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Development of Logistics Industry in China

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Chapter 1


1.1 Background

With the expansion of the globalization and the rapid development of the Information Technology (IT), the logistics industry has become one of the most important industries in the 21st century. The scope and role of logistics have changed dramatically over recent years. In the past, logistics played a supportive role to primary activities such as marketing and manufacturing. Now logistics has expanded from its traditional aspects: transportation and warehousing to purchasing, distribution, storage management, packaging, manufacturing and customer service. More importantly, the role of logistics has changed from cost absorbing to an important of competitive advantage for logistics companies. Modern theory of logistics in China was introduced in 1980s. Since its economic reformed and opened up in 1978, China's economy keeps booming, with a growth rate of nearly 10% in annual GDP which has become a global manufacturing centre. (Appendix 1) After China joined the World Trade Organization (WTO) in 2001, foreign companies were allowed to invest in China at the beginning but only in form of joint ventures that Chinese partner took up the majority. At the end of 2005, this restriction was completely phased out. At present, state-owned, private, and foreign logistics companies are all equally allowed to entry and compete in logistics industry in China.

China's logistic industry has been experiencing fast growth because of sustainable economic growth. The logistics industry reported an annual growth rate of 31% in 1999, 35% in 2000, and 55% in 2001, and was expected to continue to expand rapidly in the future. (LI & FUNG RESEARCH CENTRE, 2008) According to Exhibit 1, the average annual growth rate of the logistics industry in China was 22.2%, added value has reached to RMB 1.4 trillion in 2006 up 13.9% over 2005; and in 2007, the added value even reached to near 1.7 trillion up 20% over 2006. It is expected that China's logistics market value will continue to maintain an annual growth of 20% in 2010.

Exhibit1: Total volume and growth of China's logistics industry

1.2 Total logistics market size

The GDP of China was above RMB 10 trillion in 2002 that achieved a real growth of 8%. In the 10th Five-year Plan, China government is forecasting an average growth rate 7% per year from 2002-2007. According to the forecasts by State Development Planning Commission (SDPC), the GDP will be quadruple, about US$4.3 Trillion by 2020. In a detailed survey by the China Federation of Logistics and Purchasing (CFLP), the total logistics market was estimated at RMB1, 788 billion, 20% of the GDP in 2000. In 2002, it was estimated that the total logistics market of China were about RMB 2 trillion. According to HK Trade Development Council, leading logistics companies in China such as UPS, FedEx and DHL-Sinotrans have all recorded annual growths in over 30% on operations in China and there are more outsourcing contributes to the growth of professional logistics companies.

1.3 Players in the China Logistics Market

China's logistics market is fragmented. Government registration shows there are about 700,000 logistics companies in China and many of them are small, poorly managed with fundamental infrastructure and technology. (Alan Dixon, 2008) Those of the players are lack of nationwide competences and customer target is narrow which mainly focus on simple transportation and warehousing activities. Competition is intense, especially in the low-end market. Traditionally, China's logistics market is dominated by the state-owned enterprises (SOEs) which provide 90% of the logistics services in China.

1.3.1 State-Owned Players

There are many state-owned players in China logistics market. Before China joined WTO, China's logistics industry was a monopoly industry which could only be managed by state-owned enterprises (SOEs), mostly for transpiration and warehousing. The characteristics of the SOEs are small-scale local enterprises, slow product renovation, poor management, production plans following from various government agencies. Because of government investment and monopolistic operation, these enterprises obtained large assets and became relatively large-scale business organizations. Relying on their sufficiency capital and existing market share, these enterprises became leaders in China logistics industry at that time. The following is a list of SOEs that ranked top 5 in 2008 in China logistics industry:

China Ocean Shipping (Group) Company (COSCO);

China Railway Express Company Limited (CREC);

China Post Logistics Company Limited (CPLC);

China Railway Container Transport Company Limited (CRCTC).

COSCO Logistics

COSCO Logistics is a branch of China Ocean Shipping Company (COSCO) which was established in 2002. Because of the existing market share and advantaged infrastructure, it ranked number 1 in China logistics companies from 2002 to 2008. (Cen, 2005) COSCO Logistics has 300 logistics facilities, covering 90% of the China market and the competitive advantage is shipping transport.

1.3.2 Private Players

Since the mid-1990s, China's private domestic logistics firms started to develop themselves such as St-Anda, PGL, China Overseas logistics and so on. The private logistics companies are in medium-size which keeps the rapid growth in the market because of achieving in efficiency and effectiveness and they are more focused on geographies, service and customers. But they are lack of sufficient financial supporting for market expansion and ineffective management to support high growth and profitability. (Fu. and Gwi, 2004)

EAS International Transportation Ltd (Shanghai).

This company was established in 1985. In the past twenty years, EAS has acquired tremendous achievement in building the unique operation platform to develop modern logistics business according to the demand of customers.

1.3.3 International Logistics Players (ILCs)

Although the domestic companies dominate the general China logistics market, ILCs are also playing a very important role and their market shares are increasing rapidly. The most famous international logistics players in China are: DHL, TNT, UPS, FedEx and so on.


DHL entered China in 1981 and in 1986 it used joint venture with Sinotrans, one of the biggest SOEs in China logistics industry. DHL-Sinotrans has the biggest market shares in courier service. In the past twenty years, DHL has invested about $273 million in China. (Cen, 2005)

Nowadays, many foreign logistics organizations have built good relationship with Chinese logistics companies by using joint ventures. Foreign companies have competitive advantage in technology and management, when they are integrated with experiences and existing service network of Chinese firms that they could be brought into full play. Therefore, Chinese logistics companies usually face Merge and acquisition (M&A) risk. Many inland Chinese cities offer lots of commercial opportunities to foreign logistics companies but it need time for foreign companies to fully penetrate into the Chinese market.

1.3.4 Third Party Logistics companies (TPLs)

Third Party Logistics companies (TPL) is a new concept for most of the Chinese companies. A TPL company normally provides process-base services rather than a function-base logistics service, which generally toward to the integration and fully control of a part or whole process of customers' logistics network. (Fu. and Gwi, 2004) Because small or middle sized companies may not always achieve economics of scale in operating, which is even one of the advantages for third-party logistics companies. But due to the fundamental infrastructure of China logistics industry and developing technology, the TPLs are still need time to further improve the internal management in order to be expert in handling business.

1.4 Major modes of Transport in China

After enter 21st century, the construction of transport infrastructure keeps rapidly increasing in China.

1.4.1 Ports

Since China government opened ports to foreign investment companies in 2002, Chinese port facilities had taken huge steps that tremendous increased the capacity. In 2003, the total investment in Chinese port construction was US$2.2 billion, and in 2004, the Ministry of Communication has reported this figure was to reach nearly US$4.3 billion. Currently, China's coastal cities such as Dalian, Tianjin, Qingdao, Shanghai, Guangzhou and Shenzhen, which dominant regional logistics centres are completed new berths building. (Exhibit 2) In Shanghai for example, in 2003 the container throughput are 11.28 million Twenty-Foot Equivalent Units (TEUs) that is expected to increase to 14.5million TEUs in 2004 and in 2005, the TEUs of capacity has expanded 2M more. (Richard Brubaker¼Œ2005) Although such huge investment and abroad expansion, Chinese ports need to keep up with the increasing demand by use foreign terminal operators more.

Exhibit 2: Logistics hubs in China.

Source: Beijing Readies Logistics Stimulus, 2008

1.4.2 Road

China government heavy invests on China transport infrastructure, so the road transport becomes the prior choice for inland distribution. During the Five-year Plan from 2001 to 2005, transport infrastructure has been built significantly including 250,000 kilometers of highways and 24,700 kilometers of expressways. (Fu. and Gwi., 2004) By the end of 2006, the total length Chinese highway has reached 3,457,000 kilometers and 77,000 kilometers of railways.

1.4.3 Rail

Compare with China road and port infrastructure, China's railway infrastructure has received relatively low levels of investment. The Ministry of Railways plans to increase China's existing rail network from 72,000 km to 100,000 km by 2020. (Woosir, 2009) Use of the Chinese rail system increased 6% year on year from 2003 to 2004, the modest increase is because the weak demand of rail transportation. There are many problems cause the weak demand for logistics companies, such as poor handling practices, delays, unpredictable delivery times, theft and a general lack of infrastructure. However, despite these issues exist, the heavy subsidization still makes China's railway become the cheapest transportation compare with shippers.

1.4.4 Inland Waterways

The most significant Infrastructure on inland waterways is the Yangtze River, which increased 8% from 2003 to 2004. (Richard Brubaker¼Œ2005) Yangtze River can handle ships up to 6000 tonnes totally, however, the capacity of canals and low bridges are relative in low level because of the dry season in China. There are many waterway projects such as Gorges Dam which can serve to extent dry seasons and keep water levels low.

1.4.5 Air freight

China's airfreight sector is developed rapidly which has become the second-large domestics airfreight market in the world. According to Boeing's World Air Cargo Forecast, the market has grown at more than 20 percent annually since 1991. (Richard Brubaker¼Œ2005) The airports are fast developed by three economic zones: the Yangtze River Delta (YRD), the Pearl River Delta (PRD), and the capital city of Beijing. Moreover, the agreement between China mainland and Hong Kong gives Hong Kong airlines greater opportunities that access to the mainland. But the China airfreight is limited by insufficient infrastructure. In the coastal cities, the airfreights are more developed than that in inland cities.

1.5 Statement of the Problems

Since China jointed WTO, the logistics industry developed rapidly. But there are lots of problems during the development; here the researcher mainly focuses on cost, productivity and expansion of China logistics industry.

1.5.1 High Cost

Since China became one of the members in WTO, China logistics industry developed rapidly which kept high growth among all the industries. But the most important factor that slow down the development of China logistics industry is the high logistics cost. China's logistics expenditures took up 20% of the GDP in 2000 whereas logistics spending accounted for 10.3% of United States's GDP, 14% of Japan's GDP, and 10% to 13% of European Union's GGP. (Exhibit 3) The annual growth rate of total logistics expenditures is 10.29% in 2002, 12.99% in 2003, 16.76% in 2004 and 12.86% in 2005. (Song H. and Wang L., 2004) Statistics published by China Federation of Logistics and Purchasing shows that China's total logistics expenses reached RMB3.8414 trillion in 2006, up 13.5% year on year at current price, a growth 0.6 percentage points higher than in 2005. The rate of total logistics expense of GDP was 18.3%, 0.2 percentage points lower than in 2005. In 2007, the total logistics cost increased by 18.2% to 4540.6 billion yuan compare with 2006.

Exhibit 3: Cost of moving and storing goods (as share of GDP).

The total logistics cost in China generally includes three cost components: transportation, inventory storage and management cost. In 2004, the total cost amounted to US$ 352 billion, grew by 16.6% compare with 2005. Of this total, transportation cost took up the largest portion which accounted US$ 200 billion and had the highest growth rate which was 56.9% of total. On the other hand, inventory storage and management cost were US$ 102 billion and US$ 49 billion, accounting for 29.1% and 14% of the total logistics cost respectively (Exhibit 4).

Exhibit 4: Total logistics cost and its composition, 2003-2007.

Source: CFLP, 2007

Adding the costs of packing, transport, storage and damage cost, the ratio of total logistics costs to total industry production ranges from 40% to 60% in China logistics industry, whereas in the United States this percentage is close to 20% (Zhang Z.Y. and Andres M.F., 2006). So general speaking, the transportation costs in China logistics industry are twice as expensive as in developed countries such as US. Japan and European countries.

1.5.2 Low in productivity

The ratio of total logistics cost to GDP represents the efficiency of logistics operation in the economy which means the productivity of logistics industry. It is also used as an indicator to the level of development in logistics industry. In general, the higher the percentage, the less efficient is the logistics industry. Exhibit 5 shows the total logistics cost as a percentage of GDP in the 10th Five-year Plan period (2000-2005) in China. Although the total logistics cost as a percentage of GDP has a downward trend that decreased from 19.4% in 2000 to 18.57% in 2005 and the total cost savings in the 10th Five-year Plan period are 109 billion RMB; according to exhibit 3, the logistics cost are higher than that in US, Japan and developed countries which means China logistics industry is still in high inefficiency. As predicted by the CFLP, the ratio of total logistics cost in China to GDP will continue higher which resulting inefficiency of modern logistics industry. CFLP predicted that total logistics costs during the 11th Five-year Program period (2006-2010) will grow at 10% annually, 2% higher than that of the 10th Five-year Plan period. It also forecasted that the total logistics cost will reach 5,400 billion RMB in 2010, the ratio of total logistics cost to GDP at around 16.8% and cost savings yield during the period will be around 435 billion RMB. (Ling & Feng research centre, 2006)

Exhibit 5: Total logistics cost as a percentage of GDP, 2000-2005.

1.5.3 Slowly expansion/outsourcing

One of the most significant drivers of growth in the global logistics industry is the trend of mergers and acquisitions. Although many big China logistics companies have established overseas offices from the 1980's and 1990's to support their international transportation, their businesses are heavily depend on agents which means the China's global logistics network is still weak. For example, Sinotrans has business in nearly 200 countries, but there are only 40 overseas offices and most of the international businesses are done by the agents. In this situation, the expansion for China logistics industry is very slow. So, the global market share of China logistics industry is still relative low. As Contrill claimed, “don't expect a wave of Chinese 3PLs to land on Western shores soon. The pace of change in China is slow by Western standards and there is much to do in the home market”. (Cen Xuepin, 2005)

1.6 Research objective

The objective of this research is twofold.

  • To understand the development of China logistics industry in the last decade.
  • To investigate the factors affecting the development of China logistics industry and recommend the solutions to improve on the problems to further develop logistics industry in China.

On meeting the two objectives, this paper will develop a framework to address the factors that affect the development of China logistics industry.

1.7 Research questions

Three questions will be discussed in this article:

  • 1: Review the development of logistics industry in China in last decade?
  • 2: What are the factors that affect the development of China logistics industry?
  • 3: How to solve the current problems to further improve logistics industry in China?

1.8 Significance of study

In this article, the author introduces the development of China logistics industry in last decade. Also, this paper will contribute by indicating and analyzing some of the problems that affect development of China logistics industry according to questionnaires and interview by managers in logistics companies in China. The theoretical framework is based on an extensive review of the hypothesis in literature review (Chapter 2) to ensure the main factors that affect development of China logistics industry. After that, the searcher will give readers recommendations that solve the problems in China logistics industry.

1.9 Limitations of the research

  • Because of time restriction (from September to November, 2009), this thesis will be finished within 3 months, the research will cover the detail of logistics management (Transportation, Warehousing and IT supporting) as specific as possible.
  • Because of the location of sampling in Shanghai, China, the researcher has to come to China but only around 1month, so it is time limited to the questionnaire distributing and receiving which may cause low response rate.
  • There are many problems that influence the development of logistics industry in China; in this paper, the author only focus the above 5 main problems.
  • Because some logistics companies are not public listed companies, it is difficult to find the data from the current annual reports released by these companies, so the researcher may analyze data in these companies using the previous annual report. (Eg: Annual Report of company A in 2006 or 2007)
  • Some of the questions in questionnaires are directly related to the internal strategy of company management, so managers may do not want to answer which will cause the low response rate also.

1.10 Chapter Outline

Chapter one - Introduction: This provides the readers with background information of the study which creates a pictorial flow of the main research, research objectives, background of study, problems and significance as well as the limitations faced by the researcher are clearly stated in this chapter.

Chapter two -- Literature review: This chapter explores relevant literature; it basically dealt with pertinent literature on problems of current China logistics industry with discussions on related research variables such as government policy and regulations, transportation cost, warehousing and storage, IT supporting and infrastructure. Also, 3 indicators to development of China logistics industry are given to be as dependent variable when analyzing the correlation with independent variables.

Chapter three -- Methodology and Data collection: This chapter describes the research design used to conduct this research. This chapter will further disclose the ways used in analyzing data collected, limitations of the methods used and how the data are collected. This section concludes with discussions of the data gathering techniques and the data analysis procedures that are used to answer the hypotheses and research questions to readers. Also, theoretical framework is given to show the relationship between independent variables and dependent variables.

Chapter four -- Results and discussions: This chapter outlines results of data analysis, provides discussion of research findings and builds bridges between objectives, findings and relevant literature. The result section summarizes the analysis of the data and present findings of the study with respect to the hypothesis and research questions, while the discussion section reviews the findings of the study in the context of the theoretical framework of the study.

Chapter five -- Conclusions and recommendations are provided in this chapter together with discussions on the future of the study. This chapter concludes the research and documents the implications of the study with recommendations for future research.

Chapter 2

Literature Review

2.1 Definition of logistics

“Logistic” is the process of planning, implementing, and controlling the flow and storage of goods, services using related information from their point of origin to point of destination for the purpose of fulfilling customer requirements in efficient and effective way. (Raymond F. B. and Wm. B. M. Jr, pp: 45-55, 2004). Luo Wenping and Christopher Findlay (2002) said that the provision of logistics services requires inputs from a number of service providers; including the providers of transport and warehousing as well as other value-adding activities. Basically, logistic is business flow that connects packaging, distribution, storage and warehousing integrated Information Technology (IT) to transfer goods and service to the end users to satisfy their requirements.

The concept of logistics has undergone many significant changes. Luo Wenping and Christopher Findlay, (2002) divided the development of logistics into three stages:

- Stage 1: Physical distribution or outbound logistics system (during 1960s and 1970s). Organizations attempted to systemically manage a set of interrelated activities including transportation, distribution, warehousing, finished goods, inventory levels, packaging, and materials handling to delivery finished goods to customers in efficient way.

- Stage 2: Integrated logistics management (during the 1970s and 1980s). Firms began to recognize the additional opportunities for savings by combining the inbound side (materials management) with the outbound side (physical distribution). Initially, this provided potential savings by having a single transportation manager who could coordinate inbound and outbound transportation. Companies also become aware of the opportunities to view the whole process, from raw materials to work-in-process inventory to finished goods, as well as managing the whole process from a systems perspective which could lead to more efficient operation.

- Stage 3: Supply Chain Management (from 1980s to 1990s). Logistics management is one of the parts of Supply Chain Management (SCM) that companies expanded their purpose on the logistics processes to include all the firms involved, making use of partnerships/alliances between manufacturing companies and their suppliers/vendors, customers (channels of distribution), and other related logistics parties such as transportation and public warehousing companies.

2.2 Third Party Logistics (TPLs)

Third party logistics and related concepts are most often developed by researchers or consultants in collaboration with businesses demanding or offering third party services. Thus, the definitions reflect the phase of third party cooperation (Tage Skjoett-Larsen, 2000).

Alessandra Marasco, (2008) used the following definition: “Third-party logistics involves the use of external companies to perform logistics functions that have traditionally been performed within an organization. The functions performed by the third party can encompass the entire logistics process or selected activities within that process”. According to this definition, third party logistics includes any form of externalization of logistics activities previously performed “in-house”. Through interviews with a number of North European third party service providers, Prabir K, B. and Helge V. (1996) have pointed out the following definition: “A logistics alliance indicates a close and long-term relationship between a customer and a provider encompassing the delivery of a wide array of logistics needs. In a logistics alliance, the parties ideally consider each other as partners. They collaborate in understanding and defining the customer's logistics needs. Both partners participate in designing and developing logistics solutions and measuring performance. The goal of the relationship is to develop a win-win arrangement”. This definition emphasizes the strategic dimension of the concept and presupposes that several characteristics are fulfilled before the relationship between buyer and seller of logistics functions can be characterized as TPL. These characteristics include certain duration, joint efforts to develop further cooperation, a customerization of the solution, together with a fair sharing of benefits and risks.

2.3 Measurement the development of logistics industry

Logistics has dramatically evolved from a supportive role characterized as passive and cost absorbing, to a primary role and critical factor in competitive advantage (Fu Chinchin and Gwi Ok Kim, 2004). Companies experiencing growing pressure to reduce costs and provide better service can improve their logistics by outsourcing to third-party logistics (3PL) firms, an option that can improve both efficiency and effectiveness, so logistics outsourcing has become a rapidly expanding source of competitive advantage and logistics cost savings.

2.3.1 Productivity

Alan Stainer (1997) believe that, in measuring logistics performance, a comprehensive strategy of measurement is necessary for the successful planning, realization and control of the different activities which comprise the business logistics function. He also pointed out that, there should be a family of measures. This is a balanced collection of four to six performance measures, usually including productivity, quality and customer satisfaction, which together furnish an all-inclusive view of results but, individually, also provide a diagnostic value.

Within this performance scenario, productivity can be seen as a measurement of resource utilization, including the time element. Alberto G. Canen and Ana Canen, (2002, number: 2.pp: 73-85) points out, the productivity philosophy and its improvement has been a high priority, in the first instance, in manufacturing, then in marketing, and later in physical distribution and materials management. Thus, the time is now ripe to focus on the whole logistics process. The term productivity is often ill-defined but, basically, its measurement is that of a prescribed output to the resources consumed.

It can be divided into three main types:

  • Partial measures being a ratio relating output to a single input, such as labour, materials or capital.
  • Total factor or value-added productivity being based on sales less bought-in goods, materials and services.
  • Total productivity measures being a ratio of total output to total input.

There is a clear link between productivity and performance improvement, as purported by Lynch and Cross (1995, pp. 63-91). They show performance as a pyramid which is filtered down from the corporate vision, with market and financial measures as the main resultants, supported by customer satisfaction, flexibility and productivity as core business processes. Despite this emphasis on performance, previous research by the author (Stainer and Stainer, 1995), based on a survey of both manufacturing and service industries in the UK, France and Germany, suggests that the implementation of formal productivity programmes is still marginally behind that of the US a decade ago. Further analysis of the survey divulges the use of these three productivity measures for all respondents, as well as for those respondents employing productivity measures in the field of logistics.

2.3.2 Cost

The total Logistics cost as a percentage of GDP has widely been used as an indicator of the development level of the Logistics industry in many developed countries. In general, the higher the percentage, the less efficient is the Logistics industry, which means the cost affect the development of logistics industry.

The costs associated with logistics activities normally consist of the following components: transportation, warehousing, order processing/customer service, administration, and inventory holding (e.g. Lambert et al., 1998; Saccomano, 1999). Not surprisingly, total logistics costs often represent a large portion of total supply chain costs, especially when the supply chain is extended to the global market. As more organizations are outsourcing their products or services to global suppliers, it becomes increasingly critical to understand and evaluate the various logistics cost components in order to assure the profit margin.

2.3.3 Expansion /outsourcing

Elliot Rabinovich, Robert Windle and Martin Dresner, (1999) said that: the outsourcing of logistics functions to partners, known as “third-party logistics providers”, has increasingly become a powerful alternative to the traditional, vertically-integrated firm in logistics industry. A growth in the number of outsourcing partnerships has contributed to the development of more flexible organizations, based on core competencies and mutually beneficial longer-term relationships. Overall, some 60 per cent of Fortune 500 companies report having at least one contract with a third-party logistics provider.

Such buyouts and mergers enable logistics players to build up their infrastructure and service scale, both of which are critical to remaining competitive. By merging their operations and collaborating on technology, complementary services partners can also scale up their logistics capability without having to invest heavily in infrastructure. The result is lower cycle-time, streamlined business processes and lower manpower costs, which in turn boosts companies' productivity and profitability.

The development of logistics outsourcing - broadly defined in this paper as long and short-term contracts or alliances between manufacturing and service firms and third-party logistics providers - has been largely based on the needs that companies have to obtain cost savings and to concentrate on their core competencies. They also indicated that, the market and firm characteristics influence the decision to contract multiple combinations of third-party logistics services. These services range from single transportation activities to integrated warehousing, distribution, and information management activities.

Also several authors have indicated that across many industries logistics outsourcing has become a rapidly expanding source of competitive advantage and logistics cost savings in logistics industry. For example, Elliot Rabinovich, etl (1999) reported that some firms routinely have achieved up to 30 per cent to 40 per cent reductions in logistics costs and have been able to greatly streamline global logistics processes as a consequence of outsourcing. Other studies, however, have indicated that some logistics outsourcing arrangements are not successful. These unsuccessful relationships have been generally attributed to unclear goals and unrealistic expectations, internal sabotage by managers at the firms engaging in outsourcing, and flaws in the contractual agreements linking the parties involved.

2.4 Factors affect development of China logistics industry

2.4.1 Transportation

The key element in a logistics chain is transportation system, which joints the separated activities. Transport system makes goods and products movable and provides timely and regional efficacy to promote value-added under the least cost principle. Transport affects the results of logistics activities and, of course, it influences production and sale. In the logistics system, transportation cost could be regarded as a restriction of the objective market. Value of transportation varies with different industries. For those products with small volume, low weight and high value, transportation cost simply occupies a very small part of sale and is less regarded; for those big, heavy and low-valued products, transportation occupies a very big part of sale and affects profits more, and therefore it is more regarded. (M. Sreenivas and Dr. T. Srinivas, 2006)

Some articles (Logistics development in China) have investigated the Chinese logistics from various perspectives. Many multinational enterprises find it difficult to implement coherent strategies due to poor transportation. Despite overall low transport costs in China, it also costs more than the West. “In terms of unit cost, transport and Logistics is as competitive or more than anywhere in the world,” Zhao said. “But a lack of scale of economy, as well inefficiency, particularly with backhauls, cause higher costs.” In China, on average, nearly 50 per cent of vehicles return from deliveries with empty backhauls. In the US, it is 10 per cent.

Customers have increasing demands for transportation performance, higher on-time delivery performance, and reduced damage-in-transit. They expect transportation providers to be flexible and quickly adapt to order changes. Add to all of this an increased need for global freight visibility and control, and companies are scrambling to find the right solution to quickly address these challenges. So transportation and logistics management accomplishes this by supporting processes including carrier contract negotiations, transportation network modelling, shipment order handling, freight planning, order execution and monitoring, and freight financial settlement. The solution suite encompasses transportation procurement, planning, execution, and monitoring.

Bin Jiang and Edmund Prater, (2002) provide a breakdown of the total Logistics costs in China. They report that losses and damage account for 48% of the total, compared to 21% for the transport activities. They quote industry estimates that total Logistics costs could fall by 37% as a result of moving from the current arrangements for managing Logistics to a sub-contracting approach. The bulk of this reduction appears in their assessment to be attributable to the reduction in losses and damage, rather than a reduction of profit margins. Management fees may increase, to reflect the higher costs of the higher levels of management inputs, in terms of time and experience.

Hypothesis 1:

The higher the damage rate, the much more loss for logistics company.

Hypothesis 2:

Toll fees and road taxation are huge expenditure for logistics company.

Hypothesis 3:

Educated new driver and vehicle maintainence cost are necessary cost for logistics company.

2.4.2 Rising costs by fuel prices (Appendix 2)

Fuel prices in China have continued to climb over the past years. Take diesel fuel as an example, its price has jumped by 86% from 2002 to November 2007. On June 19, China's National Development and Reform Commission announced the biggest-ever adjustment to energy-related prices. Gasoline and diesel prices were both up by about 17-18% to reach 6,980 yuan per tonne and 6,520 yuan per tonne respectively while jet fuel prices will be raised to 7,450 yuan per tonne, up by 25%. It is estimated that fuel accounts for 35-40% of transportation enterprises' overall costs; rising fuel costs will undoubtedly put pressures on players. China's fuel prices are under government control. Despite the price increase, it is noteworthy that there is still a substantial discount between China and international fuel prices. This has resulted in tight fuel supply, as refineries were reluctant to supply to domestic market. A number of refineries were shut down last years, with queues at petrol stations and rationing remerging in some regions. These add to the difficulty for efficient deliveries. (LI & FUNG, 2008)

H4: The increasing of fuel frees effects profit of logistics company.

2.4.3 Regulation (Appendix 3)

Despite a reduction in national level regulations since China's entry to the WTO, local governments still set up bureaucratic and political barriers to protect local businesses or products and prevent the entry of outside competitors. Municipal governments also compete to attract logistics hubs and infrastructure. This local protectionism is driven by the desire to maximize local economic growth, employment, social stability and tax revenues, and less by concern about the efficient utilization of regional resources or the creation of an integrated national transport network (Zeyan Zhang and Miguel Andres Figliozzi,, 2006). Local interests and economic development have lobbied for, sometimes unnecessarily, the duplication of logistics parks and transport infrastructure in closely located municipalities.

They reviews a series of distribution reform activities and finds that some problems, such as regional differences, still exist and deter the development of Chinese logistics industry. Beyond the geographic size and unbalanced development, the political/legal barriers are the most powerful forces that separate China's distribution market. Government interference on economic activities increases the risk to private investment and affects the extent of participation of private sector in the supplying and distribution of goods. Legislation sets the allowed boundaries of distribution firms. While these limits can be placed at a national level, the biggest impact of political/legal barriers on distribution markets is regional protectionism.

Under a centrally planned economy, the Chinese government established a three-tier distribution system to control the flow of commodities. Logistics arrangements centered on wholesalers who undertook the task of fulfilling distribution goals set by the central government. State-owned logistics firms provided transportation and warehousing services but rarely performed value-added and other logistics activities (Transportation Journal, 2007). Private businesses were largely banned. Meanwhile, most manufacturing firms established in-house transportation and warehousing departments to serve themselves because of the shortage of third-party supply. This resulted in inefficiencies in management, organization, and operation of logistics services.

Although slowly opening up to outside competition, the Chinese transportation and logistics market is one of the most highly regulated in the world. Regulatory barriers in China exist at the national, regional and local levels and do much to hinder consolidation. Industry Report: Logistics (H1, 2005) has reported that even after 2006, when China's WTO commitments come into full effect, local governments may continue to protect local companies through WTO compliant non-tariff trade barriers such as licensing requirements, fees and inspection requirements, and by the costly and complicated licensing system for logistics companies.

Regionalism in China is quite pronounced, and nowhere is this more evident than in the logistics industry. There is no central governing body with jurisdiction over the transportation sector as a whole. For example, trucking companies are taxed and licensed based on the provincial areas where they pick up and deliver. If a carrier delivers to a certain province, it cannot pick up a load in that province unless it has the appropriate license. Regional authorities are keen to protect their own local interests and therefore impose their own local regulations, taxes and fees. (Francis Bassolino, 2005)

H5: China joined WTO brought lots of opportunities to logistics company.

H6: Although China's accession to the WTO has lowered trade barriers such as tariffs and quotas for international shipments, there are still problems related to moving goods around China itself.

2.4.4 Warehousing and storage

In today's competitive business climate, the effective coordination of the storage and distribution of company assets or product inventory is critical. The warehouse management system transforms warehouse operations into fully integrated logistics and fulfilment business. By enabling a company to take orders from multiple sources, process them in real time with mobile, voice- directed operations, and automating the shipping and billing processes, organizational efficiency will improve, with positive effect on the bottom line. (Total logistics management, 2009)

The Government maintains most of the warehousing capacity. There is no specific ministry or department in charge of warehousing. Warehouse space is widely available and relatively cheap, but comprehensive data on the number and locations of warehouses in China appear non-existent. Nonetheless, it is generally observed that warehouses are located near ports and railway stations. They can also be found in various zones meant for foreign investment. Most of these zones are located near the coast, to facilitate the export of finished goods.

Due to the lack of automated high-end warehousing facilities, most put away and order picking are still carried out manually. It is more economical, at least in the foreseeable short to medium term, to hire more labour than to automate warehouse activities. Until labour and equipment costs come closer to equalisation, the inclination towards warehouse automation remains slim. Besides the heavy initial capital outlay, automating warehouse activities will also incur the extra cost of training personnel to use the new technologies effectively.

Location problem is a classical planning problem, many literatures concerned this topic. Early studies concentrated at linear planning field, Efroymson and Ray (1966) developed a discrete choice model for plant location, while Francis and White (1974) solved Euclidean distance location problem with centre of gravity method. As the theoretical progress, various non-linear planning theories were used for location model. Holmbery (1999) considered non-linear transport cost and solved the problem with branch-bound algorithm. Barahohna and Jensen (1998) developed a warehouse location model with mixed integer planning.

The warehousing and storage system in the planned economy before reform was characterized by department or sector administration and operations, that is, different sectors built and owned their own warehousing and storage facilities and served their own demands only. (Luo Wenping and Christopher Findlay, 2002) Many sectors formed their own closed warehousing systems. Meanwhile, each local government at the provincial, city and county levels also established their own warehousing system to serve their local economy.

Most of China's warehousing facilities are older or old-style facilities with a range of associated issues. Many facilities do not have computerized stock supervision systems in place. Single and multi-story warehouse designs limit efficiency by preventing the use of multiple racking levels and by modern forklift trucks. Cross contamination is an issue as are unsealed loading platforms at refrigerated facilities, which expose food products to ambient air temperatures during loading and unloading.

H7: Location of the warehouse is very important because it decides whether company could provide effective and efficient service or not.

H8: Administration cost on warehouse takes heavy portion in total cost of logistics company.

H9: At present, old-style facilities cause poor facilities and management are to blame for high levels of loss, damage and deterioration of stock, especially in the perishables sector.

2.4.5 IT supporting

Logistics business worldwide is adopting technology to drive efficiencies and for saving operational costs. The information technology helped the business to realign the scenario and operational methodologies to increase integration, visibility and customer support. The challenges faced by the logistics operators and consumers all along the years. (Logistics management solution, 2009). Mark Goh and Charlene Ling, (2003) find several shortcomings of local logistics providers, especially their undependable services and unresponsiveness to customers' needs. Normally, young foreign companies cannot achieve high levels of local purchasing, and managers have to develop both technological and management expertise in their local suppliers.

Effective information technology (IT) has become absolutely necessary to support logistics processes. Fujun Lai, Xiande Zhao and Qiang Wang, (2006) said that by automating many routine logistics activities, IT has enabled managers to focus on strategic issues and core competencies and supported the use of intermediate supply chain activities, such as distribution. Some studies have even reported that IT could improve logistical efficiency, effectiveness, flexibility, cost, and service quality.

However, due to its high costs and widespread lack of expertise among users, the IT adoption rate among logistics firms remains low. Fujun Lai, Xiande Zhao and Qiang Wang, (2006) also said that one implication of this low IT adoption rate among logistics user firms has been a greater opportunity for third-party logistics (3PL) providers to exploit their advanced IT skills. Therefore, IT in 3PL firms plays an essential role in synchronizing and coordinating complex supply chain activities across logistics users and their customers.

Research on logistics, especially among business firms, is rare and the professional education system has so far included little logistics training. Foreign investment and establishments in the logistics service sector will bring technology and management know-how. The relevant know-how includes not only the operation of particular segments of the logistics operation but also the manner in which the elements fit together, as well as the management of the relationships between all the suppliers and the customers. Opening other service sectors, such as education, will also raise the quality of options available for education and training in this sector.

H10: Training in both the third party logistics sector and the manufacturing and retailing sectors is very weak both at a practical level in China.

H1: There is lack of IT standards and poor systems integration and equipment in logistics company in China.

2.4.6 Infrastructure

The transport sector is still a weak link in China's economy:.

-The number of either rail or road trunk lines linking different regions is insufficient. The major railway lines are over-loaded. The trunk lines of the highway system linking different provinces are not well networked and cannot meet the demand. These impediments also contribute to differences in growth rates between regions.

-The coordination between different modes requires planning and development.

Within each mode of transport, there are imbalances. In the rail sector, on the busy lines, the mixing together of passenger trains with cargo trains leads to slower speeds and low efficiency. (Luo and Christopher, 2002) In the air sector, there is an imbalance between the trunk and feeder lines, and in the number of big and small aircraft. In the road sector, the construction of the national level trunk road system has been accelerated, but in the rural areas the road network is far less developed.

-Service quality is generally low and the technical level of the equipment is also low. For example, in the rail sector, the share of double lines and electrified lines in the total length of lines is relatively low. Less than 20% of the freight trucks can carry containers. (Luo and Christopher, 2002)

Zeyan Zhang and Miguel Andres Figliozzi, (2006) said that, despite recent efforts to upgrade transport infrastruture, China's transport infrastructure is still insufficient to satisfy the huge demand generated by its booming economy. Congestion and shipments delay are frequent at Chinese seaports due to capacity shortage fall. Highway construction and transport bottlenecks augment congestion problems in prot area. Archaic infrastructure and lack of adequate highway networks connecting the developed coastrl regions to underdeveloped inland provinces increase rail and river congestion as more companies are moving inland to take advantage of reduces labour costs.

Considerable research has been done concerning strategic decisions of logistics providers in China. For instance, Junjie Hong & Binglian Liu (2007) examine strategic postures of 3PL providers in China. They find that differentiation strategy users perform better, and companies pursuing cost leadership are shifting towards differentiation strategy under the pressure of intense competition. And also they studied those location decisions of foreign logistics providers in China based on a census database. They find that the location decisions are determined by market size, labor cost and quality, transport conditions, and government policies. In addition, foreign logistics firms tend to cluster in cities with a large number of existing logistics providers, confirming the existence of logistics agglomeration.

H12: Transport infrastructure plays the key role for any logistics company because that directly effects profit of logistics company.

Chapter 3

Research Methodology

3.1 Introduction

This chapter illustrates an in-depth description of the research methods used to conduct in this study. In this section, geographical location of study, method of data collection, sampling techniques and the methods of analysis were explained. This chapter is of great importance to this study because it highlights adopted models and methods used to answer research questions.

The goal of any research dictates the appropriate data analytic method selected. According to Michael R., (1996) one of the two basic goals of a researcher is finding out relationships. This first goal is to describe relationships between independent variables and dependent variables and this study starts with hypotheses which are developed and presented. This chapter then details the research methodology that was applied to determine if the hypotheses were supported. The methodology section describes the operational measures of the observed variables used to test the hypotheses presented in the previous section. Then, the research methodology is discussed relative to the companies' data source. Finally, analysis methods are presented to validate the hypotheses among the set of dependent and independent variables.

3.2 Location of study: Shanghai

Questionnaires are conducted to collect information from logistics companies in Shanghai, China. The reason that this paper chooses Shanghai as the location of the survey is because Shanghai is the most promising logistics city in China, even in Asia-Pacific. Statistics show that the logistics industry has become a mainstay industry for Shanghai. According to CBRE research, (2006): In 2005, its freight volume reached 78 million tons, of which port throughput were 443 million tonnes, making Shanghai port the largest in the world in cargo transport. Its container throughput amounted to 18.084 million TEUs and ranked No.3 in the world. Shanghai's logistics added value were US$31.88 billion in 2005, accounting for 13% of its GDP and becoming one of the top four in the service sector in China. Also, Shanghai has been giving priority to the development of 3 large-scale logistics parks which are Waigaoqiao, Pudong Konggang and Xibei during the 10th Five-year Plan period. The Waigaoqiao Logistics Park in the Pudong New Area will invest 10 US$1.2 billion in distribution and delivery centres for multinational companies in the next 5-10 years. The Pudong Logistics Park plans to spend US$843 million in its second-phase of construction during the next four years. (LI&FUNG Research Centre, 2006) By the year 2010, Shanghai will establish a modern logistics service system with an internationally competitive advantage which will become an important logistics centre in the Asian-Pacific and also in the world. So, Shanghai has become one of the most developed cities in China logistics industry and because of this reason, Shanghai is more representative compare with the other cities in China.

3.3 Source of Data

There are two main methods available for data collection, the primary and secondary data collection methods.

3.3.1 Primary Data

By market research, (Quick MBA) data collected specifically for a research project and the research undertaken is called primary research. Primary research involves the use of observations, experiments or questionnaires in order to collect new information about specific market problems. Primary research can further be classified as qualitative and quantitative research depending on the data to be collected. (Exhibit 6)

Exhibit 6: Primary research

Source: Saunders et al, 2003

This research used quantitative data in the form of questionnaires. The quantitative data in form of questionnaires consist of close and open ended questions and also continuous questions based on 5 Likert-scales. Questionnaire was selected as a quantitative method for collecting data. According to Oppenheim A.N. (2001) “Questionnaires are not merely just questions, but are scientific instruments for measuring and collecting information”. Developing a research questionnaire is a bottom up process. This emerges from consultations with people in the field, from people who are involved with the issue, and from those who have an interest in learning more about it. Therefore it will be data originated by the researcher for the specific purpose of addressing the research problem.

A total of 200 logistics companies (respondents) are chosen from the membership list of the Shanghai International Freight Forwards Association (IFFA) which were also ranked top 500 in 2008 in China, then the questionnaires were mailed with prepaid stamps to the general managers in the chosen logistics companies and each of the questionnaires are attached with a specimen letter. The reason to choose managers in logistics companies as respondents is because this dissertation is specialized on China logistics industry and the questions in questionnaire are more specialization. So the author assumed managers in logistics companies have good knowledge of the organizational characteristics, processing capability, performance of their companies and the whole industry than the normal employees. After half of a month, the researcher received 116 questionnaires, and then the researcher mailed 84 questionnaires with specimen letters and prepaid stamps to the non-respondents again. After another half of a month, there were another 50 questionnaires mailed back. So totally there were 166 respondents available, thus the researcher would do testing using the 166 questionnaires in chapter four.

The interview is the primary data collection technique for gathering data in qualitative methodologies. Interview are based on the number of people involved during the interview, the level of structure, the proximity of the interviewer to the participant, and the number of interviews conducted during the research. (Oppenheim A.N. 2001)

Interviews were conducted with 2 senior managers in chosen companies: China Ocean Shipping (Group) Company (COSCO Shanghai) and China Post Logistics Company Limited (CPLC Shanghai) which were ranked in top 10 in China logistics industry in 2008. (Appendix 4) Both of the two companies' mangers have worked in the logistics industry for more than 20 years, hence their opinions and comments will provide appropriate description and insight to China logistics industry. The data collection process was painstaking and time consuming due to China's special culture. China has very strong cultural practices such as the concept of “Guanxi” that can be defined as a kind of special social relationship or connection between individual and parties. In China, all companies seek Guanxi with their potential partners before they can carry out any business (Zhang Z.Y. and Andres M.F. 2006). For this research, it is necessary to use “Guanxi” with companies and interviewees before arranging face to face interviews. The importance of having a native speaker with knowledge of the logistics industry conducting the pre-interview telephone calls before face to face interviews cannot be overemphasized in the Chinese cultural context. So a substantial number of pre-interview telephone calls were carried out to collect general company information and to ensure that the interview would be conducted with a manager that had authority in the company decisions as well as knowledge regarding the China logistics industry discussed in this thesis. As a general indication, approximately 10% of the telephone calls resulted in a successful interview where the data was including in the results presented in Chapter 4.

3.3.2 Secondary Data

Based on the Schiffman L.G. and Kanuk L.L. (2004), locating secondary data which includes findings based on research done by outside organizations, data generated in-house for earlier studies and customer information collected by the firm's sales or a credit department is called secondary research. Thus, secondary data is the data that has previously been gathered by someone other than the research. The main purpose of retrieving these data is to find a basis for the research and acknowledge the work of experts who had contributed to the pertinent literature on the subject matter. This study refers to existing data from China official association. e.g: China State Economic and Trade Commission (CSETC), China Federation of Logistics and Purchasing (CFLP), etc. Other secondary data sources used are online journals, articles, dissertations, newspapers and books. Journal articles help to identify relevant variables, literature review and develop theoretical framework. Internet homepage and newspapers were utilized to find out official statistics. Books will be referred to obtain suitable and necessary models and theories such as the Logistics industry, transportation, information technology, etc.

3.4 Methods of Data analysis

Data collected through questionnaires are analyzed to test hypothesis and find out various results that will be described in chapter 4 in this study. The numerous tests that will be conducted are described in this chapter.


“Sampling can be defined as the deliberate choice of a number of people, the sample, who are to provide you with data from which you will draw conclusions about some larger group, the population whom these people represent.” (Thomson, 2005) The sample size for this research is 166 respondents that include transportation management, warehouse management, information technology, finance management, maintenance management, purchasing management, marketing, human resource, demand planning management and so on.

3.4.2 Validity and Reliability


Reliability is defined as an assessment of the repeatability and consistency of an instrument of measurement. In this case, questionnaire is “valid” if it examines all the aspects and fact of the research questions in a balanced way; that is, if it measures what it purposes to test. From the Chapter two (Literature Review), the researcher sets hypothesis according to prior studies by other researchers; and questions in questionnaire are set corresponding to hypothesis. In this way, the responded questionnaires are validity. Then, the researcher mailed questionnaires to 200 logistics companies in Shanghai from the membership list of the Shanghai International Freight Forwards Association (IFFO) which is an official organization under China government. The sample size is large, although different respondents have different opinions, their direction and logistic are correct. When doing the interview section, the interviewees are arranged ahead of time before face-to-face interview, so the interviewees have enough time to prepare for interview. Beside these, the author does the face-to-face interview after the researcher collected all the questionnaires which would help the researcher to find out whether the answers the participants gave in the questionnaire were make sense or not.


Test reliability refers to the degree to which a test is consistent and stable in measuring what it is intended to measure which means a test is reliable if it is consistent within itself and across time. (Randy L. Hoover, 2003) To test reliability, the researcher uses SPSS software.

Reliability Statistics

Cronbach's Alpha

Cronbach's Alpha Based on Standardized Items

N of Items




Cronbach's Alpha is 0.804 which is more than 0.7, the test is consistency and stable, so the test is reliability.

Then the researcher tests each measurement in independent variables and dependent variables.

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Item-Total Statistics


Scale Mean if Item Deleted

Scale Variance if Item Deleted

Corrected Item-Total Correlation

Squared Multiple Correlation

Cronbach's Alpha if Item Deleted

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