In developing markets, logistics activities involve a range of challenges and opportunities:
Opportunities revolve around the fact that the developing markets are experiencing rapid economic growth and the resulting increase in trade and commerce drives increasing demand for logistics services. Challenges are many and varied, with the top three consistently being limitations in infrastructure, bureaucratic regulatory procedures and skills shortages.
Let’s explore three specific markets – China, India and Vietnam:
|Land mass (1,000 km2)||9,640||3,287||331|
A broad indicator of the efficiency of a market’s logistics sector is the Logistics Costs as a percentage of GDP. In developed markets this is generally less than 10%, however in developing markets the percentage is much higher – reflecting inefficiencies in the sector. As we can see below, in our three developing markets China’s logistics represents 18% of GDP, India 13% and Vietnam 25%. As these countries gradually improve and enhance their logistics sectors, we will see these percentages decline over time.
The regulatory environments for logistics in China, India, and Vietnam are somewhat restrictive – compared to developed markets – but are gradually improving. Companies doing business in these three developing markets will often encounter government bureaucracy, onerous paperwork procedures, customs delays, corruption and high duties & tariffs. These barriers to business are costly in both time and money.
China – one of the challenges in China is the variation in interpretation and application of customs regulations. In fact, foreign companies often think that there are different customs regulations in different locations, however this is not true. It is the interpretation and application of the regulations that varies – by location and in some cases by individual officials. This often results in companies being able to process goods a certain way on one port location, but not in another. This results in additional complexities within the logistics component of international supply chains.
India – companies in India often establish warehouse operations in all the different states in which they do business. This is due to the traditional tax system that operates at state level, rather than national level – each state has its own tax systems with different regulatory frameworks. This introduces unnecessary additional complexity into domestic supply chains and whilst companies may save on tax, they spend more on logistics than would otherwise be necessary. After years of debate, a national, standardised tax system is due to be implemented within the next year or so.
Vietnam – the regulatory environment for logistics in Vietnam is similar to how it was in China ten years ago. With Vietnam’s recent accession to the WTO, restrictions on foreign entities will gradually be reduced. Foreign ownership of logistics companies is currently restricted to 49%, but from year 2014, 100% wholly foreign owned logistics businesses will be allowed. Hence during the coming three years, we will see a flurry of merger and acquisition activity – at both local and global levels.
As a result of China’s four trillion RMB stimulus package initiated in 2009, China has made massive progress in transportation infrastructure development. The highway system now has over 75,000 km of expressways, new airports are being constructed at the average rate of one new airport every five weeks, inland waterways have been developed and expanded, and container port infrastructure developments continue unabated, with Shanghai port handling over 29 million TEUs in 2010. Furthermore, the huge development of the high-speed passenger rail network is expected to free up some of the existing rail infrastructure to be converted for cargo use in the future, including containerised rail freight.
In India, the logistics infrastructure is nowhere near as developed as in China. They have not provided the level of investment and support needed to keep up with modern logistics, leaving them with limited road infrastructure and congested container ports, leading to huge delays and inevitable inefficiencies – costing time and money. A recent article in the Washington Post states “If urgent steps are not taken, experts say, the cost of waste and delays will increase from $45 billion annually to $140 billion by 2020.” One positive step India took in 2007, was to allow private companies to operate on the state railway systems. One major player, Arshiya, is investing heavily in the rail logistics sector in a bid to improve India’s efficiency. Reuters recently reported that Arshiya is to invest 1.5 billion rupees in order to double its rail capacity.
Vietnam – with the support of foreign investment and through several public-private partnership projects, Vietnam has been able to make progress in recent years on infrastructure developments, particularly in southern Vietnam. One example is Cai Mep port — the large, impressive and modern container terminal developments south of Ho Chi Minh City. Other examples are the huge industrial zones and logistics parks built in Binh Duong province, north of the city. However there is opportunity to improve the overall planning and coordination of the logistics infrastructure projects – despite the Cai Mep port container terminals being open, the highway from Ho Chi Minh City to the port is not yet complete. There is also a need to develpop transportation ncorridors – road and rail – to connect the new industrial zones and logistics parks in Binh Duong province to the container ports, both the city terminals and the new Cai Mep facilities.
One logistics challenge common to China, India and Vietnam – indeed throughout all developing markets – is the skills shortage. As the economies are expanding, then logistics activity increases, which in turn drives demand for trained, skilled and experienced professionals.
The findings of the Global Chief Supply Chain Officer Report 2011state that “talent acquisition and leadership development” represents a significant challenge in supply chain management, with 35% of respondents listing it as one of their top challenges and a further 56% agreeing that it is an important challenge.
In China the difficulty of recruiting skilled professionals is exacerbated because of its scale and also due to China’s leading role in global supply chains. At the same time, the scale of the sector gives it a larger pool of experienced workers than in other countries.
India’s leadership role in global commerce has developed in areas such as telecommunications and business process outsourcing. This has resulted in a smaller pool of experienced talent to fill the expanding demand in the logistics sector. As India plans to modernise many sectors, in particular the retail trade, there will be increasing need for experienced logisticians.
In Vietnam, the majority of the population are young and well educated, with English spoken quite widely. Thus there is a large pool of potential workers for the logistics sector, however, as in many other countries, there are not enough young people choosing the logistics sector as their career path. Therefore in Vietnam, we are also seeing skills shortages in the logistics sector.
The logistics sectors in China, India and Vietnam have improved significantly during the last five years, and as they continue to do so, we can expect to see gradual reduction in the logistics costs as percentage of GDP. In line with maturing logistics sectors, we will also see an increase in the level of outsourcing, which is good news for the 3PL logistics service providers.
Mark Millar leverages over 20 years of global business experience to develop and deliver enlightening keynote speeches, and to provide Consulting, Advisory and Recruitment services that create value for clients by improving the performance of their logistics and supply chain activities.
With extensive experience in the mainland China market, Mark has worked with – and for – many leading companies in the Consumer Retail, High Tech Electronics and Third Party Logistics sectors.
Acknowledged as an industry thought leader, clients have engaged Mark as Speaker, Moderator, Conference Chairman or Master of Ceremonies at more than 200 functions in 17 countries, and his articles are regularly published by trade magazines in five languages.
Mark serves as an Advisor to several organisations, including various non-profit associations and his commitment and contribution to the industry has been recognised with several accolades , including being named in the “Who’s Who of Power Players in Supply Chain Management in China”, the “Pro’s-to-Know Thought Leaders in Supply Chain” and as “One of the most Progressive People in World Logistics”.
During his distinguished international business development career, Mark has lived in the UK, the Netherlands, Australia, Singapore, USA, Ireland, China and Hong Kong.
Mark achieved an MBA with Distinction from the University of the West of England, is a Graduate of the UK Chartered Institute of Marketing, holds a post graduate Diploma in Management Studies and is a Graduate of the Australian Institute of Company Directors.
Contact him at email@example.com