July/August 2025 Issue

By Dr. Paul G. Clifford   

In his new book, China Logistics: From Laggard to Innovator, business strategist and historian Dr. Paul G. Clifford tackles a subject that gets little attention as a sector, despite its heavyweight status in the economy. In the first quarter of 2025, the total value of goods moving through China’s logistics system was 91 trillion yuan (US$12.51 trillion), an increase of 5.7% year over year and 51.9% in terms of volume. Industrial logistics makes up 80% of China’s logistics system, and Dr. Clifford explains why it is vital to understand how it is changing, and what remains to be done to reach peak efficiency. 

“China’s logistics are large but not strong”. Thus spoke the government of the People’s Republic of China with extraordinary candor in late 2022 in what was, remarkably, China’s first comprehensive five-year plan devoted specifically to logistics. That statement, and the detailed planning that came with it, are memorable not just because they was devoid of the customary hubris, but also since it acknowledged that, as the Chinese economy has forged ahead over the four decades since the reforms began, China’s logistics have failed to match that change, creating a serious bottleneck which impedes development in multiple ways.

As the first wave of economic reforms began in 1978, China’s logistics started from a low base. This all came as a major shock to multinational corporations investing in China in those early years. Predictably, negotiating investment was frustrating, while finding the land and building the factories were slow. But when it came to the operational stage, the logistics of bringing in raw materials and distributing finished products often turned out to be a major headache. 

The railways, which were the main mode for goods transportation, were plagued by bureaucracy to the extent that manufacturers had to post staff at railway stations to pay bribes to ensure goods got put onto the wagons. The road system did not permit efficient long-haul, and China did not produce heavy duty trucks. The existing trucks were underpowered, often overloaded and with goods covered by a tarpaulin. The warehouses, many of which I visited back then, often let in the rain, were rat-infested, subject to theft and rarely specialized for certain types of goods. There was almost no refrigerated transportation or cold storage. 

Back then there was a dearth of Chinese 3PLs capable of satisfying market needs. And foreign Third Party Logistics operators (3PLs) found it hard to gain access to the market and struggled with endless non-tariff barriers which only partly faded away after China’s accession to the World Trade Organization (WTO) in 2001. As a result, manufacturers in China, whether Chinese or foreign owned, for good reason, proved to be reluctant to outsource their logistics.  

For the Chinese government today, the fixing of China’s deficiencies in logistics is an area where there is plenty of low-hanging fruit waiting to be plucked. China’s logistics costs still account for about 15% of GDP (compared to 7% in the USA). 

A striking feature is the key role played by the Chinese government in nurturing the nation’s logistics. It is true that, much as in other nations, it has laid the transportation foundation for logistics, whether it is the superhighway system, the interior waterways, improved railways (including some high-speed rail dedicated to freight), seaports and airports.  

But what is striking is that government engagement goes much deeper and broader than in other countries. It starts with detailed planning, which in turn guides asset allocation by the state banks. Local governments, despite being strapped for cash, continue to invest, alongside commercial interests, in logistics parks and in inland rail hubs that lead out into the land bridge from China to Europe and Southeast Asia. Though the Chinese government has been known to send mixed messages to the private sector, the policy imperative set out above has led it to be highly supportive of private Chinese logistics firms, for example through facilitating their initial public offerings (IPOs) on stock exchanges to raise the funds needed to fuel e-commerce growth.

But we should be cautious of over-emphasizing the role of government in China’s logistics. Under China’s hybrid system, market forces often dominate while enterprise autonomy and competition are encouraged – but all within certain boundaries and under the strict supervision of the party-state. As China’s new logistics plan stresses: “The market leads, government guides.” 

The reason the Chinese government recently lambasted China’s logistics industry was that it remained, over four decades since the reforms began,  fragmented and “scattered” – with countless sub-scale firms, small truckers and substandard warehouses, competing franticly on price and incapable of delivering a seamless service across China or to generate the retained earnings that could be invested in the IT platforms and skilled professionals required to drive a modern 3PL industry. 

Given such fragmentation, much effort is being put into encouraging the consolidation of smaller private firms into larger scalable entities or at least the creation of platforms or alliances in which small firms can share resources and knowledge. Large state-owned logistics firms have been subjected to forced mergers.

Elsewhere in the world it is taken for granted that 3PLs are specialized in certain types of goods. China has lagged in that area, for instance in cold-chain logistics, vital not only for food but also for pharma and medical supplies. Among the sub-plans within the current five-year plan for logistics there is one which specifically addresses this major gap, calling for a series of cold-chain corridors and distribution hubs across China.

Over recent decades a parallel story of powerful achievements by both Chinese and foreign logistics firms despite the record of underperformance, radical underperformance of many Chinese logistics firms there has emerged.

Some twenty years ago, with strong support from then-Premier Zhu Rongji, large Chinese state-owned logistics firms went through a radical transformation and a major restructuring and strategic rethink. I worked closely with these firms in this process. 

Most emblematic of the process was Sinotrans (0598.HK), today China’s largest logistics firm with a turnover of around US$16 billion and the logistics arm of China Merchants Group. As a former monopolist in freight forwarding under the centrally planned economy, with the reforms Sinotrans faced competition from local and (after WTO accession) foreign firms. Confronted with a brutal diagnosis of terminal decline in some of its businesses, it took very strong medicine or more aptly underwent major surgery. 

First, this involved the resolution of legacy issues such as overstaffing and a highly decentralized organizational structure that impeded a seamless service across the nation. Secondly, it put in place a business strategy that emphasized customer needs and operational excellence. The firm repositioned itself to deliver seamless, modern, integrated, logistics within China and into global markets. Thirdly it was listed on the Hong Kong Stock Exchange in 2003, which not only permitted it to recapitalize but also to enhance its autonomy, to create a little bit of distance between it and the Chinese party-state. 

On the back of this, it built a proprietary information technology (IT) platform, created strong specialization in key target segments, won business from multinational corporations, partnered profitably with Deutsche Post AG (DHL.DE) on cross-border express packages, and established rail transportation hubs in the interior to take goods over the land bridge from China to Europe. It embraced Western management systems and culture. This exemplifies the success of some Chinese state-owned enterprises (SOEs) in finding a successful new path. 

What is interesting is that despite its success in many areas, Sinotrans and other state-owned firms have failed to break into e-commerce. China’s private logistics firms such Alibaba’s Cainiao and JD.com’s JD Logistics, Inc. (2618.HK) have been the stars of the e-commerce logistics story in China. 

Since being founded by Jack Ma in 2013, Cainiao has executed a highly profitable strategy of remaining asset-light through relying heavily on a number of other private firms for its fulfillment across China, coupled with small operators and the gig economy for the last mile. In contrast JD Logistics has found profitability harder to come by, due to its asset-intensive approach which drives it to invest more heavily in fulfillment. That said, both firms have plowed investment funds into key hubs with robotics and AI used for sorting and more.

Another private Chinese logistics giant, SF (Shunfeng) Express (6936.HK, 002352.SZ), which prides itself on being something like the Chinese FedEx, took the decision to carve out a niche for itself by owning its own fleet of cargo aircraft which today stands at around 90 planes. It has also invested heavily in constructing its own dedicated “professional” freight airport in Hubei province which serves 10 international routes and 50 within China. 

With a 46% share in the airport (the rest owned by the provincial government) it represented the first time a private firm has been permitted to invest in a Chinese airport. Within China, SF Express has built a strong reputation in cold chain logistics, whether for food and vegetables or for vaccines and blood plasma.

Technology is today at the heart of modern integrated logistics. In China, investment is directed at deploying Internet of Things (IoT) and Artificial Intelligence (AI) across all steps in the logistics process. In China’s “smart” warehouses, robots are used for assembling products, packaging, sorting, palletizing, stacking and retrieving goods. This not only reduces labor costs by 70% but also lies at the heart of China’s breakthrough innovations in e-commerce efficiency. Its logistics firms handled over 1 billion packages on Singles Day,annually on November 11. United Parcel Service, Inc. (UPS.NY) handles 5.6 billion packages per year globally.

In trucking, advanced technology is being deployed in many ways. There is a prototype highway in northwest China lined with sensors that facilitates the autonomous driving of trucks, coupled with the use of green hydrogen produced from wind and solar. China is fast implementing on-line broking platforms to match trucks with loads to reduce the incidence of the dreaded empty back-haul.

When it comes to going out onto the global stage, the track record of Chinese firms, whether state-owned or private, has been patchy, and mainly devoted to facilitating exports into foreign markets, rather than creating the kind of world-wide footprint enjoyed by the likes of UPS. Global expansion is also held hostage to the uncertainties created by trade wars, limitations on the China-Europe land bridge rail links resulting from the Ukraine war and by geopolitical tensions particularly around Taiwan.

Foreign logistics players have played a key role in China’s cross-border trade but have struggled to compete effectively in the intra-China market, due to red tape and their cost structure which reduces their competitiveness. DHL tried to be a full local player but scaled back to the profitable cross-border express package business they have with Sinotrans. A notable exception is Swiss firm Kuehne + Nagel AG (KNIN.SW) which started with a rep office in China in 1979, then formed joint ventures, and ultimately, when permitted, went down the wholly owned route, with today 69 operating centers in China. 

Florida-based Ryder System, Inc. (R.US) did pioneering work in creating a viable asset-light logistics business in China.  The privately-owned Chicago firm HAVI spent decades meticulously building a cold-chain network to supply McDonald’s 6,800 stores across China. But as an indication of the growing muscle of local firms, it recently formed a joint venture with SF Express, giving it access to investment capital for further growth.

A large chunk of China’s logistics industry is still backward; much is already catching up to global standards; and in some areas such as e-commerce, it is already out-innovating global competitors. There is much work still to be done and there are some things to celebrate.

While China’s global logistics will continue to face headwinds and risks, the prospects for China’s domestic market look more positive. More than 20% of the population remains to be fully urbanized, creating significant growth potential. Moreover, since much of China’s logistics is still laggardly, there is plenty of space for improvement and we may expect logistics to grow faster than the broader economy. On top of this, we should also factor in the key role played by the Chinese government at central and local levels in fostering logistics upgrading.   

But it will be up to business (both state-owned and private) to do much of the heavy lifting and provide the urgently needed service levels to keep goods flowing around the nation and into global markets. Based on an analysis of a diverse set major Chinese players, one may have confidence that China will, in this vital sector, continue not only to catch up but also to innovate whether in terms of strategic vision, technology deployment or management.

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