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Demand slump stumps transporters

Updated: 2009-02-16 07:55
By Lu Haoting (China Daily)

Demand slump stumps transporters

Heavy duty trucks loaded with containers in Xinshengwei Freight Port in Nanjing, capital of Jiangsu province in East China. CFP

The winter of 2008 may have been the coldest for Song Zhengbing, deputy-marketing director of the Shanghai Pudong Trucking Corporation. In December, nearly 35 percent of the company's 1,500 trucks remained idle, waiting to move goods.

Song may not have much to cheer about in the year of the Ox either. With the global economic crisis worsening, Song anticipates his company's sales to fall nearly 25 percent this year.

"The old Chinese saying that 'the teeth are cold when the lips are gone' can well describe the situation of the logistics industry," Song said.

Transportation companies in China have often seen their earnings dented by soaring fuel prices and rising labor costs. However, the economic crisis seems to be pushing them further into the red as cargo transportation demand has slumped due to the slowdown in exports.

"The global financial crisis has spilled into the foreign trade business. The negative impact is now moving upward in the industry chain and will be fully felt in the logistics industry in 2009," said He Liming, managing vice-president of China Federation of Logistics and Purchasing (CFLP).

Industry analysts said the "unprecedented" crisis could force the logistics industry into a massive restructuring. While many smaller and weaker companies will either disappear or get absorbed by bigger players, the stronger ones would be forced to look for new profit avenues.

Falling demand

China's trade volume dropped for the first time in seven years in November 2008. Total trade volume in November decreased 9 percent year-on-year to $189.9 billion, with export value dropping 2.2 percent year-on-year and imports plummeting 17.9 percent.

The country's foreign trade continued to decline in December, with exports dropping 2.8 percent and imports falling 21.3 percent year-on-year.

The outlook for this year would be even more challenging. China's annual foreign trade growth rate could drop below 5 percent this year, according a recent report issued by the General Administration of Customs. That is a significant decline compared to the 23.5 percent annual growth in 2007 and the 17.8 percent increase in 2008. The report said China's export growth would be capped by weakening demand in China's major export destinations as the global financial crisis spreads to non-financial sectors.

Ports and international freight forwarders were among the first to experience the chill from falling exports and the domino effect has spread to the transportation companies carrying goods for them.

"Many small freight forwarders in Shanghai have ceased to exist. The large- and medium-sized firms that managed to weather the crisis are all expecting a 10-25 percent drop in sales this year," Song said. Over 60 percent of the clients of Song's trucking company are international freight forwarders.

CFLP's He said China's logistics industry already showed signs of a slowdown in 2008. The country's freight volume dropped 8.5 percent year-on-year in the first three quarters of 2008, according to CFLP statistics.

Transportation companies in central and northeast China have seen cargo shipments for the Yangtze and Pearl river delta regions falling nearly 40 percent since July 2008, He said. The two delta regions are China's major manufacturing and export bases.

Transportation prices are also falling. "Usually road transportation prices would see a 20-30 percent increase in September, but last year prices fell slightly," He said. China's road transport price index declined 4.6 percentage points in November compared with October.

"We are preparing to freeze 25 percent of our truck fleet," Song said. His company is also slashing costs through various means, such as laying off drivers and cutting travel expenditure.

Fuel concerns

Besides falling demand, fuel costs are another concern for transportation companies.

The National Development and Reform Commission (NDRC), China's top economic planning body, cut fuel prices in mid-December. Gasoline prices were slashed to 5,580 yuan from 6,480 yuan per ton and diesel to 4,970 yuan from 6,070 yuan per ton. But such fuel prices were based on $83.5 per barrel of crude. International crude prices have since then fallen sharply to about $40 a barrel from $147.

Last month, the NDRC cut gasoline and diesel prices again by 140 yuan and 160 yuan per ton, or by 2 and 3.2 percent, respectively. Analysts said the cut will bring down the price of retail gasoline by a little more than 0.1 yuan a liter and is a sign that the government could cut retail fuel prices more frequently to take them closer to global market levels.

"Domestic fuel prices are still high and we anticipate further price cuts," said Zhu Jihua, president of Hangzhou Jihua Logistics Co Ltd. The price cut would not result in higher profits for his company, he noted.

"Our clients are all cutting costs because of the financial crisis. Now because of fuel price cuts, they would further slash their logistics expenditure and bargain for lower prices with us," said Zhu. He said he expects transportation prices to drop 5 percent in 2009.

The introduction of the fuel tax, however, seems to spell some good news for the industry. Beginning Jan 1, the gasoline tax increased from 0.2 yuan to 1 yuan per liter, while diesel tax rose from 0.1 yuan to 0.8 yuan a liter. But at the same time the government scrapped six categories of tolls for road maintenance and management.

"Replacing road maintenance fees with a fuel tax can alleviate transportation companies' burden to some degree, but in reality the positive effect is not that big," said Chu Xuejian, vice-president of Shanghai Logistics Society.

For now, the tolls on expressways and bridges remain unchanged. Fuel and road tolls alone account for 60-70 percent of the companies' total transportation costs. Road maintenance fees are also fixed costs for transportation firms while fuel taxes are not. So, the more you drive, the more you pay.

Take, for example, a truck with 5 ton load capacity, Song said, he would be paying less now if the truck runs for less than 5,000 km a month. But the costs would be higher than before if the truck runs more than 5,000 km a month.

The new policy is expected to force logistics companies to cut costs by switching to more fuel-efficient vehicles and optimizing their traffic networks, said An Jianghong, a logistics analyst with Anbound Group, a consulting firm based in Beijing.

As profit margins of traditional logistics services such as transportation and warehousing keep falling, one-stop supply chain management and other high value-added services are becoming new profit engines, analysts said.

Guangdong-based PG Logistics Group Co Ltd said its sales still maintained "a moderate growth" in 2008 mainly due to diversification of service.

The company is one of China's largest private logistics companies and is one of the first private third-party logistics providers. Besides transportation, it also provides services such as managing inventory, distribution, direct store delivery and packaging. Its customers include some Fortune 500 companies like P&G and Philips.

"We try to create new value for customers rather than competing on price," said Xie Jianmin, marketing director, PG Logistics, adding that value-added services promise "much higher" profit margins than road transportation.

"Under a difficult economic environment, more and more companies will be forced to outsource their supply chain management in order to reduce costs. That would create new opportunities for us," Xie said.

Meanwhile the company is also trying to rely less on export-oriented businesses and is focusing more on consumer goods for domestic markets, Xie added.

Shanghai Pudong Trucking Corporation too has similar plans. The company's cold chain business remained "robust" in 2008 despite the global financial crisis, Song said. "After all, people still have to eat," he added.

Rural consumption could become another driving force, Xie said.

While pinning hopes on domestic demand as global economic crisis hits exports, the Chinese government has vowed to improve farmers' incomes. The government recently announced plans to expand subsidies for farmers' purchase of home appliances nationwide from February 1 to boost consumption.

With subsidiaries in 78 cities, PG Logistics plans to expand its network to cover third- and fourth-tier cities in the near future, Xie said.

"It is unrealistic to say there will be huge growth in these areas in the short term. But they are new markets for us and they offer larger room for growth than first-tier cities," Xie said.

Meanwhile, the government's mammoth investment packages to stimulate economy would also create new opportunities for some logistics companies, Chu said.

The State Council, China's cabinet, announced a package of investment plans to stimulate the economy in November. The government plans to invest heavily in a wide array of national infrastructure and social welfare projects, including constructing new railways, roads and airports, as well as rebuilding communities devastated by an earthquake in Sichuan in May. These projects are expected to trigger an overall investment of up to 4 trillion yuan till 2010.

The package could spur demand for machinery and construction materials. For example, the Ministry of Railways plans to spend 600 billion yuan on railway infrastructure this year which would demand 20 million tons of steel and 120 million tons of cement, Yang Zhongmin, an official from the ministry, was quoted as saying by Xinhua.

"Transportation companies that ferry construction materials and large industrial equipment will clearly benefit from the government's stimulus plan," Chu said.

(China Daily 02/16/2009 page1)

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