Problems with China’s Logistic Industry

Last week, I wrote about express delivery services stopped in China over the Chinese New Year because of not enough capacity.  In fact, there are more problems with China’s logistic industry than a simple lack of hands.

(But why we are spending so much time discussing warehouses and delivery crew?  Isn’t Technode a blog for technology??  That’s true.  But remember, logistic is one of the important pillar supporting e-commerce.  If it is in trouble, all the e-commerce players, like Taobao, Dangdang, 360Buy, etc., will be affected in the near future.)

China express delivery services ranks number three in the world in terms of amount of packages delivered.  By September last year, over 10 million packages are processed every day.  In Japan, number of packages delivered each day is 13 million and the U.S., it is 30 million.

Besides the multinational, FedEx, UPS, DHL and TNT, there are a lot of local players.  Among them, the largest are Shun Feng, Shen Tong, Chong Tong, Yuan Tong and Yun Da.  Each of the local player processes over a million packages a day.  But unlike the multinational, they don’t have deep pockets.  They cannot afford to expand their services by their own capital.  They reply on franchising.  After paying a fee, a small company can join them and serve a particular area. That is how these local services grew so quickly in the last few years, recruiting hundreds of franchisees.  They in terms hire hundreds and thousands of workers, running up and down the cities, riding on motorcycle or bicycle to do their jobs.

As you can image, competition is keen among them.  The benefit is: express delivery service is very cheap in China.  Cheaper than the regular mail from the post office.  A package shipping from Shanghai to Beijing arrives in 2-3 days and needs only RMB10.

The downside is: the low margin force most of the logistic firms to save on costs.  That means lack of training for their staff.  Lack of facilities and equipment.  Many people complained about the service quality – package damaged or lost, late on delivery, etc. Recently, during the Chinese New Year holiday season, there is no service at all.

The government is thinking of regulating the sector and a new law has passed. It requires certain minimum capital for running a logistic firm. Only time can tell whether this is effective to improve service quality.

But, one thing is certain the development of logistic service in China has reached a bottleneck. The current situation cannot sustain the high growth in demand, from online shops and now the group-buying crowd. At present, e-Commerce accounts for 30-40% of express delivery services in China.  Soon, many of the e-Commerce players will feel delivery is their biggest headache.

Small shops on Taobao will be first to be affected, as they rely totally on third party logistic services.  (During the holiday season when they could sell a lot, they have to close down their operation, as there is no delivery service .)  Large online shops, which run their own logistic team, will be affected in a later stage, as costs of running logistic service (e.g. hiring delivery staff) increase by competition.