By Joyce Jin    Photo：CANVA

A Brief Analysis of the Transition of the Freight Forwarding Industry to Third-Party Logistics

It is well known that freight forwarders play a crucial role in import and export trade. However, with the rapid development of port trade and the increasing number of freight forwarding companies, more and more forwarders are becoming aware of the intense competition. How to face this competition and how to bring more opportunities to their enterprises are questions every freight forwarder must confront. Therefore, third-party logistics (3PL) will be one of the ways forward for freight forwarding enterprises. The transformation of the freight forwarding industry towards 3PL can provide customers with systematic, personalized, and informational agency services, which is the result of logistics services developing towards specialization and centralization. During and after this transition, the freight forwarding industry should learn from and absorb the advanced experience of foreign countries in developing 3PL services, in order to better serve the development of port import and export trade in China. In particular, some small and medium-sized freight forwarders need to accurately position themselves in the market and provide services with their own characteristics.

I. Current Status of China's Freight Forwarding Industry

In recent years, driven by the rapid development of foreign trade, the freight forwarding industry has grown swiftly.

Starting in 1974, the number of international freight forwarding enterprises in our city expanded to four: Sinotrans, Tianjin Ocean Shipping, Penavico Tianjin, and Tianjin Marine. With the implementation of the reform and opening-up policy, the influx of substantial foreign investment, and the rapid development of foreign trade, the state gradually liberalized its approval policies for the international freight forwarding industry. By 1987, the number of freight forwarders in our city had developed to 12. By the end of 1994, it was 38, and by 2000, it reached 155. As China's national economy and foreign trade accelerated their pace of development, the international freight forwarding industry, as a service trade, also experienced rapid growth. By the end of 2003, the number of approved international freight forwarding enterprises in our city had reached 300. At the same time, there were 56 customs brokerage firms approved by customs; 1,400 domestic freight forwarders approved by the city's transportation commission's joint transport office; more than 200 cumulative approvals for foreign, Hong Kong, Macao, and Taiwanese business representative offices in Tianjin engaging in freight forwarding activities; and in recent years, 80 Non-Vessel Operating Common Carrier (NVOCC) agencies approved by the Ministry of Transport. The total number of the above-mentioned enterprises is around 2,100. (Source: Logistics Network)

However, the numerous freight forwarding enterprises have not aligned their organizational structures or operational processes with the logistics industry. Only a few individual forwarders have preliminary plans to build a logistics system. After large foreign logistics enterprises enter China, China's logistics industry will face enormous challenges.

Furthermore, China's freight forwarding enterprises face numerous problems:

1.Low Professional Level: Currently, many freight forwarders are still at a stage where almost anyone can do the job. The services they can provide are relatively simple, highly replaceable, and they function merely as simple intermediaries.

2.Relatively Singular Service Functions; Value-Added Services in Early Development Stage: There is still a lack of detailed overall planning and clear market positioning. Modern logistics concepts are absent, with operations still limited to simple sea (air) export, customs clearance, and basic warehousing. Profitability is low, and value-added service functions are in the early stages of development.

3.Backward Information Technology (IT) Development: We are in the information age, with rapid e-commerce development. On one hand, constrained by financial, material, and human resources, some freight forwarding leaders still cannot accept the application of Management Information Systems (MIS), and most forwarders have not yet achieved logistics information system management. On the other hand, there are misconceptions about IT. It is viewed one-sidedly as a primary means for enterprises to change strategies and management models, merely as an automation tool to save time and labor costs. Domestic freight forwarders lack necessary investment in IT infrastructure. Many companies do not have their own websites or engage in necessary e-commerce activities like online marketing.

4.Freight forwarders are stuck between shippers and shipping companies, with limited business scope. Moreover, shipping companies are beginning to adopt integrated marketing models, offering freight forwarding services in addition to container transportation. Furthermore, in recent years, large carriers like COSCO and China Shipping have established their own logistics enterprises, providing comprehensive logistics services including freight forwarding. They generally possess certain capital and technology, enabling the informatization, automation, and intelligentization of enterprise logistics. Consequently, the market share for freight forwarding companies is shrinking.

5.Some larger shippers are beginning to establish their own freight forwarding companies by leveraging their cargo volume advantage, making the survival space for independent freight agents increasingly severe.

6.Pressure from foreign-funded freight forwarders cannot be underestimated. After 2004, China allowed wholly foreign-owned enterprises to operate logistics businesses centered on freight forwarding. Currently, there are over 300 wholly foreign-owned freight forwarding enterprises.

II. Where is the Way Out for China's Freight Forwarding Industry?

The development and transformation of freight forwarders into 3PL is one of the ways out for China's freight forwarding industry. Currently, some large shipping companies and freight forwarding enterprises have already placed logistics development on their agendas and planned their logistics development directions. Foreign freight forwarders are even more advanced, already referring to themselves as "LOGISTICS." Although developing 3PL is not the only way out for Chinese freight forwarding enterprises, it is an inevitable trend. The era of winning clients solely by providing a single service is over. Nowadays, foreign trade enterprises increasingly require freight forwarders to provide integrated services such as sea (air) freight, customs clearance, transportation, and warehousing.

III. The Inevitability of Freight Forwarders Transitioning to Third-Party Logistics

Customers have diverse needs for 3PL; logistics outsourcing will be a gradual process.

1.For customers, reducing costs and cycle times while improving service levels are the main challenges, but the focus varies by industry. For the automotive manufacturing industry, as it gradually shifts from relying on imported parts to sourcing from local parts manufacturers, the importance of reducing inventory levels through "just-in-time delivery" is increasingly emphasized. For the clothing industry, shortening turnaround times is more crucial to react promptly to rapidly changing market trends.

2.Customers recognize the experience of international logistics providers in IT systems, industry expertise, and professionalism. Simultaneously, they acknowledge the advantages of domestic logistics providers in terms of cost, local experience, and domestic networks. This result also confirms the synergistic effects of domestic logistics providers establishing strategic alliances with international ones.

3.Currently, the proportion of Chinese enterprises, especially traditional state-owned enterprises, using 3PL services is relatively small. Multinational corporations in China are the fastest in outsourcing logistics and are currently the focus of China's 3PL market. However, these multinationals are also very cautious when outsourcing.

4.Customers prefer to focus their energy on core business, continuously developing new products to make them competitive. Therefore, most tend to adopt "outsourcing," delegating more services to professional logistics enterprises. The benefits include reduced inventory, less capital tie-up, lower enterprise costs, enhanced core competitiveness, improved production efficiency, etc. This highlights the importance and development prospects of the logistics industry.

IV. How to Develop Third-Party Logistics Services

Enterprises should adjust their development strategies, making appropriate adjustments based on their own characteristics and market demand orientation, striving to develop diversified services on the basis of freight forwarding business.

1.Establish One's Own Logistics Platform: Depending on financial strength, consider establishing one's own logistics park or jointly building a logistics park with other forwarders to meet customers' warehousing, transportation, and other needs.

2.Cultivate Professional Logistics Talent to Provide Professional Logistics Services: The scope of freight forwarding business is already broad, involving many areas. Enterprises should selectively focus on a few areas they excel in, such as warehousing, distribution, etc.

3.Collaborate with Foreign Freight Forwarders to Jointly Build Logistics Services: For example, partner with an American freight forwarder. Both sides can jointly handle export (import), customs declaration (clearance), warehousing, distribution, and a series of services. Improve cargo tracking systems and update information promptly on both websites, allowing customers on both sides to know the approximate status of their goods.

4.Broaden Service Types, Highlight Service Characteristics, Develop Diversely: International freight forwarding enterprises must shed their identity as mere single intermediaries. They should combine customer requirements to provide targeted, personalized services and solve difficulties and queries enterprises face in logistics. Ideally, offer different complete, integrated logistics solutions tailored to different enterprises.

V. Case Study:

Company Profile: ABC LOGISTICS CHINA LTD.. was established in early 1998 with approval from the Shanghai Foreign Economic Relations and Trade Commission and the former Ministry of Foreign Trade and Economic Cooperation. It is a Class-A international sea and air freight agency with qualifications approved by the Civil Aviation Administration of China as a designated international and domestic sales agent. The company's registered capital is 10 million RMB. Leveraging the quality brand and good social image of XX Transportation (Group), the company operates domestic and international sea and air import/export customs clearance, supervised transshipment, booking, warehousing, container consolidation/deconsolidation, freight settlement, inspection declaration, and door-to-door services in East China and across China. It possesses an integrated service network covering land, sea, and air multimodal transport with through bills of lading. Utilizing the XX e-commerce network platform and modern high-tech means of information management, and in cooperation with XX Insurance Company, it provides agency services for cargo transportation insurance, ensuring the safety and interests of customers' goods throughout transportation.

1.Before Developing 3PL Services: The company primarily focused on sea (air) import (export), customs declaration (clearance), and transportation. During the recent economic crisis when foreign trade was affected, the company's business volume also declined significantly. Moreover, facing intense competition in the freight forwarding industry and unable to provide other more professional services to customers, it lost a large number of clients (some were taken by other forwarders, highlighting strong replaceability and the fact that the most important factor in the industry is not necessarily service, but low price and personal relationships).

2.How to Develop 3PL Services:

A: Change the company's business model and strategic direction from solely providing freight forwarding to offering logistics services.

B: Cultivate Professional Logistics Talent: Logistics, as a new management technology, involves extremely broad fields. This requires logistics managers not only to be familiar with the entire process flow but also proficient in logistics management techniques and comprehensive knowledge including internal enterprise logistics and outward-extended supply chain management. Due to the late start of logistics education and training, although some graduates from university logistics programs are now on the market, many lack practical experience. There is a severe shortage of talent with comprehensive logistics knowledge and practical management skills, far from meeting the needs of enterprises developing modern logistics.

C: Take the Specialization Path and Establish a Service Brand: Facing pressure, as a small and medium-sized enterprise that is a main player in China's freight forwarding industry, ABC LOGISTICS CHINA must strive to secure a place in fierce competition by focusing on service specialization, differentiation, and refinement. It must win through operational characteristics, attract clients with advantages in specialized fields, occupy the market with flexible service mechanisms, and follow the path of specialized operation. This is not only the essential requirement of the freight forwarding business but also an important manifestation of the two core ideas of 3PL services (systematization and specialization). Meanwhile, with continuous economic growth and prosperity, demand for freight forwarding services is developing towards higher quality and personalization. Due to changing perceptions of customer needs, consumption of goods is becoming a holistic consumption. To some extent, customers are willing to pay a certain price or cost for better service guarantees. Therefore, for China's small and medium-sized freight forwarders, specialized operation and building a distinctive brand are also practical choices to overcome difficulties and cultivate core competitiveness.

3.Prospects for ABC International Freight Forwarding Co., Ltd. After Developing 3PL Business: Providing value-added services for customers and enhancing the corporate image. 3PL providers and customers are not competitors but strategic partners. They think for the customers, making the customers' supply chain management completely transparent through a global information network; customers can understand their supply chain situation via the INTERNET at any time. 3PL providers are logistics experts. They achieve complete control over the entire supply chain using complete facilities and well-trained staff, reducing logistics complexity. They significantly shorten delivery times through a global distribution network and service providers (subcontractors), helping customers improve service and establish their own brand image. 3PL providers design "tailor-made" solutions, formulating customer-oriented, low-cost, high-efficiency logistics plans, enabling customers to stand out among peers and creating favorable conditions for enterprises to win in competition.

VI. Conclusion

China's future freight forwarding market will develop towards scale and standardization. For small and medium-sized freight forwarders, they must either grow larger or face even harsher choices. Firstly, the current "briefcase" style operation model of freight forwarders will inevitably be phased out. The rise of integrated carriers, independent transport operators, and 3PL providers will lead the freight forwarding market from free competition to an oligopolistic stage, similar to how international express delivery is already monopolized by several oligopolistic companies. China's freight forwarding market will find it difficult to avoid this trend. For China's small and medium-sized forwarders, facing mergers and acquisitions by foreign enterprises is a realistic possibility, a pattern already seen in the air freight agency sector. Meanwhile, we cannot rule out mergers and acquisitions by large state-owned enterprises. However, this differentiation will, in turn, propel China's freight forwarding enterprises towards a more mature stage, leading us to redefine the freight forwarding market. After differentiation, the freight forwarding market should be diversified and comprehensive. In China, whether we call it third-party logistics or transport operators, the old freight forwarding service model is coming to an end, and a new one is approaching. Judging from logistics development practices both domestically and internationally, many first-class logistics enterprises evolved from freight forwarders. Third-party logistics is indeed a forward-looking and rational choice for China's freight forwarding enterprises.

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