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Mizuho 1038 logistics

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  • 1. Japan Industry Outlook / 38 2012 No.1 Table of Contents1, Comprehensive Industry - Japan 15, Broadcasting (Japanese only)2, Iron and Steel - Japan 16, Marine Shipping (Japanese only)3, Non-ferrous Metals - Japan 17, Logistics - Japan4, Paper and Pulp (Japanese only) 18, Electric Power - Japan5, Cement - Japan 19, City Gas (Japanese only)6, Chemicals - Japan 20, Retail - Japan7, Pharmaceuticals - Japan 21, Food and Beverage - Japan8, Petroleum - Japan 22, Food Service Industry - Japan9, Automobiles - Japan 23, Construction (Japanese only)10, Shipbuilding (Japanese only) 24, Real Estate and Housing - Japan11, General Machinery (Japanese only) 25, Travel and Tourism - Japan12, Electronics - Japan 26, Nonbank (Credit Cards & Credit) (Japanese13, IT Services - Japan only)14, Telecommunications - Japan 27, HR Service Industry (Japanese only) Contact: Industry Research Division Mizuho Corporate Bank, Ltd. mizuho.ird@mizuho-cb.co.jp
  • 2. FY 2012 Japan Industry Outlook (Logistics) Logistics [Summary] ■ Cargo volumes fell significantly in the first half of FY2011 due to the impact of the earthquake. Lagging reconstruction-related demand and the global economic slowdown mean the recovery in the second half of the year will not be enough to make up for first half losses, so total volumes for the year are expected to fall by 2.1%. After having previously suffered a one-sided slide, construction-related cargo is expected to return to growth in FY2012 on the back of a significant upswing in government-sector construction investment as part of the earthquake reconstruction efforts. There is strong possibility that consumption and production cargo volumes will also start growing again, so total volumes are expected to rise by 1.2% y-o-y, the first increase in 13 years. However, volumes still remain on a downwards trajectory in the mid- to long-term. ■ The business environment was quite challenging in the first half of FY2011 due to the substantial impact of the Great East Japan Earthquake, but many major players saw incomes rising, so corporate earnings moved relatively strongly. ■ The FY2011 settlement results of the top five listed truck companies revealed that total income and profits had increased, reflecting the substantial impact of the large-scale corporate acquisitions implemented at the beginning of the year. Total cargo volumes are expected to rally slightly in FY2012, with the major players forecast to trade firmly on the back of this demand. Furthermore, companies are now ready to expand overseas in earnest, while discontinuous growth (including M&A) looks set to continue, so the trend of rising income and profits is expected to persist.I. INDUSTRY TRENDS1. Truck transport volumes (tonnage): Reconstruction-related demand will lead to the firstincrease in 13 years (albeit slight)In FY2011, cargo Volumes fell significantly by 5% compared to the previous half-year in the firstrelated to half of FY2011 due to the substantial impact of the earthquake. Though aconsumption and reactive upswing is predicted for the second half of the year, domestic cargoproduction both traffic is expected to move weakly due to the European debt crisis, the Thaidecreased, while thefigures for floods and the persistently strong yen. Furthermore, it now looks like the fundsconstruction moved set aside for earthquake reconstruction in the third supplementary budget willflatly. The total not be put into use until FY2012, nor will the plans set out in the originalamount is expected supplementary budget to allocate 5% of public works spending to theto drop slightly forthe 12th successive reconstruction efforts. As a result, volumes for the year are expected to remainyear sluggish, down 2.1% on the previous year. 1 Mizuho Corporate Bank, Industry Research Division
  • 3. FY 2012 Japan Industry Outlook (Logistics) FY2012 is set to see a huge increase in construction investment due to FY2012 will see increases in cargo reconstruction-related demand, so construction-related cargo is expected to related to increase by around 1% after having previously suffered a one-sided slide. consumption, Consumption-related cargo is expected to increase by around 1.5% after falling production and sharply during the previous fiscal year. The recovery in production-related construction, with the total figure cargo will be restrained by the growing trend of manufacturers transferring increasing for the production overseas, so a rise of around 1% is forecast. As a result, truck first time in 13 years transport volumes (tonnage) in FY2012 are forecast to rising 1.2% y-o-y to total 4.3 billion tons, the first increase in 13 years. However, this only represented an extremely small increase compared to total freight volumes or when looked at from a mid- to long-term perspective, so the figures still remain on a downwards trajectory overall (Figure 17-1). Volumes still remain 30% down on the peak 1996 levels and may start falling again once reconstruction-related demand wears off. Figure 17-1: Truck transport volumes (tonnage) by product type Truck transport volumes (million tons) 7,000 5,000 3.5% 2.7% -1.8% 1.2% 6,000 -4.0% 0.7% -1.5% 4,500 -2.1% -3.4% -4.3% -2.0% 4,000 -3.0%-2.2%-0.1%-0.6% 5,000 -4.3%-5.6%-2.5% -2.1% 3,500 Consumption-related Consumption-related cargo Consumption-related cargo 1.2% Consumption-related +1.5% 4,000 3,000 Production-related cargo Production-related cargo 2,500 3,000 2,000 Production-related Production-related +1.0% 2,000 1,500 Construction-related cargo Construction-related cargo 1,000 1,000 500 Construction-related +1.0% Construction-related 0 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11E 12E 11E 12E The % data in italics shows the year-on-year changes in truck transport volumes (FY) Source: Compiled by MHCB Industry Research Division based on the Ministry of Land, Infrastructure, Transport and Tourism’s “Annual Statistical Report on Motor Vehicle Transport” Note: The data for FY2011 and FY2012 is based on MHCB Industry Research Division forecasts2. International transport trends: Air cargo export volumes from Japan are on the slide andthis is becoming a permanent phenomenon Volumes have Since falling sharply after the Lehmann Shock, air cargo volumes from Japan continued to suffer have now recovered somewhat, though they are still yet to return to y-o-y falls from pre-Lehmann levels (Figure 17-2). Despite signs of a recovery in the March 2011 onwards following a automobile parts sector from March 2011 onwards, IT-related cargo (electrical slump in IT-related parts such as semiconductors) has fallen sharply on the back of the global cargo economic slowdown, so export transportation volumes as a whole have dropped sharply. 2 Mizuho Corporate Bank, Industry Research Division
  • 4. FY 2012 Japan Industry Outlook (Logistics) Companies are building up inventories overseas in the wake of the earthquake There are mid-to and are also shifting to cheaper maritime transportation. Freight volumes have long-term concerns been stagnating due to structural factors in the wake of the steep falls that accompanied temporary events such as the Lehmann Shock. These factors include the normalization of cargo transportation that bypasses Japan. This stagnation is becoming a permanent feature. Figure 17-2: Consolidated air cargo volumes from Japan (tonnage) 140,000 150.0% 120,000 100.0% 100,000 50.0% 80,000 60,000 0.0% 40,000 -50.0% 20,000 0 -100.0% 06/7 06/11 07/3 07/7 07/11 08/3 08/7 08/11 09/3 09/7 09/11 10/3 10/7 10/11 11/3 11/7 11/11 TC1 (The Americas) TC2 (Europe) TC3 (Asia) TC1 (Year-on-year change) TC2 (Year-on-year change) TC3 (Year-on-year change) Source: Compiled by MHCB Industry Research Division based on Japan Aircargo Forwarders Association materialsII. CORPORATE EARNINGS1. Outline of the earnings of the major logistics companies in the first half of FY2011 15 of the 20 companies surveyed posted income gains in the first half of The earthquake FY2011, despite the significant impact of the Great East Japan Earthquake. only had a limited impact Some companies posted sharp profit drops due to internal group restructuring, on the earnings but the results of company settlements were strong overall, with the disaster of the top only having a small impact on major logistics companies, despite disruptions to players supply chains (Figure 17-3). 3PL (3rd Party Logistics) businesses in particular continue to move firmly. This reflects their aggressive moves to expand trading spheres through corporate acquisitions and so on, enabling them to remain bullish despite the tough market conditions and falling overall transport volumes. International logistics companies with a high-dependence on automobiles saw sales dropping sharply at the beginning of the year, though they recovered quickly after supply chains were restored. Shippers are exerting strong pressure on prices though and companies are struggling to improve cost structures, so 3 Mizuho Corporate Bank, Industry Research Division
  • 5. FY 2012 Japan Industry Outlook (Logistics) the earnings environment remains challenging. However, some major players have managed to realize higher income and profits through a variety of measures, despite the tough conditions. Furthermore, primarily-domestic tokutsumi (special consolidated freight motor carriers) companies were particularly prominent among those firms with falling incomes, but these companies are now fighting hard to restore profits through operational improvements and cost control via head office reorganizations. Since 2010, 13 of the 20 major Japanese logistics companies have expanded into Asia through M&A or the establishment of new companies or headquarters. Though companies are faced with some initial investment costs at present, in the mid- to long-term they can be expected to focus more on business expansion. Figure 17-3: Sales and operating profit growth rates of the major logistics companies (compared to 1H, 2010) Falling income/rising profits Rising income /falling profits – 9 companie s – 3 companie s 40% Kintetsu World Express Operating profits rate of increase/decrease (1H/2010 – 1H/2011 35% SENKO Margin* Hitachi Transport System 30% [52.6%,44.4%] K.R.S. Maruzen Showa Unyu 25% Seino Holdings 20% 15% YAMATO HOLDINGS Rising income – 15 companies 10% Kamigumi VANTEC MEITETSU UNYU FUKUYAMA 5% The Sumitomo Warehouse TRANSPORTING 0% -5.0% 0.0% 5.0% SANKYU 10.0% Mitsui-Soko 15.0% -5% Nippon Ex press -10% TONAMI TRANSPORTATION Margin* Mitsubishi Logistics -15% [23.9%, -4.6%] Top 20 companies average Yusen Logistics -20% NISSIN [90.6%, -15.7%] NIPPON KONPO UNYU SOKO -25% Rising income /falling profits – 6 companies -30% Falling income/rising profits *Margin [Sales rate of increase, operating profits rate of increase – 2 companie s Sales rate of increase/decrease (1H/2010 – 1H/2011) Source: Compiled by MHCB Industry Research Division based the financial statements of each company Note: The details for K.R.S. Corporation were compiled from financial statements released in November2. The top 5 listed truck companies In FY2011, the top five listed truck companies saw sales improving on FY2010 Income and despite the impact of the Great East Japan Earthquake (total sales were 4,183.4 profits both up in FY2011 billion yen, +5.2% y-o-y). This was down to large-scale corporate acquisitions, domestic reconstruction-related demand and moves to meet the logistics outsourcing needs of shipping companies, with aggressive overseas ventures also contributing. Operating profits were also up 11.5% on the previous year at 153.1 billion yen, due in part to stronger sales but also to continuing efforts to cut costs and rationalize operations (Figure 17-4). 4 Mizuho Corporate Bank, Industry Research Division
  • 6. FY 2012 Japan Industry Outlook (Logistics) In FY2012, there is a strong chance that the real Japanese GDP growth rate will Rising income improve in Japan on the back of demand related to earthquake reconstruction. and profits expected for As a result, domestic cargo transport volumes are forecast to grow by 1.2%, FY2012 with the industry as a whole moving firmly. The major players are expected to see income and profits continuing to rise in FY2012 due to: ongoing ventures in new cargo areas; corporate acquisitions; aggressive moves into overseas business; the utilization of the synergy effects of already-implemented M&A; and the shift into the black of overseas ventures following initial start-up costs. Downside risks include: the spread of Europe’s debt problems onto the global stage and the risk of the problems becoming more long-term/serious thereafter; and moves overseas by Japanese shippers on the back of electricity shortages (soaring electricity costs) and the yen remaining at highs for a record long period. The business results of logistics companies will be directly impacted by these moves by shippers to scale down their domestic activities. Logistics companies may also see income and profits under pressure from the risk of soaring oil prices as a result of the European/US-led economic sanctions on Iran.Underlying A pressing issue for the industry as a whole will be how domestic tokutsumiissues facing companies improve profitability from hereon. Several companies have alreadytokutsumi embarked on the rationalization of networks, but price competition remainscompanies tough and the industry may need to go through another round of restructuring. Furthermore, the traditional majors have been far from active when it comes to overseas expansion, so the time is coming when more serious deliberations will be necessary. There are many issues that need to be tackled, such as how to create business overseas and how to secure the best human resources. Figure 17-4: Estimated results of the top 5 listed truck companies 【Actual】 Companies FY10 FY11 FY12 (Unit) (Actual) (Forecast) (Forecast) 5 companies Sales (JPN billion) 3,975.7 4,183.4 4,325.0 5 companies Operating Profit (JPN billion) 137.3 153.1 166.2 ( Reference ) Operating profits rate (%) 3.5% 3.7% 3.8% 【Rate of increase and decrease】 (YOY) Brief FY10 FY11 FY12 (Unit) (Actual) (Forecast) (Forecast) 5 companies Sales (%) + 3.9% + 5.2% + 3.4% 5 companies Operating Profit (%) + 5.0% + 11.5% + 8.6% Source: Compiled by MHCB Industry Research Division based the financial statements of each company Note: The top 5 listed truck companies are: Nippon Express, Yamato Holdings Co., Ltd., (Consolidated basis) Seino Holdings Co., Ltd., Hitachi Transport System, Ltd., Fukuyama Transporting Co., Ltd. Note): The data for FY2011 and FY2012 is based on MHCB Industry Research Division forecasts 5 Mizuho Corporate Bank, Industry Research Division
  • 7. FY 2012 Japan Industry Outlook (Logistics)III. TOPICS – Review of industry sectors with strong mid-term potential: The LogisticsIndustry1. The industrial structure and changing environment of the logistics industry The industrial It goes without saying that the logistics industry is an extremely diverse service structure of the industry with links to many other business sectors, so companies within the logistics industry industry come in many shapes and sizes. There are said to be around 62,712 motor vehicle transport companies within Japan (according to the Ministry of Land, Infrastructure, Transport and Tourism), with mid-sized, small and very small companies accounting for most of this figure (Figure 17-5). This corporate structure and the close relationship between the majors and medium-sized, small and very small companies (contractor–subcontractor relationship) are likely to continue from hereon, with the industrial structure of the industry remaining unchanged. Figure 17-5: Number of motor vehicle transport companies (by employee numbers) as of March 31, 2010) (No. of companies) 35,000 49% 350 290 30,000 300 25,000 250 20,000 0.9% 200 185 23% 15,000 150 10% 10,000 100 8% 6% 2% 50 53 5,000 0.5 0.3 0.1 0 0 ~10 21~30 51~100 201~300 1,001 or over 201~300 1,001 or over 11~20 31~50 101~200 301~1,000 (No. of employees) 301~1,000 Source: Compiled by MHCB Industry Research Division based on the Ministry of Land, Infrastructure, Transport and Tourism materials Though the majors only account for a tiny fraction of the total figures, each company is involved in a wide and diverse range of business activities. There are many different kinds of business, including truck transport (room temperature, low temperature, heavy goods and hazardous goods), rail transport, forwarding (air transport, maritime transport), warehousing, cargo forwarder services, home delivery, port cargo handling and 3PL (3rd Party Logistics). Each logistics sector needs specific business licenses, special knowledge and essential assets (functions). Each player has expended a lot of management resources on using their strengths in each business sector to differentiate themselves from competitors. Responding to However, the industry as a whole is facing a long-term trend of falling total the changing cargo volumes. Under these circumstances, logistics companies will need to business environment expand their field of business activities by moving aggressively into new 6 Mizuho Corporate Bank, Industry Research Division
  • 8. FY 2012 Japan Industry Outlook (Logistics) sectors (or improving efficiency by selling off unprofitable sectors) if they want to continue growing. In the past, companies working in the logistics industry have often established working relationships across different sectors, but the industry may see more drastic restructuring from hereon as companies seek to (1) increase cost competitiveness through streamlining and (2) boost their appeal to shippers. As the market widens and becomes more varied and complex, shippers are looking for ways to revise inventory levels and diversify supply chains in the wake of the Great East Japan Earthquake and the Thai flooding, while also looking for ways to improve the quality of distribution in the Door to Door sector (punctuality, traceability, unified administration of production, sales and delivery). There is an awareness of how important logistics are for the realization of these goals. These changes to the business environment present a difficult challenge for logistics companies, but given the close connections the industry has with other sectors, logistics companies will not be able to achieve sustainable growth unless they can accurately assess how the environment (demand) is changing and then change their own way of working to suit the changing circumstances.2. Promising business sectors in the mid- to long-term The majors are For the major logistics companies who have already expanded overseas, the active in several global trend for Free Trade Agreements (FTA) and moves by Japanese shippers sectors to transfer supply chains overseas/revise supply chains (diversification) may present great business opportunities. There is a lot of new demand from Japanese shippers, with relatively few companies competing to meet this demand. However, sustainable growth will be hard to maintain if logistics companies stick to a limited number of traditional business sectors (such as forwarding, customs clearance and warehousing) or if they stick to a customer base of ‘Japanese shippers.’ Customs clearance and other operations are becoming more streamlined and vested interests are on the slide. More Japanese shippers are now recruiting local staff to supervise logistics on the ground overseas. ‘Distribution’ capabilities are becoming a key element of competitiveness, and companies will need to construct schemes for meeting the needs of shippers for distribution functions, networks and transportation modes in a profitable way that improves the quality of distribution. There are many difficulties involved in pursuing logistics management or overseas inland transportation operations overseas (particularly in emerging economies), such as market entry, standardization/procurement of handled cargo, cost and labor management. One key to solving these problems would be to form an effective partnership with a local company. When linking up with a 7 Mizuho Corporate Bank, Industry Research Division
  • 9. FY 2012 Japan Industry Outlook (Logistics) partner, a strategic amount of give and take will be necessary. At the same time, a company should not cling rigidly to current strengths and knowhow but should rather prioritize business developments that meet market demands. There are only a limited number of local firms overseas (particularly in emerging economies) who would make effective partners, so companies need to move quickly. Promising overseas business sectors include: the automobile sector (although players are limited), which may see significant changes on the supply chain side; the retail sector, which is expected to see widespread, large-scale store expansions and demand for small, frequent deliveries; cold chain systems targeting foodstuffs and medical products; and apparel.Mid-sized It is a fact that companies are shifting supply chains overseas as a reaction tocompanies changing circumstances (expanding overseas markets, the strong yen,should compete electricity shortages and so on). For mid-sized companies with human resourcein sectors thatplay to their shortages though, it would not be a good idea to rashly expand businessstrengths activities overseas. One eminently achievable strategy would be to concentrate management resources on some specific regions, expand into business areas with strong distribution needs, then increase the volume of cargo handled in the target region by improving competitiveness in terms of both price and quality. Rather than grudgingly expanding overseas and spreading management resources thinly (and being prepared to suffer losses in the process) on the pretext of ‘defending domestic cargo’ in response to the demands of shippers, mid-sized companies should perhaps focus on efficiency (profitability) through specialized activities in specific regions (the best strategy to take would be down to managerial judgment). Even in this scenario though, with total cargo volumes shrinking across all areas, these companies will need to respond quickly to changes. In order to remain successful in the face of the restructuring of the distribution system within Japan, mid-sized companies will need to push ahead with their own strategies rather than just responding to shipper demands. These strategies should include the pursuit of joint delivery systems and novel ideas as well as other systems and operations capable of responding to shipper needs for cost cutting and better distribution. Keiichi Yoshioka keiichi.yoshioka@mizuho-cb.co.jp Land, Infrastructure & Transport Team Industry Research Division Mizuho Corporate Bank, Ltd. 8 Mizuho Corporate Bank, Industry Research Division