Logistics challenges abound in China. Skyward expansion in every sector of the country's transportation infrastructure will keep the logistics sector in flux for years. And although conditions are rapidly improving, China's contract logistics industry—the homegrown segment, at least—still has a long way to go before it can meet shippers' needs. "Despite quickened progress, faster corporate growth, and tougher market competition in 2004, the Chinese logistics industry remains in the primary stages of extensive development, leaving much to be desired in quality and benefits," according to a report issued last year by the China Federation of Logistics and Purchasing.

Cost, moreover, is an enormous issue for shippers that do business in China. At more than 20 percent of the country's gross domestic product, logistics costs are at record levels—more than twice as high as in the United States.

Many foreign investors see more opportunity than obstacle in that cost structure. "Reducing logistics and domestic transportation costs by just a fraction will lead to a substantial reduction in our product costs," says the supply chain director of a leading European appliance maker.

Suffice it to say that managing supply chains in China is not for the naïve. One natural response—more assertive use of third-party logistics companies (3PLs)—raises many tricky questions of its own. To get some timely guidance on the emerging roles of 3PLs in this fast growing market, Logistics Management spoke with two leading observers of supply chain trends in China: Paul Clifford, a Mercer Management Consulting director who heads up the firm's Beijing office, and Stephen Kemper, director of the supply chain practice at consultancy PRTM. Here's what they had to say:

Logistics Management: Let's start by discussing the characteristics of today's global 3PLs. Where's the cutting edge?

Stephen Kemper: [Third-party logistics companies] have gotten very good at customs clearance, at taking advantage of good freight lanes, and so on. The sophistication is there for movement of raw materials. But there's a ways to go with complex finished goods and in spare parts.

For most providers, sophisticated operations such as marrying [shipments] in the sky or marrying them at the distribution center are still on the cutting edge. It takes a lot of work to get those systems to mature—it's still more of a vision than a reality. It's not entirely a function of the 3PLs' capabilities anyway—it's about the whole supply chain. The [limiting factor] is more the [shipper's] capability to act as the "control tower."

LM: What do global shippers want from a 3PL relationship these days, and is that true for shippers that use third parties in China?

Paul Clifford: 3PLs need to provide global reach with localized excellence. Increasingly, major shippers are looking for 3PLs that can service them globally. They'll assess and qualify those 3PLs at the head office. This plays to the strengths of the major providers that are leading consolidation in the 3PL industry.

It's very relevant in China. It's fair to say that today major multinationals from the U.S., Europe, and elsewhere tend to work in China with global 3PLs. The Chinese 3PLs are more likely to have Chinese customers. However, some multinationals are beginning to deal directly with Chinese 3PLs. That trend is likely to grow. If a 3PL cannot provide a strong service in China—these days that means far into China's interior—it may find itself vulnerable to other providers with a stronger China presence. Continued...

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