China Consumer

Logistical nightmare

The hidden costs for China consumers explained

Logistical nightmare

A lot of fat in the system

According to the American Trucking Associations, moving goods by truck in the US costs about $1.75 per mile. That includes driver salaries, truck leases, insurance, tolls and various other related costs.

By comparison, trucking costs in China’s two biggest export regions — the Yangtze River Delta region near Shanghai and the Pearl River Delta around Hong Kong — are $2.5 to $3 a mile. That is despite the low pay on offer to Chinese drivers, who often earn as little as 25 cents an hour versus about $17 an hour in the US, says the New York Times.

So how does transport by truck end up so much more expensive for Chinese operators? The baffling statistic offers a glimpse into a hugely inefficient logistics system. Despite ongoing government investment into road, rail and air infrastructure, the cost of moving goods around China remains very high.

In April, Xinhua reported that the costs of logistics nationwide had reached 21.3% of GDP, compared with 10% in the US and 13% in India. “Logistics, warehousing and shipping are still very inefficient,” Chiang Jeongwen of the China-Europe International Business School in Shanghai told The Economist.

A key issue is a highly fragmented logistics market. The China Federation of Logistics & Purchasing says there are now more than 700,000 logistics enterprises registered in China, mostly small and medium-sized operators. Even the largest logistic firms have less than 2% market share. Competition between local jurisdictions is also a complicating factor. Many local authorities won’t let trucks from other provinces cross into their jurisdiction, requiring unnecessary unloading and reloading.

There are also complaints about excessive toll charges. China reportedly has 70% of the world’s tolled roads and some of the highest fees for using them. Given all the costs, Chinese truckers perennially overload their vehicles, a strategy that normally ends up costing even more thanks to police fines.

High tariffs have led to widespread discontent among the country’s truck drivers, with Shanghai’s truckers going on strike in late April over transport-related charges. The action fizzled out after authorities pledged to cut some of the fees and charges that the truckers were complaining about (see WiC104).

In fact, onerous logistical expenses have been one of the factors blamed for increases in food prices over the last year.

But retailers are also beginning to get more flak. Suppliers pay heavily to place their goods on retailers’ shelves. They also lease space for in-store displays and are expected to contribute towards promotions and rebates. All these extra costs are then being passed on to the consumers.

“You have to pay every time the retailer opens a store. They charge everything between Rmb15,000 to Rmb5,000 depending on the size of the store,” Liu Xuesong, a rice cracker supplier in Beijing, told CCTV.

“They also expect you to subsidise everything from the ribbon-cutting ceremony to in-store promotions. This all adds up very quickly.”

Take a bag of rice crackers that retails for Rmb3. Liu reckons that about 30% of the cost goes towards subsidies for the supermarkets. He said he has repeatedly tried to negotiate a lower price differential but that supermarket bosses refuse to budge.

“I can’t really lower my price any further or I’ll start losing money,” Liu laments.

Not that the major retailers are likely to give ground easily.

Last year, “other income” (mainly fees charged to suppliers) made up 56.8% of gross profit at Wumart, 65% at Lianhua and 36.6% at Gome.

Even though the producers seem to be first to get blame for rising food costs, the retailers are the real culprit, Liu told Xinhua bitterly.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.