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Cablegate: The Bumpy Road of East China Logistics

VZCZCXRO7287
RR RUEHCN RUEHVC
DE RUEHGH #0551/01 3511028
ZNR UUUUU ZZH
R 161028Z DEC 08
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 7436
INFO RUEHOO/CHINA POSTS COLLECTIVE
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 8046

UNCLAS SECTION 01 OF 02 SHANGHAI 000551

SENSITIVE
SIPDIS

STATE ALSO FOR EAP/CM, EEB/TRA
TREASURY FOR OASIA - DOHNER, HAARSAGER, CUSHMAN
TRANSPORTATION FOR DAS JOEL SZABAT/DAS SUSAN MCDERMOTT/PHMSA

E.O. 12958: N/A
TAGS: ELTN PGOV ETRD EINV ENRG CH
SUBJECT: THE BUMPY ROAD OF EAST CHINA LOGISTICS

SHANGHAI 00000551 001.2 OF 002


1. (SBU) Summary: During a November 17-21 visit to Shanghai,
Department of Transportation Office of International Standards
Office Hazardous Materials Safety Director Duane Pfund and
Assistant Director Ryan Paquet met with three U.S. logistics
companies and attended the China World Logistics Conference in
Nanjing. U.S. logistics companies said that although there are
adequate transportation laws, uneven enforcement creates an
uneven playing field. Lack of law enforcement on overloaded
trucks also damages highways and creates safety hazards. At the
conference, China Government officials said China's logistic
sector has seen upwards of 18 percent growth over the previous
years because of strong trade volumes, but this growth has been
put in jeopardy by the world-wide economic slump. Deregulation
of fuel prices and China's stimulus package will likely prove to
be a long-term boon to East China's logistics industry, yet
further meaningful deregulation and equal enforcement is needed
to create a more efficient and less fragmented industry. End
Summary.

Unequal Enforcement Puts U.S. Companies at a Disadvantage
--------------------------------------------- ------------

2. (SBU) While in Shanghai Pfund and Paquet met with three U.S.
logistics companies: Werner Global, Emerge Logistics and
Intermarine. Werner Global Shanghai Office General Manager Juan
Bautista overviewed transportation issues in China and said it
was difficult for his company to compete with domestic logistics
companies given that industry regulations were not fully and
equally enforced. According to Bautista, 80 percent of Werner
Global's shipments to the United States go through Long Beach,
California, which often experiences bottlenecks and delays. He
also noted an accident in Shanghai in October, in which a vessel
that carries fireworks to the United States was severely
damaged. As a result, many shipping companies are now unwilling
to transport fireworks.

3. (SBU) Emerge Logistics Owner Jeffrey Bernstein seconded
Bautista's concerns on the lack of enforcement and uneven
enforcement putting U.S. companies at a disadvantage. For
example, domestic truck companies flagrantly overload their
vehicles, putting foreign logistics companies at a large cost
disadvantage as well as causing damage to roads. China has very
practical and implementable regulations, but the problem is
domestic companies disregard them and have little to fear
because the penalties are so low. According to Bernstein, it is
also very difficult in China to obtain a license to transport
hazardous goods. Intermarine China Chief Representative Richard
Seeg also agreed that the biggest logistics problem in China was
law enforcement issues. The shipping industry in China is also
suffering heavy losses due to weakening exports and imports,
said Seeg.

Potential for Growth in China's Logistic Industry
--------------------------------------------- ----

4. (SBU) During the two-day China World Logistics Conference,
government officials and industry representatives met to discuss
China's logistics issues. The conference included numerous
panel discussions and break-out sessions. Vice Chairman of
China Council for the Promotion of International Trade (CCPIT)
Wang Jinzhen said the overall value of the logistics industry in
China grew 18 percent last year, yet warned in the current
economic environment this number is likely to plunge.
Currently, logistics services account for 8 percent of China's
total service sector output and services make up 40 percent of
China's GDP. According to Wang, China's service sector
contribution to GDP was still low compared with international
standards. And, as China's service sector continues to grow, so
will the logistics industry. Vice Chairman Wang was confident
that Shanghai's 2010 World Expo will be another industry
catalyst for China's logistic industry. Other speakers express
optimism that the inclusion of transportation issues in the SED
will not only bring U.S. and Chinese government transportation
officials closer together, it will also provide a channel for
industry to provide concerns to both governments.

Challenges in China's Logistic Industry
---------------------------------------

5. (SBU) In line with comments of U.S. industry reps, speakers
at the conference noted the biggest challenge in China's
logistic sector is regulatory enforcement. Vice President of
Supply Chain Asia Mark Millar concluded the top three issues in
China's logistics sector were regulatory enforcement, lack of

SHANGHAI 00000551 002.2 OF 002


infrastructure and lack of experienced human resources. Millar
said the China's logistics sector is very fragmented and
predicted that major players in the sector are set to gain
market share. Currently, the top 20 logistics companies in
China only control 8 percent market share, which is far lower
than the global norms.

6. (SBU) Shanghai Dajin Logistics General Manager Roger Jiang
said his biggest issue was the "unfair" fuel cost structure in
China. He explained that China regulates fuel prices, which are
currently around USD 85 per barrel, compare with USD 50 per
barrel market price. And, the Chinese Government assesses a flat
road maintenance fee on all vehicles, regardless of the amount
driven. As a result companies pay according to the number of
vehicles they own, not how much each one is driven. The warped
incentive system creates an incentive to own fewer vehicles and
carry bigger loads.

Comment
-------

7. (SBU) Comment: The world's economic downturn will
undoubtedly have an adverse effect on East China's logistics
companies. However, they will likely benefit in the long-run
from the parts of China's economic stimulus package targeted at
upgrading East China infrastructure, particularly the patchy
rail system. They will also certainly benefit from the November
19 National Development and Research Institute (NDRC)
announcement to deregulate fuel prices. This coupled with the
introduction of a fuel consumption volume based tax and the
waiver of highway maintenance fees, could also help resolve the
truck overloading issue since costs will be more based on fuel
consumption based rather than the number of vehicles. However,
these measures will not be sufficient to create a world-class
industry. East China's logistics industry remains inefficient,
expensive and overregulated by a patchwork of agencies. Further
deregulation needs to occur, along with the clarification of
boundaries among regulatory bodies and meaningful and equal
enforcement of existing laws to make a sustainable difference.
End Comment.

8. (SBU) Cleared by DOT/PHMSA.
CAMP

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