

The government is also capitalizing on foreign interest in port construction.  The Shanghai Port Authority has already begun work on a 20-year, US $14.5 billion project that aims to build 52 berths along a 13-km waterfront with a draught of at least 15 meters at the Yangshan Deepwater Port.  Hamburg Port Consulting, a subsidiary of Germany-based Hamburger Hafen und Lagerhaus-AG Group, is designing the mainland container terminal.  The first phase, construction of the deepwater berths, is due for completion in 2005 at a cost of US $1.5 billion.  The second phase will see the construction of a 30-km 4-lane bridge for the transportation of cargo to Shanghai from the islands of Dayangshan and Xiaoyangshan—the base of the new port.  The final phase will involve the connection of all port utilities. 

D. Air Transport

China’s airfreight sector’s annual value stands at US $500 million per year, with three domestic airlines controlling roughly 60% of the market.  The cargo divisions of China Eastern, Air China and China Southern have all entered into domestic joint ventures and offer a diverse array of services. 

However, for the distribution of consumer products, including food and other sensitive goods, airfreight is almost never used, since trucks can reach most destinations within a few days and at far lower cost.  Furthermore, the infrequency of flights to more outlying cities cancels out airfreight’s time advantage over ground transport.  The sector is further constrained by low cargo capacity and an underdeveloped airport infrastructure.  According to a local aviation newspaper, China has just 13 airports per 10,000 km. 

As with other sectors in the logistics industry, the government’s Five Year plan outlines a major development program for air infrastructure.  By 2005, the CAAC plans to add 400 aircraft and increase the number of airports to 170, raising air cargo handling capacity from 2 million tons to 5.6 million tons.  The presence of international courier companies in China is also growing.  DHL World Express, United Parcel Service (UPS), Federal Express (FedEx), TNT Express Worldwide, and Japan’s OCS all have joint venture operations that allow them to carry international express letters and packages into and out of China.  Additionally, most international airlines provide cargo flights in and out of China.