Voluntary Report - public distribution

**Date:** 12/18/2003

**GAIN Report Number:** CH3833

CH3833

**China, Peoples Republic of**

**Market Development Reports**

**China Logistics Profile**

**2003**

**Approved by:**

![](media/image1.wmf)Ross Kreamer

U.S. Consulate

**Prepared by:**

Christina Wu

**Report Highlights:**

Although the Chinese government has invested heavily in the development
of transportation infrastructure, China still lacks an integrated
logistics industry at the national level.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Shanghai ATO \[CH2\]

\[CH\]

Table of Contents

[I. Logistics In China 3](#i.-logistics-in-china)

[I.A. Introduction 3](#i.a.-introduction)

[I.B. Overview of China's Logistics Industry
3](#i.b.-overview-of-chinas-logistics-industry)

[II. Major Modes of Transport 4](#ii.-major-modes-of-transport)

[II.A. Rail Transport 4](#ii.a.-rail-transport)

[II.B. Road Transport 6](#ii.b.-road-transport)

[II.C. Water Transport 7](#ii.c.-water-transport)

[II.D. Air Transport 8](#ii.d.-air-transport)

[III. Logistics Services 8](#iii.-logistics-services)

[III.A. Third-Party Logistics Providers
8](#iii.a.-third-party-logistics-providers)

[III.B. 3PLs and Intermodal Transport: A Case Study
10](#iii.b.-3pls-and-intermodal-transport-a-case-study)

[III.C. Cold Chain: Refrigerated Storage and Distribution
10](#iii.c.-cold-chain-refrigerated-storage-and-distribution)

[IV. Current and Planned Improvements to Logistics Infrastructure
11](#iv.-current-and-planned-improvements-to-logistics-infrastructure)

[Sector 12](#sector)

[V. Business Hints 12](#v.-business-hints)

[VI. Contact Information 13](#vi.-contact-information)

# I. Logistics In China

## I.A. Introduction

China's rapid economic growth and burgeoning trade, both internal and
external, is placing increased pressure on the country's logistics and
distribution systems. According to a report by the Economist
Intelligence Unit (EIU), the volume of containers passing through
Shanghai alone has grown by an average of 27% per year over the past
decade. Even this figure may understate the pace of growth: current
forecasts place China's total port capacity for 2003 at 47 million
twenty-foot equivalent units (TEUs), an increase of 37% over 2002.
Although China boasts a number of ports, domestic news sources calculate
that Shanghai and the southern port of Shenzhen account for the largest
share of the total.

The government of China has made substantial investments in upgrading
its transportation infrastructure over the past decade, however
logistics and distribution remains fragmented. According to EIU, the
total cost of China's logistics industry in the year 2000 exceeded US
\$200 billion, or one-fifth of the GDP and twice the cost of logistics
spending in the U.S. The American Chamber of Commerce in Shanghai
reports that logistics makes up at least 16% of overall product costs,
compared with less than 4% in many more developed countries. These
problems are affecting both imports and domestic products such as
soybeans. Foreign investment in the sector remains relatively limited,
due to limits on foreign ownership and other barriers to entry.

## I.B. Overview of China's Logistics Industry 

and permafrost (Tibet), deserts of shifting sand (Xinjiang, Gansu and
Inner Mongolia) and seasonal flooding (the Yangtze River valley).

Second, transportation networks are heavily fragmented, with regulatory
barriers that prevent consolidation. Local governments frequently
protect local transportation companies by erecting barriers to outside
companies, including licensing requirements, fees and inspections. In
addition, the current licensing system for logistics companies is
complicated and costly. Various governmental bodies require licenses to
run logistical operations, including the Ministry of Communications
(MOC), Ministry of Foreign Trade and Economic Cooperation (MOFTEC), the
Civil Aviation Administration of China (CAAC) and the State Postal
Bureau. After obtaining licenses, foreign companies must form a
patchwork of partnerships with local logistics and transportation
operators to build some kind of distribution network. Few licenses have
been granted for nationwide operations, and even holders of those are
subject to protectionist measures on the part of local governments. As a
result, third-party logistics providers (3PLs) have emerged as a popular
choice for multinational companies seeking to move product across the
country.

Third, logistics capabilities are limited and continue to lag behind
more developed nations. Key problems include inferior equipment and
poorly trained workers. China's history of state ownership in this
sector has left a legacy of poor management and an infrastructure geared
toward the movement of bulk commodities. As a result, the system is
poorly equipped to handle perishable or sensitive goods, track shipments
or handle containerized shipments over land.

In short, China's logistics industry faces major operational obstacles.
Government planners are now playing 'catch-up,' and the government has
given logistics a high priority in its current investment plan (the
'Five-Year Plan'). Increased foreign participation is also likely to
help, as China is scheduled to ease many of the barriers to foreign
entry in this sector over the next few years.

# II. Major Modes of Transport

## 

## II.A. Rail Transport

Logistics and distribution managers in Shanghai agree that rail is a
good option for moving non-perishable goods. However, for consumer foods
and other temperature-sensitive products, rail is a poor choice.
Although heavy subsidization has ensured that rail remains the cheapest
form of overland transport, several serious shortcomings make the rail
industry incapable of meeting the demands of an increasingly competitive
logistics industry.

First, handling practices in the rail industry are extremely poor. Goods
shipped by rail are much more likely to be damaged than those shipped by
road. Damage usually occurs during handling when goods are transferred
between rail cars and local truck transport. Across the board,
distribution and transportation workers are often not adequately trained
in handling sensitive goods. At best, poor handling compromises the
quality of the end product.

  ------------------- ----------- ----------- ----------- ---------- ----------
  **Table 1.                                                         
  Transportation                                                     
  Volumes (100                                                       
  million                                                            
  tons/kilometer)**                                                  

  **Mode**            **1998**    **1999**    **2000**    **2001**   **2002**

  Rail                12517       12838       13663       14575      15516

  Road                5483        5724        6129        6330       6783

  Water               19406       21263       23734       25989      27511

  Air                 34          42          50          44         52

  Sources: China                                                     
  Statistical                                                        
  Yearbooks, 1999,                                                   
  2001, 2003                                                         
  ------------------- ----------- ----------- ----------- ---------- ----------

Second, representatives from Shanghai-based Dazhong Transportation Group
report that cargo has a low priority in the rail system relative to
passenger traffic, which leads to delays and unpredictable delivery
times. These reports are confirmed by representatives of oil crushing
mills in North China, who prefer imported to domestic soybeans in part
due to the unreliability of domestic rail transportation. These mills
also report that extra payments may be demanded by local rail line
operators to make box cars available or to give priority to a cargo
during high traffic periods. Bureaucracy, poor scheduling and low speed
rail lines also cause delays. According to the EIU's *China Hand*,
shipments on less congested routes work within a one-week arrival
window, whereas for congested lines, the arrival window stretches up to
four weeks. Some cross-country deliveries can take up to 60 days. For
perishable products such as meat, dairy, frozen foods and produce,
shipment by rail is simply too slow and unpredictable.

A third problem is that goods shipped by rail must be shipped in bulk. A
minimum ten-ton requirement is usually attached to most shipment orders.
The cargo sizes for many small and mid-sized distributors are often not
large enough to be shipped in such high volume.

Fourth, theft of rail freight is an endemic problem. Security measures
can be strenuous and sometimes even require the manufacturer to employ
its own security guards on trains to safeguard its goods. Poor
circulation of information also means that goods shipped by rail are
almost impossible to track.

In light of these shortcomings, the Ministry of Railroads (MOR) is
taking steps to improve the rail system and coordinate operations with
foreign shipping firms. The 7,000 km track construction scheme mandated
in the Tenth Five-Year Plan, dubbed as the "eight verticals and eight
horizontals," constitutes 16 lines that cover a wide expanse of China's
geography. The MOR is consulting with overseas logistics firms in an
effort to streamline China's movement of cargo and resolve
inefficiencies. For instance, many Chinese railway containers are still
incompatible with those used by overseas shippers, requiring the
unloading and reloading of cargo. In addition to upgrading the
infrastructure, the MOR is modifying stations to handle foreign
containers.

![](media/image2.wmf)The government continues to promote foreign
investment in rail construction as a means of financing its gargantuan
infrastructure plans. At present, MOR claims that over 100 joint-venture
railway lines are running across the country. WTO commitments are also
encouraging foreign investors to enter into the sector. By 2004, foreign
majority shares in rail freight JVs will be allowed, while the entire
domestic rail cargo sector will by fully opened to foreign investment by
2006. Currently, Maersk of Denmark, Orient Overseas Container Lines of
Hong Kong, U-Freight of the U.S. and German-run DHL operate trial joint
ventures with state-owned companies. JV rail services allow for improved
tracking of goods and faster customs clearance times. Additionally,
foreign rail operators can offer specialized services and technology,
such as refrigerated container services.

While a foreign presence in the goods transport chain helps minimize
some of the pitfalls common to shipping by rail, inherent shortcomings
in the infrastructure mean that rail is still an undependable option for
the distribution of perishable and time-sensitive goods.

## II.B. Road Transport

Heavy government spending since the mid-1990s and the unreliability of
the rail system have positioned road transport as foreign and domestic
companies' most popular choice for the distribution of goods, especially
consumer food products. But because the trucking industry is extremely
fragmented and has never been organized on a national basis, no single
trucking firm can offer truly national coverage.

As China's entry into the WTO stimulates ever greater volumes of trade
each year, the road transport sector has struggled to keep up with
higher demand. Logistics managers and road transport providers have
identified several issues common to trucking. First, from a provider's
standpoint, truck prices are rising due to more stringent emissions
standards and the need for more sophisticated technology. Higher capital
costs equal even greater financial barriers for local companies trying
to upgrade their equipment. Second, truck maintenance is sub-standard.
Although trucking companies are technically required to undergo
inspections on a regular basis, in practice they rarely do. Only
one-fifth of China's freight trucks are containerized, which means that
the majority of cargo is vulnerable to damaged as it sits unprotected on
flatbed, open-backed vehicles. Third, overloading of goods is a typical
way through which companies try to cut costs. Transporters are known to
haul some 50% in excess of their legal payload, sometimes even higher. A
recent increase in police checks and fines is encouraging companies to
heed capacity limits, however, overloading is still rampant and often
results in delays and higher costs. A fourth problem with trucking stems
from city authorities' inclination to protect local businesses:
Non-local trucking firms are often prevented from entering city limits
during the day. In Shanghai, for example, trucks greater than 1.5 tons
are permitted to enter downtown areas only between 7 pm and 7 am, and
only on even or odd days, depending on their license plate numbers.

Despite these shortcomings, the construction of several new expressways
has expedited run time, especially on longer-haul routes, and therefore
has increased competition. Long-distance truckers are less vulnerable to
local government regulations on these expressways, enabling them to
operate inter-city routes. The emergence of hundreds of state-owned and
private long-distance trucking companies has led to competitive prices
and higher incentives to deliver goods more quickly, especially along
the busy east coast corridor. Thanks to the newly constructed
expressways, the trip from Shanghai to Guangzhou can be completed in as
little as 36 hours with two drivers, whereas it used to take three to
five days.

Newly constructed roads are also changing the nature of the rural
economy. In rural areas where refrigerated freight is still lacking,
speed of delivery is vital. With the rise of new expressways connecting
rural provinces to coastal regions such as Shanghai, farmers are now
able to ship their crops directly to urban markets in a much shorter
time. This has allowed them to diversify into more perishable but
higher-value products such as fruits and vegetables, which are in high
demand in China's coastal cities. Notwithstanding the Hong Kong 'gray
channel' and other means of transporting imported fruit and other
agricultural products into the country, the growing road network is
helping domestic farmers by linking scattered Chinese production to
urban markets and ports, thereby raising rural incomes.

An estimated 2.7 million trucking providers offer services across the
country, transporting roughly 10 billion tons of goods annually.
Sinotrans, China's largest provider, has a registered fleet of 3,000
trucks and specializes in long-distance service, while local operators
can offer cost-effective short-distance service. In major cities,
consolidation in the form of joint ventures is a growing trend.
Sinotrans, for instance, has roughly 50 subsidiaries and nearly 270
joint ventures. Firms also are increasingly expanding from traditional
freight forwarding to comprehensive logistics services, offering
warehousing facilities, ships, railway storage areas and/or port
terminals.

## 

## II.C. Water Transport

Shipping, both coastal and inland, has been used in China for thousands
of years and today accounts for over half of all domestic freight
traffic*.* Barge costs are generally low, and bookings are easy to
obtain. Shipping by vessel is best suited for moving bulk commodities
rather than distributing final products; about two-thirds of local barge
traffic is comprised of commodities for industry and agriculture, such
as coal and grain.

According to the MOC, navigable inland waterways total 122,000 km in
length. With over 18,000 km of coast, China also has three major rivers
that provide access to inland regions. The Yangtze River (or *Chang
Jiang*) is China's longest navigable river, at 6,300 km. Shipping by
barge is cheap, comparatively safe from pilferage, and the industry is
dominated by large local companies with cross-border operations.

Although China's vast collection of inland waterways has allowed it to
use water transport for centuries, lack of investment has contributed to
a growing list of shortcomings. Outdated equipment, inadequate IT
systems and obsolete inland port infrastructure place barge transport at
a disadvantage with newer competitors such as road and rail.

![](media/image3.wmf) minority stake in Chinese port facilities.

Since neither a lack of barge capacity nor waterway congestion present
major problems, the government is keen to upgrade the infrastructure for
water transport. According to the MOC, China's principal ports handled
more than 26.5 million TEUs in 2001, up 20% from 18.7 TEUs in 2000.
Currently, China has more than 1,200 ports offering berths for 33,000
vessels, including 800 deepwater berths capable of handling 10,000 ton
vessels. Major increases in containerized handling capacity are planned
for 2005. Despite restrictions, foreign companies are making inroads
into the industry. The MOC and other government agencies have entered
into talks with international shipping companies and have committed
themselves to developing regulations that require shipping lines to file
freight rates. All of these are signs of increasing transparency in the
industry.

The government is also capitalizing on foreign interest in port
construction. The Shanghai Port Authority has already begun work on a
20-year, US \$14.5 billion project that aims to build 52 berths along a
13-km waterfront with a draught of at least 15 meters at the Yangshan
Deepwater Port. Hamburg Port Consulting, a subsidiary of Germany-based
Hamburger Hafen und Lagerhaus-AG Group, is designing the mainland
container terminal. The first phase, construction of the deepwater
berths, is due for completion in 2005 at a cost of US \$1.5 billion. The
second phase will see the construction of a 30-km 4-lane bridge for the
transportation of cargo to Shanghai from the islands of Dayangshan and
Xiaoyangshan---the base of the new port. The final phase will involve
the connection of all port utilities.

## II.D. Air Transport

China's airfreight sector's annual value stands at US \$500 million per
year, with three domestic airlines controlling roughly 60% of the
market. The cargo divisions of China Eastern, Air China and China
Southern have all entered into domestic joint ventures and offer a
diverse array of services.

However, for the distribution of consumer products, including food and
other sensitive goods, airfreight is almost never used, since trucks can
reach most destinations within a few days and at far lower cost.
Furthermore, the infrequency of flights to more outlying cities cancels
out airfreight's time advantage over ground transport. The sector is
further constrained by low cargo capacity and an underdeveloped airport
infrastructure. According to a local aviation newspaper, China has just
13 airports per 10,000 km.

As with other sectors in the logistics industry, the government's Five
Year plan outlines a major development program for air infrastructure.
By 2005, the CAAC plans to add 400 aircraft and increase the number of
airports to 170, raising air cargo handling capacity from 2 million tons
to 5.6 million tons. The presence of international courier companies in
China is also growing. DHL World Express, United Parcel Service (UPS),
Federal Express (FedEx), TNT Express Worldwide, and Japan's OCS all have
joint venture operations that allow them to carry international express
letters and packages into and out of China. Additionally, most
international airlines provide cargo flights in and out of China.

# III. Logistics Services

## III.A. Third-Party Logistics Providers

In the U.S. and Europe, consumer goods firms generally outsource
logistics needs to third-party logistics providers (3PLs). Although 3PLs
control a small share of the overall logistics market in China, they are
growing in importance for multinational companies and organizations
looking to set up or expand operations on in China. 3PLs are essentially
supply chain managers who subcontract some of their logistics
requirements to container lines, trucking firms and airfreight
companies. Many own assets such as distribution centers, warehouses and
trucking fleets, and a growing number of providers are expanding to
offer across-the-board services. For consumer goods companies looking to
move their product into or around China, outsourcing to a 3PL can mean
lower supply chain costs.

According to Morgan Stanley, while 3PLs currently handle just 16% of
final products in China, more foreign and local 3PLs will enter the
market over the next five years. The emerging 3PL industry in China may
be categorized into four types:

-   *Large SOEs* (such as Sinotrans, COSCO and China Post) with
    extensive transport and warehousing assets, broad national networks,
    and strong relationships with central and provincial governments.
    These firms already enjoy a monopoly in several areas of trucking,
    shipping and postal services.

-   *Medium-sized domestic logistics providers* (generally privately
    owned), which focus on one or two key industries.

-   *Logistics divisions of manufacturers and processors*, primarily
    providing services to internal customers, but sometimes offering 3PL
    services to outside companies. The Shanghai Fruit Distribution
    Center is an example of a subsidiary company that has sought to
    internalize logistics needs. However, as an SOE, the division is
    struggling to update its facilities and compete with private
    counterparts.

-   *Foreign logistics providers*, including multinational firms, new
    Wholly Foreign Owned Entities (WFOEs) and smaller firms working in
    niche markets.

China's leading 3PLs are large foreign companies licensed to operate as
WFOEs. Also growing in importance are foreign companies that are
currently restricted to operating as joint-venture partners or through
free-trade zones (FTZs). In 2001, the government of Shanghai's Pudong
New Area lifted all restrictions on warehousing and logistics companies
setting up operations in the Wai Gao Qiao Bonded Zone, equalizing their
position with trading companies in the the zone. Foreign companies are
now allowed to operate these warehouses themselves to store a wide
variety of raw materials, parts and other finished goods for onward sale
and shipment into China. In Wai Gao Qiao, foreign operators generally
maintain high-standard warehouses at their manufacturing facilities,
which can double as regional distribution centers. A growing number of
providers are "one-stop-shops" that offer wide-ranging import
distribution services that extend beyond logistics.

By 2004, all of these firms will be permitted to operate as WFOEs, and
will be free to offer a wide array of services, provided they obtain the
necessary licenses. An outline of the status of the different services
and their licensing authorities is given below.

  ------------------------ ------------------- ---------------------------
  **Table 2. Regulatory                        
  framework for foreign                        
  participation in                             
  distribution**                               

  **Sub-sectors**          **Foreign           **Authority for license
                           participation**     approval**

  International freight    Regulated           MOFTEC
  forwarding                                   

  Airfreight forwarding    Regulated           CAAC, MOFTEC

  Logistics center         Encouraged          MOC, MOFTEC

  Domestic trucking        Regulated           MOC, MOFTEC

  Consolidation            Regulated           MOC, MOFTEC

  Warehousing              Encouraged          MOC, MOFTEC

  Customs brokerage        Heavily Regulated   CGA, MOFTEC

  Shipping line            Regulated           MOC, MOFTEC

  Airline                  Heavily Regulated   CAAC, MOFTEC

  Source: Hong Kong Trade                      
  Development Council, EIU                     
  ------------------------ ------------------- ---------------------------

From the logistics provider's standpoint, both foreign and local 3PLs
are faced with two choices in the growing commercial economy: invest up
front in a national network and wait for clients to come; or claim
national coverage and struggle to meet subsequent client demand. Most
3PLs outsource most of their logistics operations to local firms,
encouraging 3PLs to choose the second option. In the short term, that
choice is more palatable, allowing businesses to oversee operations
without having to invest heavily in equipment and personnel upfront.

However, 3PLs offering domestic supply chain management face a hard sell
in China because their high costs put them out of reach of most local
companies. Based on the table above, it is evident that 3PLs also fall
between the cracks of China regulatory bureaucracy, at least for the
time being.

## III.B. 3PLs and Intermodal Transport: A Case Study

Xintiantian Distribution Center, a subsidiary of Shanghai Food Group, is
one such distributor that entered into a three-way joint venture with
Shanghai's Dazhong (a trucking/transportation company) and Mitsui O.S.K.
Lines, a Japanese distributor, on October 1, 2003. Xintiantian is a
typical example of a delivery center that evolved from a larger SOE and
now offers specialized logistics services. Xintiantian provides
refrigerated storage and distribution services, with 12,000 tons of cold
storage capacity (or 4% of Shanghai's total 325,000 ton cold storage
capacity). The aggregate cold storage capacity of Shanghai Food Group
and its subsidiaries amounts to 130,000 tons, or 40% of Shanghai's
total. Xintiantian offers three basic services: cold storage, simple
manufacturing (including packaging and labeling) and delivery of
refrigerated goods to retail outlets. The company services a variety of
foreign and domestic clients, including hypermarket chain Metro and
convenience store chain Alldays. A synchronized computer system allows
Xintiantian, its suppliers and store branches to view the status of
orders in real time. The company presently has a registered fleet of
about 40 refrigerated trucks (some equipped for transportation of frozen
goods and some for fresh or perishable goods).

## III.C. Cold Chain: Refrigerated Storage and Distribution

Refrigerated shipment and storage of goods is relatively undeveloped in
China, notwithstanding technical advances and increased investment in
the coastal areas in recent years. Refrigerated trucks and warehouses
are still quite rare, even in coastal areas, and different goods may
require different cold storage arrangements, which many of the existing
refrigerated storage facilities have difficulty providing. For example,
fresh and chilled goods may be stored between 0 and 10^o^C, while frozen
goods such as ice cream must be kept at --18^o^C. As a consequence, some
foreign food companies, such as Haagen-Dazs, handle cold storage and
distribution responsibilities themselves, to ensure the safety and
quality of the product. Most manufacturers, however, do not have the
manpower or resources on the mainland to maintain such expensive
equipment, and choose instead to hire 3PLs to take on the task for them.

A small but growing number of specialized firms, such as Xintiantian,
serve as 3PLs, covering the movement of temperature-sensitive products.
There are also a growing number of foreign-owned or managed logistics
providers such as E-Merge Logistics, based in free-trade zones. A number
of these have access to bonded, temperature-controlled facilities, in
addition to providing a wide array of services such as inventory
control, customs clearance and foreign currency exchange.

# IV. Current and Planned Improvements to Logistics Infrastructure

The Chinese government recognizes that transportation and logistics
limitations have the potential to become a bottleneck for future
economic growth. This is reflected in the heavy commitment made toward
modernization and expansion of the transportation infrastructure in the
government's main investment planning document (the Five Year Plan). In
setting its plans, the government has identified three key tasks. 1)
Development of infrastructure for waterways, roads and rail. 2)
Standardization of regulatory requirements. 3) Increased foreign
participation in logistics and distribution.

Infrastructure development must include improvements to the conditions
of waterways, roads and railways. To expand the capabilities of
waterways, the government's plans include the construction of 135 new
deepwater berths and upgrades to 45 existing berths, adding at least 20
million TEUs to China's national container handling capacity. In
particular, Shanghai seeks to increase its container-handling capacity.
Shanghai has moved from being the world's 6th largest port in
container-handling capacity in 2000, to become the 3rd largest behind
Rotterdam and Singapore.

  ------------------- ----------------------------- ----------------------
  **Table 3. Top ten                                
  international ports                               
  for container                                     
  traffic, 2000                                     
  (1999)**                                          

  **World ranking**   **City**                      **Total TEU
                                                    (millions)**

  1 (1)               Hong Kong                     18.10

  2 (2)               Singapore                     17.04

  3 (4)               Pusan, South Korea            7.54

  4 (3)               Kaohsiung, Taiwan             7.43

  5 (5)               Rotterdam, Netherlands        6.28

  **6 (7)**           **Shanghai, China**           5.61

  7 (8)               Los Angeles, US               4.88

  8 (6)               Long Beach, US                4.60

  9 (9)               Hamburg, Germany              4.25

  10 (10)             Antwerp, Belgium              4.08

  Source:                                           
  Containerization                                  
  International,                                    
  *Business China*                                  
  ------------------- ----------------------------- ----------------------

The Shanghai Port Authority has also launched a long-term dredging
program to increase the depth of the Huangpu River (Shanghai's main
river), but current plans do not yet provide a permanent solution to the
problems of heavy silting and the river's relative narrowness and
shallowness. Nevertheless, after port expansion, Shanghai will only
trail Singapore (and possibly overtake it) in worldwide TEU handling
capacity.

For land transportation, the government's plans allocate RMB 1 trillion
(US \$120 billion) for highway construction. By 2005, about 200,000 km
of roads will be complete, bringing the national total to about 1.5
million km. Some of the major plans include the 2,000 km
Shanghai-Chengdu Highway and the 2,500 km Beijing-Zhuhai Expressway.

The government has invested RMB 350 billion (US \$42 billion) to build
new railways, upgrade the existing network and improve the speed of
delivery. This budget is earmarked to add a total of 7,000 km of new
track to the existing total of about 75,000 km. These ambitious plans
require the construction of about 3,000 km of track per year, as
compared to an average of just 700 km of new track per year over the
past ten years. To achieve its targets, the Ministry of Railways has
actively solicited consultants, suppliers and investors, both domestic
and overseas.

China's government is relying on foreign participation to help lower
costs and increase competition. Under its WTO accession agreement,
Beijing committed to open the distribution and logistics sectors to
foreign participation by 2006. Increased foreign competition is expected
to hasten consolidation within the industry, and hopefully will work to
reduce long-standing problems of inefficiency, substandard equipment,
poor management and poorly trained labor.

The Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA) is
a special free-trade agreement in which China agreed to allow
preferential access to China, above and beyond WTO commitments, for
goods and services suppliers in Hong Kong. Thus, CEPA is designed to
provide Hong Kong companies, which would include Hong Kong subsidiaries
of non-Hong Kong multinationals, an additional competitive edge over
non-Hong Kong companies that receive only the general benefits of
China's WTO accession.

+-------------+--------------------------------------------------------+
| **Table 4.  |                                                        |
| Market      |                                                        |
| access      |                                                        |
| r           |                                                        |
| estrictions |                                                        |
| in          |                                                        |
| logistics   |                                                        |
| services**  |                                                        |
+-------------+--------------------------------------------------------+
| # Sector    | **Limitations on market access**                       |
+-------------+--------------------------------------------------------+
| Road        | -Foreign majority stake of up to 75% in JVs currently  |
|             | permitted; wholly foreign-owned enterprises (WFOEs)    |
|             | permitted by 12/11/04                                  |
|             |                                                        |
|             | -CEPA allows WFOEs from 1/1/04                         |
+-------------+--------------------------------------------------------+
| Rail        | -From Jan 1, 2003, foreign majority stake permitted;   |
|             | WFOEs permitted from 1/1/06                            |
|             |                                                        |
|             | -CEPA allows WFOEs from 1/1/04                         |
+-------------+--------------------------------------------------------+
| Maritime    | -Minority shares allowed in JVs, degree depends on     |
|             | sub-sector of maritime transport services              |
|             |                                                        |
|             | -CEPA allows WFOEs from 1/1/04 in most areas,          |
|             | depending on sub-sector                                |
+-------------+--------------------------------------------------------+
| Storage and | -WFOEs permitted by 12/11/04                           |
| warehousing |                                                        |
|             | -CEPA allows WFOEs from 1/1/04                         |
+-------------+--------------------------------------------------------+
| Freight     | -Foreign majority stake of up to 75% in JVs currently  |
| forwarding  | permitted; WFOEs permitted by 12/11/05                 |
|             |                                                        |
|             | -CEPA allows WFOEs from 1/1/04                         |
+-------------+--------------------------------------------------------+
| \*CEPA      |                                                        |
| agreements  |                                                        |
| apply to    |                                                        |
| "qualifying |                                                        |
| Hong Kong   |                                                        |
| service     |                                                        |
| suppliers," |                                                        |
| which can   |                                                        |
| be taken to |                                                        |
| include     |                                                        |
| Hong Kong   |                                                        |
| permanent   |                                                        |
| residents   |                                                        |
| and         |                                                        |
| juridical   |                                                        |
| persons     |                                                        |
| such as     |                                                        |
| co          |                                                        |
| rporations, |                                                        |
| trusts,     |                                                        |
| pa          |                                                        |
| rtnerships, |                                                        |
| joint       |                                                        |
| ventures,   |                                                        |
| sole        |                                                        |
| prop        |                                                        |
| rietorships |                                                        |
| or business |                                                        |
| a           |                                                        |
| ssociations |                                                        |
| organized   |                                                        |
| under the   |                                                        |
| relevant    |                                                        |
| laws of the |                                                        |
| Hong Kong   |                                                        |
| SAR.        |                                                        |
|             |                                                        |
| Source:     |                                                        |
| US-China    |                                                        |
| Business    |                                                        |
| Council;    |                                                        |
| Access      |                                                        |
| Asia; Baker |                                                        |
| & McKenzie  |                                                        |
+-------------+--------------------------------------------------------+

The government's ambitions, as laid out in the Five-Year Plan, in
accordance with the implementation of WTO and the Sino-U.S. bilateral
agreements, deem the next few years as crucial to the development of an
integrated logistics and distribution industry. Accordingly, the central
government continues to encourage state-owned firms to form alliances
with both domestic and foreign partners.

# V. Business Hints

When devising a distribution strategy, firms should bear in mind the
rapidly changing nature of China's developing economy, and be as
flexible as possible in dealing with unexpected setbacks or
opportunities. It is important to remember that China is a unique
market: it is a mistake to assume that experience in other markets, even
post-communist ones, will smoothly translate into success in China.
Shortcomings in transportation infrastructure, the constantly evolving
legal environment, limited business expertise at the local level and
arbitrary enforcement of commercial regulations can combine to
complicate matters on the ground. One key measure that businesses can
take to reduce their risk is to conduct their due diligence: the Chinese
partners that a company works with are often the key to success or
failure.

Manufacturers and exporters should also consider the following when
crafting their distribution strategies in China:

-   *Focus on achieving depth, rather than breadth, of market
    penetration*. This may mean limiting activities to a single city or
    region. Fragmented local logistics systems make distribution across
    large areas more difficult and expensive. In addition, China's vast
    size and economic and cultural diversity make it nearly impossible
    to enter all markets simultaneously.

-   *Carefully consider the regulatory risks*. Although enforcement of
    commercial regulations at the national level has become more
    transparent under WTO, local enforcement remains arbitrary. Some
    rules are not widely publicized, while others are vague and open to
    interpretation. Reliance on a favorable interpretation of the
    regulations is dangerous. Companies should be aware of where the
    potential risks lay, and consider preparing a strategy to cope with
    an unfavorable change in interpretation. Since many of the rules are
    not publicized, identifying them will require working closely with
    an experienced Chinese partner.

-   *Exercise caution in the selection of Chinese partners*. As noted
    before, Chinese partners can be the key to success. A partner with
    prior experience in the area will be able to identify potential
    pitfalls and will have the network of business and government
    contacts needed to do business in China. To remain adaptable in
    China's ever-changing markets, it is advisable not to become overly
    reliant on a single partner. Ideally, partnership arrangements
    should give the Chinese partner a clear stake in the success of the
    venture.

# VI. Contact Information

**US Agricultural Trade Office, Shanghai**

Suite 331, Shanghai Centre

1376 Nanjing West Rd.

Shanghai 200040

Tel: (86-21) 6279-8622

Fax: (86-21) 6279-8336

Email: <atos@public.sta.net.cn>

<christina.wu@usda.gov>

The companies listed below were interviewed for this report and/or would
be willing to provide you with information regarding their services. ATO
Shanghai does not endorse the companies and instead provides their
contact information purely for your reference.

**Emerge Logistics**

Mr. Jeffrey Bernstein, Director & General Manager

Shanghai Bonded Logistics Center

27 Hua Shen Rd., Bldg. B1, Suite 8A

Wai Gao Qiao FTZ

Shanghai 200131

Tel: +86-21-5866-7693

Email: <jbernstein@online.sh.cn>

**EverReach Logistics**

Mr. Dustin Mattison, Client Manager

12C Zhong Xi Mansion

121 Jiang Su Rd.

Shanghai 200050

Tel: +86-21-6226-8012, ext. 220

Email: <dustin_mattison@everreach.com>

**Shanghai Da Zhong International Warehousing Logistics Co., Ltd.**

Mr. Peng Yi Ming, General Manager

Mr. Yan Xiao Ming, Assistant Manager, Logistics Business Dept.

No. 423 Wu Ning Rd., 7F

Shanghai 200063

Tel: +86-21-6254-9862

Email: <pym@82222.com>, <yxm@82222.com>

**Shanghai Le Hui Logistics Co., Ltd.**

Mr. Wang Zhonghua, President

No. 2390 Jungong Rd.

Shanghai 200438

Tel: +86-21-6574-2639

Email: <huazhongw@online@sh.cn>

**Shanghai Xintiantian Dazhong Cold Chain Logistics Co., Ltd.**

Ms. Xie Pei Ling, Vice General Manager

No. 222 Longcao Rd.

Shanghai 200235

Tel: +86-6482-1116

Email: <xttps@citiz.net>

**Weiss-Rohlig China Limited**

Mr. Alex Sharp, Rohlig Representative

Shanghai Representative Office

E. 26F, Lucky Mansions

No. 257 Siping Rd.

Shanghai 200081

Tel: +86-21-6521-1770, ext. 202

Email: <alex.sharp@weiss-rohlig.com.cn>