Sunday, July 22, 2012

Chinese government to boost development in distribution industry - likely to benefit growing ecommerce sector

The Chinese government announced plans to boost development in the country’s distribution industry. This is welcomed news for a country that is slowing economically but still in need to improve its domestic infrastructure.  By improving its distribution network, it is anticipated domestic consumption will increase which in turn will help transition the country’s economy from one that is predominately dependent on exports to one that is more balanced.

Among the government plans include distribution networks to link cities and the countryside in order to promote an easier flow of industrial goods and farm produce between the two regions; private investment will be encouraged for the project; and the removal of regional protectionism which will be welcomed by many logistics and transportation providers.

The development of China’s distribution industry will be welcomed by all industries including the country’s growing ecommerce sector.  According to AT Kearney, China’s online retail market size is about $23bn, second only to the US and is expected to grow at a rate of 29% each year over the next five years particularly as Chinese infrastructure and online purchasing behaviors evolve.

In a recent Tompkins International podcast, the large online retailers compete based on delivery frequency. And because of the fragmented logistics market, e-retailers have been forced to develop their own distribution networks.  For many e-retailers, deliveries are made to small depots regularly throughout the day. “From the depot, the orders are taken by bicycle, motorcycle, three-wheeled cart, or whatever means are available for delivery to the customer,” says Jim Serstad, principal of Tompkins International-Asia. “While these networks provide impressive delivery times measured in hours, much of the country is not serviced at all.”

Hopefully transportation improvements will be made along with the distribution network improvements. Retailers and e-retailers alike, rely on small parcel. However, small parcel remains inefficient in China due in part to regional protectionism which the government wants to do away with as part of this new initiative. Newegg, a consumer electronics e-retailer, operates 8 distribution centers throughout China. However, it has noted third party parcel delivery services in China are not capable of meeting its parcel delivery needs. Therefore, in metropolitan areas where the company operates a facility, the company delivers a large amount of products through a local delivery system developed, owned and operated by the company. For deliveries outside these networks, the company relies on China Post.

Indeed, the need to open the domestic express market to such providers as FedEx and UPS complements the push towards distribution network improvements (see previous blog post: “Rumors of Chinese domestic licenses being granted to FedEx and UPSprove false).

As the government attempts to move China from being the "manufacturer to the world" to one of a more balanced economy of exports and imports, encouragement of growth sectors such as ecommerce is important. As ecommerce continues to grow however, the need for distribution and transportation networks connecting the entire country will be needed. This may be a tipping point for such companies as FedEx and UPS to enter the domestic market.