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News Release

Shanghai

Cost Advantages Drive Rapid Growth of Emerging Logistics Markets

Second and Third Tier Coastal Cities Expected to Become Hotspots for Manufacturing Logistics Sites


As the global economy recovers from a difficult 2009, manufacturers in China are faced with the challenges and opportunities of a rapidly changing manufacturing landscape. At the recent 2010 AmCham Shanghai Manufacturers’ Business Council Conference, manufacturing professionals and top executives from multinational companies discussed the future of China’s manufacturing industry and current issues that need to be addressed. Rising logistics costs in manufacturing was a key topic during the discussion. As Stuart Ross, Head of Industrial at Jones Lang LaSalle China, pointed out, “The logistics costs for manufacturing companies has risen over the past few years, especially in prime markets such as Shanghai and Suzhou. Emerging markets which offer a competitive advantage in terms of costs are becoming a new option for manufacturers looking to address their logistics needs.”
 
Chart 1: China Logistics Costs
 
 
“In evaluating the logistics costs, you need to take all of the cost components of the business logistics system including transportation costs, inventory-carrying costs and logistics administration costs into account,” said Mr. Ross. “The overall trend of growing logistics costs does not fully reflect the rise and decline of the various cost components.” Figures from China Logistics Information Center show that between 1991 and 2008, logistics administration costs have remained stable while inventory-carrying costs have increased and the proportion of transportation costs has dropped. Inventory-carrying costs include capital, service and risk costs for inventory and more importantly, storage space costs, or warehouse costs. Indeed, warehouse costs are the most important factor affecting inventory-carrying costs. “Data shows that in recent years companies have been paying a lower percentage of the total costs for transportation and more for warehousing,” said Mr. Ross. “Logistics transportation costs are closely linked to the development of the country’s infrastructure system. China’s economic stimulus plan has significantly improved the infrastructure system with substantial investment in railways, highways, airports and power grids, which explains the falling transportation costs.”
 
In contrast, warehouse rents have risen sharply in all primary and some secondary logistics hotspots identified by Jones Lang LaSalle during the past five years. Most markets show a double-digit growth and some are over 20% (Guangzhou, Shenzhen, Tianjin, Qingdao, Dalian, Ningbo, and Chengdu). For those with low growth rates such as Shanghai and Suzhou, their rents already top the market and contracted significantly during the economic downturn. It’s worth noting that warehouse rents in the regions surrounding some of the primary markets have also risen significantly. Taking the Yangtze River Delta as an example, markets closer to Shanghai (Suzhou) have already seen rents approaching the Shanghai level, while markets further away are still relatively low (Nanjing and Ningbo). Mr. Ross explained, “The growth in warehouse rental costs is driven by higher land prices and the improved specification of warehouse facilities. With better infrastructure and transportation conditions, and the tight supply of high quality warehouses in mature markets, more manufacturers are considering new markets to address their logistics requirements. This will undoubtedly bring opportunities for the logistics industry to develop in second and third-tier cities.”
 
Warehouse Rental Growth (2005-2009)
 
 
Mr. Ross also emphasized the importance of strategic planning in site selection. “With the option of more cost-effective locations in emerging markets, manufacturers still need to plan carefully. Low costs are not the only consideration for choosing a manufacturing site. Important factors to consider are the area’s proximity to customers and suppliers, labor supply, access to utilities, infrastructure support for raw materials and finished goods distribution, the suitability of the operation to various zones (e.g. high tech zone), as well as market transparency and the local government’s preferential policies and tax incentives. Although some locations have higher logistics costs, their mature market conditions may better meet the actual needs of the company. Therefore, manufacturers should fully consider the company’s long-term needs and development when it comes to site selection.”

Mr. Ross also noted, “Although China is putting its efforts into developing the western regions, there is no doubt that the traditional logistics hubs in the coastal regions such as the Yangtze River Delta in the east, Bohai Bay in the northeast, and the Pearl River Delta in the south will remain a huge attraction for the majority of manufacturers. With the continuing improvements in the transportation network and China’s new focus on developing emerging markets in coastal regions, I believe that the second and third-tier cities located around these three main logistics hubs will have greater room for development in the future.”