China's fragmented transportation and third-party logistics industry will soon begin to consolidate with industry leaders emerging in the next three to five years, according to the consulting firm A.T. Kearney.

Chee Wee Gan, a principal in A.T. Kearney's Management Consulting practice in Shanghai, estimates that there are more than 18,000 contract logistics service providers of various sizes in China. In addition, he estimates that China has about one million trucking companies, the majority of which operate fewer than 10 trucks. Furthermore, the top 10 truckload carriers in China control only 3 percent of that market, and the top 20 less-than-truckload carriers only have 2 percent of that country's markets, he says.

A number of factors are driving industry consolidation, Gan says. For one thing, small providers are confronting intense price competition, and they face scale, management, and cash-flow challenges. "Costs in China are rising," Gan explains, "and with the higher operating cost environment, many weaker players will be weeded out."

Another factor behind industry consolidation is the Chinese government's recent push to further develop the country's logistics industry, which officials have characterized as "small and fragmented." "Domestic players are encouraged to expand and improve (by the government)," Gan said.

Customers are also promoting mergers because they want more coverage and capabilities from carriers and providers. Gan noted that customers "are not satisfied with the low quality service offered out there" and are increasingly looking for carriers that offer more comprehensive capabilities.

Yet the potential for consolidation does not mean that things will be easy for foreign logistics service providers interested in acquiring Chinese companies to gain a larger presence in the fast-growing nation. Gan cautions that foreign providers should be aware of a number of obstacles. For one thing, they would incur 20 to 30 percent in hidden costs related to compliance with Chinese tax, regulatory, business, health, and safety laws. In addition, the management teams at most Chinese companies are weak, in his view. Finally, many local companies will be distrustful and not in favor of being acquired.