Bring up the subject of third-party logistics (3PL) in Asia and, likely as not, the first word you'll hear is "China." Offshore manufacturers flocking to the People's Republic of China, where managing distribution remains a challenge, have spurred the recent development of contract logistics services there.

Although China receives the most attention these days, logistics outsourcing continues to expand in more economically developed countries such as Japan, Singapore, South Korea, and Taiwan. Elsewhere in Asia, outsourcing is likely to take off when information infrastructure advances and national governments liberalize their policies toward domestic and foreign business.

Accurate assessments of the value of the Asian 3PL market are hard to come by. Executives at DHL Danzas Air & Ocean, for example, estimate that the Asia-Pacific market for supply chain management services will be worth more than $2.7 billion by 2006. "This is a direct result of growing outsourcing and the continuing shift of manufacturing to this region, particularly China, by large multinational companies," says Singapore-based spokeswoman Li Li Koh.

Others, including veteran logistics industry observer Richard Armstrong, have offered somewhat different figures. Despite the lack of hard numbers, though, it's clear that third-party logistics will continue to be a growth industry in Asia for some time to come, and that China's manufacturing boom will be the prime mover behind that growth.

In many respects, the state of third-party logistics in Asia today resembles the situation in the United States 10 years ago. "There are very viable small and mid-size logistics providers—niche players that are geographically specific and have very good relations with local customers—and there are the larger players, the multinationals," says Lynnette McIntire, director of public relations for UPS Supply Chain Solutions in Atlanta.

Contract logistics is well-established in highly industrialized countries such as Japan, Singapore, South Korea, Hong Kong, and Taiwan, where the technology infrastructure and financial systems are strong. In Hong Kong, for example, the market for logistics outsourcing is mature and there has been little if any growth in the past few years, says Gilbert W. K. Lau, managing director of Hong Kong's Oriental Logistics Company.

The one bright spot, he says, is that more manufacturers of high-value products in Hong Kong are demanding services such as vendor-managed inventory that can best be provided by 3PLs. Motorola, for example, is asking its vendors to deliver orders within a few hours, he points out. "Not so many of those manufacturers or trading companies have regional connections or competency to provide this high-demand service," he observes. Third-party logistics companies are quickly stepping in to fill that need, he adds.

But even in some of the more developed nations, the 3PL industry remains relatively immature in comparison to the United States. Take South Korea, for example. There, government policies promoting transportation deregulation just recently laid the basis for 3PLs to develop stronger offerings.

"With the Korean government's full liberalization of its transportation market, including inland trucking and airfreight forwarding services, the domestic profile of logistics is rising rapidly," Koh observes. Investments in infrastructure, such as the new Incheon International Airport and free-trade zones, also bode well for 3PLs serving the electronics, telecommunications, and automotive sectors, she adds. (A recent trucking strike, however, has dampened some Korean companies' enthusiasm for outsourcing. See Management Update on Page 1 of this issue.)

The 3PL concept is gaining traction in Southeast Asia, albeit slowly, says McIntire. "There's still some resistance, because most manufacturers are somewhat locally or regionally focused," she says. "They're used to dealing with a very fragmented market. They use different people for different services and different geography, and they may be managing their distribution internally." Even so, some Southeast Asian manufacturers have been told by their foreign customers to employ outside service providers, she notes.

Koh, for one, sees countries such as Indonesia, Vietnam, Cambodia, and Thailand, where the concept of logistics management is still in its infancy, as "the next hot spots" for 3PL growth. That will stem partly from an explosion in intra-Asia distribution and partly from rising domestic consumer demand.

High-tech companies that manufacture in Asia have pushed especially hard for 3PLs to handle their logistics needs in developing nations. "Today, these are typically low-level service requirements, but as global competition increases, demand for new, innovative solutions is becoming more routine," says Damon Newquist, manager of marketing and pricing for the Americas at Japanese freight forwarder and 3PL Kintetsu World Express. "This is driven largely from the high-tech industry, where companies like Dell are strong-arming their way up the supply chain to drive out cost while meeting consistent quality and delivery schedules."

Often the 3PLs that get those assignments are foreign-based. In addition to UPS and DHL Danzas, with Asian hubs in Singapore and Hong Kong, respectively, FedEx Corporation has established 19 "Logistics Distribution Centers" in nine Asian countries, including one at its Asian hub in Subic Bay, the Philippines. A host of other U.S.- and European-based providers, such as TNT Logistics, Kuehne & Nagel, Exel, APL Logistics, BAX Global, Maersk Logistics, and Schenker, to name just a few, also have established a major presence throughout the region.

These days, China has become the hottest market for third-party logistics companies in Asia. Rapid growth in manufacturing in that country set the stage for the emergence of a 3PL industry there.

Some of the first to take advantage of that trend were the Hong Kong-based logistics providers that moved across the border as manufacturers set up factories there. "A lot of manufacturing industries have been moved to the Pearl River Delta (PRD) area of southern China," says Lau. "So most of the freight transportation and logistics providers are moving north of Hong Kong to meet the new demand there. The market in the PRD is huge and has very high growth potential."

Despite the arrival of 3PLs in China, many of them are closer to their carrier roots than to real contract distribution providers, says Perry Lam, president of the Hong Kong Roundtable of the Council of Logistics Management. "The previous 'freight forwarders' and 'transportation companies' all have 'logistics' in their name now," he notes. Nevertheless, Lau points out, a number of 3PLs in China do indeed offer true, value-added logistics management services.

To reach their full potential, 3PLs in China will have to overcome many hurdles. For one thing, they must contend with infrastructure limitations, such as an inland transportation system that largely runs east-west and doesn't appear to encourage communication and cooperation among ports, says Michael Goldsmith, president of KLS Logistics in Pleasanton, Calif.

Although deficient infrastructure creates service roadblocks, the biggest constraint on 3PLs may be regulatory restrictions, says Rick Moradian, vice president, Middle East and Asia for Oakland, Calif.-based APL Logistics. Licenses are required for many activities that we take for granted, such as the right for trucks to travel in certain provinces or for foreign companies to acquire Chinese transportation and logistics services providers, he observes. "There's no one pan-Chinese authority that issues those permits and licenses," he says. "It's done regionally, province by province, city by city."

Further complicating matters is the fact that Beijing maintains control over the industry through its Sinotrans logistics company, which holds a 51-percent stake in most foreign transportation and logistics ventures in the country. Still, some see change on the horizon. "One of the things that appears to be happening is a transition there from government-controlled to privatized logistics management," says Goldsmith. "There is tremendous energy in the private sector," says Goldsmith. "A lot of people want to do business with the rest of the world. The government is going along, kicking and screaming."

Moradian, who often negotiates with Chinese government authorities, believes officials there have woken up to the need to develop world-class logistics service capabilities in their country, whether local or foreign-owned.

"The government is quite serious in their efforts to truly develop logistics prowess within the country," he says. "The Chinese understand the limitations and restrictions they've imposed and what kind of impact it has on growth." Still, China remains a "sleeping giant" when it comes to logistics infrastructure and capabilities, and it will take the right combination of resources and political will to wake that "giant" up, Moradian predicts.

Before third-party logistics can firmly establish itself throughout Asia, most experts believe the industry must shake off the shackles of national control. Governments will have to privatize state-owned contract logistics providers and allow multinational corporations to buy them. "As the Asian political climate goes away from [ownership by] government organizations, it gives rise to buyouts or joint ventures," says Rob Pericht, vice president of contract logistics for KN Lead Logistics, a unit of Switzerland-based Kuehne & Nagel. The economic climate in Asia today favors large 3PLs, and some multinationals are buying up mid-sized service providers or establishing joint ventures with a 3PL in a neighboring country, he adds.

Other factors are keeping contract logistics from spreading rapidly through all regions of Asia. For one thing, Lam says, many Asian executives are unaware of the competitive importance of logistics. As a result, few companies have given logistics a place at the senior-level table.

Logistics companies also need to develop a stronger talent pool in Asia. Although most of the region's logistics expertise still comes from foreign service providers and foreign-educated locals, Asian universities are beginning to offer logistics programs. The first group of logistics degree students from Hong Kong University, for example, graduated four years ago, Lam reports. Moradian notes that today many Asian graduate students are choosing to study industrial engineering with a concentration in logistics and supply chain management. The recent establishment of the Hong Kong Roundtable of the Council of Logistics Management is another encouraging sign that professional development is becoming a higher priority in Asia.

Ultimately, though, how deeply third-party logistics companies make their mark in Asia will depend on whether or not they are able to overcome shippers' attitudes about internal control. Kintetsu's Newquist, for one, remains skeptical. Logistics outsourcing may be growing now, he says, since many companies that operate well in the West are relying on logistics partners to manage some functions in Asia. But he foresees more companies relying on their own representatives to oversee contract manufacturers' activities in the future—a trend that potentially could shift back to controlling logistics activities in-house, he says.

That debate aside, all other signs point to a steady growth track for third-party logistics in Asia as multi-national corporations operating tight supply chains demand sophisticated distribution services. The future development of logistics outsourcing in Asia, in short, is not so much a matter of "if" as it is a question of "how much."

Editor's Note: A report on third-party logistics in China, authored by Diana Huang and Mark Kadar of Mercer Management Consulting, is available online at www.mercermc.com (go to "Perspectives," then "Specialty Journals," then "Mercer on Travel and Transport.") A report on China's transport infrastructure and logistics industry is available for sale from Drewry Shipping Consultants Ltd. For more information, go to www.drewry.co.uk.

Richard Knee is a freelance writer who specializes in the maritime industry and international transportation. Senior Editor Toby Gooley also contributed to this report.