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A. Third-Party Logistics Providers

In the U.S. and Europe, consumer goods firms generally outsource logistics needs to third-party logistics providers (3PLs).  Although 3PLs control a small share of the overall logistics market in China, they are growing in importance for multinational companies and organizations looking to set up or expand operations on in China.  3PLs are essentially supply chain managers who subcontract some of their logistics requirements to container lines, trucking firms and airfreight companies.  Many own assets such as distribution centers, warehouses and trucking fleets, and a growing number of providers are expanding to offer across-the-board services.  For consumer goods companies looking to move their product into or around China, outsourcing to a 3PL can mean lower supply chain costs. 

According to Morgan Stanley, while 3PLs currently handle just 16% of final products in China, more foreign and local 3PLs will enter the market over the next five years.  The emerging 3PL industry in China may be categorized into four types: 

?     Large SOEs (such as Sinotrans, COSCO and China Post) with extensive transport and warehousing assets, broad national networks, and strong relationships with central and provincial governments.  These firms already enjoy a monopoly in several areas of trucking, shipping and postal services.

?     Medium-sized domestic logistics providers (generally privately owned), which focus on one or two key industries.

?     Logistics divisions of manufacturers and processors, primarily providing services to internal customers, but sometimes offering 3PL services to outside companies.  The Shanghai Fruit Distribution Center is an example of a subsidiary company that has sought to internalize logistics needs.  However, as an SOE, the division is struggling to update its facilities and compete with private counterparts.

?     Foreign logistics providers, including multinational firms, new Wholly Foreign Owned Entities (WFOEs) and smaller firms working in niche markets. 

China’s leading 3PLs are large foreign companies licensed to operate as WFOEs.  Also growing in importance are foreign companies that are currently restricted to operating as joint-venture partners or through free-trade zones (FTZs).  In 2001, the government of Shanghai’s Pudong New Area lifted all restrictions on warehousing and logistics companies setting up operations in the Wai Gao Qiao Bonded Zone, equalizing their position with trading companies in the the zone.  Foreign companies are now allowed to operate these warehouses themselves to store a wide variety of raw materials, parts and other finished goods for onward sale and shipment into China.  In Wai Gao Qiao, foreign operators generally maintain high-standard warehouses at their manufacturing facilities, which can double as regional distribution centers.  A growing number of providers are “one-stop-shops” that offer wide-ranging import distribution services that extend beyond logistics.

By 2004, all of these firms will be permitted to operate as WFOEs, and will be free to offer a wide array of services, provided they obtain the necessary licenses.  An outline of the status of the different services and their licensing authorities is given below.

From the logistics provider’s standpoint, both foreign and local 3PLs are faced with two choices in the growing commercial economy:  invest up front in a national network and wait for clients to come; or claim national coverage and struggle to meet subsequent client demand.  Most 3PLs outsource most of their logistics operations to local firms, encouraging 3PLs to choose the second option.  In the short term, that choice is more palatable, allowing businesses to oversee operations without having to invest heavily in equipment and personnel upfront. 

However, 3PLs offering domestic supply chain management face a hard sell in China because their high costs put them out of reach of most local companies.  Based on the table above, it is evident that 3PLs also fall between the cracks of China regulatory bureaucracy, at least for the time being.

B. 3PLs and Intermodal Transport:  A Case Study

Xintiantian Distribution Center, a subsidiary of Shanghai Food Group, is one such distributor that entered into a three-way joint venture with Shanghai’s Dazhong (a trucking/transportation company) and Mitsui O.S.K. Lines, a Japanese distributor, on October 1, 2003.  Xintiantian is a typical example of a delivery center that evolved from a larger SOE and now offers specialized logistics services.  Xintiantian provides refrigerated storage and distribution services, with 12,000 tons of cold storage capacity (or 4% of Shanghai’s total 325,000 ton cold storage capacity).  The aggregate cold storage capacity of Shanghai Food Group and its subsidiaries amounts to 130,000 tons, or 40% of Shanghai’s total.  Xintiantian offers three basic services:  cold storage, simple manufacturing (including packaging and labeling) and delivery of refrigerated goods to retail outlets.  The company services a variety of foreign and domestic clients, including hypermarket chain Metro and convenience store chain Alldays.  A synchronized computer system allows Xintiantian, its suppliers and store branches to view the status of orders in real time.  The company presently has a registered fleet of about 40 refrigerated trucks (some equipped for transportation of frozen goods and some for fresh or perishable goods).

C. Cold Chain:  Refrigerated Storage and Distribution

Refrigerated shipment and storage of goods is relatively undeveloped in China, notwithstanding technical advances and increased investment in the coastal areas in recent years.  Refrigerated trucks and warehouses are still quite rare, even in coastal areas, and different goods may require different cold storage arrangements, which many of the existing refrigerated storage facilities have difficulty providing.  For example, fresh and chilled goods may be stored between 0 and 10oC, while frozen goods such as ice cream must be kept at –18oC.  As a consequence, some foreign food companies, such as Haagen-Dazs, handle cold storage and distribution responsibilities themselves, to ensure the safety and quality of the product.  Most manufacturers, however, do not have the manpower or resources on the mainland to maintain such expensive equipment, and choose instead to hire 3PLs to take on the task for them.

A small but growing number of specialized firms, such as Xintiantian, serve as 3PLs, covering the movement of temperature-sensitive products.  There are also a growing number of foreign-owned or managed logistics providers such as E-Merge Logistics, based in free-trade zones.  A number of these have access to bonded, temperature-controlled facilities, in addition to providing a wide array of services such as inventory control, customs clearance and foreign currency exchange.