With recent warnings from the OECD to close the income gap between rural and urban populations - and eastern and western regions - the Chinese government's plan to develop western infrastructure, a cornerstone of its 11th five-year plan, seems to be bearing fruit.

"The government's transportation infrastructure development plans provide significant investment for improved road, rail and air links with the western region," said Mark Millar, Honourary Chairman of the China Supply Chain Council, the only professional organisation representing foreign logistics providers in China. "The government strategy is to increase investment in the western regions to spread the economic prosperity inland as the eastern seaboard locations become more congested."

China's western region covers 60 percent of its territory, and is home to nearly 30 percent of the total population, which has largely been left behind in China's rapid development. The region is known as much for its bountiful mineral resources, such as oil and natural gas, as it is for its lagging infrastructure. However, the government has invested more than RMB850 billion (US$105 billion) on 60 key projects from airports, rail lines, terminals and pipelines to power stations and broadband installation. In terms of rail infrastructure, China's containerised rail traffic network totals 160,000 kilometres.

"Likewise, with labour costs rising in the coastal cities, foreign investors are looking for lower labour cost areas and are therefore looking to move inland," Millar said. "Major foreign companies establishing plants in inland regions will accelerate the development of improved infrastructure, particularly in telecommunications and transportation, and we are seeing some progress in this direction."

Inherent inefficiencies

In the first quarter of 2005, Yunnan, a once obscure and remote southwestern province nestled between Tibet, Burma, Laos and Vietnam, recorded the fastest-growing provincial economy in China. As development of the China ASEAN Free Trade Area marches towards completion, Yunnan looks set to become a major intermodal logistics hub as China expands its economic influence into Southeast Asia.

With China domestic retail volumes increasing at unprecedented rates, domestic transport networks are in dire need of increased capacity and efficiency allowing China's booming industrialisation to move further inland spreading development. "On average, logistics costs account for 9-10 percent of developed countries' GDPs, compared to 21.3 percent in China," said Millar. "Logistics in China accounts for as much as 40 percent of total production cost and 90 percent of the total production cycle, many times higher than in developed countries."

China's rail system has been under chronic strain for decades. A less expensive option than trucking, railfreight is still China's dominant transport mode, but remains best suited to bulk commodities. Additionally, damage rates on unitised railfreight are far higher than trucking, and theft is so common that manufacturers sometimes employ private security guards to accompany their cargo.

Chinese enterprises also prefer using their own transport teams, despite empty rates of as much as 37 percent. Once storage is taken into consideration the turnover period of Chinese products is somewhere between 35-45 days, compared to less than 10 days for many overseas companies.

According to Millar, "The very limited availability of containerised road and rail capacity leads to enormous inefficiencies in hinterland distribution. The huge amount of manual handling, loading and unloading of goods is one of the inherent inefficiencies in logistics in China - not necessarily in terms of costs, because in the majority of cases the labour is much cheaper than the equipment, but certainly in terms of time, damage and loss. Containerised ground transportation would alleviate these issues, but this would involve massive private investment. However, with the post-WTO opening of China's logistics sector, several major US trucking companies are entering the market, so we should gradually see an increase in containerised trucking fleets."

Kunming East Station is at present Yunnan province's only container handling depot, with direct links to only three provinces, Guangzhou, Guizhou and Sichuan, and onto the metropolitan district of Chongqing. "At present these lines are being upgraded to carry double-stacked container wagons," says Li Bo, logistics manager at the Kunming Rail Freight Depot. "In addition, there is a large shortage of rail cars suited for containers, and large volumes better suited to be transported in containers are still carried on flat-beds or general open wagon cars better suited to carrying bulk commodities."

Stretching ahead

In July of this year, as part of the Kunming development plan, work started on construction of a comprehensive intermodal container depot located in Jiaying, Chenggong County, about 20 kilometres from Kunming City, one of 18 new rail container depots planned by the Railway Ministry across the country. The engineering construction program will occupy an area of 16,000 hectares, with a fixed investment roughly equal to RMB449.5 million (US$55.6 million). The new depot is planned to come online in July 2006, and is expected to handle 63 million tons annually.

"At present all new proposed railway container centres and transport network construction investment is exclusively provided by the Chinese government for the purpose of building a comprehensive national containerised traffic network base, creating for the first time a door-to-door transport system network," said Bo. "In other words, all container traffic heading out of Kunming will be processed once in the container depot, without the need for transfer stations en route, greatly reducing costs and improving operational efficiency."

The new Jiaying Depot is planned to mesh with the new system of highways built linking Yunnan to the increasingly important markets of Southeast Asia, facilitating cheap Chinese exports to the region and granting resource-poor China greater access to the region's massive raw material resources. Bo argued, "Yunnan should become a progressively important area in the Southwest's rail logistics both in terms of national and international logistics."

"Yunnan is also hoping to play a key role in the United Nations Development Programme of the Greater Mekong Sub-region (GMS). The resource-rich region, with a population of approximately 250 million, covers a land area of 2.3 million square kilometres and GDP is estimated to grow to US$863 billion by the year 2010," said Zhou Yunxiang Honourary President of the Yunnan International Cultural Exchange Bureau. Whilst GMS economies are at present predominantly subsistence agriculture, they are gradually diversifying into several modern economic sectors rooted in a more transparent, market-based system."

"Low levels of productivity and severe economic problems compelled the governments in GMS countries to reduce the state's productive role in the economy and allow the business sector to take a greater role in developing the countries both economically and socially, and in most cases the private sector has surpassed the state-owned portion of the economy," Zhou said. Furthermore, the relatively young population of the region offers a significantly large pool of future workers and a substantial consumer market.

"With a total length of nearly 1,800 kilometres, the four-lane Transnational Highway starts in Kunming, runs through Laos and ends in Bangkok. The China section in Yunnan is 688 kilometres long. Construction began at the end of 2002. China has invested RMB12 billion to build new highways and renovate old ones along the route. The project will be completed towards the end of 2006. China is also offering financial assistance in building one-third of the Laos section," said Zhou.

"The Pan-Asian Railway, an ambitious railway project linking the countries of Southeast Asia, is planned to run through Hanoi, Ho Chi Minh City, Phnom Penh, Bangkok and Kuala Lumpur to end in Singapore. Construction will take about 10 years at a cost of more than US$2 billion. China plans to invest approximately US$1.5 billion, almost 75 percent of the total cost," Zhou added.

The total costs on the Yunnan section of given projects is expected to amount to up to RMB13 billion, jointly funded by railway authorities, the provincial authorities and related prefectures.

Zhou added, "As part of the overall infrastructure network, road links between Kunming and Laos will soon be completed, forming part of a transnational highway that will eventually link Yunnan with Thailand. Projects such as these and the Pan-Asian Railway - a bold project linking Kunming to Singapore via Malaysia, Thailand, Cambodia and Vietnam, with a total length of 5,600 kilometres of rail line, due for completion in the next few years - are likely to turn Kunming into a major logistics hub."