Executive Summary

China has been very successful in turning itself into a production powerhouse in just two decades. Given that Chinese exports have by now captured a sizable share of the world market for consumer goods, cost competitiveness alone will not be sufficient to guarantee further success. On the other hand, the liberalising domestic market in China is big and fast growing enough to attract more and more local and foreign players to compete.

There is an increasing consensus that logistics management will become an indispensable competitive tool for China's manufacturers/exporters in the world market and traders/wholesalers/retailers in the domestic market. Efficient integration along the supply chain will help differentiate the winners from the also-rans.

The superior economic performance of the US over the past decade has owed much to advancements in logistics management. It is in this regard that China needs to make significant and rapid improvements. It is estimated that logistics in China's industrial production take almost 90% of the whole production cycle time and 40% of general production costs. High inventory levels also affect the competitiveness of wholesalers and retailers.

China's accession to the WTO gives Hong Kong services providers golden opportunities to render tailor-made logistics solutions for users in various manufacturing and services industries. Arguably, such opportunities will come as much from relaxation of regulatory constraints as the global trend towards more demanding service requirements.

Logistics: Recent Global Developments

Logistics has come into vogue in strategic management in the past decade. Once a traditional industry of moving goods around, cargo transport has been transformed into a modern "logistics" business which creates value by integrating transportation activities and providing supporting services to facilitate the smooth operation of material flow, which constitutes a vital part in supply chain management.

The global forces that bring about the rapid growth of the logistics industry include:

In recent years, more and more options are being explored for better supply chain management. Specialised companies have been developed to provide third-party logistics services. Approximately two-thirds of all major US consignees now use third-party logistics support.

Sophisticated logistics services are custom-designed to meet specific end-user needs. Customers appear to prefer to use as few services providers as possible, and the general trend is towards fewer and larger providers. Indeed, recent trends are for shippers, consignees and services providers to come together at various parts of the value chain to find common solutions.

Logistics in China: Thriving in the Post-WTO Market

China has much room for improvement in supply chain efficiency and reduction in wastage. Moreover, the need for tightly-focused, efficient logistics services will escalate, given the expected rise in the volume of external trade and domestic distribution induced by WTO accession. Logistics, a young industry in China, thus promises exponential growth in the post-WTO environment.

China's accession to the WTO will also bring a decisive change to the regulatory regime on foreign investment in this sector. In freight forwarding, majority ownership in joint ventures will be allowed one year after accession, while wholly foreign-owned subsidiaries will be allowed within four years of accession. Foreign companies will no longer be obliged to undertake only international freight forwarding business. In most logistics sub-sectors, including storage and warehousing, express delivery and ground transportation, majority-owned joint ventures will be allowed one to two years after accession, while wholly-owned enterprises will be allowed in three to six years.

The transportation and logistics sector has historically been under the control of state monopolies and its liberalisation will be a complex process as it involves the coordination of intermodal transport modes both at the provincial and national level. The fact that various logistics sub-sectors are under the control of many different government bodies also does not help. Nevertheless, market competition, intensified by the participation of foreign players, will be the pivotal development of the sector and it will have strong impact on China's external trade regime and internal wholesale and retail business.

Consistent with the worldwide trend, the use of third-party logistics services providers will gradually be accepted by local Chinese enterprises as they concentrate on their core business and reducing logistics costs and inventory in the face of intensified competition. According to a survey by China Association of Warehouse and Storage, 60% of large and medium-sized corporations will outsource the logistics function to a third party. The growth of B2B and B2C e-commerce will also accelerate the demand for "quick response"-based supply chain management in the China market.

Opportunities for Hong Kong Services Providers

This report attempts to outline the expected changes in the regulatory and business environment following China's WTO accession and discuss opportunities for Hong Kong players. Experienced Hong Kong companies have already shown keen interest in investing in logistics infrastructure such as cargo-handling facilities and logistics centres as well as providing freight forwarding services and logistics solutions in the mainland, in response to easier access to the market post-WTO accession. They can leverage on their experience in supply chain management, e-logistics, international freight forwarding and logistics facilities operation and management as well as financial capability to form joint ventures with local or foreign players.

Research suggests grounds for a more diversified regional strategy for Hong Kong companies. The case for a diversification strategy is supported by, among others, the shift of economic policy in favour of the inner regions, extension and improvement of transportation to these regions, and the relatively low level of competition there. Suitable joint-venture partners are also easier to find. It may be argued that the risk of investing in second-tier cities is higher than in the more developed coastal cities. However, the potential opportunities and rewards are also greater for those able to gain an early entry to the more challenging and fast-growing markets.

Three major areas are covered in this report, namely air transportation and express cargo, freight forwarding, and logistics services.

Air transportation constitutes a major infrastructure element in the logistics sector. By 2005, China will have bought 400 aircraft and built or renovated 150 airports, including three international standard aviation hubs at Beijing, Shanghai and Guangzhou, 13 large airports, three standby airports and 40 lateral airports. Air transport-related services and commercial activities such as airport logistics-centre management, airport-facilities management, aircraft maintenance, will provide substantial opportunities for Hong Kong investors.

The growth of logistics services and demand for supply chain management will trigger demand for express cargo services. Moreover, the growth of e/m-commerce will also have a positive impact on the express business. Hong Kong-based operators will be able to leverage on Hong Kong's strategic location and penetrate further into domestic express services along side international services, most likely in niche areas.

The opening up of services auxiliary to distribution will provide new opportunities for Hong Kong-based freight forwarders to provide even better supply chain management services to their existing clients and to expand their client base in the mainland. At present, most Hong Kong freight forwarders conduct international freight forwarding business in the mainland. Now that China's market for domestic distribution is also opened to foreign participation, Hong Kong operators are likely to consider providing domestic plus international freight forwarding services which require more customised and sophisticated services such as warehousing and distribution, trucking and consolidation etc.

As reliability is the key to good freight forwarding services, Hong Kong freight forwarders' global business networks and their understanding of international practices can help secure the confidence of the service users.

Hong Kong operators have competitive edges over new foreign entrants, since they have already accumulated substantial market knowledge, IT know-how and investment in China. Thus, Hong Kong companies will be the ideal partners for foreign companies to develop a total supply chain network between China and the world. Mainland domestic companies may also want to partner with Hong Kong operators to make use of the complementary expertise.

Being a major transportation and logistics hub in the region, Hong Kong is in an advantageous position to capture the opportunities offered by the unprecedented opening up of the mainland markets. With bilingual capability, business know-how and financial muscle, Hong Kong's logistics services providers are ready to enter the mainland market, either by themselves, or through partnership with other overseas companies. Mainland logistics companies are also eager to use experienced Hong Kong companies as strategic partners, since the latter are particularly suited to play the role of a catalyst in this transformation process by providing technical expertise and marketing skills, as well as facilitating access to funding.

Hong Kong companies are already quite active in the mainland logistics market. Some, for example, have been associated with talks in developing airfreight-related logistics services near mainland airports. Since Hong Kong companies are major investors in developing mainland ports, a lot of logistics facilities, including logistics centres, around these ports are also funded by Hong Kong companies. The growing demand for third-party logistics services, e-logistics support and western development will provide further opportunities for Hong Kong's services providers. Finally, Hong Kong companies are also major participants in the cross-boundary trucking industry.