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