Market Overview

The definition of logistics, as adopted by the Council of Logistics Management, is commonly known as that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from point-of-origin to point-of consumption in order to meet customer's requirements, ie the management and movement of information and physical goods.

Prospects for the Logistics Industry in China

Since China's accession to WTO, foreign goods and services have much greater access to the China market. China now accounts for the largest share of Asia-North American air cargo market. Since 1985 the China air cargo market has grown an average of 21.8%, increasing China's market share from 3.5% in 1985 to 10.9% in 1995, and then to 32.7% in 2005.

In 2005, China's external trade reached $US 1,422 billion, making it the world's 3rd largest in the global economy. Exports continued to grow rapidly by 28.4% while imports increased by 17.6% resulting in a trade surplus of US$ 101.9 billion.

China's growth in real GDP remains strong. In the first quarter of 2006, the China economy grew by 10.3% and accelerated to 11.3% in the second quarter. Growth of real GDP slowed to 10.4% in the third quarter of 2006, resulting in a 10.7% growth for the first nine months. In the first 10 months of 2006, exports increased by 26.8% while imports grew by 20.9%.

China's top ten trading partners in 2005 were the US, Japan, Hong Kong, South Korea, Taiwan region, Germany, Singapore, Malaysia, Russia and the Netherlands. China's trade with these ten economies together amounted to US$921 billion, or 65% of China's total external trade in 2005.

Bilateral trade between the Mainland and Hong Kong amounted to US$136.7 billion (9.6% of the Mainland's total external trade) in 2005. Exports from the Chinese Mainland to Hong Kong grew to US$124.5 billion, making Hong Kong the second largest export market after the US.

Bound by the WTO Protocol, China is liberalizing market access on most service industries including the logistics sector. During the past 5 years, China has made significant investments in the infrastructure required to accommodate the strong growth. From 2000 to 2005, gross fixed investment in the industry reached RMB 94.7 billion; 21 new airports were built, with many of the 120 existing ones upgraded.

The regulatory environment for the logistics sector and related services has been also undergoing substantial, trade-friendly changes. The liberalized benefits introduced in CEPA and its Annexes provide logistics companies, such as GPEI with a much greater advantage than foreign companies in entering China's market.

Logistics in China's industrial production occupies almost 90% of the production cycle time and 40% of general production costs; therefore, strengthening the logistics sector is crucial for China to improve overall productivity. The demand for logistics services will continue to increase because of the previously noted rise in the volume of export trade and domestic distribution. This provides a tremendous opportunity for experienced companies in Hong Kong, such as GPEI, to invest in cargo-handling facilities, logistics centres and to provide air and sea freight-forwarding services on the mainland.

In addition to the growth opportunities provided by the large cities located along coastal regions such as Guangzhou and Shanghai, Hong Kong based companies and their related services providers would explore further business opportunities in the second-tier cities with China's rapid development on manufacturing, trading and domestic distribution sectors. GPEI and its subsidiaries have already began to exploit the opportunities in the coastal regions through their Branch Offices is Shanghai and Guangzhou.

Based on Hong Kong's merchandise trade statistics for 2005, 62% of re-exports were of China origin and 46% were destined for the Chinese mainland. According to China's Customs statistics, Hong Kong ranked the third largest trading partner of the Chinese mainland after the US and Japan, accounting for 9.6% of its total trade in 2005.

International freight traffic from the People's Republic of China (PRC) has expanded at 9.6% per year over the last ten years. This dynamic market has benefited from the shift in the types of commodities exported, towards higher value goods. It has also benefited from the transition by the country's electronics manufacturing sector, from mainly components manufacturing, to more final assembly and the integration of these electronic components.

International traffic is expected to grow by 6.7% per year over the next 10 years and 6.1% over the next 20 years. Among the top traffic flows, PRC to North America and Europe will be the two fastest growing international markets, 11.6% and 10.4% respectively by 2015.

The Outlook for Asia-North America Air Cargo

According to Boeing's 2006-2007 Air Cargo Forecast, China now accounts for the largest share of the Asia-North America air cargo market. This market has grown at an average annual rate of 20.8% since 1985. As a result, China has increased its market share from 3.5% in 1985 to 10.9% in 1995, and then to 32.7% in 2005.

However, growth in the Asia-North America air cargo market slowed during 2005. Part of this was attributed to the higher cost of jet fuel, which increased by an average of 42% during 2005. As well, demand for imported products dropped in Europe and North America during 2005.

The Asia-US market, which accounts for 93.3% of total trans-Pacific air cargo tonnage, grew only 2.9% in 2005. This growth compares to the 16.5% growth reported in 2004, when Japan, China, Thailand, South Korea, Australia, and New Zealand all contributed double-digit growth to the transpacific total.

The eastbound component of trans-Pacific air trade accounts for 62.0% of the Asia-US market. US-bound air cargo traffic grew 4.1% in 2005, following 18.1% growth in 2004. The westbound component grew only 0.5% in 2005, following 13.9% growth in 2004.

The Asia-North America westbound airfreight market accounted for 1.2 million tonnes of cargo, which represents 1.3% growth for 2005, following 14.6% and 6.2% growth in 2004 and 2003, respectively. Eastbound air cargo traffic accounted for nearly 2.0 million tonnes, growing 4.0% in 2005, after 17.9% growth in 2004, and following a contraction of 1.8% in 2003.

GDP for the 12 countries in the trans-Pacific market will grow 3.4% per year over the next 20 years, outpacing GDP growth in other parts of the world. Mainland China will continue to play a major role in Asia, buoyed by China's membership in the World Trade Organization, the recent US-China air services agreement, and a projected 6.8% annual GDP growth over the next 20 years.