There seems to be no respite for logistics companies in China as they appear to be headed for tougher times.

The companies are already grappling with lower profits as demand shrinks due to the economic slowdown. Adding to their problem now is the proposed introduction of a fuel tax.

"The fuel tax will definitely increase our costs," said Liu Wu, president of PG Logistics Group Co Ltd. The Guangdong-based firm is one of the largest private logistics companies in China.

"A number of small private logistics companies will be forced to close shop next year," said Liu.

Media reports last week suggested that the government might "soon" start levying a fuel tax.

"The economic slowdown is already like a sword hanging over logistics companies. The fuel tax could very well be another (sword) for them," said An Jianghong, a logistics analyst with Anbound Group, a Beijing-based consulting firm.

While exact details about the policy are not yet available, it is widely believed that the government will scrap road maintenance fees, but retain most of the road tolls.

"This is our biggest concern as fuel and road tolls account for 60 to 70 percent of our transportation costs," Liu said.

Logistics companies are also anxious about the exact timing of the policy.

"The sooner, the better. We are now signing contracts with customers and everything will be set in place by the end of the year. If the policy comes before that, we can raise our prices. But if it is announced only next year, we will have to suffer for a whole year," said Zhu Jihua, president of Hangzhou Jihua Logistics Co Ltd.

Analysts are of the view that fuel tax policy may force logistics companies to cut costs by switching to more fuel-efficient vehicles, optimizing traffic networks and lowering vacancy rates.

"Some transportation companies have been duplicating automobile license plates so that several trucks share the same number plate and pay much less road maintenance fees," said Chu Xuejian, professor at the Modern Logistics Research Center of Shanghai University.

"They could offer very low prices, which is unfair to others who follow the rules," he said.

Replacing road maintenance fees with a fuel tax could create a level playing field, analysts said.

Chu said that the fuel tax should be levied along with a series of supporting policies to minimize the negative impact on the industry.

"For example, what kind of companies could be subsidized? If the fuel tax rate varies in different regions, how would it be able to coordinate the trucks traveling across many regions?" Chu said.

(China Daily November 28, 2008)