In Depth: Logistics Is Getting Pricy in China, but Reform Will Be a Long Haul

18 Jun 2024

By Zou Xiaotong, Bao Yunhong and Wu Peiyue

China’s powerful e-commerce economy was built on the back of a robust logistics infrastructure that allows consumers to receive items ordered on platforms within days, or even hours.

That’s the conventional wisdom. But the success story masks deeper flaws and inefficiencies in Chinese logistics. One is that shipping goods in China relies heavily on trucking. The relatively expensive freight mode drove up overall logistics costs to 18.2 trillion yuan ($2.5 trillion) in 2023, equaling 14.4% of China’s GDP — far surpassing the proportions in the USA (7%) and Japan (5%).

The vulnerability of trucking — which often relies on husband-and-wife contractors who own or rent their vehicle — was laid bare during the Covid-19 pandemic when lockdowns brought haulage traffic to a standstill.

Chinese policymakers are facing growing pressure to nurture so-called intermodal transport — that is integrating trucking, rail, and water transport to shrink the reliance on roads. New regulations on doorstep delivery, expected increases in courier wages to address labor shortages, and upcoming road freight tax reforms add uncertainty to the mix.

On March 5, the “Action to Reduce Logistics Costs” was included in the 2024 government work report. In 2022, the goal set by the “National ‘14th Five-Year’ Modern Logistics Development Plan” was to reduce the ratio of social logistics costs to GDP by about 2 percentage points from 2020, aiming to reach 12.7% by 2025.

Social logistics costs are costs resulting from products entering the domestic demand sector for the first time — the transportation of goods to buyers from suppliers based on their initial source, including agricultural and industrial products, imported goods, recycled resources, and goods produced by organizations and residents.

The railway system might seem like a good alternative due to lower costs, but experts say entrenched interests and institutional inflexibility will make it the most challenging to reform. Wang Kai, operations director at logistics information provider Wuxi Yuanmai, told Caixin that rail transport costs nearly a quarter less than road transport. Yet more than four-fifths of containers that reach Chinese ports rely on roads to get there, significantly trailing global averages.

Efforts to revitalize the railway system are underway, with China State Railway Group Co. Ltd. (China Railway) leading coordination efforts across road, rail, and waterways to offer comprehensive services including terminal connections, warehousing, and information management, several logistics experts told Caixin.

Zhang Wansheng, marketing director at the freight logistics service center of China Railway’s Beijing Bureau, said the group has this year begun to streamline resources and departments engaging with shippers by establishing 40 new logistics centers across the country, ensuring every province has its own dedicated hub.

But efforts to reform rail freight are dogged by skepticism. One seasoned logistics professional told Caixin that the railways still face significant challenges in terms of digitalization and bureaucracy, with a series of perverse incentives in place.

“The shift from roads to railways is actually a response to the pressures of achieving the nation’s ‘dual carbon’ goals, rather than incentivized by cutting costs,” the person said.

Bottleneck of railway freight reform

Railway freight in China has faced significant challenges in its efforts to modernize and adapt to dynamic market demand. Freight reforms initiated in 2013 aimed to diversify beyond bulk commodities like coal, steel, petroleum, and iron ore to include higher-value items such as clothing, paper products, and electronics. These goods often arrive in smaller, mixed shipments requiring consolidation for cargo transport.

While the industry has tried to handle the complex logistics required to manage such diverse freight types, progress has been slow. By 2022, bulk goods continued to dominate, comprising at least 85.2% of railway freight.

Deep-seated issues contribute to these challenges. China’s railways are seen as bureaucratic, slow to respond, and fraught with restrictions that hinder efficient operation. “Companies using railway transportation first need to ‘request a car,’ but the railway system is quite closed off. Our freight stations can only interact partially with the railway system, leading to inefficient communication,” a shipper who has long dealt with the railways told Caixin.

Despite higher-level awareness of these systemic flaws, lower levels lack the motivation for reform due to rigid regulations. For example, the capacity of some railway bureaus to handle market-oriented freight is limited. The Beijing bureau must first meet the needs of its bulk commodity customers, who account for 90% of its total volume, before it can serve other customers, according to China Railway’s Zhang.

Pricing remains another barrier. Rail freight tends to offer lower base rates compared to road transport. But when additional expenses such as short-haul transfers to and from rail terminals and warehousing are considered, the cost of rail surges, Gao Jinxin, manager of a coal transportation business of a large coal company in Inner Mongolia, told Caixin.

In response to decreased demand from the real estate sector, which affects the transportation of steel and coal, railway bureaus have been empowered to lower freight rates. This measure, exemplified by a southern railway bureau aligning its “door-to-door” coal transportation costs with road transport, aims to enhance rail competitiveness and offer favorable prices for select goods, provided they meet shippers’ needs.

For instance, a railway bureau in the south recently reduced the coal transportation rate from about 130 yuan per ton to less than 90 yuan per ton, aligning them with road transport costs, according to Liu Gengchen, a product manager at the logistics company G7 Connect.

Beyond freight rates, the lack of specialized rail lines connecting key industrial and logistic hubs further limits the railway’s utility in the logistics chain. Despite plans to extend rail access, progress has been slow, often due to financial constraints.

Associate Professor Zuo Dajie from the School of Transportation and Logistics at Southwest Jiaotong University told Caixin that China Railway’s creation of 40 logistics centers is a step towards better network operations, but these provincial logistics centers are ill-equipped to handle demands that span multiple provinces and railway jurisdictions. “These centers cover regional operations, and are not network-wide, leading to a considerable increase in coordination efforts across different bureaus.”

New delivery rules drive up costs

The push to reduce logistics costs has been undermined by new door-to-door delivery rules that punish firms that leave packages in community delivery areas without securing customers’ consent.

Effective March 1, these rules can impose fines of up to 30,000 yuan on couriers or companies that do so.

While aimed at improving consumers’ shopping experience, the rules have led to a chain reaction of rising logistics costs, which could impact retail market consumer spending growth.

While consumers are spending less per order, their expectations for logistics experiences remain high, one courier industry veteran told Caixin.

Another courier industry veteran told Caixin that strict enforcement of the new rule would raise the shipping cost per order by 2 yuan. He emphasized that low courier fees are essential for e-commerce platforms to handle low-value goods transactions.

“In Yiwu, the international small commodity distribution center, the delivery fee per order is as low as 2 yuan. A 2 yuan increase in the final delivery cost could deter the generation of some low-value small orders, affecting market vitality,” the person said.

Over the past year, influenced by a price war in courier services, the cost of last-mile delivery fees has been continually pushed down. Couriers, the least powerful party, have been forced by their employers to eat the cost in terms of reduced pay. Now the industry is having trouble recruiting and retaining staff.

Caixin has learned from several courier companies, including YTO Express and Yunda Express, that in top-tier cities like Beijing and Shanghai, couriers earn between 1.1 yuan to 1.3 yuan per delivery, handling more than 300 items on some days, with monthly take-home pay ranging from about 7,000 yuan to 10,000 yuan. Earnings are even lower in smaller cities. A rise in courier numbers would require an increase in delivery fees, but adjustments to courier fees have not yet been seen.

Lai Songqian, an expert at the courier industry analysis firm Quantum Consulting, told Caixin that it will take three months for the full impact of the new courier rules to become apparent. The regulations will compel courier companies and e-commerce platforms to adjust their end delivery models, diversifying delivery and pick-up methods and creating different payment models to achieve a better balance.

Tax uncertainty

Compared to railroads, highly competitive road freight transportation has long been at the forefront of market-oriented logistics systems. Through digitalization, truck-load matching, and other means, the sector has continuously sought to improve efficiency to reduce unit costs. This has led to the emergence of a series of platform companies such as Full Truck Alliance, G7 Connect and ANE.

According to data from the China Federation of Logistics & Purchasing, the scale of China’s road freight market was around 50 trillion yuan in 2022, with the overall market size of digital road freight estimated at about 700 billion yuan, representing a market penetration rate of only around 15%.

Full Truck Alliance Co. Ltd., a leading truck-booking platform in China, told Caixin that while truck-load matching and online freight services could partially address efficiency and cost issues in road transportation, deeper digitalization in the logistics sector will take time. Currently, the penetration and proportion of online logistics are still too low.

But the road transport industry is under significant cost pressure due to changing tax policies. In the past, although the official tax rate for truck drivers or companies was 9%, some local governments lowered the effective tax rate to 5%–6% through tax rebates to attract and encourage the freight industry.

However, since January, the National Audit Office has started to crack down on local governments arbitrarily offering tax incentives and rebates to win investment. These could spell the end for rebate policies in freight hubs like Jiangsu, Anhui, and Tianjin, meaning increased taxes on road freight could be around the corner.

The pressure to cut costs and rectify tax rebates in the logistics industry is putting online freight platforms and cargo owners in a bind. Multiple sources from online freight platforms told Caixin that if highway taxes and fees are rigorously reinstated at 9%, logistics costs will inevitably surge and undermine company profits.