China's logistics sector faces a number of challenges however a recent e-commerce boom and rising domestic consumption are helping to offset these, according to KPMG's latest report.
The report, titled On the Move in China, notes the high costs of managing logistics in China, which currently amounts to around 18 percent of China's gross domestic product, higher than in many developed countries.
The sector is fragmented as carrying goods around the country can involve a mixture of foreign, state-owned and domestic private businesses. The challenge for transport and logistics companies is to keep pace with industrial relocation within China and also with the growth of domestic demand. They are also subject to a range of taxes and regulations. Companies that span different parts of the supply chain have to pay multiple taxes to various parties at different rates.
However, changes are on the way. Jeffrey Wong, Partner, KPMG China, says: "The introduction of a pilot VAT tax reform in Shanghai from January 1 will see turnover tax replaced by value-added tax (VAT). The transport and logistics sector is at the forefront of this change. Some companies may benefit from the reforms however some will feel a hit to their bottom line. It really depends on the type of business model that the operator runs, and it will be an interesting few months to see how things transpire."
The report also notes that while consolidation is on the cards for a number of companies, a majority of smaller operators continue to target lower tier cities, as they know their locality well and can offer low price services. Financing for acquisitions is often hard to come by at a reasonable price and also given the light asset base model of the logistics business, as are managers with the right skills and experience to handle he integration of acquisitions.
Consequently, organic growth is the preferred strategy for many companies in this sector. Jeffrey adds: "Finding the right niche and operating segment is critical to operate in this complex landscape. Making it big does not necessarily mean being profitable. Whilst consolidation of domestic business will continue, we may also see more divestments by operators as they re-position their strategy. This includes some of the foreign operators."
China's rapid take-up of e-commerce meanwhile is helping to drive new opportunities, as Chinese consumers increasingly opt for e-commerce and mail order shopping. A significant development in recent years has been the emergence of consumer-to-consumer (C2C) e-commerce among China's internet user population, now numbering around 300 million people.
Jeffrey concludes: "China's high rate of economic growth, while fuelling demand for logistics services also creates challenges for operators and wage costs are rising sharply. Consumers in China want change and as costs rise, manufacturers are looking to new points on their supply chain to drive efficiency. Logistics has become critical to many businesses' competitiveness."
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