Logistics and distribution in China

Current situation

China is experiencing insatiable demand for transportation and logistics services—so much so that dedicated service providers are struggling to keep up. This is causing some of China’s biggest retailers to strike out on their own with in-house logistics.

It is certainly not because of a lack of infrastructure that China’s logistics industry is struggling to meet its potential. The country is number one in the world in terms of ton-kilometres of freight, at 2917.4 billion, as well as inland water transportation, with 110,000 km of navigable waterways. Nonetheless, shipping remains very expensive in China. Heavy road tolls  pay for China’s ongoing infrastructure upgrades. These tolls can account for 30 to 40% of trucking companies’ transport costs.

Types of enterprises

China currently has three different types of enterprises in the logistics and distribution industries in:

• state-owned giants
•  like Sinotrans Group and China Post, and their offshoots such as EMS, China Air Express and China Rail Express, which dominate restricted sectors;
• private domestic enterprises operating in less restricted sectors
• such as trucking, general logistics, and express delivery—the majority of which are small and medium enterprises (SME) with a local or regional market presence;
• foreign enterprises
• focused on the international market and often undercut by local operators.

Foreseeable development

In the coming years, the unimpeded expansion of chain retailers into more and more areas of China will keep up the demand for logistics space. As the logistics market matures and smaller firms are consolidated through mergers and acquisitions, we are likely to see service providers diversifying their product portfolios toward value-added services, including:

• simple sourcing
• warehousing
• inventory management
• distribution and delivery
• product testing
• secondary packaging

Breaking into lower-tier cities may entail shouldering larger costs. The recent trend, of large-scale investments into domestic logistics  ,seems to indicate that companies are nonetheless ready and willing to do what it takes to create nationwide networks.

Moreover, in the year of 2016, the State Council issued a plan to lower logistical costs. It detailed its aims to reduce the ratio of costs to 8.5%for manufacturers and 7.3 to 7.7 percent for wholesale and retail sellers by 2018. Customs clearance will be sped up and delivery services will be extended further into rural areas with financial support and adequate land supply designated for logistics purposes.

Find a distributor or agent

China is a highly fragmented market and it is easy to bite off more than you can chew. Consider a regional approach based on your product’s target market and opportunities.

SMEs with limited budgets for branding and marketing often turn to regional agents or distributors to create a sales network. These agents and distributors bring their existing sales networks and can be helpful in terms of responding quickly to market changes and keeping track of policy and regulation updates. Many of the larger Chinese trading companies have offices abroad, as well as a significant network throughout China.

Best China distributors’ profile

The best profile for distributors in China typically share the following characteristics:

• They are relatively new companies
  •  having been formed in the last 15 years;
• They are privately-owned
• They focus on a particular region of China
• They have achieved success with their own products
  • similar to the products you are seeking to sell in China.

Find the right distributor

To find the right distributor in China, one option is to hire the right China consultant to find eligible companies. Alternatively, figure out the China market for your product and/or similar products and you see who is already succeeding at it.

Things to be noted

Before meeting with potential partners, have at least a general idea of how you would like to structure an agreement. Discuss issues such as profit sharing, sales territory, advertising support and scale of investment. Don’t be afraid to ask questions about a potential partner’s sales volume, market reach, or sales force. Verify the answers you receive to choose the best agent for your product.

Also, review the business licences of your providers and investigate whether the services they offer your business are within their licensed operating parameters. Professional assistance in logistics services is available and should not be overlooked.

Two of the most common errors that companies make are:

• failing to sufficiently supervise and train the distributors they choose
• neglecting to undertake adequate due diligence before appointing an agent or distributor

Whether your business is in goods or in services, you must always be wary of trying to operate in China without a physical presence in China.

Disclaimer:

The Canadian Trade Commissioner Service in China recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information. 

Content on this page is provided in part by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.