Shanghai shapes up as logistics base of the future

Shanghai has seen an explosion of activity in the logistics market in the past 12 months as foreign companies have entered the market and domestic ones have increased their focus on the importance of logistics.

Companies such as UPS are moving their Greater China headquarters from Hong Kong to Shanghai to capitalise on the city's many advantages, including its dynamic economic growth and strategic location.

Others such as ProLogis, the world's largest provider of distribution facilities and services, are moving into the Chinese market for the first time, but concentrating on Shanghai first as a "dragonhead" through which they can expand into other Chinese markets.

This focus on logistics is a new phenomenon in a country where the average corporation spends 90 per cent of its time on logistics and 10 per cent on manufacturing. This inefficiency translates into logistics costs which are 20 per cent of China's gross domestic product, compared with 10.1 per cent for the United States in 2000, according to a State Council report.

Many of the problems associated with logistics originate from government policy. Existing regulations prohibit foreign firms from distributing products other than those they make in China and then only directly to a retailer or business; otherwise goods must be sold to licensed distributors.

The commitments made by China as a precursor to its WTO accession are due to change this, and by next year third-party logistics service providers will be able to freely operate as wholly owned foreign enterprises in China.

While the liberalisation of regulations affecting logistics companies has a major influence in attracting these companies to Shanghai, there are many other factors. Shanghai has the largest GDP of any mainland city and remains the country's economic engine. Much of this is fuelled by foreign investment, a contribution that came to US$6.1 billion in the first half of this year alone.

This represents a 40.1 per cent increase over last year's levels, despite the slowdown the country experienced during the Sars crisis.

Evidence of Shanghai's economic strength and investor confidence in the city are manifested in the strong property market.

According to DTZ's research, take-up in the second quarter of this year surpassed new supply by 23 per cent, despite a quarter-on-quarter decrease in industrial demand due to Sars. The penetration rate of third-party logistics service providers is about 2 per cent, much lower than in either Europe or the US where the rates are 10 per cent and 8 per cent, respectively, according to a report by Morgan Stanley.

However, many third-party logistics service providers have already entered Shanghai in the hopes of capturing a share of the burgeoning market.

APL Logistics, Kerry Logistics, ALPS Logistics, Kintetsu World Express, APW, Maersk, TNT, Global Logistics and many others have already positioned themselves in Shanghai's logistics hubs in Taopu, Waigaoqiao, and Songjiang.

"What Shanghai is experiencing is a rapid influx of 3PLS third-party logistics service providers looking in the short term to capture some key projects and, more importantly, in the long term to position themselves to reap the benefits of the upcoming surge in the demand for logistics services," Jeffrey Shen, the head of DTZ's industrial team in China, said.

With the confluence of Shanghai's continued emergence as an economic powerhouse, its attractiveness to foreign investment, its inefficient state of logistics, and the impending deregulation of the industry, it is no wonder that Morgan Stanley predicts that the annualised growth rate for 3PLS from 2002-2005 could be 30 per cent or higher.

Pat Boot, the general manager of ProLogis China, summarised the situation this way: "The entire world is looking to China as a manufacturing base. The obvious next step is to decrease costs through improvements in logistics. What better place to start than Shanghai?"