China’s economic growth has been accompanied by the ever-increasing demand for outsource logistics services. However, the country’s logistics capabilities still remain at an early stage of development, with a number of unresolved challenges. That said, foreign and local players continue to expand into the logistics market, and the government is pushing to improve logistics capacity and efficiency. Based on China’s logistics industry, which registered a healthy growth in 2012 with a total logistics value of 177,300 billion yuan, economists believe the logistics sector is set to maintain a steady and robust growth over the coming years.

The manufacturing sector remains key to China’s economic development. As a result, the logistics value of industrial products accounted for an overwhelming 91.4% share of the total value in 2012.

Today, logistics entails much more than the simple handling, transport, and storage of goods. Logistics service providers have long since developed intelligent solutions for the entire supply chain providing them with capacities to effectively organizing production, distribution, finishing, and other value-added services in shared-work processes. The companies, for their part, expect a service provider with a high degree of technological competence, and therein lies the opportunity for experienced logistics providers to expand their activities in China.

Having said that, contract logistics still in early stages. Only a quarter of the companies surveyed outsource functions to contract logistics providers in China. The most common value-added service is the packaging of goods, followed by procurement, materials recycling, and packing (in that order). Logistics service providers are seldom retained for manufacturing and assembly or complaints handling. Many companies cite their own superior level of efficiency as the reason for not using logistics service providers. A whole 42% reported not even having considered outsourcing certain sub-segments to logistics service providers.

To a relative extent, China state-owned logistics enterprises have a comprehensive network across the country and close contact with the state itself. They have advantages in highly regulated logistics segments. By contrast, domestic, private-owned logistics enterprises can provide cheap and efficient delivery services that are acceptable to price sensitive clients. These firms dominate the domestic e-commerce logistics market.

Over the last decade, China has invested in improving infrastructure in interior cities, with a focus on building larger interior cities into major logistics and distribution hubs. For example, Wuhan, Hubei, is becoming the multimodal logistics hub of central China. The city has one of China’s largest inland ports, handling up to 40 million tons of cargo annually, with shipping lanes that lead to 14 countries.

Every manufacturing company needs a strategically focused business plan for outsourcing supply chain activities globally. Too often, near-term pressures to reduce product costs or increase overall profitability precipitate the need to outsource product design, manufacturing, and logistics. The decision to source value chain activity in China is certainly no exception.