Market Access Report: Logistics
March 31, 2003 | BY
clpstaff &clp articles &Jones DayChina's imports and exports surged to US$620 billion in 2002, ranking fifth in the world. Logistics costs related to the acquisition, storage,…
Jones Day
China's imports and exports surged to US$620 billion in 2002, ranking fifth in the world. Logistics costs related to the acquisition, storage, movement and disposition of goods in China hit US$1.9 trillion in 2001, or approximately 20% of the country's GDP, compared to approximately 10% of GDP for more developed markets such as the United States. In the past three years, the majority of China's logistics service providers enjoyed revenue increases of more than 30% per year, and over 90% of multinationals in China contract at least a portion of their logistics business to third party logistics service providers. Nevertheless, the lack of an integrated multi-modal logistics industry, a shortage of skilled professionals, distribution networks that tend to be regional rather than national, and the inability of China's transportation infrastructure to keep pace with the country's economic development, continue to hinder supply chain operations in China. Internal and external inefficiencies and correspondingly high costs have been the result.
With China's logistics service provider revenues projected to increase 50% per annum over the next three years, it is not surprising to see foreign players such as DHL, Danzas and Maersk strengthening their presence via strategic equity acquisitions in, and partnering with, key Chinese industry players. For years foreign logistics companies barred from entering China independently have had to work through joint ventures (JVs) authorized to provide services only within limited segments of the supply chain. Since teaming up in 1986 with Sinotrans, China's leading state-owned logistics company, DHL's China business has grown significantly and continues to grow at over 40% per year. DHL, UPS and Exel acquired strategic stakes of 5%, 3% and 0.8%, respectively, in Sinotrans when it listed in Hong Kong in February 2003, the first international securities offering by a PRC logistics company. Meanwhile shipping titan Maersk, vying to increase sales and gain market share, will almost certainly benefit from its parent company's establishment of a foreign-funded container terminal management JV company in collaboration with the Shanghai Port Authority in September 2002.
Historically, China's logistics industry has never been fully integrated, being more akin to a number of narrow service sectors rather than one integrated industry. Until June 2002 no company had been authorized to engage in the provision of comprehensive integrated multi-modal logistics services. In short, logistics in China remain largely micro-regulated, with each logistics sector, governed as a distinct sub-sector within the broader logistics industry. China's various logistics investment sectors are currently regulated by a plethora of scattered laws and regulations. A unified logistics legal framework is still lacking, although central government policy commitments made in March 2001, China's accession to the WTO in December 2001, amendments to the Foreign Investment Industrial Guidance Catalogue (外商投资产业指导目录) in 2002 and a recent government circular have set the stage for a more coherent logistics legal regime.
WTO Commitments and Investment Sectors
Even after the 1998 Foreign Investment Catalogue was revised in 2002 (reflecting many of China's WTO commitments), air traffic control and postal management companies remain prohibited to foreign investment. The construction and operation of highway transport, civil airports and port facilities remain encouraged investment sectors, except that foreign investment ratio limits for port facilities have been removed, and the Chinese party's interest in civil airports shifted from a "controlling" to "relatively controlling" interest. Under both the 1998 and 2002 Catalogues, cross border road transport and water transport are restricted, although a foreign majority holding is allowed in the case of the former. Whereas air transport was restricted under the 1998 Catalogue, it is now encouraged, with the Chinese party still being required to hold a majority interest.
Pursuant to the 2002 Catalogue, transport-related warehousing and road freight transport are encouraged, and although by December 2004 wholly foreign-owned enterprises (WFOEs) may be established in respect of both sectors, foreign investors are currently technically only allowed to take a majority stake in transport-related warehousing JVs, and to only own up to 75% equity interest in road freight JVs. International maritime transport and international multi-modal combined transport are also encouraged under the 2002 Catalogue, with foreign majority ownership now allowed in international multi-modal combined transport JVs while foreign stakes of up to 49% are allowed in international maritime transport JVs. Rail freight transport is classified as restricted under the 2002 Catalogue with foreign participation capped at 49%, although rail freight transport WFOEs will be allowed by December 2007. Courier services are also restricted under the 2002 Catalogue but foreign majority participation is already allowed and foreign investors will be authorized to set up courier services WFOEs by December 2005.
In June 2002, the Ministry of Foreign Trade and Economic Cooperation took an important step forward when it promulgated the Issues Relevant to the Launch of Pilot Projects for the Establishment of Foreign-invested Logistics Enterprises Circular (关于开展试点设立外商投资物流企业工作有关问题的通知), which permits the establishment of fully integrated logistics JVs that may engage in the full spectrum of logistics business services and activities, including integrated supply chain management services. Although China's logistics industry is rapidly changing from a state-dominated oligopoly into a more modern competitive industry, further consolidation within the logistics industry is a prerequisite to the creation of streamlined supply chains. Such consolidation is already occurring in tandem with China's gradual regulatory shift from a strict sub-sector regulatory regime into a more unified body of law that permits and even encourages multi-sector and multi-modal logistics enterprises.
By Mitch Dudek, Anthony Hotung and Chenbo Zhang,
Jones Day, Shanghai
This premium content is reserved for
China Law & Practice Subscribers.
A Premium Subscription Provides:
- A database of over 3,000 essential documents including key PRC legislation translated into English
- A choice of newsletters to alert you to changes affecting your business including sector specific updates
- Premium access to the mobile optimized site for timely analysis that guides you through China's ever-changing business environment
Already a subscriber? Log In Now