China logistics industry trends investment opportunities_2011


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Overview of the development of China's logistic infrastructure and industry; identifying potential obstacles and opportunities for investment

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China logistics industry trends investment opportunities_2011

  1. 1. CONFIDENTIAL State of China’s Logistics and Potential Business OpportunitiesBY: KC YOONGLOBAL CHINA CAPITALMobile: 18675573803 1Email:
  2. 2. Section One-State of China’s Logistics - Challenges & Future GrowthState of China’s Logistic Market Market Characteristics Understanding the Costs and Challenges Industry Trends and Drivers Future Market PotentialLaying China’s Logistic Infrastructure Current and Future Transportation Infrastructure Logistic Hub, City and Passage Development Chinese Government’s Support for IndustryLeading Logistic Players in the Market Leading Domestic & Foreign Players Recent Business & M&A 2
  3. 3. China Market Becoming Attractive Market Size at Record Manufacturing Bias Market size of Logistics industry in China set Industrial products has a 90% share of the a new record high in 2010, at US$15.75 goods transported. billion, with growth of almost 30% Y-o-Y. 2009 Value Yoy Mkt (bn RMB) Growth Share Agricultural 2,236 43% 18% products Industrial 113,103 14.6% 90% Products Imported 9,431 22.1% 7.5% Products Recycled 446 39.5% 0.4% products Comm & Pers 198 14.7% 0.2% Source: KPMG Products Total 125,413 15% Source: National Development & Reform Commission Source: KPMG Logistic market growing and in-transition- offers new business opportunities
  4. 4. Market Demand on Increase Market Demand Recovering Expansion of Value-Added Measures logistics value to GDP ratio, Logistic value-added showing market increasing since 2006;recovered from the expansion since 2006- value-added increasing financial crisis from 2.9 to 3.2 in 2010 at rate of tiertary (service) sector Logistic Demand Coefficient Source: CFLP Source: CFLP Market for logistic services on the increase with broad-based demand
  5. 5. Logistic Cost High vs Global Peers Logistic Cost as % GDP High Transport is Major Cost Chinese total logistics cost is high (at Transport and labor costs account for Rmb7100Bil in 2010) with low logistics typically 60% of Chinese distribution center efficiency (China ratio is 17.8% vs USA 7.7%). cost structure vs 8-10% for US/Japan Breakdown of China’s Total Logistics Cost (2009) Other Storage 25% Transportati on Warehouse 55% 8% Management 12% Source: National Development & Reform Commission Source: ATKearney Report Chinese Logistics 2015 Chinese logistics has significant room for cost & efficiency gains.. 5
  6. 6. Challenges faced … China’s Logistic Industry Large but Undeveloped.. Logistic practices not upto global standdards..Foreign companies only allowed into sector in 2005 and still not fully plugged-into the market Lack of modern logistic Poor penetration by 3PLs; Poor use of logistics i.e. lack facilities and sufficient spend on 3PL only 2.7% in of cold-chain logistics; poor warehouses space 2009 vs 30% for EU planning tools 2009 China Other % Coldchain 10% US/JPN: 80% 3PL Number. refrigerated 60,000 ME: 50% US: 250,000 JP: 150.000 trucks Source: GZ Cold-chain Logistics Assoc. Business Development Needs to Consider -Infrastructure to Planning 6
  7. 7. Industry Trends (1).. Economic Shift – Movement of Manufacturing Locations to the West Increasing Land and Labour cost of coastal cities driving manufacturing factories to move into the hinterlands- for both YRD and PRD… benefiting new logistic hubs like Wuhan, Chengdu, etc Source: CB Ellis Coming Demand & Growth in Logistics due to shift in Manufacturing to Western China 7
  8. 8. Industry Trends (2).. China’s Strategic Shift towards Consumption Drive Demand Demand for sophisticated retail logistics management & warehouse space from the expansion of global retailers Walmart, carrefour plus other retail/consumer brands from coastal into rural and inner cities creates demand De-regulated environment allows foreign participation Asia Retail Forecast 2014 In China retail Expansion in Online Shopping similarly adds to demand Modern Logistic a pillar in “China’s 11th Year Plan” IMF estimates that by 2025, retail will dominate 75% of domestic logistics Source: PWC Report on Asia Retail 2010 Major consumption centres are building up inland i.e. Strong retail sales for past 3 years in Chongqing, Changsha, Chengdu, Xian where logistics will be required to transport consumer goods to these cities. Coming Demand & Growth in Consumption-Driven Retail Logistics 8 offers new business opportunities
  9. 9. Industry Trend (3) … Market in Growth Stage with Increasing Competition Market is fragmented (Top 20 operators with 6% of total revenues); Dominated by companies with limited scale/limited service scope. M&A Trend as Govt push to nuture domestic giants; interest from foreign players looking for an entry into the Chinese market Source: ATKearney Report on Chinese Logistics by 2015 Fragmented & Growing market – Opportunity for Consolidation to become 9 Market Leader
  10. 10. Industry Trend (4) … Continued Investment in Transportation Network Build-up of Nationwide Transportation Infrastructure Currently China suffers one of the heaviest freight density in the world- driving up transportation cost. In 2009-2010: RMB 1.4 trillion invested in rail network. By 2020- 120,000km highspeed railway network to be completed- dramatically improve speed of delivery and nationwide access Rail Network 2020 Hubs Source: China’s Future Transport Infrastructure , Tsinghua University Rail Network brings significant new efficiencies in land transportation; New hubs will be created 10
  11. 11. Industry Trends (6) Market Demands Improvements in Efficiency With increasing market competitiveness, efficiency gains from improved logistic management critical to firms remaining competitive; Domestic firms investing in advanced SCM IT system and online logistics Advanced SCM Platform eLogistics Source: Fraunhofer IML Opportunity to bring world-class SCM capabilities as Value-added 11
  12. 12. Industry Trends (7) Development of Domestic 3PL +Rise of Outsourcing Currently only in China 2.7% outsource vs 15.7% global norm but market segment growing at 25% annually vs overall logistics- By 2013 China expected to be largest contract logistic market in Asia-Pacific reaching RMB183.5 billion market value. China’s Contract Logistics Market Contract Logistics Market Forecast (2009-2013)RMB billion 200 Geographies CAGR 180 Asia 12.8% 160 140 Western Europe 6.5% 120 North America 9.8% 100 Global 9.5% 80 China 20.6% 60 40 Inter Asia Trade Forecast (2010-2015) 20 2010 30.1 million TEU’s 0 2015 44.1 million TEU’s 2003 2004 2005 2006 2007 2008 2009 2013F Source: Transport Intelligence, Colliers International Source: Transport Intelligence, Colliers International Potential to build 3PL market hub leader leveraging global skills 12
  13. 13. Case Study: Outsourcing Trends Outsourcing Rate Increasing Outsourcing Characteristics Survey of Chinese enterprises shows Enterprises outsourcing more of internal outsourcing volume increasing to 61% in logistics especially transportation & 2009 from 35% in 2005 (does not reflect distribution functions; future needs are whole market only sample) advanced logistic functions Types of Functions Outsourced Outsourcing Vol. Domestic Enterprises Future Planned Functions Outsourced 70% enterprises surveyed outsourced more than 50% of logistic functions; while 40% outsourced more than 80% Source: NDRC and Nankai University Source: Extracts from NDRC and Nankai Survey Market for more sophisticated 3PLs on the increase.. 13
  14. 14. Future Growth for Logistics Market China Market to Reach US$ 450 billion Market demand, the development of transportation infrastructure plus availability of world-class logistic facilities and systems will support the overall upgrading of China’s logistic market Express Road freight Air freight Intl freight fwding 3PL outsource Consumption-related Spend will drive 5 key logistic segments! Source: ATKearney Report on Chinese Logistics by 2015 Broad growth in market segments and various transport modes
  15. 15. Section Two-State of China’s Logistics - Challenges & Future GrowthState of China’s Logistic Market Market Characteristics Understanding the Costs and Challenges Industry Trends and Drivers Future Market PotentialLaying China’s Logistic Infrastructure Current and Future Transportation Infrastructure Logistic Hub, City and Passage Development Chinese Government’s Support for IndustryLeading Logistic Players in the Market Leading Domestic & Foreign Players Recent Business & M&A 15
  16. 16. Transportation Network Long Term Goals Transportation Infrastructure Build-up Plan (I) Transportation accounted for 75% of the RMB 3 trillion investments in logistics in 2010. Early phase of transportation network build-up focused on road and deepwater ports in support of the manufacturing and export demand. Chinese ports rapidly led in world container traffic Early Phase Focus Source: Research Centre for Modern Logistics Tsinghua University, National Bureau Statistics Priority on transportation reflects Govt priority on improving logistics16
  17. 17. Transportation Capacity Traffic Capacity by Transportation Modes Road Transportation remained the primary mode for passenger and freight traffic while air transportation mode saw the strongest rise. While road traffic capacity has increased… MILEAGE PER CAPITA CHINA VS US ONLY 10% Source: National Bureau Statistics Current capacity relies on road transportation which is still restrictive17
  18. 18. Transportation Network Long-term Goals Transportation Infrastructure Build-up Plan (II) Primary goal from 2010 to 2020 is to ramp up the domestic transportation network to support the growing, broadening and deepening of the domestic consumption-focused economy 2010 to 2020 Source: Research Centre for Modern Logistics Tsinghua University Recognising this focus- identify rail/coastal ports for early partnerships18
  19. 19. Roads and Expressways Network 2020 Multiple Highways & Trucking Hubs (42) Source: Research Centre for Modern Logistics Tsinghua University19
  20. 20. Rail Network and Hubs 2020 Railway Container Hubs (18) Hub Source: Research Centre for Modern Logistics Tsinghua University20
  21. 21. Case Study: China Rail Opportunity and Challenge Using Force Field Analysis as decision-tool - Insights into future development of the Chinese rail transport system appears to be positive • Major passenger carrier Energy Saving • 2007: 1.4bn pax;3.2bn tons goods Competition Most energy efficient Intense competition from3 transport mode cpr to • 2007-2012: US$300bn invested other transport modes esp. 3 Japan’s rail system road with heavy investment Growth of China Rail Social Demand Poor Financing5 Already high load density but demand outstrip supply. High construction capex funded through domestic 3 Need further expansion bonds; limited flexibility Container Transport Limited Profitability4 Development crucial for inland economy; increase Profit margin 1-2%; Low pricing esp passenger as 4 share of land transport Driving Force Restraining Force viewed as public service Govt Support 17 VS 13 Strict Control Financial & policy support Viewed as strategic asset5 plus independent Ministry with semi-military control; 4 of Railway lacks market flexibility21 Source: Research by Zheng Wan , University of California Xiang Liu, University of Illinois Urbana-Campaign
  22. 22. Coastal and Large-Scale Ports Vibrant World-class Port Network World Ranking of Container Ports Source: Research Centre for Modern Logistics Tsinghua University22
  23. 23. Civil Airport Network in 2020 Core Hub Formed by BJ, SH, GZ Airports Northern Hub North-West Hub Sub-hubs in each Geographical area with International, Regional and Trunk Airports South east Hub China Eastern Hub China Southern Hub Source: Research Centre for Modern Logistics Tsinghua University Source: Research Centre for Modern Logistics Tsinghua University23
  24. 24. Current Developments -Logistic Hub/Pks Total of 1300 + Logistic Parks have been Developed • 85% supported by local govt • Govt build infrastructure • Special tax incentives for tenants • Cluster development • Value of land increase primary motivation for investment • Overcapacity- only 40% utilization. • Corruption contract allocation • Design not meet business needs • Lack multimodal transport24 A Crowded market.. Need to offer unique proposition to stand out against Competition
  25. 25. Logistics Hubs Bloom Across China 5 Major Logistic Hubs Across China Broadly classified into 3 categories (1) Primary hubs are the leading coastal cities of Shenzhen/Guangzhou; Shanghai and Beijing/Tianjin (2)Secondary hubs are extensions from the primary (3) Emerging hubs are in the inland and have risen priomarily due to strong retail/consumption story Source: Research Centre for Modern Logistics Tsinghua University25
  26. 26. Examples of Primary Hubs Primary Hubs are formed from the Early Economic Zones A significant number of logistic parks and warehouse facilities have already co- located within these hubs Harbor City Tianjin-Bohai Bay Shanghai Hub PRD HubSource: Research Centre for Modern Logistics Tsinghua University26
  27. 27. Logistic Cities City Locations with Logistic Potential State Council designated Cities due to being part of air, land or sea transportation nodes; State Council also identified 10 logistic passages with key traffic volume • 21 Nationwide Junction cities • 17 Regional Junction cities Source: LiFung Research27 Need for in-depth study to study opportunities offered by cities
  28. 28. Recent Chinese Policies SupportingLogistics Market Under 12th Five Year Plan by NDRC- Logistics Key Focus Eight key preferential terms for logistic market 1. To reduce tax burden for all logistics companies effectively 2. To increase support for Logistics Land Policy 3. To promote and facilitate convenient passages for transportation vehicles 4. To improve management of logistics enterprises 5. To encourage integration of logistics facilities and resources 6. To promote innovation and application of logistics technology 7. To increase investment in logistics industry 8. To promote development of agricultural logistics. Targets set by NDRC • Total Logistics value grow at CAGR 14% & CFLP by 2015 • Logistics Value-added increase at CAGR 15% Leverage on Chinese Govt Support to Drive Growth of Logistic Hub 28
  29. 29. High-Level Co-ordination Still Weak.. Constraints at Provincial Re-Org of Govt. Dept Level Lack of co-ordination among Govt Dept leads to multiple jurisdictions and limits development of logistic industry; provincial level authority still exerts influence and impacts industry Functions of government departments regulating civil aviation, postal services, communications and urban public transportation consolidated under establishment of Ministry of Transport in 2008 Other dept still responsible for monitoring different aspects of logistics industry G to G efforts would be required to ensure nation-wide co-ordination 29
  30. 30. Section Two-State of China’s Logistics - Challenges & Future GrowthState of China’s Logistic Market Market Characteristics Understanding the Costs and Challenges Industry Trends and Drivers Future Market PotentialLaying China’s Logistic Infrastructure Current and Future Transportation Infrastructure Logistic Hub, City and Passage Development Chinese Government’s Support for IndustryLeading Logistic Players in the Market Leading Domestic & Foreign Players Recent Business & M&A 30
  31. 31. Leading Logistics Enterprises.. Performance of Domestic Logistic Business for 2009 Revenues of Domestic Enterprises Profitability in 2009 Average profit margins of domestic enterprises was 6% in 2010 down by 7.1% yoy Source: NDRC and Nankai University Low profitability opens partnership and profit improvement opportunities 31
  32. 32. Leading Logistics Enterprises.. Foreign Logistic Enterprises Continue to Expand Market share of foreign logistic players still small but growing especially in the land freight and air express freight segments 1. Fedex Asia-Pacific delivery center in Guangzhou Baiyun Airport commenced operations in 2009- largest outside the US. 2. UPS relocated its intra-Asia hub from Clarke in Philippines to Shenzhen in 2010 3. DHL entered agreement with China Merchants Maritime Logistics in June 2010 to establish a global distribution center in Qinghai, Shenzhen 4. TNT established and invest EUR 170M in a wholly-owned road transportation subsidiary in Hangzhou 5. In 2010 Japan’s largest logistic co. Yamato Holdings will setup cold-chain land transport company in YRD with aim to reach 30 bn yen in 5 years Foreign enterprises seek to enter China also opens partnership opportunities 32
  33. 33. Leading Logistic RE Players.. Gaining Interest from Foreign RE Developers and Funds Logistics Real Estate Developers: - Government Ind/Log Parks, Local and Central SOEs. - Private Co.: GLP (Prologis), AMB, Goodman, Ascendas, Mapletree Log. etc. - Funds: A-Reit, ING Real Estate, Cache (ARA-CWT), PingAn, Equity Int’l, China Inv Corp, Canadian Pension Fund etc. Portfolios of Key Private Developers: (sqm by 2009) (Lease rates) 2010/11 New Devt. On hand & under construction - 44000 150,000 270,000 300,000 850,000 - 96,000 40,000 82,000 - 220,000 60,000 170,000 1000,000 2,800,000 300,000 500,000 1,850,000 5,100,000 33
  34. 34. Recent New Business Starts.. Market Developments focused on Specialist Sectors Retail and consumer brand enterprises have been aggressively expanding and building logistic capabilities- in-house and through 3PL partnerships; Automotive logistic has also been a sector targeted by foreign enterprises Large sports retailers: eg. Nike & Adidas. E-commerce: eg Alibaba, DangDang, Amazon. Retailers: eg. Carrefour, Tesco, Watson etc. Automobile & Car components: eg. Benz, BMW; GiTi, Faurecia. Food Industry: eg. Havi LC (McDonald) vs YLC (Yum! KFC) Cold chain logistics: eg. Americold, China Merchant Log, PFS. Others: Medical Pharma, Chemical logistics. eg. CWT, Kerry Log. SERVICE PROVIDERS: 3PLs: moving from freights (DHL, Fedex, UPS) to Contract Logistics: eg. APL- Hanes, Legend; YCH- Dell; Schenker- BMW. 3PLs-Shippers: eg. CEVA, Maersk, K+N, Samudera. SCM / BPO: eg. Banks- CitiBank, DEM/OEM- Hi-P, Eternal Asia. Knowing the Market Needs and identify opportunities
  35. 35. Recent Market M&A.. M&A Driven by Foreign Logistic companies…. World Class centres needed to support world class players’ logistics needs 35
  36. 36. Section Two- Identifying Business Opportunities in ChinaScoping of Opportunities Screening Attractive Market Segments Case Examples 36
  37. 37. Scoping of Opportunities… Identify Possible Market Segment Opportunity Screen Potential of Market Landscape & Competitiveness; Analyse Opportunity Transportation Mode vs Industry Segment Road/ Air Air Intl Remark Rail Freight Express Freight Freight Non-Food Vol + Margins Retail (Luxury gds – strong MarginsLarge Mkt Logistics Import Pharma Domestic Market Domestic Market Gd. Margins only only Logistics Hi-tech/Auto Efficient SCMMed. Mkt Logistics required; Export Food + Agro Domestic Market Domestic Market Niche Cold Chain only only logistics – Gd Logistics MarginsSmall. Mkt Source: Various, Internal Analysis Retail & Hi-Tech/Auto Logistics Looks like good opportunities
  38. 38. Scoping of Opportunities… Identify Possible Market Segment Opportunity Screen Potential of Market Landscape & Competitiveness; Analyse Opportunity Transportation Mode vs Logistic Segment Non-Food Pharma Hi-tech/Auto Agro-Food Remark Retail Logistics Logistics Logistics Logistics Outsourcing Transportation trend OutsourcingLarge Mkt trend Distribution Outsourcing Warehousing trend Packaging &Med. Mkt Processing Logistic IT & Future demand Mgt SystemsSmall. Mkt Source: Various, Internal Analysis Transportation, distribution & warehousing current hot Sectors
  39. 39. Scoping of Opportunities.. Identify Possible Market Segment Opportunity Screen Potential of Market Landscape & Competitiveness; Screening Opportunity by Transportation Mode vs Location Road/Rail River Air Intl Remark Freight Freight Freight/Exp Western Chengdu Chongqing Mega-hub Central Wuhan Eastern Shanghai Northeast Bohai-Tianjin Southern GZ-SZ Larger Opportunities in emerging logistic hubs
  40. 40. Case Examples- Logistic Function Overview of Warehousing Investments… As land &labor costs increase in the coastal cities, warehousing expansion continues in 2nd / 3rd tier cities with need for better, quicker and more accurate deliveries demanded by customers- hence opportunity for foreign investments State of Chinese Warehouses Foreign Investments • Current automation levels low • Foreign investments concentrated inBeijing, • Only 5% have good IT systems Shanghai and Guangzhou hubs • Existing warehouse in populated areas • Warehousing focus for retail, apparel, auto, which restricts trucking pharma, electronics and tobacco sectors Source: Tomkins International Survey 2009 Recent continued investments continue into warehousing sector 40
  41. 41. Case Examples- Segment Investment Recent New Business/Investments by Segments… Active investments into building logistic infrastructure evident especially from foreign logistic-focused RE players.. Non-Food Italian fashion retail Retail Invests to open Invests U$1.2bn Asia Distribution Retail + warehouse Logistics in logistics Center in TJ Pharma Zhejiang Nhwa Pharma Logistics International invests invests US$18M in US$15M in Pharma Xuzhou Logistic logistic center Center Hi-Tech/Auto Logistics Invests U$200M RMB680M Food + Agro In Suzhou to cater Distribution Centre Metro Hypermart JV with Logistics for manufacturing in Chongqing Shuanghui for delivery of all & supermart retail frozen products Source: Various, Internal Analysis Substantial Investments seen into Auto/Consumer/Retail Segments 41
  42. 42. Case Examples – Location Investments New Inland Hubs away from the Coast Wuhan is identified as the Central Logistic and Transportation hub and provincial capital of Hubei province Pop. GDP Transport Economic Competitive Nodes Drivers Edge Wuhan 8.9M RMB • 4th Aviation • Hi-tech • Large pool U grads (Central) 456bn Hub • Biotech • Strong IT foundation • Road/Rail hub • Auto- Honda, PSA • Rel. low land/labour costs • Largest inland • Logistic – TNT, • Strategic centre of China’s River port DHL transport network Wuhan’s 1+8 Cluster of surrounding cities offers multiple re-development opportunities Source: Chinese Govt. Sources 42
  43. 43. Case Examples – Location Investments New Inland Hubs away from the Coast Chengdu will become China’s Southwest logistic hubs to drive economic development further inland Pop. GDP Transport Economic Competitive Nodes Drivers Edge Chengdu 11.4M RMB • Aviation Hub • Hi-tech and IT • Large pool U grads (Southwest) 450bn • Asia’’s largest • BPO hub • Strong IT foundation rail container • Biotech • Rel. low land/labour costs hub • Food processing • Strategic centre of China’s • Largest rail • Logistic – TNT, transport network network DHL Source: Chinese Govt Sources Emerging Hubs appear to offer broader investment opportunities 43