Competition Heats Up for China's Cold Chain

China’s cold chain logistics industry has entered a stage of rapid development, with growth predicted at 25% p.a. until 2017.1 Increased consumer spending and the growing number of pharmaceuticals made in China which have gained certification from health authorities in Europe and North America are just two of the driving factors underpinning this growth. However, the short-comings of China’s existing cold chain infrastructure are becoming increasingly apparent as it struggles to meet demand.

Whilst tier 1 cities like Shanghai and Beijing are hubs for China’s cold chain, the rest of China’s cold chain system is highly disjointed, with a patchwork of logistics providers who are incentivised to cut corners in order to win business. This is combined with a lack of internationally recognised best practices in cold chain operations, meaning that reliably transporting temperature sensitive products across the rest of the country is extremely challenging and costly. As a result, several of the global players have begun pouring investment into the country to meet demand and modernise China’s cold chain.

Transportation Challenges in China

· 180+ Commercial airports

· 2000+ River & seaports

· Longest highway system in the world

· Railways are amongst the busiest in the world

· Unreliability of some 3PL providers for temperature controlled goods

· Lack of internationally recognised best practices in cold chain operations

· Extremes in temperature from north to south

Earlier this year DHL Global Forwarding (DGF) invested US$18 million to expand its air cargo facility at Shanghai Pudong, including a 1,600-square-meter cold storage facility. This represents a twenty-fold increase in the company’s cold chain capacity at the airport. In the same location, handling firm Pudong Air Cargo Terminal Ltd (Pactl) has built a new perishable centre at the airport with a deep-freeze area (-18 C), several cool storage facilities(4-8°C) and an ambient temperature storage zone (15-25°C). The centre also has an acceptance area with separate X-ray machines and a build-up zone, a 1,500-square-meter handling area for quick breakdowns and a specially designated delivery sector.

Another major improvement in China’s cold chain happened in August 2015, when FedEx launched a "one-stop" cold chain solution servicing mainland China, Outbound FedEx International Priority® (IP) Service and domestic Priority Delivery Service. These services give shippers a choice of two packaging options, gel packs and a "cold shipping package." Whilst the gel packs have been common in the industry for sometime, the "cold shipping package" offers a refrigerated environment of 2-8°C for up to 96 hours and can be activated simply with the press of a button. Furthermore, these solutions can be used in combination with FedEx Priority Alert® and a "Temperature Data Logger" device for proactive monitoring and notification of the status of a shipment and the temperature data during transportation. New solutions such as these offer much needed capabilities to China’s growing demand for cold chain logistics.

Yet it is not good news for the entire industry, as new regulations force industry players to modernise their processes or scale back their operations. For example, cold chain logistics companies usually operate on thin net profit margins, whilst the creation of a modern cold chain infrastructure requires a significant investment in equipment, quality control and training. Due to upcoming policy requirements such as the revised Good Supply Practice guidelines, some small scale logistics companies have had to restrict their delivery radius to avoid temperature fluctuations causing some pharmaceutical companies to close or relocate their business.

According to Sarna Yeung, Partner and co-leader of the Transportation and Logistics Competence Center at Roland Berger Greater China, model innovation is particularly important for bio/pharma and cold chain logistics providers. Industry players need to work closer together to move towards offering value added services, integrating supply chains and developing into comprehensive one-stop cold chain logistics service providers like the industry leaders. Through this process, companies will see stronger profitability in value-added services and warehousing and increased outsourcing of cold chain transportation.

As regulations tighten and competition over China’s cold chain logistics market intensifies, only companies that can adapt will survive. Based on research by IQPC, the capabilities essential to survival have been identified as the ability to:

· Formulate complete and reliable cold chain processes to reduce cost and add value.

· Select the most appropriate service providers to cooperate with.

· Adopt reliable and cost effective technology solutions.

Yet achieving these capabilities is easier said than done. According to further research by IQPC, the core challenges obstructing China’s bio/pharma industry and cold chain logistics providers include:

There is no question that the demand for cold chain service providers, refrigerated warehouses, 3PL’s and express delivery services will continue to expand at a rapid pace. The U.S.Department of Commerce even predicts that China’s cold chain capacity may increase by as much as 20 times over the next decade, however this growth will be reserved for the companies that can adapt to the new market conditions and partner effectively.5 Furthermore, international best practices must be adopted, otherwise risk missing out on market expansion opportunities.

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