Dynamics reshaping the logistics industry in China

As the financial crisis impacts China, the country’s logistics industry is being reshaped by three major dynamics. While many companies hope to just weather this storm, others will seize the opportunity to leapfrog competition and reposition for long-term success.

Dynamic 1: continued downward pressure on demand coupled with shifting mix call for assessment of service offerings

Declining international and domestic trade have created downward pressure on demand for logistics services. Along with decreasing international trade, domestic cargo volume growth has also been declining across the different modes of transportation, including rail, waterway, road and air.
However, logistics companies can offer customized and potentially higher margin offerings when they are attuned to and adjust for changing customer demands, such as:
  • Export growth opportunities are still strong in select top 25 lanes where trade has been less impacted by the crisis
  • Domestically, government policy and manufacturing companies are driving the shift of manufacturing bases inland and consequently accelerating inland demand for logistics
  • Companies are restructuring their supply chains and directly impacting requirements for logistics services, as they opt for flexibility and scalability on top of cost
  • Increased need for more high value-add and specialized logistics services due to industry upgrades in coastal cities

Dynamic 2: declining profits compounded by more volatility require aggressive cost restructuring

Since Q4 2008, prices have continued to drop across almost all sub-sectors of China’s logistics industry due to overcapacity resulting from the economic downturn. In addition, operational complexity, a changing legal environment, and a new competitive paradigm are complicating cost drivers and structures.
For example, the recently launched “Fuel Price Reform Policy” calls for the retail fuel price in China to be tied more closely to the global market, increasing volatility in an industry of tight margins. If the crude oil price increases by 20 percent, the margin of a typical road transportation business will be reduced from 3 to 0 percent, as it becomes more difficult to pass fuel cost increases to customers in this over capacity market.
For a company’s short-term survival and longer term competitiveness, bold and sweeping cost optimization actions are critical, such as:
  • Linehaul – network optimization, routing improvements, fleet management
  • Labor – process and activity optimization, workforce management, capacity adjustment
  • Operations – outsourcing of fixed assets, consolidation, and achieving economies of scale

Dynamic 3: renewed investment interest signals further industry consolidation

Industry dynamics and corresponding options
Despite the effect current market conditions have on China’s short-term growth, China is expected to rebound and continue to develop as one of the major global manufacturing bases. Logistics companies with relatively strong financial positions are already expanding their capabilities by pursuing mergers and acquisitions (M&A). M&A activity is stimulated because of:
  • Market demand for expanded capabilities and network
  • Targets supporting companies’ longer term growth strategies are becoming available at attractive prices, driven by low valuation
  • The government of China’s legal and financial support for consolidation in the logistics industry

We anticipate M&A activity to ramp up quickly and significantly change the competitive landscape.
As these three dynamics reshape the logistics industry and alter the competing paradigm, companies need to be proactive with cost re-structuring, competitive positioning, and a long-term growth and investment strategy. Logistics companies have several strategic options depending on their desire for growth, financial positioning, and risk appetite – defend, rebuild, and/or attack.

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Mui-Fong Goh, a partner in the Beijing office and the Transportation Lead for Asia
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Chee Wee Gan, principal in the Shanghai office
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Tina Wang, principal in the Shanghai office
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