Logistics Costs in China: Real Estate Matters
China's logistics costs are about 18% of its national GDP, compared with 9% in the United States. This naturally begs the question, why is it so high in China? And what are the drivers in logistics costs and how can companies control them?
For most logistics organizations, costs are relatively evenly distributed between real estate, labor and transportation. All three of these are experiencing consistent increases, with little relief in sight. In a three-part series for this report, I will explore the three main drivers of logistics costs in China.
Let's start with real estate. Most of the chatter about a property bubble in China has subsided over the past year because of the effectiveness of government policy in cooling the real estate market. Only 17 state-owned enterprises are now allowed to invest in real estate outside of their own operations, the lending rate has increased over the past three years, and ample new land supply continues to be released. These types of measures seem to have let the air out of the property bubble, but the primary effect was on the residential market.
Industrial rents continue to rise: in the Shanghai area, for example, warehouse rents increased 6% over a six-month period ending in March with average rents in the range of USD 0.50 - 0.70 per square foot per month (click here for a Colliers International research report -- PDF). Although ample industrial-use land is being released by the government for industrial development, good locations are hard to come by. So the useable options are limited, which is driving up rents. This situation is not likely to change much in the near future.
Understanding Your Options
Being familiar with the options you have in China is your best bet for finding a cost-effective solution. Most companies will, at some point, avoid the real estate issue altogether by using third party logistics providers. 3PLs are experienced in real estate and offer the greatest amount of flexibility. They are also a good option for entry into China, especially if you are only distributing to coastal areas and major cities.
A next step toward bringing real estate and logistics in-house is to lease from international developers such as Ascendas, Goodman, Prologis, Maple Tree, etc. They have high-spec options in good locations, and a warehouse can go live in a short amount of time. Your real estate agent will be able to introduce you to them.
It is also possible to work with these developers in the early stage while they are still acquiring land. If you, as a user, join with the developer to the show the local government who will be the end user, then the government may be more likely to offer incentives. Early involvement also affords the opportunity to build to suit.
Leasing from local developers or directly from government-owned industrial parks requires a great deal of patience and good government relations. If you choose this option, it is very beneficial to have a real estate agent who already has a relationship with the landlord.
While most multinationals in China lease, purchasing is also possible and is in fact the preferred option for most domestic companies. In China, all land is owned by the government, so a land purchase is actually a 50-year leasehold contract (for industrial property).
After the 50 years, the land reverts to the government. In theory, the leasehold can be renewed; however, no one knows because the leasehold system has not been in place long enough for any to expire. If land purchase is the only way to get a particularly attractive location but your company does not want to own property long-term, a sale-and-lease-back is an option.
Regardless of which of the above options you pursue, a thorough requirement analysis, site selection process, and negotiation are critical to controlling real estate costs. Next month, we will examine labor costs in our pursuit of understanding the unusually high cost of logistics in China.
CEO & President, Tompkins International
Podcast: E-Commerce in China
Blog post: China is Still Turning Heads
Report: China Supply Chain Perspectives, Operations & Future Investments
Case Study: Chinese Footwear Brand Positioning Study
Asia Supply Chain Excellence
Paper: Leveraging Asia Supply Chains for Increased Value
See previous issues of the Asia Supply Chain Excellence Report.