Consumer demand for all kinds of products may be rising in China, but for producers trying to get their goods to market the system is cumbersome, costly, and slow. The country’s transportation and logistics sector is only just developing—historically, state-owned producers tended to transport their own goods, and logistics services were rudimentary or nonexistent. Today, the sector cannot meet the demands placed on it, but the government is now jump-starting its growth, taking steps that will create opportunities for transport and logistics competitors inside and outside China.

As it stands, the sector is in low gear. Ships and railroads, long used for moving commodities and bulk goods rather than finished ones, are slow and inflexible. Most plants in China lack rail sidings, and the country has neither an intermodal rail system, which would allow truck-borne containers to be loaded onto rail wagons, nor modern trucking networks, such as a less-than-truckload system, to ship consumer goods efficiently.

Air services don’t provide much of an alternative, because domestic air routes are circuitous and flights to some areas infrequent. Moreover, freight forwarders rarely provide support services, such as local pickup and delivery. For domestic parcel and express services, one overstretched supplier—China Post—dominates the market. International players such as FedEx and TNT, though present, cater only to international shipments.

These difficulties will take years to sort out, but the impetus to do so exists. The rise of hypermarkets and other big retail customers with much greater bargaining power has created a demand for logistics providers (exhibit). Meanwhile, the government is encouraging Chinese companies to outsource logistics and encouraging logistics players of all stripes to develop modernized warehouses. In return for gaining entry into the World Trade Organization, China has also agreed to do more to open up the sector to foreign competitors over the next four years.

The business of getting goods to market is therefore set to become more competitive. International and Chinese companies are already assessing the opportunities. Large state-owned transportation and logistics providers, drawing on their massive assets and strong relations with local manufacturers, will seek partnerships with leading foreign companies that can contribute value-added logistics capabilities. Smaller, private local logistics companies that have a reputation for flexibility and a willingness to serve the needs of customers, as well as good IT support systems, could be acquisition targets for foreign players wishing to build presence quickly.

Among the foreign logistics companies in China are APL Logistics, Danzas, Exel, and Inchcape, which mainly provide multinational companies with export- and import-related services and have strong logistics capabilities, overseas networks, and international customer relationships. These companies could expand into domestic logistics by partnering with state-owned companies to gain access to assets while providing systems and skills, or they could increase their presence by acquiring smaller, more flexible companies.

Finally, leveraging captive business volumes, manufacturers and distributors are expanding into logistics. For instance, Haier, a Chinese manufacturer of white goods, has transformed its in-house distribution unit into an independent logistics services company and formed an alliance with China Post. The alliance will give Haier access to the vast network and transportation assets of China Post, which will benefit from Haier’s business volume and experience in improving distribution logistics. This alliance is consistent with the central government’s policies, since it will certainly promote the much-needed modernization of China’s transportation and logistics industry.

The effort to fill in the gaps in China’s transportation and logistics sector could inspire a keenly fought battle during the coming decade.