That the Chinese express and logistics market is continuing to grow at stellar rates is not in doubt. However this growth does not necessarily translate into profits and getting visibility on the health of the industry is nearly impossible.

Some sectors, including freight forwarding, have enjoyed an excellent few years. Their asset light business model is well suited to the high growth market, and profits in absolute terms have grown proportionally with the growth in volumes. The high levels of capacity which shipping lines are adding to the market will only increase their margins, as they benefit from falling rates.

Asset owning companies however face a range of risks. As mentioned shipping lines have added huge levels of capacity to the key lanes as they seek to optimise the growth in exports. This has had a very predictable impact on rates which have fallen significantly and this has already been reflected in quarterly results of some of the key carriers. Thankfully for them, economic growth seems as strong as ever. Even so, they remain at risk from a slowdown in the US consumer market, which would have a serious impact on the sector’s prospects given that the supply/demand equation is so finely balanced.

Air cargo operators have also not benefited to the extent that could be imagined. The main problem here is the massive imbalance of goods flows, with many flights returning to China almost empty. As an antedote to this, Chinese air cargo operators are trying to improve the underlying profitability of their businesses through ‘plugging’ into other airlines’ networks to maximise backhaul.

The other major sectors are road haulage, contract logistics and warehousing. Here, high levels of fragmentation make for cut-throat market conditions. International 3PLs providing comparable services to local Chinese competitors face the up hill battle of trying to justify higher rates. Achieving these is certainly not a foregone conclusion even from multi-national manufacturers or retailers. Although some foreign companies in the market will want to work with a ‘familiar face’ and have more sophisticated needs which push them towards western logistics companies, many will be influenced by price. Western logistics companies therefore have to focus their offering on niche, value adding parts of the market.

One of the big questions at the moment is whether western companies should invest in Chinese transport assets. It seems that a small but growing number of operators think so, including one of the big US trucking companies, YRC Worldwide. Although there is an obvious risk in the hyper-competitive market, there may well be a space for high quality, high technology trucking companies. Western manufacturers are increasingly required to guarantee the integrity of their international supply chains and the link between factory gate and port/airport is growing in importance. It is these manufacturers who may be willing to pay a premium for secure and high value road haulage services.

Source: Transport Intelligence

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