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China Domestic Distribution: Thoughts on Regulatory Reform

China Domestic Distribution

Can you imagine a China where 3PLs can get a transportation license without owning assets? Where cargo insurance laws are clear and the onus of insurability is clearly stated and uniform? A place with low barriers to entry and exit and access to capacity helps create strong markets and greater efficiency?

Good news. China may already be going down this path. And I think, in the near future, it may be possible for a Non-truck Operating Carrier to supplement regulatory reform and help shape the future of the China distribution sector.

Let me back up. Despite everything from labor cost inflation to a slowing global market for Chinese made products, China continues to demonstrate a strong economic growth track. One key aspect of this promising record and forward expectation is the rapid development of a consumer culture. With close to 1.5 billion people and a strong desire to consume, I believe that the domestic market in China is bracing for strong growth in the coming decade and beyond. This suggests a critical need for improved logistics services that cater to the domestic distribution of products.

China’s existing port and road infrastructure has allowed the country to maintain relatively efficient export operations over the last several years. However, the total cost of logistics in China is still very high when compared to the more developed economies and other competing emerging economies. For example, it’s estimated that China’s logistics costs are about 18% of GDP, while that of the U.S. is only 9%. The gap is likely due to high inefficiency and costs tied to domestic product distribution and warehousing.

The rapid expansion of China’s road infrastructure over the last decade has been a great benefit to the economy without a doubt. However, the growth produced extremely high toll charges across China’s highways. As a result, toll costs play a significant part in the cost of domestic logistics throughout China and warrant the right level of correction over the next decade. A lack of reform to the existing toll system will potentially begin to have greater impact as the consumption levels in China increase.

So, when you add up the rapid growth in disposable income and the quick onset of consumerism, it’s essential for China to improve its overall logistics spend efficiency. In my opinion, regulatory reform that fosters strong market forces will attract focused investment and innovation, and form the base of a strong China domestic distribution sector.

Regulatory reform is by far the key element required to trigger improvements to China’s domestic logistics segments. At present, there is clearly minimal regulation in the industry; this is leading to across the board inefficiencies—from asset utilization to service levels to safety. And inefficiency can result in significantly higher costs.

If China focuses on attracting targeted logistics investment— whether local or foreign—that will supplement the regulatory reform and support specific modes, increase competition, and create innovative products and services that can help drive greater long-term improvement. Historically, China’s complex licensing regulations have limited investment in certain sectors of logistics. While international transportation eventually had lowered barriers to entry that allowed strong foreign 3PL investment into China, there is clearly a need to begin the same degree of reform to attract investment into other sub-sectors in logistics. Transportation and logistics companies with world class technology, processes, and transportation management solutions could be incented to invest in and support innovation that can supplement government actions. Conversely, government action on reform of transportation laws should help create a strong market, uniformity, and clarity on risks, rules, and enforceability.

How can China begin to create a better transportation regulatory system? The primary goals of any regulatory transport body should be to create awareness of: 1) the importance and benefit to the carriers of establishing strong markets and 2) access to information that can be achieved through industry standards.  A system should do this while fostering entrepreneurism among the carrier community. 3PLs or large carriers can also support the change by sharing technology and service management basics. Ultimately, an engaged regulatory body can foster the right balance of reform and will help shape the future of China’s distribution.